Editor’s note: In this guest post David Ellis, Managing Partner of Flow Equity, argues for more investment in developing world businesses that earn too much to qualify for microfinance, but too little to attract commercial investment.

The barriers to development in Uganda are manifold. Charities need to work smarter. Democracy has to work better. But at the end of the day, it is a thriving private sector that will enable Uganda to realize its potential.

Private investment in Africa has focused mainly on microfinance and commercial scale capital. Small to medium size enterprises (SMEs), often the engines of economic growth and job creation, have been mostly overlooked, creating what is now known as “the missing middle.”

These businesses are starved for growth capital in the range of 5,000 USD – 100,000 USD, the respective ceiling and floor of microfinance and commercial banks. Loans in this range are hard to access, have prohibitive collateral requirements, are expensive (average 20% APR), and impatient, often strangling cash flows with immediate repayment requirements. Though an SME can have a competitive business model and stable revenues, they may not have years of audited financial statements or formalized business processes, and thus fall outside of the financial system.

SMEs are not only underserved, but are critical for development beyond dependency. Uganda is the youngest country in the world and youth unemployment hovers around 83 percent – thousands of jobs must be created to fill this gap. In the United States, small firms account for 64 percent of all new jobs, and employ approximately 51 percent of the nation’s workforce. In Uganda, the data is even more striking: small businesses account for 75% of GDP output and 66% of non-farm private sector employment. According to a recent reportby the Summit Development Group, a dollar invested in an SME creates three times as many jobs as a dollar invested in a microenterprise.

Uganda is also a promising frontier market for investment. GDP growth has averaged 8 percent over the past five years and is projected to continue in the future. Economic liberalization, regional integration, a stable currency, the recent discovery of oil, rapid urbanization, and a growing middle class create the conditions for sustained economic progress in Uganda. The Ugandan businesses that will drive this economic growth are just now being born, only now being discovered. Who will invest in them, who will accelerate the growth of their enterprises?

This is why we are building Flow Equity – to create thousands of jobs in Uganda, participate in the renewal of a region, and capture significant economic growth for investors. Flow Equity is a new social investment fund making growth stage equity investments in promising SMEs in East Africa. We look for entrepreneurs in competitive sectors who have a blended value proposition, that is, they pay fair wages, protect the environment, and realize above market-rate returns. Beyond capital, we work with entrepreneurs to formalize processes, build brands, develop long-term strategies, and find markets for their products, making them more sustainable, credit-worthy, and competitive in the long-term.

Flow Equity is trying to help the world think differently about Africa. Though partially true, we cannot carry on thinking that Africa is suffering and needs our help. This perspective is not only degrading, but dishonest. If we want Africa to be more than a second-class global citizen, a recipient of our charity, we must invest more than annual donations and volunteer stints. We must invest in its entrepreneurs and believe in its economic future.

(Photo by weesam2010)