Unconventional Sources of VC: Multilateral Development Banks

Searching for financing?

As a founder, finding startup or growth capital is never an easy task – even doubly so if you’re in an emerging or frontier market. During recessions, the process becomes even more complex as the more common sources of financing dry up.

As such, sometimes it pays to examine less commonly sought sources of capital. One area we see is from the Multilateral Development Banks (MDBs).

MDBs, a very brief overview

MDBs work like commercial banks, with two key differences:

1) MDBs are funded by their members, national governments (as opposed to private stockholders); and, of more interest to you,

2) they focus on providing funding to spur economic development in their member countries.

The five most well-known are the Asian Development Bank (ADB), African Development Bank (AfDB), European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IDB) – covering Latin America and the Caribbean, and the World Bank Group.

Most MDB funding is for financing large-scale public projects and government programs, however, since the early 2010’s, they have set up venture capital investment arms and provided financing to startups, early-stage, and growth companies.

Advantages of obtaining funding from MDBs

Committed to their regions.

The “D” in MDB stands for Development. MDBs’ primary objective is to spur economic growth in their member nations. So, while as VCs their objectives are return on investment, they have more of a vested interest in making a deal work than an outside-the-region, purely return-driven investor.

They have presence in markets where most VCs don’t/won’t operate.

For seed financing, the issue is often that your operating market may be considered to be too small or fragmented, which presents a barrier to entry for most VC firms. For MDBs already with a presence in your country, this is less of an issue.

Local investors may be reluctant investors.

There is scarce funding from local investors for startups, small technology companies, and early growth companies in most frontier and emerging markets. For equity investment, there is often a limited local pool of capital available, may have a long investment cycle, and be risk adverse.

By being international in structure, coupled with a large balance sheet, MDBs can operate with fewer of these constraints. Additionally, they may open up and offer some new forms of financing, such as venture debt, that may be new in your market.

Details on funds and programs

We’re presenting a series of Insights pieces that will cover each Bank’s venture capital program. For details, please follow the links below:

Part 1 – Asian Development Bank (ADB): ADB Ventures – covers Central Asia, South Asia, East Asia, Southeast Asia, and the Pacific.

Part 2 – European Bank for Reconstruction and Development (EBRD): VCIP – covers Eastern Europe and Central Asia; parts of North Africa, West Asia, and Central Europe; and a bit of Southern Europe and East Asia.