RECOGNISING the need for more capital solutions for start-ups in the micro, small and medium-sized enterprise (MSME) space to scale their businesses, the Development Bank of Jamaica has plans to introduce two new programmes that will match MSMEs with providers of equity capital.

The bank, within the current calendar, will launch the DBJ angel fund and its venture capital (VC) fund.

Supported to the tune of US$2 million by the Inter-American Development (US$1.5 million) and the European Union (US$500,000), the DBJ Angel Fund aims to provide working capital support to businesses in the post-incubation phase by matching the investment of angel investors.

“Currently in the ecosystem we have had limited options for our entrepreneurs. So, after they have gone through the incubation phase or maybe at some point in the incubation phase, if a company is growing, many of them will be going to commercial banks to seek funding, then they run into roadblocks…because they don’t have the [financial] historicals to show that the business is growing,” Natalie D’Oyen, technical coordinator, intermediary relations, BIGEE Programme at DBJ, told the Jamaica Observer recently.

“Two options that we’re introducing to the market over the next couple of months would the angel investment fund and the Venture Capital Fund,” she explained further.

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 external sources.

“So what we want to do is stimulate [growth] because we have some angel investment now that occurs in Jamaica,” she added.

The creation of the Angel Fund will not only redound to the benefit of MSMEs seeking funding, D’Oyen pointed out, but will encourage more angel investors to broker deals with the help of the bank. However, angel investors, like the entrepreneurs who have gone through DBJ’s approved incubator and accelerator programmes, will have to meet certain criteria to become approved partners of the bank.

To clarify, D’Doyen said the DBJ will not be certifying organisations or investors as angel investors but, rather, will be approving angel investors as partners to engage in deal-making with entrepreneurs seeking the assistance of the DBJ. Additionally, she said the bank will not dictate to entrepreneurs or angel investors with whom to invest, but will invite both parties “to be the drivers of the deals…and we’ll join you”.

“We ourselves will have mingles, events and bring both players in the room,” Christopher Brown, programme manager for BIGEE at DBJ, chimed in. “We’ll create the space for people to meet,” he continued.

When both parties have come to an agreement the DBJ will match the angel investor’s portion with a convertible debt instrument.

“The great thing about this loan is that we are deferring interest on principal until the end of the life of the loan,” Brown outlined, adding that the instrument has a tenure of between three and five years, with minimal cumulative interest.

Moreover, the business owners have the option of converting the debt to equity or repaying the loan early without any penalties.

D’Oyen shared that the aim of matching angel investment with a debt instrument is not to maximise profit but, instead, to derisk the equity that angel investors will be putting up. At the same time, the development partner wants to also ensure that it maintains the value of the money it will on-lend and will therefore charge interest at the same rate as inflation.

When asked how soon the Angel Fund will be launched, D’Oyen said the DBJ is now in the process of vetting individuals who have offered their service as angel investors.

“One of the main things that we want to inject into the process is smart capital…because, again, it is: ‘How do we support the entrepreneur?’ ” she outlined.

Describing smart capital, D’Oyen said it is the ability of angel investors to advise, mentor and provide some expertise to start-ups “as the investment plays out”. This, she underscored, is a critical element in supporting the entrepreneurs’ growth.

When the Business Observer asked how the DBJ will ensure that angel investors are not predators looking to take advantage of desperate business owners, Brown noted that the bank is educating the market about what conversations to have so that deals are not one-sided.

“We conduct and will continue to do equity training for entrepreneurs to give them knowledge about negotiating with angel investors,” he said, adding that it includes advising business owners how to properly value their companies and how much stake to offer for equity.

Moreover, D’Oyen also encourages MSMEs to hire the service of a legal professional to assess term sheets. The 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 start-ups in the first year of the launch of the Angel Fund. In order for businesses to qualify, they should secure a minimum of US$50,000 in angel investment.

Turning her attention the Venture Capital Fund, D’Oyen said the DBJ has allocated approximately US$5 million to that initiative.

“It will be Jamaica’s first VC fund targeting innovation-based start-up companies, so that’s going to be very critical,” she stated.

While highlighting that VC funds have a specific timeline within which to raise money, she said the bank expects to launch that product in late 2023 or early 2024. At present, though, the DBJ is searching for a venture fund manager, which will be an independent entity evaluated by a panel with individuals having venture capital experience.

“We expect to make an announcement of that in the first quarter of 2023 as to who the fund manager will be. Once we do that…we’ll then start the capital raise process, which they’ll have nine months to a year to complete. Once they have acquired enough funding — it should be in the region US$15 million to US$20 million — that will be dedicated to investing in accelerated start-ups or scale-ups in the ecosystem,” D’Oyen revealed.

Again, Brown clarified that the fund will be similar to JASMEF which is administered by London, England-based Actus but co-funded by VM Investments Limited.