Wednesday, April 18, 2007

Some Thoughts on "Capital" and "Investing" in the BOP

Last month, I was fortunate enough to attend the Skoll World Forum. Interestingly, many of the other attendees were bemoaning the lack of "capital" for early stage social ventures. It seems that just a little more money (or a lot, depending on the participant) would cure a host of the world's ills. And, frankly, many of the participants (including me) were there in part because we are looking for money. But the specific issue of getting money for your organization is different than the issue of "is there enough money" for this emerging sector.

I have spent part of my career in the biotech sector. It was a common complaint that there was not enough start up capital in this industry either. The complaints were numerous: venture capitalists were moving to later stage deals, pharmaceutical companies were waiting too long to enter partnerships, the governments needed to get involved, universities needed start up funds, etc. So I designed an experiment. When someone started in on this, I would ask them for a specific example of a good team with a good idea that didn't get funding, somehow. In close to 10 years, I never got an example. It is NOT a trick question.

Does this mean there aren't examples of companies that didn't get as much funding as they wanted, had to delay some programs, pay "below market" salaries, travel in coach, or stay in Motel 6? Of course not. The point is that good teams, energized by good ideas about which they are passionate, will figure out a way to keep going. They work for stock, stay in Motel 6 and bust their butts. So, please, tell me what good social venture with a good team hasn't gotten funded, somehow?

When I talk about funding BOP ventures, I emphasize that "capital is relentless". What does this mean? It means that capital seeks a return... and if it doesn't get it, it leaves. And this isn't true of just financial capital... it is also true of human capital, and natural capital (1). So, if your organization (or sector) isn't getting capital you are doing something wrong. If you are having a hard time raising money, or getting good people to work for you, your red warning flag is flapping. I hope you see it. This does not make you a bad person, or a failure (unless you don't figure it out and try to fix it). Remember, too, that no one is entitled to capital. Remember those old Smith Barney advertisements? You have to "earn it." As long as capital is limited, you are competing for it, and that is hard work.

What about the bigger picture? What is the funding challenge for social ventures (and I am focusing on the "new" models here, not the more traditional charities)? Why is capital going to come into this sector? Remember, the context of trying to alleviate poverty is one of trillions of dollars of aid, with a very poor return on the investment. Now we are mixing in "start up venture," another high risk/low return (overall) proposition. At least when I took math, a low probability times a low probability resulted in an even lower probability. That is going to make capital (of all forms) a bit leery. Hmmm. More hard work.

And what about the other side of the equation? Are Jeff Skoll/Bill Gates/Pierre Omidyar/Google.ogres (just kidding, Sergey, in case you are reading this) sitting around saying: "Jeez, I wish I had more money, because there are so many good teams with good ideas that I would like to fund because I know they can be successful?" I doubt it. My sense is that they are seeing lots of interesting ideas swirling around, but not the teams that offer superior execution. Jeff Skoll was posting on this in the early days of his SocialEdge site. Why are and Omidyar Network looking in the for-profit sector? Probably many reasons, but at least in part because they aren't happy with the deal flow/quality in the social sector. Why are Prahalad and Hart emphasizing the need for multinational companies to lead the charge on BOP markets? In large part because they believe that only MNCs can execute(2).

Please don't tell me the answer is that if the sector only paid more (3), more good teams would form and attract more financial capital. The history of entrepreneurship is that ventures start with people with dreams, that then attract capital. It is only during the bubbles that this sometimes flips, and it doesn't last. It certainly isn't a "sustainable" way of attracting capital to the sector.

My next post will be about "walking the talk". Where am I investing in this sector... both my financial and human capital?

Until then, do good, and be great at it.
(1) I don't think this is necessarily the case with intellectual capital, because for practical purposes, there are no limits on imagination/creativity. That is not to say that governments, cultures and organizations don't try to limit them.
(2) They convenienly ignore, unfortunately, that there are few (no?) examples of large corporations leading large scale societal change. That role typically falls to entrepreneurs and activists.
(3) Check out Rod Schwartz's interesting observations on this from his March 30 posting.


Anonymous said...

No Paul, it's not about the compensation levels in the social business sector!

Compelling businesses get funded. If they offer a high potential return on capital invested, there will be a long queue (that's British for 'line') of people looking to invest. If it's a social investment, potential funders can either be attracted by the financial or non-financial rewards. But I must confess, I think you're right, compelling businesses never fail for lack of funding.

This does not mean that the "lack of capital in the sector" argument is not the most common explanation used by social entrepreneurs in discussing their failures. Investors, are invariably short sighted idiots who cannot see the wondrous beauty of their proposal. This is classic behavior, and perhaps it's more comforting to sit smug in the certain knowledge that there are extraneous factors which are preventing your success. The best social entrepreneurs I know, however, try to get underneath the potential investors "no" and find out how to improve their proposal. Others simply start up on on a shoestring budget and grow organically until the right time comes to secure external funding.

But in conclusion, I'm afraid that once again I have to agree with you. It is a weak team, a flawed business model, a poor business plan, a dysfunctional board or bad timing and not a lack of capital which hampers this emerging sector. As the proposals in the entrepreneurs improve the capital will flow.

Regards, Rod Schwartz

Unknown said...

Paul, I just commented on this on my blog

What about investors as entrepreneurs? What may be lacking is creative, talented, entrepreneurial investors as much as great teams pitching great deals.