entreSociety

Building an entrepreneurial society

Archive for the category “Scenarios”

If venture capital investors worked like not for profit funders

There is a need for innovation and accountability in the social sector but there are many challenges that get in the way. One of the major impediments is the way not for profit organizations are funded. To illustrate these challenges I will present a scenario where venture capital and angel investors work like not for profit funders.

Firstly, the investors wouldn’t solicit business plans from entrepreneurs as they do now.  Instead they publish a set of requirements of what it is they are looking for in terms of product description, target market and what expenditures funding would cover.  The applications would also have to be in prescribed form so that they can be evaluated easily.  Instead of receiving multiple business concepts from an unlimited number of sources they would only receive concepts that the investors could conceive of.  Most of these would be incremental changes from things that had worked in the past.  There would be no breakthrough ideas that nobody had considered before; the kind that go on to become Google, Paypal or Tesla.  Since they would all have to apply in the same format there isn’t even an opportunity to discuss innovative approaches to the requested business concept.

The investors would lay out exactly what the funding would cover.  There would be funds to hire programmers, acquire any materials needed and other direct product costs.  Marketing and management would be limited to 10% if it was allowed at all.  The applicants could have people working on products but no one to coordinate the business or get the word out to the market.  The applicants will go without any management team or hire at low salary levels resulting in inexperienced people or those that are not a good fit.

Since the funding would not be sufficient from any single investor or would require matching funds there would be a need to go to multiple sources.  But each investor group has a slightly different idea for what the product will entail or who the target market should be.  They will also have different restrictions on spending, application format and reporting requirements. The organization will spend an excessive amount of time filling out multiple applications in different forms and keeping track of results so that they can report individually to each investor in their specific format with their metrics.  There is then the issue of how to manage a strategy for an organization that is now being pulled in multiple directions and none of them leading to the target market.  Remember that the applicant has not been provided with the funding for the people who will be responsible for managing these conflicting demands.

Most early stage companies find that their original path does not work and they need to change directions. Paypal started out as a way to transfer money between phones and then shifted to a secure means to accept payments online.  Happily for their investors.  Under the scenario being presented here these shifts would be impossible without violating the funding agreement.  The company would choose between a path they knew wasn’t working or one that would maintain their funding.

The metrics would be a combination of staying within the spending restrictions and some contrived success numbers such as number of page views, downloads and probably customers acquired.  The company would again need to twists its operations so that they maximized page views and downloads even if they didn’t result in sales.  They would sell at low prices to get customers even is they were not profitable customers.  None of these strategies tends to result in a healthy and successful organization but it will create the illusion of success while maintaining funding.  There is no measure of impact (i.e. whether the organization actually made a difference with the funding they received).  Without impact metrics it is difficult to determine if the organization is providing real value, if they are improving or if there is another organization that can make better use of the funds.  The lack of a requirement for impact metrics is a good things since there was no funding provided to pay for people capable of measuring and reporting on impact or the systems needed to support that.

There will be a need to apply for additional funding next year since there is little chance organizations operated in the way we have described will be sustainable.  As long as they met the reporting requirements they will probably get another round of funding under the same terms as before.  That is unless the investor has run out of funds or decides not to offer another round.  There is no chance a more innovative applicant will be funded instead since the application process doesn’t allow for any innovation to be presented.  This takes us back to the beginning of a process that will repeat itself annually.

The venture capital process is not perfect by any means and there are not for profit funders that don’t fit this design but unfortunately not many.  Part of the attraction of social business is the need to move away from this process to one that more represents private sector funding.  There is also a movement towards self-sustaining models that don’t rely exclusively or at all on these funding sources.  The transition to these models will take time and there will always be challenges that don’t lend themselves to a private business model. If funders want more innovation, accountability and performance then they need to reconsider how they fund not for profits.

 

Large companies as platforms for enterpreneurship

Entrepreneurship is not something that often arises when we think of large companies.  Maybe that is because we think of the legacy products and large scale infrastructure when we think of a large company.  We see bureaucracy and a commitment to productivity over change.  That perception would not be wrong because in most instances that is what they are.  They have legacy products and services that absorb most or all of their resources and attention.  Some have entrepreneurial units intended to create new products for the future that are poor second cousins and often amount to nothing more than window dressing.

I have long been curious as to the mix of large and small companies and how they will fit together going forward.  There are many cases of large companies becoming irrelevant as upstarts disrupt their markets and push them out.  Others just fade away over time as their market erodes or their performance declines.  Only a few seem able to go on through all kinds of change and turbulence and that number is declining.  Most struggle with innovation and rethinking their business models.

What if we looked at big companies in a different way?  We might see the potential for real innovation.

Large companies have some resources that would be valuable to the entrepreneurs as they develop their business models and try to scale them.  Large companies often have global reach with distribution and people in markets around the world.  They have infrastructure that enables large scale production and distribution.  There are lab facilities and other means of building and testing products and services.  There are usually financial resources that can be used to fund and build new ventures.  Finally they have people used to running larger entities and systems and processes that early stage companies can graduate to once they prove their business model.

