Sunday, June 29, 2014

The BS test for social entrepreneurs: 5 questions every impact investor should ask

The world loves the story of the lone crusader (who happens to be young, attractive, and usually from an elite university).  Social entrepreneurs, specifically those from the United States and occasionally Europe who are flocking to the Global South to save the poor while living large, are the latest answer to all the “failures” of the non-profit and public sectors.  And there are plenty of “impact” investors ready to fund them, and foundations ready to crown them with admiring awards.  It’s all good, except for the fact that many of these (expensive!) ventures fail to deliver any value.

Some investors have set up shop in the Global South so that they have a front-row view of the action and can get their hands dirty.  Many other investors are unwilling or unable to do this.  As a result, social entrepreneurs sometimes take advantage of the fact that potential investors are not always savvy about the targeted markets and contexts.  Over the last few years of meeting a lot of entrepreneurs, I have come up with a few basic rules of thumb that may help investors better separate the truly great ideas from the ones that are pretty unlikely to succeed.

#1 Where is the entrepreneur based?  Or spending most of their time?
If you were starting up a new company in Silicon Valley, would you spend most of your time in Tokyo?  Of course not!  You’d be living and breathing the challenges of getting everything up and running on the ground.  Trust me that there are many additional levels of complexity when you try to do this in a developing country—from electricity, to establish occupancy in an office, getting permits, to the informal powers that will inevitably expect a cut if you want to avoid their wrath.  None of this can be done remotely. 

If the CEO is spending less than 80% of their time onsite, I’d be deeply skeptical that a.) they actually know what’s going on, and b.) that they are qualified to talk about whatever problem they are solving.

A side note: social entrepreneurs that decide to tackle markets in multiple places (like East Africa and South Asia) simultaneously scare me a bit, because there is really no economy of scale and double the challenges.  Poor people are not the same everywhere—and it’s hard enough to go one place and solve the problem.  Once you prove something in one place, at a reasonable scale, then it makes more sense to me to look abroad.  A global portfolio too early to me points to signs that an entrepreneur is unable to scale up in one place and is compensating (see #4 for more on that).

#2 Can the entrepreneur communicate with his/her target consumers?
I’m always surprised at how quickly some American entrepreneurs and investors assume that the ability to talk with consumers “over there” is superfluous.  To me this is just subliminal racism or something.  Obviously if someone who only spoke Urdu tried to apply for funding to market a new product to American teenagers, without having actually ever spoken to one or worse, even thinking that she needed to talk to one, they would face serious doubts from investors.  But flip the roles, and that’s the norm.

In the “normal world,” entrepreneurs are intimately familiar with their potential consumers.  Often they are themselves a member of the target group, or were quite recently.  It’s possible to design products and services for people whose culture, lives, etc. are radically different, but it’s much harder to do so.  Understanding the intricate details of decisions, values, risks, trust, and financial management requires diligent efforts by an outsider.  And a lot of time.

If the entrepreneur cannot speak the local language, and even worse, doesn’t seem to think that his/her constant dialog with consumers is required, this should be a big red flag.  If there are “other people who do this for him/her”, then those people better have the lion’s share of decision-making power.

#3 Can you talk to someone outside of the company (ideally a semi-neutral third party) who has seen the work on the ground?
Over the past few weeks, I have been reading a great deal about a social enterprise that’s going to transform financial services for the poor.  The founder is based in the USA, the company in South Asia.  A friend of mine work works in the industry tried for a month to schedule a visit to see their work on the ground.  After receiving lots of warnings that the field site was “really remote” and “would require an uncomfortable journey” and other things that failed to dissuade my friend, he was eventually told that there was actually “no activity to see.”  Unfortunately, entrepreneurs working in remote places often greatly overstate their activities because it’s unlikely that the investors or the media will actually go and check.

Don’t be played a fool.  Go yourself, or check with others in the region/sector who may have gone (make sure to say upfront that the conversation is “off the record” and mean it, if you want to get the real picture without endangering relationships).  Get the name of the villages and even check on social media/facebook to see if you can find someone in the area.  Just because there’s an article in the New York Times about the company, doesn’t make it true.  Write to the journalists to see if they visited.  If the entrepreneur can’t produce a few external references and/or seems reluctant to let you visit, something’s up.

#4 Who are the local partners?  How does the entrepreneur describe the relationship?  How do the local partners describe it?
Every successful social enterprise I’m aware of owes at least some of its early success to a good partnership, usually with one of the so-called “evil” or “failed” non-profit organizations.  Organizations, like BRAC for example, have a deep community network that can provide distribution, but also the less tangible benefits such as legitimacy, quick mechanisms for feedback, and knowledge on community influencers.  Many social enterprises seek out partners like BRAC, because they also know that a successful experience with a world-renown organization will signal to investors and donors the quality of their project.

So if an entrepreneur says that they have no local partners, this would be a crazy big warning sign.  Never underestimate how hard it is to break into this space—from getting policy-makers to approve your work to convincing a farmer in a village to spend money on your product.  The lack of local partners would probably mean that they approached organizations and were rejected, which is a sign that you may want to do the same.

If they have a local partner that sounds legitimate, ask them about the experience, and the plans for scale up.  Is the NGO also seeking funds for scale up?  Because that’s what we usually do when we see something effective.  Are we publicizing this new innovation?  Talking about it at conferences?  If not, ask the entrepreneur why not.  My favorite answer is usually “because the NGOs just can’t see the benefit of it.”  That’s industry code for, “The NGO leadership is just too polite to tell you that it’s not working and hoping that this can just quietly die.”

#5 Does the entrepreneur (or one of his/her co-leaders) have the technical expertise required to run the business and evaluate the quality of the product/service?
One of the truths of development (and life) is that there is ZERO correlation between the ability to TALK the walk, and actually do the work.  Yet it appears that smooth communication is the best indicator of ability to raise funds.

Fine, investors want to talk to someone who excites them with the possibility.  But probe a bit deeper to learn about the bench strength.  Taking a design course or a “lab” is not enough!  A medical device company should have a doctor or two, a new solar light needs a few engineers. These should be full-time staff, not just advisors, and ideally they would be based in or near the primary market, so that they can continuously observe what’s not working.

If you get the sense that the entrepreneurs greatest asset is the ability to paint a beautiful story rather than provide specific details, ask to speak to someone else as well who is potentially less flashy but more grounded in the work.  If everyone you speak to besides the entrepreneur seems to either be a.) far away from strategic decisions, or b.) inexperienced and unsure about their technical expertise, danger ahead.

Final thoughts 
Personally, if I had millions of dollars that I was thinking about investing for “social good,” I’d take a few thousands and go on one hell of an expedition around the world (Jim Rogers did this and had a blast!).   I’d take my sector(s) of interest, identify a few countries with a lot of activity, and go spend a few weeks visiting them.  Will it make you an expert? Not at all.  But it will give you the ability to picture the environment and the people to a much more vivid degree.  Many people take these trips with an eye to what’s NOT working, or what could be improved.  I would suggest going the other way—focusing on what is working, what has changed in recent years, because there’s a lot that can be learned studying the successes and multiplying them.

Don’t have the time?  Hire someone like me to take the trip for you and report back on what I see. #dreamjob

 Want more?  Kevin Starr at the Mulago Foundation gives some good guidance from his own experience.

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