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Thursday
September 5
2013

NextBillion Editor

On the Ground at SOCAP – Day 2: Big partnerships, lean startups and government hijinks

Scott Anderson and Marzena Zukowska are your roving bloggers from this week’s Social Capital Markets Conference in San Francisco.

Here are just a few of the many snippets of wisdom they picked up during Day 2 (Wednesday) at the sprawling social investing gathering – taken from four of the day’s many sessions.

High Growth Partnerships Between Social Enterprises and Global Corporations

Four years ago, solar lamp company d.light was producing about 20,000 to 30,000 units a month. Today, that number tops 500,000 a month. One significant customer contributing to that sales surge is Total S.A. – that’s right, the international oil and gas behemoth.

Donn Tice, d.light’s Chairman & CEO, talked with Robinson Alazraki of Total S.A.’s Access to Energy Program about the partnership and its pros and cons – for both social enterprise and multinational – during the “High Growth Partnerships Between Social Enterprises and Global Corporations” session at SOCAP on Wednesday.

Total sells d.light solar devices throughout Africa on a business-to-consumer basis. Its relationship with d.light is not as a corporate social responsibility initiative, but as a B to C supplier. Tice explained that both the social enterprise and the corporation have aligned interests in terms of getting solar appliances into the hands of customers at an affordable price. But to meet Total’s standards, d.light not only needed to ramp up its production, but also its quality – and that arrangement was not as easy as flipping on a light. According to Tice, two years ago the company conducted a significant product recall, one that required a “seven-figure” commitment to make right.

“If it goes wrong … it goes wrong on a large scale,” Tice said. Asked for his advice on partnering with a multinational, he was blunt: “Fasten your seatbelt low and tight around your waist and prepare for turbulence.”

Total also faced an uphill climb. Convincing upper management that it was worthwhile – both as a social benefit and as a business proposition – to be a B to C supplier of d.light goods wasn’t easy, Alazraki said.

“(Terms like) base of the pyramid, ‘social entrepreneurship’ – it was like speaking Chinese to senior management,” Alazraki said of the early going.

What Does the Lean Startup look like for the Social Sector?

Yes, this session was all about applying Eric Ries’s lean methodology principles to nonprofits and social enterprises. These principles include: valuing testing experimentation, relying on customer feedback, and failing fast and forward. Great ideas – and easier said than done! But here are some concrete steps and examples from the panelists on how to get started.

“First off, ask yourself ‘What are the organizations that we respect that are already doing this?’ Take the top three ideas from five organizations before launching,” said Tabreez Verjee of Uprising. Do your market research to build a bigger cushion against the aftermath of failure, which itself could be inevitable.

As a social entrepreneur, you also need to be open and honest with your investors. “We know we will fail and screw up,” said Megan Kashner of Benevolent. “We need to be open with funders about that, so when you come back later, no one is surprised about your pivot.”

When you move into the realm of impact, and start measuring your success or failure in the eyes of the investors, the answers get murkier. According to Chase Adam of Watsi.org, “The social space has not learned to quantify risk well, because success is still seen as binary.” How do you measure the impact of a successful microfinance institution against that of a local grassroots nonprofit delivering medical supplies? “It’s like pass and fail grades at school – why try hard when you have this large margin of error?” said Adam.

The question around risk then becomes “Who bears the risk of testing your assumptions?” Resources in the social sector are already scarce as everyone is competing for the same grants and capital investments. How do you explain to a funder that you just don’t know and need to test it?

Christie George of New Media Ventures offers the final words of wisdom for the lean-startup-social-sector enthusiasts: Approach your funders like you would your customers. Understand why they are giving money, how they are giving money, and who is benefitting. Understanding the customer is at the core of lean methodology, and you don’t need to be a Silicon Valley overnight success to understand that.

This is Impact Investing: The Inner Workings of 15 Outstanding Funds

“When you get to that super star status sometimes your problems have just begun,” said Mildred Callear of the Small Enterprise Assistance Fund (SEAF) with a laugh.

Callear was referring to successful social enterprises that are also the recipients of public/private financing. SEAF has plenty of experience in that regard. It was founded by the organization CARE some 25 years ago to assist former Soviet block countries in creating new enterprises following massive job losses after the fall of the state-run economy. The first country-specific fund was launched in Poland. Some 32 funds and more than $700 million in managed money later, SEAF has made 350 investments and seen 150 financial exits from those investments, Callear said.

“We’re in markets where, certainly at local levels, government officials will try to corrupt your team,” Callear said.

Whether it’s dealing with government officials looking to bribe entrepreneurs, or tax administrators who go after companies that adhere to standard accounting practices (because playing by the rules is suspect), there are increasing stories of governments leaning on social enterprises. These types of scenarios are likely to rise with the growth of public-private investment funds.

“The challenge was what free money could do to our own finances,” said Veneet Rai, founder of Aavishkaar Venture Management, who accompanied Callear on the panel.

Aavishkaar, a venture capital firm focused on India’s rural areas and the BoP space, recently made the final close of its second venture capital fund, Aavishkaar India II Company Ltd at $94 million. And although the Indian government has served as an investor in Aavishkaar for a rate of return, Rai said he has eschewed any government grants from the start, even though it took him several years to pull together the first $1 million for BoP enterprise investments.

“The moment you get free money is the moment you get extremely unaccountable,” said Rai, who candidly added that had he taken government grant money his temptation would have been to raise his own salary.

From Oaxaca to Peru: Case Studies of Local Innovation Ecosystems

When Mark Beam, the co-founder of SOCAP, first came to Oaxaca (the second poorest state in Mexico, with over 75 percent of the population living in rural areas), he did not see an absence of innovation, but instead, an absence of networks.

“I was introduced to many great projects across Oaxaca, but everyone was working in isolation – either due to competition for scarce funding resources or fear that someone would take their idea,” said Beam, emphasizing the need for a physical space to encourage co-creation.

All across metropolitan cities in the U.S., we are accustomed to seeing co-working spaces, where entrepreneurs, consultants, writers and artists can share desks, tables, coffee machines – and most importantly, ideas. Can you imagine building a culture of co-creation from scratch in a region that is not accustomed to such direct openness?

When you’re talking about a place like Oaxaca, “The best approach is to be local and grassroots, but offer the legitimacy of being connected to a global network,” said Beam. That’s why he co-founded the Hub Oaxaca, which began to build a network connected to other networks that encouraged local innovation. These networks included TedX, FabLab, and even the Catapulta Festival, to include artists and musicians as well as makers and doers.

While Oaxaca is seeing the beginning of an ecosystem of social innovation, many of these innovators still face major challenges in attracting early stage capital, said Beam. “The microfinance piece exists, but the next level of funding is still missing.”

Still, he said, this is an opportunity for more than just social entrepreneurs and investors – Oaxaca is building a movement that encourages everyone to use their passions for social good.

Categories
Entrepreneurship
Tags
conferences, impact investing, nonprofit, public private partnerships, SOCAP, social enterprise, startup