Recently in Market Creation Category
The world is stuck in a prolonged downturn--growing inequity and a spiral toward environmental meltdown--and we can't seem to find a way to turn the corner. Not surprisingly, there is much talk these days about job creators--in US politics as well as geopolitics.
Two camps seem to dominate this debate. The first camp advocates cutting taxes for the rich, under the assumption that their investment and spending will "trickle down" to everyone else. The second camp wants to focus attention on the little guy--the small and medium enterprise (SME) sector, under the assumption that assistance for "mom and pop" enterprises will enable them to grow and flourish from the "bottom up."
The reality, in my view, is that neither the "trickle down" nor the "bottom up" perspectives will get us out of the hole that we are in.
Some years ago (1978 to be exact) Filley and Aldag published a wonderful piece in the Academy of Management Journal entitled "Characteristics and measurement of an organizational typology." In this article they empirically classified organizations into one of three types: Administrative, Craft, and Promotional.
Administrative organizations are established enterprises that are run by professional managers using formal systems of reward and incentives. At best, they generate slow, linear growth since they typically compete in established industries where unsustainable practices and bureaucracy reign supreme among incumbents. And they produce few jobs, since their focus is on increasing labor productivity rather than employment. Indeed, the corporate sector (the largest of the administrative organizations) makes up fewer than one percent of the world's enterprises and has actually shed jobs over the past decade, at least in the developed world.
Craft organizations comprise the vast majority of the world's enterprises which are created by their owners for the purposes of convenience or survival. Most "mom and pops" fit into this category and their defining characteristics are informality and a desire for stability. It should come as little surprise that the small shops and microenterprises of the world produce little in the way of job or employment growth since they are seldom started or run by real entrepreneurs. Indeed, those at the low end of the income scale are typically entrepreneurs by necessity rather than choice: Given the option, most would prefer a good job for a decent wage. Expecting the world's craft enterprises to somehow rescue us from our current malaise is therefore a false hope a best and a shibboleth at worst.
That leaves us with Promotional organizations, which constitute only a small fraction of the world's SMEs. Promotional enterprises are started by entrepreneurs whose intention is to get big. They are driven by a passion for achievement and will stop at nothing to realize this dream. Most fail. But the few (less than 10%) that succeed are the real job creators and growth engines for the future.
The good news is that promotional enterprises can come from anywhere in the world and need not be focused exclusively on the development and commercialization of new technology. In fact, entrepreneurs focused on solving social and environmental problems through enterprise are some of the most passionate and driven people on the planet. Our challenge (and the leverage point for the future) is therefore to devise ways to multiply the number and success rate of this new breed of promotional enterprise.
As a co-founder of the new Indian Institute for Sustainable Enterprise, I aim to do just that--dramatically increase the number and success of entrepreneurs and intrapreneurs focused on socially inclusive and environmentally sustainable business development for the 21st century.
To realize this vision, IISE has assembled a complete innovation ecosystem to foster the creation of tomorrow's distributed and sustainable infrastructure, including an education platform, incubator, investment fund, technology bank, cluster (social) network, learning laboratory, and field support system.
The flagship offering is the Post-Graduate Certificate Program in Sustainable Enterprise which aims to create nothing less than a new model of business and entrepreneurial development appropriate to the challenges we face in the 21st century.
The real job creators will drive innovation from the base of the pyramid, creating the companies and industries of tomorrow and a more sustainable way of living for the world.
Twenty years ago, in 1992, the first Rio Earth Summit took place in Brazil. While it was convened amid great fanfare and high expectation, the only really lasting legacy was the creation of the World Business Council of Sustainable Development (WBCSD) and the christening of "eco-efficiency"--doing more with less--as a key private-sector based strategy for sustainable development. The governmental negotiations produced a massive volume--"Agenda 21" but little concrete action.
Next week, the Rio + 20 Summit will convene, again in Brazil. The past twenty years has produced some good news and some bad news. First the good news: Eco-efficiency has become standard practice in large corporations everywhere and is now spreading to the world's small and medium sized enterprises as well. This is a major accomplishment and has significantly reduced the impact per unit of output in economic activity.
Now for the bad news: we have not yet begun to actually slow or reverse the level of human impact on the planet. Indeed, over the past twenty years, we have tripled the size of the global economy, added nearly two billion people to the world's population, and further intensified our ecological footprint on the planet. Growth swamped eco-efficiency. Today, the science is clear: we have overshot the carrying capacity of the planet and serious repercussions are now inevitable.
In 1997, I wrote an article that appeared in the Harvard Business Review entitled Beyond Greening: Strategies for a Sustainable World. The piece won the McKinsey Award in 1997 as the best article in HBR. The article stressed that corporate eco-efficiency (greening) strategies aimed at incrementally reducing negative social and environmental impacts, while important, would not be nearly adequate to the challenge of global sustainability in the decades ahead. Even then, it was clear that "beyond greening" strategies--leapfrog clean technologies, and business models that included and lifted the four plus billion poor in the developing world--would be essential if we were to fundamentally change the course of the global economy, and set it on a course to sustainability.
