Technopolis recently conducted a study with impressive results. The study explores the concept of the Catalytic Effect, focusing on the ability of investment funds (IFs) to stimulate additional investment in SMEs beyond the initial investment. The study results show that more than 95% of investment funds supported by DGGF report that their portfolio companies have successfully raised additional capital.
Image: © DGGF
On average, SMEs obtained 2.76 times their initial investment, with some securing as much as 50 times more funding. Notably, most of this catalytic funding materializes over a year after the initial investment, highlighting the sustained impact of DGGF’s strategy.
Beyond financial capital, DGGF significantly contributes to job creation, enhanced business practices, and stronger local ecosystems. The fund’s hands-on approach, emphasizing local expertise, strategic advice, and ecosystem development, has been vital in helping SMEs reach their full potential.
The Dutch Good Growth Fund (DGGF) has been instrumental in addressing the financing needs of small and medium-sized enterprises (SMEs) in developing countries and aims to function as a catalytic investor in underserved markets. Through its second track, Financing Local SMEs, DGGF strengthens local investment funds and financial institutions. Operating as a fund-of-fund model, DGGF provides capital to Investment Funds and Financial Institutions in developing countries. Thereby supporting the "missing middle" SMEs: businesses that are too large for microfinance institutions but perceived as too small or risky for traditional commercial banks or investors.
Catalytic Effect and Mechanisms
Recent analyses have highlighted the catalytic impact of DGGF's investments, demonstrating how they generate broader financial growth. Since the Catalytic Effect is a relatively new concept with limited study and application in monitoring, this Deep Dive explores how the Catalytic Effect manifests at the SME level, its origins, and its scale.
The catalytic effect refers to the ability of SMEs to attract additional investment from new sources as a result of DGGF-backed funding. This effect is achieved through two main mechanisms:
- The cornerstone role refers to IFs enhancing credibility of SMEs by signaling confidence to other investors (passive effect), while also actively supporting SMEs in areas such as fundraising (active);
- Professionalisation involves contributing to SME development by offering strategic guidance, training and support provided by IFs.
Image: © DGGF
Figure 1 DGGF Catalytic Effect Conceptual Framework
It's important to differentiate the Catalytic Effect based on when additional investments occur, as attribution effects vary across activities and timeframes. Therefore, catalyzed funding types should not be aggregated. The Deep Dive separates the Catalytic Effect into primary (within one year of the initial investment) and secondary (after one year) effects.
Further directions and conclusion
As DGGF continues to evolve, the study suggests aligning fund selection with catalytic best practices, increasing visibility to attract further investors, and expanding opportunities for peer learning among fund managers. Improving monitoring tools will also aid in fully capturing catalytic outcomes.
DGGF’s catalytic impact extends beyond financial gain. It acts as a catalyst for sustainable growth, resilience, and opportunity in some of the world’s most promising markets.
More information on the Catalytic Effect and Key Recommendations you can find in the full article via here.