Wednesday, June 17, 2009

Pay Attention To Your Private Parts

When you are designing a venture, spend some time on the network. Think about the "5 Deals" in a venture: customer, founders, funders, employees, and supply chain. Your venture will need to make a deal with each of these groups to build out the network.

Once you have sketched out your proposed network (use a dirty napkin for karma points), think about which of these deals are private, and which are public.

Private in two ways.

First, is this a deal with a public organization (charity, social enterprise, government agency) or private organization (a company)? If private, the consideration (the legal term for value) will need to have some financial components. Not all financial, but primarily. If public, then the mix will likely involve some non-financial items.

Second, is this deal private between the parties? Can you talk about it? Typically, a venture does not disclose terms of supply arrangements, founder and employee options, or terms of financing. Be sure you understand what you can talk about, and what you can't. And understand that if you have public organizations in your network, they may have a different culture, and rules, about disclosure.

Now back to the napkin. For many BOPreneurs, there will be a mix of public and private organizations in the network (yet another "hybrid"). As with any entrepreneur, your job is to create and share value. Not just for your organization, but for this network. Too often, founders will focus on creating value for a specific group ("our" investors, "our" users) but not for the entire network. Does the network create and share value effectively and efficiently? Is each group providing and receiving value? Can you find that elusive synergy that characterizes strong networks?

An example from Envirofit. Our cook stoves are manufactured in China by a private company. Envirofit (a non-proift) ships these to India and sells them through a network of dealers and retail outlets (mostly private, but some NGOs). Our customers purchase the stoves, and receive a warranty from Envirofit. Envirofit employees have incentives to sell stoves (but the details are private), as do the dealers and retail outlets (profits!). We provide value to our donor-investors by reducing pollution and improving public health. Paying attention to the private parts of the network is important. Private firms are willing to work with social enterprises, but they also want to be paid. And these deals with private firms can be a source of competitive advantage for your venture (price, reliability, etc.).

The trick, of course, is to provide value all the way through the supply chain. Customers like the stove and find the price attractive. Dealers sell at a price which provides an attractive profit. Envirofit gets enough margin to pay employees and suppliers. Manufacturers make an attractive profit by selling the stove to Envirofit.

These 5 deals are key to building your venture. Now they are on your napkin, be sure that you can make the numbers real, and that you understand what value each organization provides and receives by participating.

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