Gazelles constitute only 5-10 percent of all private companies, yet in typical years they create 50-80 percents of all net new jobs.
When former classmates Giorgi and Alexander opened their first fast food restaurant “Degusto” in Tiblisi, Georgia in 2016, it was hard to predict that within three years they would have grown to 250 employees, mostly young people like themselves. Giorgi Mushkudiani and Alexander Norakidze had worked on several projects together before. In their mid-twenties, they managed to save a supermarket chain from financial collapse. This time around, the young entrepreneurs started a business themselves with their own money and a new concept in Georgia– the first locally-created and branded fast casual restaurant chain, which also leverages the central kitchen to provide additional value add B2B catering solutions to large corporates. This central kitchen and its chain of retail outles offers a good nutritious and healthy lunch, at an affordable price and consistent quality. In 2016, they managed to convince a local Georgian equity investor to invest in Degusto, so they could open four additional outlets. Without a track record or substantial collateral, it was hard for them to find other creditors or investors for the next phase of their expansion. “We approached three or four banks, but were turned down every time”, explains Alexander.
In 2017, Gazelle Finance’s investment fund, Gazelle Fund, backed by leading development finance institutions, including FMO, DGGF, and OPIC, and a local sovereign investment fund, Partnership Fund, stepped in. “The only collateral Gazelle demanded was our own shares in the company”, Giorgi remembers. “They believed in our concept and took the risk.” With a loan from Gazelle they opened five additional outlets, upgraded their central kitchen and obtained an ISO certification. “We are a real gazelle”, says Giorgi. “We lack collateral, but we doubled our sales every year, from one million dollars in 2016 to four million dollars in 2018.” In the meantime, Gazelle has taken over the shares in Degusto from the Georgian investor. “Gazelle is flexible, everything can be negotiated with them” says Giorgi.
Gazelle Finance, in addition to Gazelle Fund, manages a separate business development services facility, that provides highly targeted, business performance enhancement interventions to its portfolio companies, so as to further accelerate the growth trajectory. The strategy behind this approach is to adapt the traditional value-add venture capital and private equity value model to the SME mezzanine financing space. This allows Gazelle Finance to provide value-add services in addition to its growth capital to its portfolio companies and do both in combination and at scale. The primary product deployed through this business development services facility is the zero-interest loan, from which the repayment obligation ensures that there is truly buy-in from the beneficiary.
In the case of Degusto, leveraging this business development services facility, Gazelle Finance was able to carry-out four discrete interventions that were critical difference makers to enable the company to maintain its classic gazelle growth trajectory. The first performance enhancement intervention was to help the company implement an ERP system to improve inventory cost accounting management controls and track performance of food items sales at the individual outlet level, inclusive of seasonal and other exogenous factors. The second performance enhancement intervention was a branding make-over that has created a truly distinctive brand widely recognized throughout the country of Georgia. The third performance enhancement intervention was to conduct the company’s first third party tax audit, which improves financial management controls and transparency as the company evolves to become a more mature company with heavier reporting olbigations. The fourth performance enhancement intervention times with Gazelle Finance’s execution of its equity investment in the company: the introduction of a mentor board member to improve the corporate governance capacity of the company.
Young entrepreneurs like Giorgi and Alexander are the key drivers for job creation, innovation and economic growth in Georgia. Deugusto is a great example of how Gazelle Finance achieves such development impact through the rapid scaling and growth of its portfolio companies. “We put the entrepreneur first, to align interests and form a strong partnership that rewards both parties for their efforts,” says Gazelle’s CEO Jeffrey Liebert. Gazelle Finance’s partnership approach was critical not only in the company’s first high growth phase of development, but when it was determined that there was an incentive alignment problem with the passive equity investor, Gazelle Finance provided additional capital to acquire these shares to enable the company to continue on this high growth, job creation trajectory. While commercial returns for its investors are the primary driver for Gazelle Finance’s investments, in addition the company targets a social impact investment goal to generate 33 new jobs per investment transaction. Over the life of the Gazelle Fund it is anticipated that over 3,000 new jobs will be created in the South Caucasus region, of which the majority will be for women. Employment generation is just one of many of the development impact metrics that Gazelle Finance tracks using its proprietary monitoring and evaluation system.
