Part II – The reality on the ground – Some of the complexities in utilising business to fight poverty in Developing Countries
In my last article I outlined some of my conceptual questions around the current status and success levels of businesses targeting the Base of the Pyramid (BoP) and the social business/impact investing space for solving challenges in developing countries. In this post, I will share some of my questions and invite others in the Business Fights Poverty community to share their thoughts and insights.
1 Do investor interests align with the reality on the ground?
I was initially drawn to concepts of BoP business strategies as I liked the idea it implied of accountability to the end-users. I felt the non-profit/aid community was too tied to the needs of the donors, sending glossy reports back to funders with not enough accountability to the end-users in the populations they serve. I liked the idea, based on simple market-based principals, that if you develop and design the right products and services, at the right price points for BoP customers you can create a profitable business where accountability is to the people you serve.
However, in retrospect, I think this concept is much too simplified. A growing company is always dependent on external funding and this puts the leverage and power with the funders. So instead of donors dictating the terms, it’s in many cases investors. Of course, the solution is to be selective in the investors you take and make sure interests are aligned, however in a world of limited resources this is often easier said than done. It’s hard for most companies to refuse funding which usually comes with some form of influence or strings attached.
Take for example, the need for scale. This is a legitimate requirement of most investors – on the impact side, scale is needed to solve the massive challenges of the world, on the profit side scale is also needed to achieve the returns that will justify the investment. However, the reality it seems in many cases what happens instead is that either a. companies are pressured to expand, perhaps faster than their capacity, or before enough time has passed to see the full implications of their interventions and/or b. they find themselves making unrealistic projections or very loosely defining their metrics (e.g. an active user for a mobile service that includes users that has only ever accessed an application once etc.) A company that does not project comparable usage numbers comes across as inferior to its peers, competing for limited resources in this space. As a result, both companies and investors have come to expect these numbers to be exaggerated, making it very difficult to understand what real impact has actually been achieved.
2 Is innovation ‘buzz’ the best use of investment dollars?
I recently read the book, The Innovation Delusion, although this focused mainly on examples from the U.S., I found much of their arguments to be particularly relevant for the developing world. The book talks about the phenomenon of ‘Innovation Speak’, where despite innovation being so widely sought in today’s world, the level of innovation has actually declined over the same period. They also discuss the world’s obsession with growth and advocate instead for what they term ‘the maintenance mindset’. The authors explain how in many cases, the returns on ‘boring’ maintenance projects can be much more effective than the latest ‘sexy’ innovation. They give examples of infrastructure that has not been upgraded so goods are much more expensive to transport or even worse lethal accidents happen when railways or bridges are not adequately maintained. This is so pertinent to developing countries, where often the greatest needs are not some ‘new innovative technology’ but rather ‘boring’ infrastructure gaps or products produced by traditional ‘brick and mortar’ businesses. Yet instead money flows to those with the latest pitch deck and tech gadgets, possibly crowding out tradition local players that may actually be better suited to serve some of these needs.
One example of this that I have encountered in my own experience is the many e-commerce players who entered emerging markets to ‘digitise’ the fragmented distribution networks. Most of these believed they would replace the traditional wholesalers who have been in this industry for decades. However, today a few years and billions of dollars of investments later, most of these e-commerce players who effectively were new ‘tech-enabled middlemen’ have largely failed in these markets. Instead BoP customers continues to purchase from indirect markets where it is believed that over 80% of the population buy from traditional wholesalers and the micro-retailers they serve.
3 Is donor support overcoming barriers to entry or crowding out private investment?
The BoP theory recognises the importance of different types of subsidies. In line with basic economic principals, if donors/aid agencies sponsor the initial market entry of for-profit players they can help overcome usual barriers to entry or obstacles that make these fields initially unattractive to the private sector. The theory holds that by supporting these businesses initially, it enables them to reach scale and gain valuable experience which will ultimately allow them to continue to profitably serve the poor. I initially subscribed to this idea and still believe it’s an important part of creating the supporting ecosystems for success at the BoP. However, in my experience, one of the unintended outcomes I saw of this, is that even some of the largest businesses working with BoP populations will wait for ‘easy money’ from foundations or aid agencies instead of investing company resources in what would be profitable initiatives. For example, in my experience working in Africa even some of the largest banks were reluctant to pay for services as they knew they could wait for one of the global foundations to sponsor activities that had a clear impact on low-income customers. In comparison, in Southeast Asia where donors are less prevalent it was much easier to close deals with both financial institutions and large corporations who saw the value of our services and where willing to pay for their immediate roll-out.
4 Is impact investment bringing new funds to low-income populations?
The impact investment space has grown significantly in recent years and while I believe that overall this is positive I do find myself wondering how much of this is new/smarter money to the space. On the one side of the spectrum where traditional philanthropies have entered the impact investment space, money they would likely have previously been given out as grants is now channeled instead to impact investments. The question then arises of are we seeing better, more efficient/scalable impact than if they had simply handed out this money as charity or even directly to end users (e.g. Give Directly which does this has very impressive outcomes). On the other side of the spectrum are those impact investors who are looking for market returns channeling new funds into this space or is it simply rebranding as impact or ‘ESG’ the same investments they would have otherwise made for purely financial motives.
The above are just a few or my questions and I would love to hear feedback from others in the BFP community. While seemingly cynical, I ask these questions as a strong believer in the potential of business as a source of good. I believe such reflection is essential to make sure that we remain both focused and humble enough to realize the potential of business to be a powerful tool for fighting poverty in developing countries.
