How can we Strengthen the Contributions of Incubators and Accelerators?
Friday, Jul. 18, 2014
James L. Koch is the Don C. Dodson Distinguished Service Professor of Management. He was founding director of Santa Clara University's Center for Science, Technology, and Society, and a co-founder of the Tech Museum Awards, as well as the Global Social Benefit Institute (GSBI®).
Among the chief takeaways from the Incubation to Acceleration track I chaired at Michigan’s 2013 BoP Summit was a singular notion: conventional business wisdom has limited applicability at the BoP. That insight stood in stark contrast to the assumptions that underscored the 2003 Networked World Conference at Santa Clara University. The purpose behind the latter conference had been twofold: to engage technologists, inventors and entrepreneurs in alternative future scenarios, and to spark Silicon Valley potential to develop solutions to urgent global problems, including poverty alleviation.
What can we learn from what did – and what notably did not – transpire in the decade between the two gatherings?
In answering that question, it’s important to consider how we might strengthen some of the lessons learned, to frame, as Peter Buffet wrote in a "New York Times" op-ed, “… a new operating system. Not a 2.0 or a 3.0, but something built from the ground up. (A) new code” that “truly creates greater prosperity for all.”
The 2003 Networked World Conference at Santa Clara University
The late C.K. Prahalad delivered the April 2003 keynote at the Networked World Conference – a conference coordinated with Santa Clara’s launch of the Global Social Benefit Institute (GSBI®). Prahalad reiterated the assertion of his 2002 Harvard Business Review article, “Serving the World’s Poor Profitably,” co-authored with Al Hammond, that, “Serving the lives of the billions of people at the bottom of the economic pyramid is a noble endeavor. It can also be a lucrative one.” Moreover, he argued, “Multinational companies should lead this market driven paradigm.”
Why Didn’t MNCs Lead the Way?
Since those early days, Hammond has worked to catalyze the BoP movement at a variety of levels. While my efforts have focused on teaching and mentoring social entrepreneurs, including nearly 200 GSBI ventures, we’ve collaborated in a number of areas such as the development of a sector approach to scaling innovation. Independently, we’ve observed that the BoP market development efforts of major corporations have been greatly eclipsed by grassroots innovators.
Bill Davidow, co-founder of Mohr Davidow Ventures, offered discussant comments following Prahalad’s keynote. In retrospect, they proved prescient. Among them he suggested:
Corporate infrastructure is not equipped to do the job.
BoP markets are risky and fragmented, and the needs are very different. Social customs are different, politics are different.
Unique markets require special attention and understanding. Large organizations like to do things that are homogeneous.
Davidow concluded, “I believe the opportunity is to create lots of entrepreneurship and inventiveness. I have lots of faith in that messy process.”
What Can We Learn from Social Entrepreneurs at the BoP?
The Michigan summit was an opportunity to reflect on the experiences of the GSBI ventures, but also to learn from other conference attendees, especially the individuals who joined my New Venture Development panel: entrepreneurs Donn Tice of d.light and Radha Basu of Anudip; Nancy Wimmer and her meticulously documented study of Grameen Shakti’s transformative rural business model; and Saurabh Lall, director of Research at the Aspen Network of Development Entrepreneurs and recent coauthor of a major study of BoP incubators and accelerators.
Four recurring themes emerged. First, the BoP customer has been poorly understood. Second, customer needs may exist, but market demand for products that meet the need may not. Third, vertical integration is often a necessity. Fourth, depth and breadth approaches offer alternative paths to scaling impact.
The BoP Customer Has Been Poorly Understood
Only recently has the “one-size fits all” myth been rejected. For example, the renewable energy success story of Grameen Shakti grew because it embedded its customized products and after-sales services in rural villages. Even at the BoP, consumers want choices, and may prefer to invest in aspirational goods that give them a perceived higher quality of life rather than goods that directly benefit their health (e.g., cell phone applications like mobile banking versus clean cooking stoves).
Customer Demand Must be Created
While a consumer need may exist, market demand for products that meet the need may not. For example, before d.light could sell solar lanterns, they needed to educate consumers about the product to generate market demand. Similarly, Anudip needed to overcome self-limiting, culturally-based concepts of women’s roles in Muslim society to stimulate demand for its market-based skills training; and Grameen Shakti leveraged the trusted “brand” of Grameen Bank and pragmatic agency of village engineers to create customized use-case solar solutions fitted to the needs of rural households and future cash flows of micro-enterprises.
New Businesses are Often Forced to Become Vertically Integrated.
