Tuesday, September 22, 2009

3 Billion Served?

When I was a kid, the McDonald's signs kept me updated on how many billions had been served. The year I was born (1958), in it's 10th year of business, it hit 100 million. When I turned 5, McDonalds hit 1 billion. About the time I reached 6 feet, it reached 10 billion burgers. By 1984, when I graduated from law school, McD's reached 50 billion. A few years later it stopped counting.

What does this have to do with BOPreneurs? Well, this simple metric illustrates a great example of scaling up an international business. Jim Collin's writes about the flywheel effect of gradual, increasing momentum in a business. For McDonalds, part of this came from potent branding and marketing to a newly mobile population. But the other part came from a solid franchise model. This let them experience logarithmic growth without exploding, and allowed them to leverage other people's human and financial capital.

Yesterday, Jason Fairbourne of BYU's Economic Self Reliance Center, visited CSU to talk about his work in applying franchise principles to BOP markets. Fairbourne persuasively made the case that this is a promising approach for both large companies and growing ventures. Borrowing from his research on companies such as VisionSpring and Fan Milk, as well as his own work with a new start up in Ghana, Fairbourne proposes a straightforward framework for "micro-franchising."

1. Find a Successful BOP Business. He didn't say this was easy, and it takes getting out into the field. You won't find these at conferences or in a library. On the other hand, since many of the businesses in BOP are hawkers, you might be successful by looking at "businesses that aren't hawkers." Or not exactly hawkers. It takes a little observation to see that Fan Milk is not just hawkers selling yogurt or ice cream in Ghana, but a sophisticated, profitable organization with low turnover of its bicycle based franchisees. If you are a BOPreneur, microfranchising is not your strategy, but it is a tactic you can use once you have proven your business model.

2. Systematize it. What is the venture's business model? What are leverage points that come with growth? Look at issues of branding, supply chain logistics, territory, contracts and operations manual. The idea is to remove the "creative burden" required for a new entrepreneurial venture, and move to a system which a manger can operate. By doing this, the franchisor reduces risks and enhances income generation for the franchisee. Note that Fairbourne isn't advocating for the demise of entrepreneurship in the BOP. But he is suggesting that those BOPreneurs wishing to "scale up" would be better off to rely on training microenterprise managers, rather than hoping to find an army of micro-entrepreneurs (which he has found to be in short supply).

3. Replicate it. Once the supply chain has been figured out, the manuals written, the managers trained and the business proven regionally, it is easier to replicate the concept into other territories and markets. This is where McDonalds excelled. Not all McDonalds were the same, but they were very similiar around the world. Local modifications may be neccessary as a venture enters new markets, but they should be kept to a minimum to enhance rapid growth. CSU students quizzed Fairbourne on how to decide where to start, and he suggested they pick regions with more stable governments and growing economies.

Fairbourne emphasised two big advantages he sees for this approach. First, it reduces the risk of failure for the business operator. Done properly, incentives for success and penalties for failure are better shared under Fairbourne's approach. Secondly, it connects informal operators to formal supply chains. In doing so, it has macroeconomic effects as these businesses become formalized and grow (not surprisingly, Fairbourne has discussed his approach with Hernando DeSoto's ILD as a way to promote development).

If you are interested in finding out more about micro-franchising, take a look at Fairbourne's book, the Microfranchise Toolkit, and David Stoker's blog. And certainly attend the conference he is hosting in early November (as a special BOP bonus, I'll be there too).

I was impressed with Fairbourne's talk, and the potential microfranchising offers for certain types of consumer focused businesses in the BOP. There is a lot of cheap talk on scaling up BOP ventures, but precious few examples of BOPreneurs that can claim "millions served" (IDE, Aravind, Grameen). The world could use a few "billions served" social enterprises, and if history is a guide, franchising might be a good way to get there.

Tuesday, September 08, 2009

Definitions and Metrics (yawn)

SoCap09 had many sessions, blogs and tweets on metrics and ratings. And the "social entrepreneurship" field seems to have a fascination with definitions. Dare I say it is a morbid one? (I do.)

Today, Ashoka x-posted Adrienne Villani's blog on the question: "can you be a social entrepreneur if you aren't the head honcho?" Why do we care so much who gets to wear this coveted badge? Does it actually make a difference where it counts- solving the issues of poverty, environment and health in the BOP? I'm skeptical.

So, why do I think this fascination with definitions and metrics is "morbid"? Because this field is full of people who like to watch, comment and tweet. Social entrepreneurship, and for that matter, plain old entrepreneurship (irony intended) are not spectator sports. This well meaning crew (I am giving them the benefit of the doubt) of spectators is, at best, a distraction. More likely, it is a negative effect, in that it is making entrepreneurs spend time on spreadsheets, conference calls, conferences and reports, instead of getting stuff done. And if the spectators spent their conference fees on ventures, I'd bet the world would be better off. Take the money to attend the next "unconference," and start a fund which actually has to make decisions and investments. Not just discuss stuff.

Will ratings and metrics help? Well, reports from both Skoll Foundation and the Center for Effective Philanthropy help illustrate the quandry. Because these entrepreneurs build value that cannot be measured with financial tools alone, investors/donors have resorted to a plethora of self-set goals. Perhaps workable for measuring effectiveness of an individual venture, but hard to compare across a portfolio. Unlike those VC's (which most of our spectators seem to envy) who supposedly have terrific, easy to use metrics (e.g., 10x or 30+% IRR). So our spectators get all a-"twitter" on how the field needs transformational radical new metrics. Then they fall all over each other with competing methods. So the new venture looking for funding now has to run spreadsheets using IRIS, GIIRS, SROI, and WTF.* That is sure to add value, right?

Can standardized, improved metrics help bring new capital to the field and fertilze more and better ventures? That is the underlying assumption. But as I have written before,** I suspect this capital shortage in this field is only the market being relentless. It isn't a financial capital shortage if the market is not providing funding to those ventures that don't deserve it (and I have had my fair share of these). It may be a human capital shortage. Does financial capital drive more human capital into a new field, or does experience point to the converse being true? My opinion is that finance follows after the innovators; the trail needs to be pretty packed before those carrying money bags come along. And the early innovators aren't motivated by money, or swish conferences. They are motivated to fix what sucks.

Two years ago I challenged this sector to "give me a specific example of a good team with a good idea that didn't get funding." Maybe I don't get around enough, but no one has given me that example. Sure not every venture gets what it tries to raise, but the good ones are still going. Yes, the market is a nasty and brutish place, compared to the loving embrace of a feel-good conference. Progress can seem slow to the spectators, but on the field, the entrepreneurs are working hard, learning and doing. Often without standardized metrics and rigorous evaluation techniques. But making progress on addressing what sucks. Doing something about it.

Don't get me wrong. I think there are definitely some unserved needs for financing these new ventures. New instruments and new incentives could be very useful. But enough on definitions and metrics. Time for less talk and more action- if you have a theory on metrics, go raise a fund (e.g, Acumen) and make some real investments. A few decent sized seed and A rounds have happened.*** A few more are in the works. All good stuff. But I think that there is too much academic/consulting/foundation DNA in the room. Not listening enough to the entrepreneurs and experienced investors. Having investable deals will drive investment in worthy ventures, not better definitions or metrics.
*OK, I admit it, I made the last one up.
** See here and here, if you are so inclined.
*** d.light and Vidagas come to mind.