In 2015, Otar Nachkebia and Irakli Chavleshvili hatched the idea to create a branded food products company in Georgia that specializes in producing high quality, natural and organic ingredients, with a focus on using endemic varietals. Despite the fact that Georgia is at the center of where modern human beings first domesticated wheat, during the Soviet-era this crop was nearly wiped-out as a result of unfortunate central planning. Here is where Gemovani enters the picture, as farmers won’t grow endemic wheat varietals if there is no demand in the market for their crops. The Gemovani entrepreneurs established a small bakery and create the brand “Mzetamze”, which in English translates to “The Sun of Suns”. They then developed a seed distribution and off-take partnership with local farms, secured processing space at a flour mill, and developed relationships with retail stores to sell their products. At this point, July 2018, Gazelle Finance steps-in and invests $ 370,000 in Gemovani, including debt and equity to enable the company to rapidly scale their business. The use of proceeds of Gazelle’s capital included ovens, baking equipment, remodeling costs of an industrial-scale baking facility, working capital, and delivery vehicles. The company’s revenues from the date of investment until today has grown from ten thousand dollars to forty thousand dollars per month, representing 300% growth rate and has led to the creation of 30 jobs. In addition, Gazelle Finance through its business development facility, which is blended financing vehicle, provided a $4,000 grant to secure HAACP certification for food quality, safety and hygiene purposes to bring the company into compliance with the highest level of food handling standards. This is a classic example of impact investing that results in import substitution. Moreover, this is just the beginning of the story of these ambitious entrepreneurs, who are positioning themselves to be the next Burts Bees Wax, Toms of Maine, Neiman Ranch of the South Caucasus.
Manana Gvirjishvili is a classic story of an entrepreneur in post-Soviet Georgia.Manana, a former teacher of Georgian language and literature for 18 years, had been a state employee with no entrepreneurial background whatsoever, suddenly was faced with an incredible, but risky opportunity, in a very chaotic time - to become an entrepreneur owning and managing a private school with a 900 plus enrollment capacity [in the middle of an economic downturn].Up until 2011 year Manana had been the principal of K-12 private school “Shvinda” in the Digomi region on the outskirts of Tbilisi.
At this time the school was grossly underfunded by the state and the old facility was in a state of utter disrepair.The dilemma for the government at the time was that the school was the primary K-12 education service provider and community center serving this fast-growing, working class neighborhood, yet it lacked the resources and know-how to provide proper educational services to the children in this community.
In 2011 year the state government agreed to privatize the school if Manana would commit to three conditions: provide quality education on a subsidized basis to a percentage of the local community and the remainder would pay tuition on private school basis, introduce a modern western-styled education curriculum [Emily see the language we used with OPIC], and would invest significant capital to modernize the facilities to meet international standards for a building serving as an education and community center.The first step Manana took was to engage her son, who had been working in Austria, to develop a relationship with the education ministry that would help her to develop the European equivalent curriculum. In addition, she took out the first loan in her life to do a basic remodel of the facilities just to get it to a functioning level. However, this capital was insufficient to meet the minimum standards of competitive western-styled K-12 private school and would not be able to increase enrollment and tuition to meet the debt service requirements of the loan.This is where Gazelle Finance enters the picture. Manana is an exceptional and highly respected educator with a strong vision for her school.The school’s facility assets had great potential for further capital investment that would lead to doubling or tripling enrollment from the current levels. The location of the school in the Digomi region is ideal for creating a market leading private school with a western-style curriculum in what was likely to be a future middle-class neighborhood.Gazelle Finance stepped-in with a minority equity investment that provided the necessary capital to bring the school’s facility up to an international standard and sufficient working capital to attract teacher and administrator talent. In addition, through its ESG and business development services teams, Gazelle Finance completed a [first, health, safety] evaluation, and provided USD 4,000 grant to do fire and safety audit. In addition, utilizing Gazelle Finance’s business development services facility and through facilitation by the investment team at Gazelle Finance, Manana will attend a training with a potential strategic partner in the region with the hopes that further cooperation between these two organizations will lead to further innovation for this emerging market leading private school.