Between 2010 and 2011, our fledgling startup was turned down by somewhere between 100 and 150 different investors. In lieu of formal financing, we turned to selling personal assets, delaying payments, and borrowing from friends and family to keep afloat. We committed all of our energies to finding investors and, in the process, almost forgot to spend any time building our business.

Three years and 15,000 kilometers later, we found ourselves serving thousands of small and medium enterprises (SMEs) in Kenya that faced a similar, though significantly more difficult, reality: No one would invest in them – no debt, no equity, no factoring, nothing. In turn, they spent countless hours looking for money instead of building their businesses.  

We were familiar with the concept of the “missing middle” in SME finance, but this felt personal. We wondered: What is it, exactly, that’s making investors turn our customers down? Being a software company, we started by focusing on the absence of structured, verifiable data. Specifically, we noticed that most of our SME customers had virtually no electronic records whatsoever, which might otherwise be imported, parsed, and analyzed to determine their creditworthiness. They were, effectively, blank inputs in a risk model – vacant cells waiting for… something, anything to convince an investor that their businesses were more than a crapshoot.

We then put ourselves in the investors’ shoes. If we had limited capital, limited time, and a minimum expected return on assets, how would we respond to a scarcity of data? Easy! Just dial down our risk tolerance, dial up our collateral requirements, focus on larger ticket sizes, and increase the interest rate to adjust for default. Happy bosses, happy shareholders, no problems.

So we empathized with our SME customers, but echoed the uncertainties of their would-be investors. We were willing, on the one hand, to vouch for our customers’ integrity, but, on the other, understood that investors were just making the best of a bad situation.

We think that’s emblematic of a market failure: We were willing to invest in our customers, but couldn’t, while investors weren’t willing to invest in our customers, but could. Were we just naïve, or did we have something the investors didn’t?

It just so happens it might have been the latter, but that’s for a subsequent post.

This is Part One of a three-part series on how alternative data can help bridge the “missing middle” to extend financial services to millions of SMEs in emerging markets. In Part Two, we’ll explore what “alternative data” means, where it comes from, and why it could offer ground-breaking visibility into a sizeable chunk of the global economy.