Recognizing the need for more capital solutions for start-ups in the micro, small and medium enterprise (MSME) space to expand their businesses, the Development Bank of Jamaica plans to introduce two new programs that will match MSMEs with equity capital providers.
The bank will, within the current calendar, launch its DBJ angel fund and its venture capital (VC) fund.
Backed by $2 million from Inter-American Development (1.5 million USD) and the European Union (500,000 USD), the DBJ Angel Fund aims to provide working capital support to businesses in the post-incubation stage by matching the investment of angel investors .
“Currently in the ecosystem, we have had limited opportunities for our entrepreneurs. So once they’re past the incubation stage or maybe at some point in the incubation stage, if a company is growing, a lot of them will go to commercial banks for financing, then they run into roadblocks…because they don’t this. HAVE [financial] stories to show that business is growing,” said Natalie D’Oyen, technical coordinator, broker relations, BIGEE Program at DBJ. The Jamaica Observer recently.
“The two options we are introducing to the market over the next couple of months will be the angel investment fund and the venture capital fund,” she further explained.
These two funds, D’Oyen said, will bridge the gap between the bootstrapping phase — where entrepreneurs use their own funds to grow their companies — and the acceleration phase, when they seek additional funding from outside sources.
“So what we want to do is to stimulate [growth] because we have an angel investment now happening in Jamaica,” she added.
The creation of the Angel Fund will not only benefit MSMEs seeking financing, D’Oyen noted, but will encourage more angel investors to broker deals with the help of the bank. However, angel investors, such as entrepreneurs who have passed through DBJ’s approved incubator and accelerator programs, will have to meet certain criteria to become approved bank partners.
To clarify, D’Doyen said that DBJ will not certify organizations or investors as angel investors, but rather approve angel investors as partners to engage in deals with entrepreneurs seeking DBJ’s assistance. In addition, she said the bank will not dictate to entrepreneurs or angel investors who to invest with, but will invite both parties “to be the deal makers…and we will join you.”
“We ourselves will have meetings and events and bring both players into the room,” said Christopher Brown, program manager for BIGEE at DBJ. “We will create the space for people to meet,” he continued.
When both parties have reached an agreement, DBJ will match the angel investor’s share with a convertible debt instrument.
“The best thing about this loan is that we are deferring the interest on the principal until the end of the life of the loan,” Brown emphasized, adding that the instrument has a term of three to five years, with minimal cumulative interest.
Additionally, business owners have the option of converting debt to equity or paying off the loan early without any penalty.
D’Oyen said the goal of matching angel investment with a debt instrument is not to maximize profit but, instead, to tease out the capital that angel investors will deploy. At the same time, the development partner also wants to ensure that it maintains the value of the money it will lend and therefore will pay interest at the same rate as inflation.
When asked how soon the Angel Fund will be launched, D’Oyen said DBJ is now in the process of vetting individuals who have offered their service as angel investors.
“One of the main things we want to inject into the process is smart capital…because, again, it’s, ‘How do we support the entrepreneur?’ “, she described.
Describing smart capital, D’Oyen said it is the ability of angel investors to advise, mentor and provide some expertise to start-ups “while the investment is taking place”. This, she underlined, is a critical element in supporting the growth of entrepreneurs.
When Business Observer Asked how DBJ will ensure that angel investors aren’t predators looking to take advantage of desperate business owners, Brown noted that the bank is educating the market about what conversations to have so deals aren’t one-sided .
“We do and will continue to do equity training for entrepreneurs to give them the knowledge to negotiate with angel investors,” he said, adding that it includes advising business owners on how to properly value their companies. and how many shares they should offer for capital.
Additionally, D’Oyen also encourages MSMEs to hire the services of a legal professional to evaluate term sheets. DBJ will continue to have similar trainings within the year.
The bank will match angel investors with up to US$100,000 per business and will target a minimum of 20 startups in the first year of the Angel Fund’s launch. In order for businesses to qualify, they must secure a minimum of US$50,000 in angel investment.
Turning her attention to the Venture Capital Fund, D’Oyen said the DBJ has allocated about $5 million to the initiative.
“It will be Jamaica’s first VC fund targeting innovation-based startups, so it will be very critical,” she said.
While noting that VC funds have a specific timeframe within which they can raise money, she said the bank expects to launch that product in late 2023 or early 2024. However, DBJ is currently looking for a venture fund manager, who will be an independent entity evaluated by a panel of individuals with experience in venture capital.
“We expect to make an announcement in the first quarter of 2023 about who the fund manager will be. Once we do that…then we’ll start the capital raising process, which they’ll have nine months to a year to complete. Once they have received sufficient funding – it should be in the region of US$15 million to US$20 million – that will be dedicated to investing in accelerated start-ups or scale-ups in the ecosystem,” revealed D’Oyen .
Again, Brown clarified that the fund will be similar to JASMEF which is managed by Actus based in London, England, but co-financed by VM Investments Limited.
Source: Jamaica Observer and DBJ
