Recently when we wrote an article in our MSD blog series entitled Partnership for Hire: Are Private Sector Actors in Uganda Transmuting to capture MSD cash? we were met with praises and criticism from both private sector players and MSD practitioners. To us, that is exactly the reason we run this blog, to disrupt the status quo in the development arena. With our writings, our interest is to give anti-clockwise/out of the box thoughts, opinions, ideas and tips on market systems development especially in thin markets. While penning that article, we didn’t mean that it was not right for PS actors to target MSD cash (given the current project designs and market realities), we basically questioned ‘how’ such support was being given.
One of our celebrated writers, Michael Goldberg in his book Beyond Silicon Valley reminds us that all people who attempt a business endeavor, who try to take an idea from concept to marketplace, have one thing in common—they all need help. Such help range in the form of moral support from friends and family, sure, but help from institutions, too. In Michael’s hometown Cleveland, many people work at institutions that do the behind-the-scenes work of helping entrepreneurs start and grow their businesses. In the book, Michael categorize these institutions and organizations by the roles they play, namely; government, philanthropy, intermediary organizations and non-governmental organizations (NGOs), anchor institutions, and institutions that provide mentoring and capital. In our context, MSD practitioners would fall in a number of these categories. The type of support is to the most parts determined by the operating reality or the context.
The operating reality of PS in thin markets
To appreciate why MSD cash is important, let us dissect what operating realities of PS players look like in thin markets. Eric Kacuo in his book Entrepreneurial Solutions for Prosperity in BOP Markets defined operating reality as the unique set of circumstances forming the context under which one operates a unique combination of cultural, micro economic, macro economic, financial, institutional, environmental, political, and human capital that defines the set of possible outcomes for any entity. This operating reality defines the opportunities and challenges available to PS actors and is shaped by internal pressures and external constraints, as well as intrinsic sense of possibility, and accompanying mindsets about stakeholders.
Our experience is that generally, Uganda’s capital market is still thin with products from financing houses (commercial banks and MFIs) often not aligned to business needs (especially startups) and necessary players such as angel investors, venture capitalist and private equity investors are few, concentrated in the capital city and are not that keen to invest in up-country businesses. In addition, employable skills are limited, and innovation often is not the major driver for business growth. In response to this, most current MSD projects “circumvent’ the problem (due to scope and duration).
Given this background, seeking partnerships with projects that can guarantee access to some form of financing is perhaps the most prudent short-term endeavor any business owner can/should do. Actually, we would be surprised if any business actor turns the “soft-landing” that comes from access to such financial resources especially from projects (be it from state or non-state actors). Even though we are aware that long term solution is rather to address these constraints and avoid crowding-out the actors in this finance space, in this article, we majorly address how these projects that are already designed with in-house financing mechanisms can avoid the negative consequences of being “funders” of sorts. The golden rule is that such cash should not just be cash, but smart capital. MSD practitioners in such projects can indeed turn the cash into smart capital and if they don’t, private sector players should make them do it.
So, what is smart capital?
One of our celebrated entrepreneurs and writers is Eric Kacou, in his earlier highlighted book, used the word Intelligent Capital. To us, this is synonymous with smart capital. Kacuo defined intelligent/smart capital as capital delivered concomitantly with right amount of insights. For MSD practitioners, this means that we should break away from single-mindedly focusing on the “golden egg” which are normally outcome metrics majorly in the form of numbers of poor reached, volumes of trade, etc., which so often puts projects on one-side and private sector players on the other side- the very reason why partnerships turn in to a “rent-collection” relationship.
Our reiteration is that MSD should deploy not just cash, but also the right combination of skills enhancement opportunities, investment insights and business connections to enable growth of high-impact entrepreneurs. Such is a foundation for smart capital. Smart capital should focus on solutions and not exits. MSD practitioners should see their capital as a means to enable private sector players fulfill their mission and vision.
