The Agora Model for Job Creation in Nicaragua Paul Davidson October 26, 2006 pdavidson@agorapartnerships.org www.agorapartnerships.org
The employment issue that the project is trying to address: The Missing Middle in Nicaragua and the corresponding lack of job creation 2
Why is job creation so important? Nicaragua is the second poorest country in the Americas. 2.3 million people, 45% of its population, live on less than $2 per day. 49% of all income goes to the richest 20% of the population. Only 14% goes to the poorest 40%. 70% of Nicaraguans are under the age of 30. 60,000 jobs per year need to be created to maintain current employment rate Source: UNICEF, 2003 3
Nicaraguan non-farm economy 100 90 80 70 60 50 40 30 20 10 0 Micro Small Medium Large % Firms % Employment Source: Censo Económico Urbano 2000 4
Nicaraguan business landscape Non-farm economy as a whole, including commerce Employees / firm # of Firms % Firms % Employment Micro 1-9 109,105 97% 59% Small 10-30 2,450 2% 11.5% Medium 31-50 350 0.3% 4% Large >50 395 0.4% 25.5% Source: Censo Económico Urbano 2000 5
Nicaraguan industrial sector 100 90 80 70 60 50 40 30 20 10 0 The Missing Middle Micro Small Medium Large % Firms % Employment Source: Censo Económico Urbano 2000 6
Nicaraguan industrial sector Employees / firm # of Firms % Firms % Employment Micro 1-9 21,115 96% 40% Small 10-30 489 2.8% 7% Medium 31-50 77 0.4% 3% Large >50 165 0.8% 50% 7
Why is promoting the creation of new small and medium-sized businesses so important? SME s are the motor of most modern economies. SME s tend to operate in the formal sector, providing benefits to their employees. SME s help improve income distribution and create a middle class. ~15 families control most of the medium and large scale businesses in Nicaragua. Nicaragua will not be able to create the jobs necessary nor grow its per capita GDP without a new class of entrepreneurs creating more small and medium enterprises. 8
How do we start filling the missing middle? Option 1: Help micro-enterprises to grow into small and medium-sized enterprises. 100 90 80 70 60 50 40 30 20 10 0 Micro Small Medium Large % Firms % Employment Source: Censo Económico Urbano 2000 9
How do we start filling the missing middle? Option 2: Foster the creation of a new class of small and medium-sized enterprises. 100 90 80 70 60 50 40 30 20 10 0 Micro Small Medium Large % Firms % Employment Source: Censo Económico Urbano 2000 10
SME entrepreneurs With some exceptions: University-educated >5 years work experience Not the poorest of the poor Vision to grow, not just survive or help the family get ahead 11
University graduates in Nicaragua In Nicaragua there are approximately 150,000 university graduates between the ages of 20 and 50 (based on numbers from the Consejo Nacional de Universidades 2006, INEC, 2001 and IADB, 2003). If only 5% of university graduates are potential entrepreneurs, there are approximately 7,500 potential entrepreneurs in Nicaragua. 30.3% of university graduates are unemployed (Higher education report, IADB, 2003) 12
Why aren t more small and medium-sized firms created in Nicaragua? Closed social networks Closed family groups Socio-economic discrimination Difficulty to imagine success, no role-model available Lack of formal business training Many entrepreneurs are technical, not business-based People don t grow up thinking like entrepreneurs Limited business and entrepreneurship curriculum Lack of financing Prohibitive interest rates and collateral Low to no savings No angel market Poor entrepreneurship climate Onerous regulations Poor infrastructures High set-up costs (170% average per capita GNI) Squandered human potential Insufficient new business / job creation Scarce access to national and regional markets Too many entrepreneurs fail or never try With so many obstacles, the majority of people don t even dream of owning their own business
Financing in Nicaragua = Loans Interest rates from 12% - 60% Collateral of 1.5x - 2x value of loan Only 25% of commercial loans are for productive activities 12% for manufacturing and agro-industries 13% for agriculture (Trinchera de la Noticia, April, 2004). Small-scale industries receive only 3% of the loans granted by microfinance institutions (ASOMIF, March, 2005). Banks won t loan to start-ups Loans are not the most appropriate way to finance new venture creation 14