The actors in the supply chain are commonly in formative stages or simply do not exist. Distribution channels must be created, often to penetrate low-density markets that characterize the rural poor. This was the case for both d.light and Grameen Shakti. Becoming vertically integrated from product design, to manufacturing, marketing, distribution and after-sales service strains the integrative capacity of new ventures and requires increased attention to organizational culture, systems and talent. Because of this, the flat portion of S-curve market cycles stays flatter longer. A great deal can be learned from the practices of organizational development in severely resource-constrained environments.
Influential players including investors and funders are often guided by incorrect assumptions. Conventional business wisdom holds that ventures are most likely to scale through a narrowly focused product or service strategy, or by doing a few things well. While the economic rationality of this approach is frequently compelling in large established markets, many BoP ventures find that becoming embedded in local ecosystems requires that they seek a more significant level of social and economic impact through a depth-scaling approach within a community or narrower geographic context. Key in Grameen Shakti’s becoming the world’s largest solar home system provider to the poor was the ethos of its founders – if the village does well Shakti does well.
How can we strengthen the contributions of incubators and accelerators? Below are four suggestions.
1. Reduce Pressure to Scale
Investors equate scale with success. Despite the uncertainties under which BoP ventures operate, new ventures are often pressured to scale before they know their customers, develop cost efficient distribution channels, understand unit economics and price structure, create demand, and attract and train the correct talent. The incubation phase for new BoP ventures should be a time to gather this information and “get the unit right” before scaling. This entails understanding the “unit of social benefit” or impact as well as the “unit economics” or financial viability of a replicable unit of the business.
2. Coordinate Funding Sources
Capital is often aimed at specific stages of venture development, resulting in fragmented funding sources and “lean periods” as ventures graduate from one funding source but do not yet qualify for the next. John Kohler, Director of Impact Capital in the Center for Science, Technology, and Society at Santa Clara University advocates that incubators and accelerators should facilitate hand-offs across venture financing stages by conscious attention to milestones that are relevant to investor criteria for early-to-growth stages of organizational life cycles. This is a work in progress that will involve re-imaging how capital markets might work if they were truly intended to serve the greater good.
3. Set Appropriate Expectations
There is a greater need to emphasize the challenges of execution. Investments are needed to build the organizational capacity and support sustainable growth. Research by the Aspen Network of Development Entrepreneurs (ANDE) on incubators and accelerators suggests that by fostering a disciplined approach to growth, providing access to technical services, and increasing selectivity these intermediary organizations can become more central actors in facilitating access to a continuum of capital that is aligned with organizational life cycle needs.
(Above: Eco-fuel Africa, a member of the GSBI class, aims to empower communities in Africa by converting locally sourced farm and municipal waste into clean cooking fuel and organic fertilizers. Image credit: GSBI)
4. Codify Informal Knowledge
Over the past decade, hundreds of ventures have been launched, but few have achieved significant scale in relation to the size of the market opportunity. The success of ventures depends on understanding the unique characteristics of doing business with those at the BoP. While the domain is just starting to understand these particularities, this process can be accelerated by learning from the exemplary practices of successful entrepreneurs. Codifying informal knowledge can enable the participants in incubators and accelerators to ground abstract concepts and convert uncertainty into clearly defined risk factors with field-tested mitigation strategies. Incubators and accelerators would benefit from a greater attention to learning from success and failure. ANDE research finds that systematic assessment of social benefit or impact is seldom used by incubators and accelerators as a feedback mechanism to measure and improve their effectiveness.
A Concluding Note
The “fortune at the base of the pyramid” thesis may not have been correct. That’s especially true if our ultimate measure of value is the functioning of the global economy in facilitating growth through the flows of material goods, money, and people. It may not have been correct if we apply the rationality of large company decision making that measures success in quarterly returns or ad revenue growth curves. Neither is this thesis of a fortune in serving the unmet needs of humanity likely to hold in the future if we measure our fortune in the prospects of a sequel to “Angry Birds,” the unprecedented stock option wealth of CEOs, or the ability of social media to lure brilliant mathematicians and physicists to apply their genius to the development of “big data” algorithms for high frequency trading or monetizing the private data of unsuspecting users to benefit a small number of people.
The real fortune at the base of the pyramid is a different kind of treasure — one that is measured in life options as opposed to stock options. It is measured in children who will not die of diarrheal disease before the age of five. It is measured in access to economically sustainable technology solutions that can provide all members of a family with safe water for just eighteen dollars a year. It is measured in the recognition of our collective humanity.
The challenges discussed at the 2013 Michigan BoP summit are complex, and reflect a different mindset and reality than the 2003 Networked World Conference a decade earlier. These challenges call for whole systems thinking. At the same time, we’ve made real progress in identifying the critical factors for market-based solutions to play a meaningful role in providing every child the freedom to hope. In the next ten years, converting those dreams into reality is the scale by which we should measure our progress.