Following our implementation experience in such markets and iteration, we propose the following as key guides for structuring MSD Project-Business relationships:
Turn due diligence into a “service” for businesses
Most often, due diligence is done by MSD projects to determine whether or not a business is able to deliver on “the assignment” of reaching the poor. Not very unusual, some take due diligence as a way of determining whether or no a business will put cash to a right use if they are given. In a nutshell, this means the focus is on identifying risk factors for the project and “fault-finding” with a you-are-in-or-out verdict will be expected by the business. To us, instead, due diligence should be aimed at examining whether key aspects such as business models, structure, systems and governance approach are indeed growth-oriented. This approach would turn due diligence from a painful but fruitless process to a service for the businesses. The outcome of such a process would be a step-wise pathway to address the gaps and enhance strengths
Pay attention to skills
Lack of proper skills is highly regarded as a cause for business failure in developing economies like Uganda. It is thus important that as MSD money comes into a business, MSD practitioners identify the skills gaps address them so that the businesses can succeed in their day-to-day business operations. In fact, its skills that turns the MSD cash into capital! As MSD practitioners, we should not be shy to seek assistance if we are unsure about our abilities and skills to address these gaps, the same applies private sector players. Developing the necessary skills will provide business with solid foundations for growth.
Innovate the business model
MSD projects should stand side by and sides with private sector players to find new ways of creating, capturing and delivering value to their customers. MSD projects must help deliver clear value proposition when necessary. Creating and delivering value proposition is the basic driver of growth, and therefore a significant issue that MSD practitioners need to consider in planning strategies. As we observed in our earlier article, If your only added value as MSD project to the private sector players is the money, you should be very worried because you will either not stay long in the MSD space or you will dilute the approach. Unfortunately already practices such as signing partnership, disbursement of finances from MSD projects to private sector players and sitting and waiting for numbers is seemingly the new normal. This in isolation does not bring or make any form of financial capital disbursed to the private sector a smart one.
Orientation towards results
When players in the financial sector offer cash to businesses, they asses for inbuilt mechanisms to produce results that will guarantee pay-back. In fact, the financial market rewards good results and punishes bad performance, and so should MSD projects! Before disbursements, there must be business milestones and targets set to ensure the business runs on sound foundations (and avoid the “free money curse” – where businesses relax their systems after bloating their balance sheets with grants, thereby crashing in the long run when such grants are withdrawn) as much as they focus on guaranteeing societal benefits. Again we want to be very categorical here that the results should come from value co-creation (where MSD projects stand side by side with businesses to create value) not just value sharing (where MSD projects sign agreements with businesses, do a little money transfer and start collecting data as their part of results measurement). The latter the simplest to do and the greatest temptation today for MSD projects. Value has to be co-created before it is shared.
Appreciate that time is essential
Business changes take time to effect, perfect and certainly measure. As such, MSD projects need to build relationships with businesses for longer term in such a manner as equity investors, venture capitalists do to guarantee their exits. This allows the businesses to pull through the major phases of transformation post investment and are indeed ready shoulder both social obligations and turning profits sustainably. This time varies from business to business and industry to industry. Good judgement is there called from the MSD practitioners in light of information accumulating from their business performance measurement activities.
Catalyze a network of support for the businesses
Developing economies, for various reasons, always post mixed performance in terms of GDP growth. As such, businesses experience the effect in their operations. As a sustainability mechanism, MSD Projects should focus on catalyzing network of actors (especially ones initially crowded-out by the project) to support the businesses for continued growth going forward. This will in a way shield the businesses from turbulence due to macro-economic factors (the hardest to control) and guarantee survival, thus continue to offer social benefits to the poor.
Conclusion
In conclusion, we observe that there is no substitute for developing a conducive entrepreneurship ecosystem. What we have proposed is rather a stop-gap measure to avoid damage to sustainability resulting from current implementation modalities. In the long term however, MSD projects should be designed to address the constraints associated with supporting functions for social entrepreneurship to continue providing opportunities to the poor.