With that in mind we could look at large companies as platforms with pools of capital on which to start and grow new ventures.  Thinking from this perspective will give a whole new structure to the lifecycle of businesses and products.  The company would not be the products but would be the mechanism to create, scale and retire a constant stream of products and services.

Part of the company would continue to focus on operational excellence in delivery of active products by constantly finding ways to improve their access to markets around the world and to efficient production and delivery of products and services.  The strength of this part of the organization will be essential in the ultimate success of products being developed.

Under this model all products would lack permanence.  They would be in place until the next generation moves them aside and funds would not be spent trying to extend the life of a dying product through price cuts and advertising campaigns.  The role of senior management would be to manage a portfolio of products and ensure that the knowledge and resources flow between the venture development and operational sides of the business.

With the market access, core product and technology knowledge and scaling infrastructures these companies would incubators on steroids.

How the entreSociety could come about

We start from where are today with a number of large corporations and government employing the bulk of  the people and having significant influence over the economy and the pace of change.  We also have a large number of small companies and not-for-profit organizations.  We have seen a growth in enterprises built not just for profit but to bring about social change this trend will continue as people look for ways to solve society’s issues that fall between the boards.  Young people unable to find jobs will start companies as an alternative and will be an influence on other young people to do the same.  Boomers near the end of their careers and those that have been forced out of employment will also start new companies.  Some will do so out of necessity and others will be following a long held dream that wasn’t possible up until now.  New technologies and business models will also make it possible to start companies with fewer resources than were needed in the past.

As this trend gains momentum  people will start to select smaller, entrepreneurial companies over government and larger entities as employers.  They will be attracted by the ability to have some control over their lives and pursue things other than the latest quarterly earnings.  They will also see themselves accomplishing things that matter as opposed to just showing up and putting in eight hours.  Wealthy individuals will provide angel funding and use these entities to fund social causes that may not have been served effectively by traditional not-for-profits.

Large companies will have to fight to attract and retain talent.  This won’t be easy for them and many will fail at it.  Some will acquire some of these ventures in an effort to revitalize a fading product line.  If they don’t do this with a true entrepreneurial spirit these acquisitons will die on the vine and the people will shift back to the entrepreneurial sector.  The ones that get it will create pools of new venture within their organizations to give creative people the ability to start and grow new product lines and operations.  Large companies that can do this will have a good chance to grow these into large ventures that can join the global marketplace.  Others will build networks of small entities that link to their core operations providing resources and a channel for these ventures.

The vast multicultural population in North America will help to build global channels for new ventures as they link back to contacts in their countries of origin.  New markets and ideas will result further strengthening the entrepreneurial society.  We will find success in areas where we have world class strength and capabilities while importing goods and services where we don’t.

Financial insitutions will realize that they don’t exist for their own purposes or the need to enrich a select few.  They will relearn hwo to provide services that support people and entreprises that make things or do things for people.  This means a shift back to basis banking and financial services.  Smart people will no longer seek the riches of financial services and instead will use their talents to build businesses that create real value.

Governments will see the benefit of offloading some of their services to entrepreneurs that can perform them more effectively and efficiently.  This shift of services will reduce government expenses and let them focus on activities that can’t be effectively served by private enterprise.  Society will be surprised to find that there are not as many of these exclusions as they once might have thought.  Governments will also stop trying to pick winners and protecting old line businesses.  They will build an environment where new enterprises will flourish.  Regulation will evolve to provide boundaries that protect resources, the ecology and people while giving business room to build.

Unions will need to change with the times as well.  They will need to move away from a confrontational approach that impedes progress and prices government services and businesses out of reach.  Instead they will find a way to support entrepreneurs and their employees by facilitating supports that big companies and governments provided in the past such as training, pensions and health benefits.  They will do this in a cooperative way that works with entrepreneurs for the benefit of everyone.

We as a society will rethink our values after the near collapse of our economies and environments.  We will move from a shopping-driven culture to one that values things like people, equality and the environment.  Consumers will be driven to support those organizaitons that provide this type of services.  They will also demand more accountability from government for their tax dollars and make sure that politicians do more than just work on getting re-elected.

This is an example of a scenario that can be used to illustrate in a narrative form what might be.  It is not a prediction but a possible outcome that can guide people and also help them to adapt in the event that the scenario becomes a reality.  This particular one is slanted in an optimistic way and may be a bit broader than many scenarios would be but it is intended to give a possible view of what an entrepreneurial society could be.  It is also an example of what I call tools and resources that help entrepreneurs.

Future posts will describe other tools and resources that entrepreneurs and others may find useful.  I would be happy to have readers comment on these or add to them based on their own experiences.  I also want to talk about trends and realities that are taking place in the world that will impact the entrepreneurial society.  Finally I will tell stories that I have experienced or that I have read about and will also create other scenarios for consideration.  I hope you find these posts inspirational and helpful as you consider your path in the entrepreneurial society.

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