Socially responsible & For profit capital for emerging markets – a better model?

The inspiration for this post was my Business at the Base of the Pyramid class at Harvard Business School and it’s something that I have been pondering as I consider being an early stage investor in East African technology businesses.

There are two main kinds of capital deployed to emerging markets to stimulate economic activity for small businesses:

•  Social(Not for Profit) Capital – This kind of capital is usually issued by governments, charitable foundations or entities like the World Bank/IFC and makes up the majority of investment capital to small businesses from abroad
• For Profit Capital – Investors looking for returns which are as high as possible from emerging markets to compensate them for the high risk of their investments

I think the best model for emerging markets is a hybrid form of for profit capital from socially responsible investors. i.e. Investors who are looking to make a reasonable return on their investment without exploiting the recipients of their capital. 

One of the key problems of investing in social (not for profit) enterprises is that it does not create the incentives for these businesses to scale into self-sustaining entities. If businesses are accountable to their investors to yield positive unit economics and positive returns they are less likely to operate in a lean and efficient manner. Commerical enterprises are just better designed to create long term value for their shareholders, employees and (hopefully) customers provided they are ethically run.

I think that initiatives such as Root Capital and the Grass Roots Business Fund are trying some extremely interesting innovative models and hopefully we’ll see some positive results from them.

Figuring out a more effective way to deploy capital to emerging markets is a huge problem and I really hope that such innovations make strides towards solving it.

Alleviating poverty through education and entrepreneurship

I’m a believer in two key methods to alleviate poverty and stimulate long-term economic growth for developing countries:

•  Education – Out of all children in Kenya about 85% of children attend primary school (but <50% finish), 24% of children attend secondary school, and 2% attend higher institutions. At this level of attrition more than half the population has not even completed primary school, which is typical of developing African countries. Access to knowledge and information is a critical part of opportunity creation for people in Africa.
• Entrepreneurship – This is Africa's (and Kenya in particular) ticket to stimulating the economy from the ground up. Governments are corrupt and policy is extremely slow and ineffective. Creating and facilitating an entrepreneurial mindset and ecosystem for people in these countries with the drive to create businesses which solve fundamental issues has got to be the way to sustainably get these countries out of poverty.

This is such huge topic and my paragraph above does not really even scratch the surface, but I want to write more often, in bite sized chunks going forward. For each of these issues, work needs to be done at both an infrastructural/country level and at a grass roots level. I believe that we will see quicker more effective results through bottom up initiatives so long as we are able to find and fund the scaleable and effective solutions at this level.

Next post will be about what type of investment could work for developing countries at this level.

Kenya - Silicon Safari

San Francisco has Silicon Valley, New York has Silicon Alley, London has Silicon Round and Tel-Aviv has Silicon Wadi. I think Kenya could have Silicon Safari*, and I'd love to be part of making that happen.

I never really thought I would go back to Kenya, but when I was back home this summer I had a strong feeling that it could be the forefront of innovation and entrepreneurship in Africa.

A little about where Kenya is today...
Kenya has about 30M people and a GDP per capita of $1,600 ppp Kenya is a leader in mobile innovation in the developing world. Kenya currently has a mobile penetration rate of ~ 50% and is forecasted to hit 90%+ by 2013. M-Pesa (mobile-to-mobile money transfer through text) was created here by Safaricom (part owned by Vodafone) and now almost $30M are transacted every day. This model has been replicated in many emerging markets which look to Kenya as a leader in emerging mobile products - particularly in banking and payments.

In October 2010, Barclays started offering M-Pesa to it's clients and we are not far from a place where mobile phone 'bank accounts' can offer most services provided by traditional banks which have a far lower penetration rate than mobile phones in Kenya. In September 2010, a major carrier (Zain) cut all call costs by 75% and all the other major carriers followed suit. With infrastructure capital costs already paid off, the market is highly competitive and consumers are getting excellent quality of service at constantly decreasing prices.

I'm not the only one who sees potential in Kenya... 
(work in progress)

• Techcrunch, Sarah Lacy in particular, did a piece in August 2010 about the possibilities of mobile in Kenya 
• Google opened their first non-sales office in Kenya in 2007 and is tasked with figuring out their entire Africa strategy

The Entrepreneurial Ecosystem is underdeveloped...

• Talent - Classic brain drain coupled with an underdeveloped local education system particularly in for technical talent is a HUGE issue. 
• Capital - There is little capital for early stage ventures and few investors on the ground who have the appetite and expertise to invest in entrepreneurs. The path to exit is also unclear with underdeveloped capital markets and low M&A volume.
• Community - We need to build a community for entrepreneurs and investors to find each other and share ideas and best practices. This is starting with initiatives like vc4africa, and Nairobi's IHub but these are still in their very early stages

What I'm hoping to do...

