Small Companies, Big Impacts
Editor’s note: This post first appeared in www.wri.org
The New Ventures country directors answer questions about what small, sustainable companies can do to boost local economies and protect the environment.
One company supplies solar lanterns to communities without electricity. Another refurbishes discarded copy machines and resells them to companies that couldn’t otherwise afford them. Another turns coffee waste into ethanol. Small and medium enterprises (SMEs) are the engines of local economies. They drive innovation, spur equitable growth, create jobs, and supply poor communities with better products and services. But many small entrepreneurs have trouble bringing their ideas to fruition, and most will fail within the first few years. For sustainable SMEs – those that manufacture and market environmentally friendly products and serve low income communities – the challenges can be particularly daunting.
WRI created New Ventures to help sustainable SMEs build their capacity, learn key management skills, and connect with investors. Working in six of the worlds’ emerging economies – Brazil, China, Colombia, India, Indonesia, and Mexico – New Ventures helps these countries develop their economies while protecting their environment.
I recently sat down with the six New Ventures country directors at their annual meeting in Washington, DC and asked them to explain why these small companies can have such a big impact:
What challenges do small and medium enterprises (SMEs) face?
Sanjoy Sanyal, India: In the developing world, SMEs lack one very critical resource: credit and financial resources to grow. They may also have access challenges, such as access to markets, access to the right kind of talent, but fundamentally the lack of access to credit and financial resources can be a debilitating obstacle.
Diyanto Imam, Indonesia: There’s also the challenge of capacity building. In terms of technical knowledge, these people know what they are doing. They know how to develop efficient machines, they know how to create a formula for an organic pesticide or herbicide. But many of them don’t know how to run a company, they don’t know how to develop a balance sheet, or they don’t even know what a balance sheet is.
They don’t have the business skills to begin with, and for green SMEs in particular, they also need to educate their customers about their products. Most people in Indonesia don’t really differentiate between green products and conventional products. They equate green products with a premium price and don’t understand the other benefits.
Andre Carvalho, Brazil: In Brazil, it’s very difficult to attract investment. Many companies don’t know how to market themselves. They don’t know what “green” means exactly, or they’re green and they don’t even know it. These companies need investment, they need resources, they need networking opportunities, and they need media attention.
Why is it so important to support the growth of SMEs?
Sanjoy Sanyal, India: In developed countries like the US or in Europe, SMEs contribute a substantial percentage of the gross domestic product. So vibrant SMEs, when they’re well managed, have the ability to radically reshape a country’s economics. At the same time they have these challenges. So it’s really fertile ground for intervention.
Diana Gaviria, Colombia: It’s not only important to help SMEs, it’s important to help green SMEs. In many ways, in our country, SMEs are the motor of the economy, and by having green SMEs that are successful, we’re promoting more sustainable societies and showing the world in general that having a sustainable business model is something not only viable but that can also promote economic development.
Can helping SMEs also help the poor?
Andre Carvalho, Brazil: Yes, definitely. SMEs can work more directly with smaller suppliers than big companies can. The majority of suppliers to big companies have to be big themselves in order to keep up. If we help SMEs develop, they can act as suppliers to big companies and also develop relationships with smaller and local suppliers and bring more business to them. The business model is more inclusive.
Diyanto Imam, Indonesia: They provide employment, which is particularly good for Indonesia because for the last thirty years, the center of economic activity has been in the capital in Jakarta. 70% of the money circulates in Jakarta, and that’s not good for the economy. So SMEs can really help develop the economies of smaller cities.
Sanjoy Sanyal, India: Most of our SMEs have base-of-the-pyramid strategies, where they either provide services to poor communities or low-cost products. They do help the poor, not necessarily because they are small, but because of the nature of the business they do.
The type of companies we work with are the ones that sell solar lanterns, or energy efficient cooking stoves for poorer people, poorer women in particular. These products help bolster local economies in both a socially and environmentally constructive way.
What does New Ventures do to help?
Weijia Ye, China: We help sustainable SMEs grow by getting them the right type of funding. We work with them to develop their business plans and help them network with a range of mentors whom they could not access by themselves.
Rodrigo Villar, Mexico: We are also trying to convince people that being an entrepreneur is better than just having a regular job. We don’t really have any entrepreneurs in Mexico. There is a negative connotation to what “businessman” means there; usually it makes people think of rich men who have stolen money. So no one wants to be an entrepreneur. Everyone wants to get a university degree and then work for a big company. And when you talk about environmental entrepreneurs, it’s even harder. We have to convince people to go into environmental areas and industries, because they can make a profit and help their society develop.
Diana Gaviria, Colombia: One of the most important things we do is act as an honest broker and help these companies get to investors and institutions that can aid them in their process of acceleration. We’re trying to promote a climate where individuals of high net worth can invest in companies rather than just big institutions that come in and do all these very demanding due diligences and long processes for riskier business.
