In Indonesia, the entrepreneurial landscape is rich with businesses that are not only seeking profit but also aiming to create positive social and environmental change. These impact-driven businesses, particularly Small and Growing Businesses (SGBs), are making a real difference in their communities, yet many struggle to access the capital they need to scale.

SGBs typically seek funding between $100k and $1 million, but their business models don’t align with the hypergrowth expectations often sought by traditional venture capital. For amounts under $100k, businesses can turn to microfinance options. For amounts above $1 million, they can approach banks or private equity. But for the $100k to $1 million range, these businesses are caught in what’s called the “missing middle,” where they don’t have the collateral needed to secure funding from traditional options.

Blended Finance as a Solution

A promising approach to bridge this gap is blended finance, which pools capital from various sources—impact investors, philanthropic organizations, and other capital owners—and ensures that capital flows to impact-driven SGBs. The goal is to ensure that all stakeholders, regardless of mandate or incentive, are aligned in a way that supports the creation of real, measurable impact on the ground.

Blended finance works by lowering the risk for investors, making it easier to direct capital to businesses that are often seen as too risky by traditional investors. For instance, a blended finance initiative might combine grants from philanthropic foundations with low-interest loans from impact investors. By aligning the objectives of different capital owners, we can ensure the right businesses get the funding they need to grow and create positive change.

Connecting Businesses with Global Capital

Beyond innovative funding solutions, networks play a crucial role in helping impact-driven businesses access capital, particularly those caught in the “missing middle.” Organizations like the Indonesia Impact Alliance (IIA), chaired by Instellar, are key in connecting local businesses with larger pools of capital to scale sustainably.

For example, IIA’s Impact Transparency from the Ground Up event, in collaboration with GSG, brought together investors, entrepreneurs, and government representatives to foster impactful partnerships. Another initiative, the SDG Impact Standards Training of Trainers, partnered with UNDP to align businesses and investors around global sustainability standards.

Most recently, IIA launched the Indonesia Impact Investment Landscape Report 2024, which provides valuable insights into the challenges and opportunities in the country’s impact investment space. These initiatives highlight how IIA bridges the capital gap, ensuring impact-driven businesses have the funding needed to scale and drive lasting change.

A Regional Challenge

While the capital gap is challenging in Indonesia, it’s not unique to our country. At the recent #CAMESCO24 summit, it became clear that other Southeast Asian countries, including Cambodia and Vietnam, are facing similar struggles. This shared issue emphasizes the need for solutions that can bridge the funding gap and help local businesses thrive.

Addressing this problem requires pooling resources, knowledge, and expertise across borders. By coming together, investors, businesses, and ecosystem builders can help ensure that the growth of impact-driven businesses isn’t limited by a lack of capital.

The Way Forward

A concerted effort from all relevant stakeholders–investors, ecosystem builders, and policymakers–is needed to find a sustainable solution. In other countries, this has often taken the form of a blended finance mechanism, which not only channel funding but also help develop the impact investing ecosystem in the country. By adopting similar strategies, we can nurture an environment where impact-driven businesses in Indonesia and Southeast Asia can access the capital they need to scale up and create lasting change.

This article is part of our #INScope column, where we explore key trends, challenges, and solutions shaping the industry. Through #INScope, we share our perspectives on the evolving impact ecosystem and offer insights for sustainable growth and positive change.

#INScope – Bridging the Capital Gap: Supporting Impact-Driven Businesses in Indonesia and Southeast Asia

instellar

Blended Finance as a Solution

Connecting Businesses with Global Capital

A Regional Challenge

The Way Forward