I moved to Silicon Valley to see how the most sophisticated entrepreneurial ecosystem in the world works. I am about to start working for an early stage start up, and am going to try and be as involved in the start-up community as possible. I want to learn as much as I can so when I do go home, I know what could be possible for Kenya.

I don't know exactly what I'm going to do or how I'm going to do it when I do return to Kenya, but what I do know is that I want to build technology businesses as both an entrepreneur and an investor (maybe some sort of hybrid incubation model would work best). The country needs pioneers for the field and I hope to be one of the people to build the bricks of the entrepreneurial ecosystem.

* Silicon Safari is a term that I made up! Hope it catches on :) Silicon Savannah was something else I was toying with..

Digital Sky Technologies - The Mini Exit

Digital Sky Technologies (DST) have created a new class of investment in the western world that has caught both the entrepreneurial community and investment community by surprise. They have purchesed significant minority stakes in extremely high profile pre-IPO technology companies such as Zynga, Facebook and Groupon.

They take long positions on these companies by buying large amounts ($100M+) of common stock at relatively high valuations. Traditional investors (venture capital and private equity) would look to invest for preferential equity, board representation and sometimes controlling stakes but DST seem to be happy to take minority common stock with no board representation. Basically, they trust the market leaders with capital to keep doing what they've been doing and it's working out well for them so far. Their $200M investment in Facebook at a $10Bn valuation is already up by 4x, and their $180M investment in Zynga is probably between 2-3x up as well.

I think that the key benefit they are providing to the founders and early employees of these companies is the option to partially cash out without having to prematurely exit or IPO. This has never really been an option for the founders and early employees of these successful technology businesses and it seems to have been mutually beneficial for both DST and the early stage founders.

Blogging: It's the right thing to do

I was initially skeptical about starting my own blog. I did not really see the point - who would read it and care what I had to say? I've actually found it to be a pretty interesting outlet for crystalizing my viewpoints on subject matter that is interesting or topical to me (and probably many MBA students in my position). I feel it'll pay off at some point in a way that I would not expect - and for now i'm just enjoying expressing my thoughts.

I'm taking a class this semester with Misiek Piskorski called 'Competing with Social Networks (CSN)' and it's got me to think about my online 'brand'. I think that a blog is simply another outlet to help re-enforce this brand together with your Linkedin, facebook, twitter, Digg etc profiles - all content that you can control about yourself. A blog can also serve as a way to meet new people who are interested in your thoughts / content and also deepen relationships you have with your current network. I think it would be awesome to have a case on blogging in our CSN course...

Fred Wilson posted a few weeks ago about a blog being a very important part of your online brand and that Union Square Ventures have hired their junior investment staff on the basis of their blogs. Is a blog really more important or useful as a hiring tool than a resume? I see a resume as a collection of brands which leads to a yes/no decision on meeting the candidate. A blog is a much more powerful way of understanding how someone thinks. Resume's and blogs serve different purposes but I can definitely see the value from a recruiting perspective of having your own blog.

I've also been kind of obsessing about the analytics for the site - there are a bunch of free sources that give you loads of information - I use Google Analytics and Sitemeter I've been tracking are the details of people who come to the site - Location, Entry Pages, Source of Click. I generally post new blog entries on twitter, facebook and Google Buzz. Facebook seems to get me the most clicks, followed by twitter and then Buzz.

I've had old friends reach out to me about businesses they are starting or working on, and I've picked up some followers on twitter who are not in my immediate network. It's been really cool to see the effect of my blog on these old, ill maintained relationships and also in making new relationships and I am looking forward to seeing how blogging will continue to enrich my personal and professional life.

Metrics - The Online Advantage

I believe that online businesses have a key edge over offline businesses - they are able to easily gather data on customers, the purchase funnel and conduct iterative A/B testing. Harnessing this data and using it to drive decisions for customer acquisition, product development and generally having excellent management information (MI) is critical to executing a successful internet business.

There are three things that I want to touch on in this post:

Using Metrics to raise financing: While I was working in VC last summer, I encountered many entrepreneurs and it was interesting to see how they all thought about and ran their businesses. It was significantly more impressive and informative when the entrepreneurs understood the right metrics for their business. It allowed them to educate us on the important variables and what the implications were for their business and it also made it easier to compare the business against other models that we were familiar with. I think that it shows professionalism and credibility to be on top of this information and it was definitely something we used to screen entrepreneurs.

