Scale Is Overrated: Why the ‘Unicorn Industrial Complex’ is Holding Back Social Enterprise and Emerging Markets Business
There is a lot of excitement around social enterprise – it’s an attractive concept that has drawn interest from entrepreneurs, well-meaning investors, donors, development finance institutions and global foundations. Global and local ecosystems of entrepreneur support organizations (ESOs) have emerged to support the financing and growth of these emerging companies.
In addition to funding, these ESOs bring smart people, a global network and other crucial resources to these early-stage enterprises. But unfortunately, too many funders and other ESOs are approaching these companies in a way that ignores the needs – and essential natures – of the vast majority of social businesses and other small and medium-sized enterprises (SMEs), particularly in emerging markets.
This problem came to mind when I read this recent NextBillion article about the small and growing business (SGB) investment gap – part of a growing amount of discussion of SGBs across the development sector. I believe this focus on SGBs ignores some key realities about social and emerging markets business, and overlooks the crucial importance of SMEs – i.e., small businesses that aren’t focused primarily on scale.
Understanding the ‘Unicorn Industrial Complex’
The emphasis on SGBs seems natural to investors and other key players in this ecosystem who base their approach on the business models typical in the private sector startup world, as exemplified by places like Silicon Valley. While many impact investors are more patient than a typical startup investor, and willing to offer concessionary capital, they still expect to see some return, usually from cashing in on equity or collecting interest on venture debt. Many accelerators and other ESOs also expect to earn a profit from equity transactions. These organizations claim to be pursuing broad social impact. But in reality, many of them are supporting a few select companies that they hope will break through to become the next unicorn (i.e., a startup that achieves a valuation of over $1 billion). And by definition, the chance of finding a unicorn among these startups is low.
Even when these ESOs are not explicitly looking for equity returns, they are often staffed by alumni of prestigious business schools and consultants from top-tier consulting firms. It’s not too much of a reach to say that these talented people have probably not spent a lot of time thinking about, much less working with, SMEs that are content to remain small or medium-sized. As a result, the ecosystem is built around creating companies that scale – while ignoring those that may be better suited to become slow-growing but successful SMEs in terms of profit and impact. I’ll call this the “unicorn industrial complex.”
The unicorn industrial complex encourages entrepreneurs to think big. To be clear: There’s nothing wrong with thinking big, given the large and complex challenges society faces. And many of these big ideas have seen success. Even though the social impact ecosystem has generated few (if any) examples of social enterprises that have reached $1 billion in market cap, it has created a long list of rising stars – some of which may one day reach unicorn status.
But what happens when an investment does not reach expectations – or when those expectations are lower in the first place? What about the countless SMEs that don’t get much more than a quick glance from an investor who doesn’t see a clear opportunity to scale? Unfortunately, the unicorn industrial complex excludes these SME startups, even though they can provide impactful, socially responsible services to local communities, and play an important role in driving growth and employment in an emerging economy.
There are, of course, support networks specifically for SMEs, but they are less likely to provide financing and capacity-building programs offered by the world’s leading funders and support institutions. That means would-be unicorn SGBs not only attract more finance, they tend to draw the best ideas and the most ambitious employees. As a result, SMEs are more likely to be started and managed by people who don’t have the support and knowledge they will need to succeed – let alone the funding.
The Impact of the Unicorn Industrial Complex on SMEs
This challenge is particularly acute in emerging economies. As hard as it is for investors to admit, impact investment focused on promising SGBs often flows into the hands of expatriate founders who parachute in with their “great ideas” and their extensive connections to investors. When these social enterprises fail to meet investor expectations, the well-meaning ex-pat founders can head back home to their promising careers while leaving the locals behind to work on another risky unicorn idea, or to find new jobs or careers altogether – perhaps, ironically, at a local SME that funders had overlooked in favor of the now-defunct would-be unicorn.
It’s time for the unicorn industrial complex to recognize the potential impact SMEs can bring to local communities. To that end, ESOs should be inspiring and seeking out local entrepreneurs to build modest SMEs – alongside their efforts to find unicorns. After all, local entrepreneurs understand the unique challenges they need to overcome in emerging markets, and they are more likely to come up with effective solutions. ESOs should be establishing processes to identify potentially successful SMEs early in the enterprise support process, even before investors shift the focus to these businesses’ scalability. These SMEs need less help preparing investor decks and complex financial models, and more tactical support in the form of building achievable business plans, preparing budgets, and hiring and training staff. They also need small business loans and other sources of working capital. Implementing these measures would ultimately represent the systems change that so many of these SMEs need to succeed.
Additionally, when impact investors commit to an SGB that doesn’t scale as they expected, they should be building an “off-ramp” for would-be unicorn entrepreneurs that enables these companies to right-size their expectations. Many of these companies were based on the seedling of a good idea, and these entrepreneurs and their teams have developed important skills and established valuable relationships. Investors and even the founders may have lost interest, but this doesn’t mean the idea should die. Once they’re free from the expectations of the SGB-focused, unicorn-seeking ecosystem, many of these companies could still become profitable – if slower growing – SMEs. While the founders (and their investors) may not become the next billionaires, these entrepreneurs can build viable businesses that can earn them a meaningful and sometimes highly lucrative living, while also generating a measurable social impact.
According to the World Bank, small and medium-sized enterprises account for about 90% of businesses and over 50% of employment worldwide. If we expect emerging markets to build healthy economies, we need to support these SMEs, and the social enterprise ecosystem is in a great position to ensure that these companies generate a positive social impact along the way. These companies may not generate the excitement or the headlines of the latest potential unicorn, but their value should not be ignored.
Photo courtesy of yosuke muroya.