Examining Entrepreneurs at the BoP
The Social Equity Venture Fund (S.E.VEN) has just invested $100,000 to research the age-old question of what factors lead some entrepreneurs to success and others to failure, only this grant is one of the few to support research on this topic in the developing world.
S.E.VEN has awarded this money to Harvard poverty expert Michael Kremer, as a part of a total of $400,000 that it has invested in researchers working on enterprise based solutions to poverty. Kremer’s study will look at entrepreneurs in both Kenya and India to “understand who these individuals are, what in their environment contributes to their development as entrepreneurs, and social, institutional and personal barriers to further growth.” These two countries were chosen because “most of those subsisting on less than a dollar a day live in South Asia and Africa.”Clearly, there is something different about entrepreneurship in these environments or there would be no reason for studying them in addition to all of the research that has been done on entrepreneurship in more formal markets. The environments at the BoP are filled with uncertainties such as fluctuating currency, interest rates, political unrest, population migration, and technological and infrastructure upsets.
So what does this mean for the characteristics of an individual or a venture that is able to thrive in this uncertain environment vs. the more predictable context of the developed world? Is there a difference?
And if there is a difference, do we have to reexamine the tools and techniques that we use to “identify the entrepreneur” to ensure that we are looking for the right characteristics?
A recent journal article by Jay Barney and Sharon Alvarez of the Ohio State Fisher College of Business laid out the two dominant theories of entrepreneurship: the discovery theory and the creation theory. The discovery theory, which has been the more widely researched of the two, abides by the idea that business opportunities exist because of shifts in the market, and the role of the entrepreneur is to “discover and exploit” those opportunities that “arise exogenously.” This theory works well in an environment of certainty, where business plans can clearly make projections on future demand and earnings. “Armed with this information, potential entrepreneurs can apply traditional risk-based decision-making tools, including discounted present value techniques, real options analysis and scenario analysis.” These entrepreneurs are able to lay out a well-defined plan that will not morph much over time and will have a good chance at attracting startup funding.
However, discovery theory does not work as well in an uncertain or ambiguous decision-making context. Here, the creation theory plays a role. The creation theory sets forth the idea that instead of searching for exogenous opportunities, entrepreneurs create opportunities by “exploring ways to produce new products and services.” With creation theory, entrepreneurs are operating in an uncertain environment where it is difficult for them to forecast demand and earning potential, and instead of searching within existing markets, successful entrepreneurs act, observe how consumers and markets react, learn through trial and error, and constantly reexamine and adjust their offering. It brings to mind a line that I heard from Hector Ureta, of CEMEX’s Patrimonio Hoy project. When referring to the ingenuity of those at the BoP, he said that “the poor operate in the optimal corner based on the constraints of their environment.”
This aligns well with Stu Hart’s creative discovery process that he puts forward in the BoP Protocol. In fact, in a paper that he released last week, “Beyond Selling to the Poor: Building Business Intimacy Through Embedded Innovation,” he and co-author Erik Simanis devote an entire section on the “creation-based approach to opportunity,” which cites the Alvarez and Barney paper. He writes that one of the keys to embedded innovation is abiding by the creation-based approach to business development, whereby a new market is “nurtured by progressively evolving an altogether new value proposition and business model through action-learning.”
The implication of these two theories is that most people in the mainstream have traditionally seen entrepreneurship through the lens of discovery theory, which means that they have assumed that entrepreneurs are individuals with special knowledge and characteristics that can be identified, and the viability of their offering can be judged by business plan competitions and forecasting models. As Hart says, “the cornerstone of the discovery-based mode is the business plan.”
So, when we use our traditional tools and techniques to identify ventures in the developing world, are we looking through the wrong lens? Are grant proposals, business plan competitions, and traditional forecasting models that are supposed to determine which ventures deserve seed capital the right tools for assessing new venture viability for the BoP?
Maybe one of the reasons that we have the “missing middle” of financing for BoP ventures, and one of the reasons that even progressive organizations like Acumen Fund are struggling with deciding how to provide more than mezzanine funding is because one area where we haven?t seen much innovation is in the theories, tools, and standards to evaluate entrepreneurs and measure potential ventures in these ambiguous environments.