Segmenting customer base - yield optimal unit economics: Once the product has been launched and the customer base starts to expand I think it's really important to start to segment the customer base and understand the motivations and unit economics of each segment. I think you should start by understanding what attributes that you can use to segment customers - demographic information, source of click, etc and then measure these attributes against engagement metrics, revenue per user, social metrics etc. This will allow you to identify different user groups, understand what motivates them (potentially through qualitative studies) and plot their evolution over time. This data would be extremely useful to drive product changes as well as acquire specific types of customers.

For example: I was recently talking to Pasha Sadri at Polyvore (a social fashion site where people create sets or outfits which are shared with the community) and a handful of talented "creators" drive 80% of the traffic to the site (approx. 6M monthly users). If they were able to identify patterns about where these creators come from / demographic it would be easier to acquire more creators and they would drive significantly more traffic to the site.

Product changes - A/B testing: This is a pretty heavily blogged about topic but I think you should use data and metrics to drive and measure incremental product changes. It's especially efficient when you have a suite of products with similar features and you can leverage learnings from one product change and apply it to the family of products. Zynga are especially good at A/B testing and they have learnt best practice in monetisation/virality and roll out their learnings to new and existing social games very effectively.

Approaching Start-Ups and VCs

Continuing on from my last post.. an MBA looking for a start up opportunity..

I think it's important when you approach early stage start-ups and Venture Capitalists to clearly articulate what value you could bring (particularly for small ventures) but try and retain humility. You want to make it an easy decision for them to say yes to having a conversation with you.

There seems to be some negative feeling (arrogance and entitlement) associated with HBS MBAs in the start up community in particular and it's our collective responsibility to try and quel that sentiment. My proposed approach is to be totally honest about your expectations and motivations for wanting to join the start-up and be flexible on compensation, equity and your job title. I think it's really important to emphasize (and actually believe) that you are motivated by the same things as your potential colleagues and being honest and flexible upfront is the way to understand your compatibility as quickly as possible.

In general, I try and think about things from the eyes of the person receiving your message....

An important part of a Venture Capitalist's job is to help recruit talent for his/her portfolio companies. I think you should make it as easy as possible for them to forward your application over to their CEOs. These guys are often busy and do a lot of work from their mobile devices - if your story is compelling and your credentials look good, I don't see why they would not send your message to their portfolio companies.

A couple of guidelines that I use (in chronological order):

• Introduce yourself clearly and highlight your current situation (when you graduate) in the first line
• State which particular companies in their portfolio you are interested in
• Articulate what you would like to do/what skills you bring based on some sort of expertise
• Identify why these skills/expertise would be important for the portfolio company
• Show that although you have a value proposition you are willing to be flexible 
• Ask to speak with the VC - they will most often not have time but are awesome people to get advice from

I think the same principles apply to when you are approaching a venture directly, but I try and talk a little bit more about why I like the product/company. Founders/CEOs are pretty emotionally attached to their products and it's always nice for them to receive positive feedback from their users.

I am of the opinion that no conversation with a smart, successful person in a field that you are interested is a wasted conversation and each one will help you understand a little more about what you want and perhaps open up new opportunities - you never know!! 

I've had reasonable but not exceptional success with this approach so would love to get other peoples' thoughts - would be good to share the collective wisdom.

An MBA Looking for a Start-Up Opportunity...

Like many MBAs out there, I'm looking to work for a start up when I graduate in June - a recent survey showed that appox 15% of our 2010 HBS class feels the same.  I really like new/innovative technology and the internet and so I've narrowed my search to that area with a focus on the Bay Area.

I wanted to share my approach to finding start-ups with the rest of you. In my opinion, it's really similar to being a Venture Capitalist for yourself with a couple of adjustments depending on your goals and personal risk tolerance. 

If you don't have a background in technology, it probably makes sense to work for a bigger start up (with a solid brand) to give yourself a bit more legitimacy in the market. I think there are loads of solid opportunities out there and I'm also looking at these companies. Some examples of the size of companies I'm taking about are Gilt, Linkedin, Zynga and Facebook. These guys are pretty well-established but still pre-exit and are low risk, in my opinion, but with great people and learning opportunities.

My general approach for finding smaller start-ups is something Ben Holmes (Partner at Index Ventures who sat on the Playfish Board) taught me this summer and he writes about it on his blog. 

1. Market - Is the market big enough ($1Bn+) and can you see this venture being a leading player (with 10%+ mkt share) in the next 3-5 years?
2. Technology - has the company got a differentiated product/technology?
3. Team - has the company got an exceptional and complementary team?
4. Traction - has the company got positive user and/or revenue traction for their product?

