At the FLII Central America & Caribbean conference in Honduras in November 2023, one thing stood out: among hundreds of entrepreneurs and investors, almost no one represented medium-sized firms, or funds targeting companies with revenues above USD 1M. Nearly everyone worked at the micro or small scale. When we asked why, the most common answer was that the region has a “missing middle.”
Does the missing middle exist?
The idea that developing economies lack medium-sized firms was popularized by Tybout (2000) and Krueger (2009). Others argue it reflects how the data are constructed; see Hsieh and Olken’s “The Missing ‘Missing Middle’”.
The question matters to us because this is where we invest. Our view is that Central America does have a middle. It is smaller than in other regions, partly because so much economic activity is informal, but it exists. Through our network, we have built a proprietary database of more than 600 firms with estimated annual revenues above USD 5M, and identified over 60 promising investment opportunities within it.
Why these firms were absent from the conference is harder to say. One explanation is that they can access cheaper capital than smaller firms. In our experience that is often not the case: we know several medium-sized companies that cannot borrow below 18% in local currency.
Why the middle deserves attention
Returns scale with size. Medium-sized firms can face real barriers to growth, but the payoff is larger. Quadrupling revenue over eight years takes a small company from USD 250K to USD 1M; a medium-sized company goes from USD 5M to USD 20M. We achieved the latter with one of our investments.
The job impact is greater. At one portfolio company, full-time headcount grew from approximately 30 to over 100, with wages exceeding USD 1,200 per month, excluding senior management, which is significant in a country like Honduras. Small firms that grow from 2 to 10 or 15 employees matter too, but the scale is different.
They are more resilient. Starting a business in Central America is one thing; operating one successfully is another. Medium-sized firms have already proven they can navigate a difficult operating environment, which makes them less likely to fail. What they need is the capital and capabilities to grow, and that is the gap a dedicated manager with a differentiated strategy can fill.