Skin in the Game: Microequity and Mentorship for Online Freelancing based Micro-entrepreneurs in Bangladesh

This project considers an innovative new microfinance product, based on the principles of equity financing, in which promising potential entrepreneurs are provided with capital, training and mentorship to help them become online freelancers.

A key question in the study of SMEs in low-income countries is what policies can help more dynamic entrepreneurs start and grow their businesses. However, recent studies that have attempted to alleviate financial constraints through the provision of microcredit, or human capital constraints through training programs, have shown limited impact. Novel work suggests that more personalised mentorship may have significant benefits for entrepreneurs. Following this wave, in this project considers an innovative new microfinance product, based on the principles of equity financing, in which promising potential entrepreneurs in Bangladesh are provided with capital, training and mentorship to help them become online freelancers.

The researchers will work with 340 potential microentrepreneurs who have passed the screening stage for our online freelancing project. Of these, they will randomly assign 100 to a control group, who will not be offered any form of financing, but will be offered the package of initial training and mentorship from the partner organisation, for a fixed up-front cost. The remaining 240 will be placed into one of three treatment groups: (i) a debt treatment group; (ii) an equity group; and (iii) a second equity group, which is the same as the first equity group, except that the mentor’s compensation is directly linked to the entrepreneur’s performance. This allows the researchers to isolate the causal effect of each different contract on microentrepreneur outcome.

The online freelancing industry is currently experiencing extremely high growth; there is also substantial policy interest in online freelancing from the Bangladeshi government. More generally, this project will inform the design of financial services for the poor in many developing countries, in particular for those looking for an alternative to high-interest debt-based financing modes. It could also be used as part of a government-sponsored programme, in collaboration with online freelancing platforms, training institutions and existing microfinance institutions to promote the growth of microentrepreneurs, in particular in rural areas. An equity-based product has the potential to meet the demands of millions of poor individuals who would otherwise have little or no access to finance.