In the 1990s, people spoke in terms of the need for fundamental change over the next decade or two. Indeed, the title of the WBCSD's inaugural book was "Changing Course." Unfortunately, all we got was continuous improvement through eco-efficiency.
As I prepare to leave for Rio next week, my hope is that this Summit can plant a new stake in the ground--the Beyond Greening Stake. I will do everything I can to drive this agenda.
We are running out of time.
We accept it almost without question—prognostications about the future which begin with the phrae: “if present trends continue…” Extrapolating present trends into the future has become a stock technique for both those on the political left (e.g. “if present trends continue, the gap between rich and poor will continue to widen”) and on the right (e.g. if present trends continue, GDP will double again within the decade”).
Consider the following trend: China consumed more energy in the past ten years than it did in its entire history, spanning thousands of years. The vast majority of this energy was in the form of fossil fuels. If this trend in energy consumption continues, then by 2020, China would consume virtually all of the oil currently produced for export in the world today. And, by 2030, China’s oil consumption would exceed today’s total global production of petroleum. What is the likelihood that this trend continues?
Even if we set aside the obvious implications of this trend for climate change and assume that the world embarks on the all-out development of unconventional oil reserves (in the form of shale oil and tight oil), to compensate for the now declining world production of conventional oil, it is not clear that production could be ramped up at a sufficient pace to meet this exponentially rising demand.
It is important to note that similar projections of current trends into the future are commonplace in virtually every domain, including the production of food, consumption of water, and emission of greenhouse gases into the atmosphere. The reality, however, is this: it is highly unlikely that any of the current trends in the world can or will continue into the future for very long.
Nor should we expect them to. History is filled with game-changing discoveries and events that fundamentally alter the trajectory of society and civilization. Consider for a moment how future projections for energy and food production appeared in the 1890s, just prior to the explosive growth of the oil industry, automobile industry, and the rise of mechanized agriculture. No one could have anticipated how radically the world would change in a relatively short period of time.
So expect a very bumpy and exciting ride over the next decade or two. Nothing will stay the same. We are approaching a time of unprecedented turbulence, change…and opportunity.
Schumpetarian creative destruction will reign supreme. Many incumbents will fall, and entirely new industries will be born. An age of entrepreneurship on a scale that we cannot yet imagine is about to be unleased.
There is only one trend that we can really count on: Present trends will not continue.
- new urbanism
- mass transit
- sustainable agriculture
- distributed generation
- renewable energy
- bottom-up entrepreneurship
- IT-enabled development
- inclusive wealth creation
As we all know, the transformation to sustainability is the biggest business challenge--and opportunity--in the history of capitalism.
As we enter the second decade of the new century, however, the "dark satanic mills" of the Industrial Revolution are giving way to a new generation of technologies that promise to change dramatically the societal, economic, and environmental landscape. The information economy powered by the microchip has already begun to revolutionize society by democratizing access to information and empowering the repressed. Indeed, You-Tube, Twitter, and the rapid emergence of the "blogosphere" have spawned a bottom-up revolution in user-generated content.
Increasingly, the technologies of tomorrow will be decentralized, distributed in character and disruptive to incumbent firms and institutions. It is much cheaper and more energy efficient, for example, to treat drinking water at the point of use, rather than transporting massive quantities of clean water through pipes from treatment plants only to have much of it leak out or be re-contaminated before it reaches its final destination.
Indeed, we are witnessing a dramatic reversal of the logic of scale--the new diseconomies of scale.
Think about it: Over the past decade or so, we have witnessed the rise of: distributed generation of energy, point of use water treatment, community supported agriculture, microbreweries, point of care healthcare, microfinance, and sustainable construction, to name just a few. Indeed, the term "nano" has become de rigeur.
Because existing players in the utility, energy, transport, food, water, and material sectors have so much to lose, however, it is enormously difficult for the entrepreneurs developing such distributed solutions to gain traction in established markets. Yet given their small scale and distributed nature, such clean technologies hold the potential to creatively destroy existing hierarchies, bypass corrupt governments and regimes, and usher in an entirely new age of capitalism that brings widely distributed benefits to the entire human community.
And rather than depending on national governments or paternalistic social engineers to design the future for the aspiring masses, these disruptive new technologies may be best brought forward through the power of capitalism--not the capitalism of the Industrial Revolution, which enriched a few at the expense of many, but rather a new, more dynamic form of global capitalism that will uproot established elites and unseat incumbents by creating opportunity at the base of the economic pyramid on a previously unimagined scale.
This metric made sense in the 19th century, when coal (and other raw materials) were plentiful and people were relatively scarce. Now, however, exactly the reverse logic applies--fossil fuels and other raw materials are increasingly scarce and people are relatively plentiful. We now live with the paradox that increasing business productivity means fewer jobs (especially when economic growth slows), precisely at the time that we need productive employment the most.
