Perspective · Rewiring Entrepreneurial Ecosystems · 6 min read
The Missing Middle Is a Design Problem
Small and growing businesses are not too risky for capital. Most capital is simply not designed for them.
The phrase 'missing middle' describes businesses too large for microfinance and too small for private equity. It is a useful description and a misleading diagnosis. It implies that something is absent from the businesses. In practice, what is missing is a financial product.
A business seeking the equivalent of a few hundred thousand dollars in Ghana is not asking for something exotic. It is asking for capital priced for a firm with real revenue, thin collateral, informal records and a market that pays late. Almost nothing in the standard toolkit is built for that profile. Banks price for collateral. Equity funds price for exits that this business will never pursue and should not be pushed towards.
Risk is not the same as unfamiliarity
Much of what capital providers call risk in small and growing businesses is really unfamiliarity — the absence of a track record in a format the provider recognises. Two businesses with identical cash flows will be priced very differently depending on whether one keeps management accounts in a form a credit committee can read.
This is why enterprise support and investment readiness are not soft add-ons to finance. They are part of the underwriting infrastructure. Every hour spent turning a real business into a legible business reduces perceived risk without changing the underlying economics at all.
“Most capital that avoids small businesses is not avoiding risk. It is avoiding work.”
Designing for the actual firm
Capital designed for this segment tends to share a few features. Repayment tracks cash flow rather than the calendar. Security is built from the transaction — receivables, offtake contracts, inventory — rather than from land. Ticket sizes start small and increase with demonstrated performance. Technical support is bundled and paid for out of the instrument rather than treated as charity.
None of this is novel. It is simply expensive to originate and requires proximity to the businesses. Institutions that build that proximity — and can therefore see the difference between a hard business and a bad one — end up with portfolios that outperform the sector's assumptions.
What this asks of us
It asks capital providers to accept higher origination costs in exchange for lower loss rates. It asks enterprise support organisations to stop measuring themselves by the number of businesses trained and start measuring by capital deployed and repaid. And it asks government to use public money to absorb first losses rather than to compete with private lenders.
The middle is not missing. The instruments are. That is a design problem, and design problems can be solved.