What are some examples of the companies in the New Ventures portfolio?
Sanjoy Sanyal, India: One company that comes to mind is called Sumaya HMX Systems. They make energy efficient air conditioning systems. India and large parts of the developing world are hot and tropical, and air conditioning is by now a mandatory requirement for most workplaces, but at the same time they consume loads of energy, and are a big source of carbon emissions. This company uses a technology that allows adaptive cooling – a more efficient cooling system – which brings the temperature to only a couple of degrees above what you’d expect in a conventional air conditioning system.
It’s still comfortable, but it obviates a lot of the energy usage and carbon emissions in more conventional AC systems. It’s a great technology; it’s very useful and appropriate for large parts of both the developing world and the developed world. I think New Ventures’ intervention in this company was at a very interesting point. We were able to get the company a corporate investor, which took on a simple majority stake in this company, and helped the innovation reach a very large audience because of their marketing and technical service operation.
Diana Gaviria, Colombia: In Colombia we work with a man who had his own water treatment company that mainly served affluent neighborhoods. He wanted more out of his business, and so he investigated technologies and came up with one that would provide water to communities that currently don’t have any access to water at a very low cost, much less than what people were already having to pay. When he first came to us we weren’t sure if his proposal was viable. He wanted the communities to manage the whole operation, so he not only wanted to sell to them but he wanted them to be involved in the management of the business. We had many discussions with him and finally we were convinced. And so with the help of students from the Cornell MBA program and business mentors, we put together a viable business model, where he is able to produce portable water treatment plants that can be run and operated in local communities.
Rodrigo Villar, Mexico: We work with a company called Biofabrica Siglo XXI. They came to us four years ago. The owner of this company was an agronomist, he didn’t have any experience with business, and he was using this technology to change chemical fertilizer into biological fertilizers. So we helped him with the business plan, and now, four years later, this company is worth $7 million, and over 200,000 hectares are using his bio-fertilizers instead of the chemical ones, and he was able to drop the price of his product too, so he continues to get new clients.
How is the economic crisis impacting your country?
Weijia Ye, China: It’s different for different industries. In general it’s hard to say “Now it’s ending.” I would be pretty cautious and wait another half year or year. This crisis is so different from previous ones because no one can predict it. Some of them are doing pretty well, but it doesn’t mean it’s the end of the crisis. I think the current financial crisis is sending a very strong, clear signal that there is something fundamentally wrong with this current regime of the market economy.
Rodrigo Villar, Mexico: Between the economy, the H1N1 flu scare, and the drug problems, it’s been a tough year for us. But a recession can be a good time for entrepreneurs. Companies are growing. If they can make it work now, they’ll grow even more as the economy recovers.
Can green companies be competitive in the current economy?
Sanjoy Sanyal, India: These are early days. But I think there clearly is an understanding that yes, green companies can be competitive. A lot of it is coming from the fact that, while the US is still struggling with its economy, it is still clearly signaling to the world that businesses need to develop a more sustainable model. So whether it’s Walmart or a Cisco, people are saying that we need to incorporate energy efficiency and climate into our business thinking. Another thing the US is signaling to the world, which I think emerging economies are picking up on, is the fact that consumers are willing to vote with their wallets that they would like to spend more on goods and services that have a clearly professed environmentally positive, or at least an environmentally neutral effect.
Andre Carvalho, Brazil: Six years ago the community of investors in Brazil thought that sustainable business was only something very small, and that it couldn’t be scaled up. But New Ventures has been showing them that there are a lot of opportunities, and showcasing successful fair trade models that are part of a new history that’s being written right now. We are showing the mainstream that there are other ways to think about community development.
Weijia Ye, China: We want our SMEs not only to be producing green products, but also to have strong values. I believe that the future of the world depends on all companies becoming sustainable. There’s a call for a new generation of enterprises, which should be different from Henry Ford’s generation. Because at the time, if you look at the management of these original industries, they were quite brutal. We’re at the stage where we should not be doing the same things as we did before. We are ready to develop new models.
What motivates you in your work at New Ventures?
Diyanto Imam, Indonesia: You get to meet these great individuals with ideas, with fire in the belly. They have amazing passion. I like to meet with these entrepreneurs simply because they are passionate about what they do. They have this belief that they can change the environment and affect the people around them in a good way. The spirit is there. In Indonesia, life is tough. But these people see opportunities.
Weijia Ye, China: My wish is for the next generations of big companies to be fundamentally different from current versions. They should not be developing Corporate Social Responsibility plans only when they become big. They should have these plans in their DNA from the very beginning. It should be incorporated into their way of doing business. These small companies we work with have the right core values now, and when they grow they will be part of the next generation of business.