Occupy Wall Street, the Arab Spring, the corruption crisis in India, the rural revolt in China--all of these growing social protest movements originate from the same source--a growing "opportunity crisis" driven by unemployment, underemployment, alienation, and humiliation. The time has come, therefore, to overthrow the tyranny of labor productivity and graduate to a new definition for what it means to be "productive" in business.
In the emerging economies of the world, this revolution has already begun. ITC in India, for example, prides itself on creating livelihoods for the poor in the rural areas as part of its strategy for wasteland reforestation and agricultural productivity improvement. Indeed, as commodity costs rise, it may make sense to redefine productivity--from capital intensity and labor efficiency to labor intensity and capital efficiency. In the 21st century, "sustainable" enterprise must define success by the extent to which they create productive and fulfilling employment for the people of the world.
Is business up the challenge?
How does business move beyond greening? TOP - “Create needs in existing markets” vs BOP - “Create markets from existing needs.”
As someone who has been working in this space for better than twenty years, this is indeed exciting to finally see. But wait a minute. Houston, we have a problem: Despite all the hand-waving and rhetoric, we are still not at the tipping point. Why? Because for many entrepreneurs dedicated to incubating new sustainable technologies and business models serving the base of the pyramid, there is still a dearth of investment capital. In short, there is a "doughnut hole" in the field of sustainable finance.
On one side of the hole in the doughnut, there is the emerging domain of Impact Investing. This new space is made up of a hodge-podge of social investors, micro-financiers, and community reinvestment specialists. What they tend to have in common is a focus on "doing well by doing good." Think Acumen Fund, E + Co, and IGNIA. Not that this is a bad thing. On the contrary, it is an exceedingly important development. But the central tendency for the Impact Investor is to place social impact over financial return.
Many impact investors are focused on providing finance to the "social entrepreneur"--the bootstrapping player from the developing world who is looking to grow a local enterprise, creating new opportunities for livelihoods and service to the underserved. Think Grassroots Business Fund, Ashoka, Root Capital and New Ventures. Most expect, as a matter of course, a longer payback and below-market returns.
Others, like Muhammad Yunus, have advocated a form of enterprise called "social business" where investors simply get their money back, with no capital gain at all. Few, if any, in the impact investing space are interested in investing in "Western" (or Northern) technologists or entrepreneurs seeking market returns from new, clean technologies or business models in the developing world.
On the other side of the hole in the doughnut, there is the emerging Clean Tech Venturing space. Billions of dollars have flowed into these emerging technologies over the past decade. Think Kleiner Perkins, Technology Partners, and Clean Edge. Most investors in this new space are venture capitalists seeking market returns from deals that follow the same rules as conventional VC investments, such as Big Wind projects, battery technology, and large scale solar applications. Most want to see contracts with large OEMs, or at least $1 million in revenue, prior to investing and want to cash out within 3-5 years. Few in this space are interested in the developing world as a potential early market since it probably takes longer to develop, delaying the ultimate "liquidity event."
And now for the doughnut hole: For Western (or Northern) entrepreneurs focused on incubating next-generation clean technologies, starting in the developing world at the base of the income pyramid, there is still a dearth of capital. You are caught between a rock and a hard place. I know, because I have some first-hand experience with this. For the past four years, I've been involved with a start-up company, The Water Initiative (TWI). TWI is focused on creating commercially viable, household scale (point-of-use) solutions to drinking water challenges in the developing world, starting in Mexico.
We had little problem securing first round financing from Angels to launch the business development process in Mexico starting 2008. After two years of hard work in co-creating a viable business concept, along with extensive new technology development in point-of-use water treatment, we were ready to begin scaling the business in 2010. However, the doughnut hole prevented us from securing critical second round financing until well into 2011.
Founder Kevin McGovern pitched our case to dozens of Impact Investors and Venture Capitalists in the 2009-2011 time frame. The story that emerged was clear: We did not fit the "social investing" pattern for Impact Investors nor did we fit the time frame or payout expectations for the traditional VCs. We fell between the cracks. In the end, we secured second round financing from an off-shore financier.
So despite the recent upsurge in attention to "social," "impact," and "clean tech" investing, there is still a structural gap--a doughnut hole-- in sustainable finance. But this also means that there is a huge opportunity for visionary financiers to invent the new investment categories and asset classes needed to fill this gap. There is also an opportunity for corporate leaders to "plant the flag" by investing in the technologies and business models of tomorrow.
So far, emerging market financiers and corporations (e.g. the Indians and Chinese) seem more inclined to innovate the financing mechanisms needed to fund the sustainable enterprises of tomorrow--those that take a bit longer to incubate, but have the potential to transform the world and produce incalculable growth and profits in the long run.
The question is: Will the US, Western Europe, and Japan cede this emerging space to financiers and corporate leaders from the emerging economies thereby missing out on the opportunity of the century: the chance to participate in the creation of a truly sustainable future?