Q&A with Christy Sisko on the Revenue Capital Approach (Part 2 of 2)


This post is the second of a two-part blog series, originally featured on Microlinks, showcasing a question and answer session with Christy Sisko, technical manager for Asia and Middle East Economic Growth Best Practices at Chemonics, on the revenue capital approach and its revolutionary effect on the small and medium enterprise (SME) financing world. This post is a follow-up piece to Microlinks' April 25 event, Revenue Capital: Reducing, Rewarding, and Realigning Risk, which explored key features of the revenue capital approach, why it works, and how it can be leveraged to finance SMEs around the world. Click here to access more resources on this emerging topic from the event.

The term SME is used to describe a very large range of types of companies. Is revenue capital meant to target the top segment of the SME sector in reality, as opposed to micro, small, and medium enterprises (MSMEs), which are often not "formal" or registered businesses?

To answer this question simply, revenue capital is particularly well-suited to established — if often young — SMEs that have an identified opportunity to expand. You will often hear the term “gazelles” used to describe SMEs that are well-suited for revenue capital financing mechanisms. Gazelles are characterized by having achieved revenue growth of 20 percent or more for four consecutive years, or 30 percent growth over three consecutive years. What makes gazelles a preferred SME for revenue capital investors? With the emphasis on sales for revenue capital mechanisms, SMEs that fall into the gazelle category are attractive to investors since they have experienced rapid and consistent growth that investors can benefit from. The potential for a significant upside can be considered more appealing when financing gazelles.

At the same time, institutions such as Business Partners in South Africa finance SMEs that are MSMEs, or as they label them, lifestyle businesses, that are much smaller in size (but formal) and do not have overly lofty growth projections but rather want to sustain their sales. This proves that revenue capital can be used for SMEs that identify as gazelles or MSMEs depending on investor preferences and fund structures.

What are proven experiences with regard to providing and paying for the pre- and post-investment technical assistance? Are costs wrapped entirely into the deal structure? Or funded separately by donors of some kind?

All risk capital investors provide some degree of non-financial help to their investees over the life of the investment. This is commonly as an active board member who makes key contacts for the investee. But post-investment support can be much more involved. Again, the principal difference between banking and risk capital is that there is the potential for “upside,” that is to say, for improving return on investment by successfully helping the investee improve its performance. Again by contrast, if a banker makes a loan at 8 percent, then 8 percent is the maximum return and any effort to assist the borrower will eat into the 8 percent.

An essential feature of risk capital’s revenue-based investment model is that it motivates investment staff of the revenue capital fund to take a labor-intensive, hands-on approach to investment in order to assist investees to sustain high revenue growth. This means not only making the best use of risk capital fund staff to provide direct business assistance but also identifying other affordable and effective sources of outside assistance.

Typical ways in which investment staff assist portfolio investees include:

  • Advice in business and financial planning
  • Design and implementation of financial controls
  • Design and implementation of marketing strategies
  • Improvement of terms and conditions of sales and purchasing agreements
  • Raising and maintaining operational processes and quality control to international standards
  • Cost accounting and pricing
  • Preparation of product catalogues and trade fair presentations
  • Preparation of permit and licensing applications and agreements
  • Growth management
  • Human resources management
  • Restructuring and/or negotiation of bank debt

Given the developmental objectives of most SME risk capital funds and their investors, many have been able to raise grant funding from official development agencies, governments, and private sources. Such grant funding is generally held outside the accounts of the fund to pay for additional technical assistance required by, or improving the performance of, portfolio investees. Funding is often pooled into what is known as a “technical assistance facility.” Typical uses of a technical assistance facility include:

  • Creation of customized accounting or management information systems
  • Creation of Internet capabilities and other information and communication technology capacities
  • Procurement of engineering or other technical services to create or enhance production or distribution of products or services
  • Qualification for a specific certification or license, including ISO certification
  • Funding and organization of training for managers in areas such as: use of available information and telecommunications technology; human resource management and employee relations; local and international legal issues and interpreting legal documents; customer relations and standards of business practice

Normally the investment officer of a fund will be in close consultation with investees to jointly identify the nature of third-party assistance interventions needed by the investee. The third-party service supplier is then paid by the facility and either partially or fully reimbursed by the investee on a cost-sharing or interest-free loan basis as negotiated between investee and the fund.

Mentoring of entrepreneurs by experienced business people has also proved to be an effective way of assisting portfolio SMEs, particularly when an investment officer has helped the investee identify a particular problem or opportunity so that the right mentor can be matched to the right task. In addition to NGOs that identify, vet, and arrange assignments for mentors and entrepreneurs, some funds build their own stables of volunteer mentors, who may be retired business executives or volunteers taking time off from their professional or personal activities. With risk capital investments, mentoring can be particularly useful when revenue growth can be directly tied to the mentor’s intervention.

Christy Sisko is a technical manager for the USAID Asia and Middle East Economic Growth Best Practices (AMEG) project.
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Q&A with Christy Sisko on the Revenue Capital Approach


This post is the first of a two-part blog series, originally featured on Microlinks, showcasing a question and answer session with Christy Sisko, technical manager for Asia and Middle East Economic Growth Best Practices at Chemonics, on the revenue capital approach and its revolutionary effect on the small and medium enterprise (SME) financing world. This post is a follow-up piece to Microlinks' April 25 event, Revenue Capital: Reducing, Rewarding, and Realigning Risk, which explored key...

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