New venture financing in the US and Europe Idea generation Prototype Start-up Early growth Stability Founder 3F s Angel Investors Venture Capital Loans, IPO s 15
Launching socially responsible businesses in Nicaragua 16
Our mission is to create opportunity for talented, developing-world entrepreneurs to launch and grow successful, socially responsible businesses. We work to achieve this mission by providing them with the right kind of tools, networks, financing and support. 17
The Agora integral solution VENTURE FUND A non-profit organization that finds, educates, and supports socially responsible, developing world entrepreneurs A for-profit, double bottom line angel venture capital fund that invests in the most promising Agora Entrepreneurs. Two legally distinct, affiliated organizations working together to create wealth, jobs and opportunity in Nicaragua. 18
The new venture creation chain Spirit Idea Plan Selection Pre- Incubation Financing Incubation 19
The Agora Model with the new venture creation chain Spirit Idea Plan Selection Pre- Incubation Financing Incubation 20
Agora Partnerships Model We provide emerging market entrepreneurs with the arsenal of tools available to their counterparts in wealthy countries: seed capital, business networks, personal mentors and business consulting Identify Consult Invest Support 21
Agora s model systematically addresses each barrier Current barriers Agora s answer Closed social networks Lack of formal business training Entrepreneurial Potential Identify Consult Agora creates a merit-based process to identify promising entrepreneurs and provide them the opportunity to demonstrate their potential. Agora matches US-based graduate students with entrepreneurs for an intensive consulting and due diligence process Lack of financing opportunities Invest Agora Venture Fund provides direct investment in the most promising ventures that meet strict investment criteria. Poor entrepreneurship climate Support Potential Realized Agora assists in the launch and execution of the business plans providing strategic advice, business contacts and support for financial management 22
Project highlights Provide TA to 45 entrepreneurs and Invest in 15 firms over 3 years 15 already through TA, 3 ready for investment, 2 others w/potential Entrepreneurs over 18 years old, no upper age limit Min. high school graduate + 2 years of technical or university education Investments from $25k - $200k Sales >$200k by Yr 3 Employment > 15 Vision to become medium or large Sectors with value-added or innovation Agro-industries, tourism, manufacturing, renewable energy, bottom-of-the-pyramid, export Most exits through share buy-out by entrepreneur 23
Measurement of results Annual Targets for 2007 Annual Targets for 2010 Overall Targets by 2010 A. Number of net new jobs created directly through project 49 71 353 B. Number of direct jobs consolidated or sustained 0 282 0 C. Number of indirect jobs consolidated or sustained 97 428 428 D. Unit cost per job created or consolidated $9,011 $1,275 $5,099 E. Other Social benefits Total annual revenues from project beneficiary firms $597,347 $9,796,721 --- Total annual wages earned by project beneficiaries $122,158 $1,270,800 --- Total project expenses $441,522 $450,000 $1,800,000 Note: Doesn t include firms receiving TA but not Investment. This reduces cost per job by about ½. 24
Other social benefits Promote a culture of social and economic entrepreneurship by creating entrepreneurial role models, raising expectations and expanding access to opportunity. Mobilize graduate student and professional volunteers in developed countries and direct their energy and skills to help aspiring developing world entrepreneurs. 25
Issues related to job creation indicators Direct vs. indirect Created vs. consolidated Creation vs. displacement, net jobs Anti-technology bias Anti-industry, pro-agriculture bias Quality vs. quantity, cost / salary $ Measuring long-term effects, imitation 26
Agora Partnerships Our Main Partners 27
VENTURE FUND www.agorapartnerships.org info@agorapartnerships.org 28