Ben's philosophy, and something that I've tried to apply when thinking about ventures, is to find companies which are exceptional (A++) in one or more category, not companies that are a 'B+' in every category. 

I keep a prioritized list of these companies and try and find ways that I could be connected to the management team through my network. If there is no connection, then I will often email the VC on the board or the management team directly. 

There are a couple of things that I think are also important when making your choices:

• 'Go where you want to live' Joe Lassiter told me that in a meeting I had with him last semester - it's important to start building a network at a local level
• Understand what the advantages and disadvantages of joining a small vs. bigger company:
• Small company - IF you build a great product and company from a small scale and have a successful exit I think you build a lot of credibility and it'll be easier to be a co-founder in your next venture
• Bigger company - you get the advantage of good branding and learning a specific set of skills from people who know what they are doing
• Try and be as flexible as possible on your salary, equity, and job title if it's a company and product that you are really passionate about - I figure all that stuff will come if you do a really good job

I will write again in the next couple of days about how I think about approaching companies and VCs.

Thanks for reading!

Fashion 2.0 - Apparel goes digital

Fashion & Apparel is one of the fastest growing online areas and there is a tremendous amount of innovation in the space. The market is large ($150BN in 2011 in the US) of which online spend is likely to make up about 25%. Top-tier Venture Capital firms such as Benchmark, Matrix & IVP have invested in innovative models which are creating shifts in the online fashion & apparel markets.
There are a few areas that I find extremely interesting:

1) Limited Time Sales: using email lists to target buyers of high fashion products in time sensitive sales.

• Vente Privee in France (almost $1BN Revenue in 2009) pioneered this model for luxury fashion goods in Europe and there has been some great success with US companies emulating this model. 
• Gilt Groupe have got some great press and have done an awesome job at expanding into new verticals (Fusion, Men, Travel) and Ruelala had a successful $350M exit in 2009 to GSI Commerce.
• Shopittome has a pretty interesting model where users input large amounts of information about their preferences and receive highly personalised sales. They seem to be doing well and have no venture funding - it would be interesting to see if IP can be created with such innovation to increase the barrier to entry in the space.

I do feel that the major department stores are in a better position than these players as they have pre-existing relationships with the brands, and access to a lot more customer data from their stores - in the long term I think they are going to come out on top...


2) Bridging the gap between online and offline shopping 

• Image Recognition: People are great at buying stuff they search for, but they have already discovered it offline. Like.com and Modista allow people to specify items they like the look of, but then suggest alternative products which are similar based on image recognition
• Social Shopping: Social fashion is a fragmented market and no-one has really solved the issue of creating a social platform for people interested in fashion/apparel - this is a cool area to look out for... I really like the idea of using games to drive engagement and try and gauge product/style demand this way. 

3) Crowd sourced content: There are a bunch of companies working on crowd sourcing apparel content and we've studied a bunch of interesting models at HBS (Threadless & Zazzle) which are great and have shown that crowd sourcing of product design is a great way to engage customers and drive sales.

• Polyvore have built an awesome product which crowd sources editorial/fashion collages (what Vogue and Elle produce). They have pretty amazing usage stats (5M+ monthly actives growing at 10% MoM) which I think makes them the most visited fashion site on the web. I think it's one of the most innovative sites I've seen for browsers to discover new products. For fashionistas out there - it's definitely worth checking out..

4) Men's shopping: Men are rubbish at buying stuff online. As a group, we are not good at sale shopping, buy only stuff that we are familiar with and don't shop that often. There are a couple of cool companies that i've come across to cater to more niche needs - they have built brands online alone and have a small but dedicated following.

• Bonobos make trousers that fit the modern, younger, and more athletic man (/yuppie) - and I think each customer has bought >1 pair - it's definitely branding itself as a niche product and will be interesting to see if they can maintain this identity as they expand to more products.  
• Proper Cloth allow men to completely customize every aspect of their shirts - from collar cut to the colour of your cuffs. The barrier to entry for a user to try this is a little high ($120+) but it's definitely a service I would use if I was happy with the first shirt.

5) Rental Models:  Sometimes it's too expensive to buy stuff - especially high fashion items or things you don't wear very often.

• Avelle (previously Bag, Borrow or Steal) have set up a service where you can rent handbags by subscription and send it back when you are done to get the new hot thing. Great idea but I wonder how women feel about using someone else's bag - I've heard that one can get pretty attached to these bags :)
• Rent the Runway was founded by a 2009 HBS student and has received venture funding from Bain Cap Ventures. Users can rent ball gowns, tuxedos or other high cost/low wear frequency items. If I were them, I would focus on stuff people already rent, as opposed to high fashion items for the fashionistas. Will be cool to see how they do....