Social Change Requires “Slow Entrepreneurship”

Fast entrepreneurship runs on adrenaline-infused quick returns and quick failures, burning through long nights of brainstorms and coding. It is exciting in its own right, but appropriate only for specific ventures. Slow Entrepreneurship treasures human relationships, health, and sanity, and strives for the good life. The vision for Slow Entrepreneurship is that by going through a learning program with the right mentoring and guidance, almost everybody with dedication will bring their project to fruition.

There is a small corner of the world where multibillion-dollar IPOs are launching, valuations are going through the roof, enormous sums are being paid for takeovers, and incredible scalability and return on investment are generating tremendous excitement. Young entrepreneurs and programmers are flocking to Silicon Valley in the hopes of joining this modern-day Gold Rush. Venture capitalists are using their expertise in technology and far-reaching network to add extra value to the companies in which they invest.

However, when Venture Capital becomes the model for all other kinds of entrepreneurship and funding strategies, dangers lurk. One of these is the sky-high failure rate of tech start-ups. Only one in 300 companies make it in the Valley; the rest live on hope and borrowed money. Of the ten Venture Capital investments that finally get made, seven will never make any money, two might break even, and only one will yield an outsized return. When you invest, you are on the lookout for the kinds of companies that can yield at least a tenfold return on investment.  This usually requires an immense amount of scaling.

Capital always has a risk/return ratio: if the risk is high, then the return must be also high. If the risk is low, the return can be lower. Venture capital is a high-risk, high-return investment. Venture capital asks for high returns, which puts pressure on the person receiving the funding. There is constant pressure to show results as quickly as possible, often in the form of a quick IPO. The fear of start-ups is that they will lose out if they spend an extra month or week on the project. They want to cash in on the concept before it has had the chance to be fully tested and developed. Technical and online innovation is time-critical.

The high-risk model of investment is similar to newly hatched baby turtles running for the ocean. Only one out of 1000 eventually makes it.

The high-risk model of investment is similar to newly hatched baby turtles running for the ocean. Only one out of 1000 eventually makes it; predators will eat the others. It’s an incredible wasteful process because of the number of baby turtles lost. To offset this loss, turtles lay a lot of eggs. Whales, on the other hand, have few predators and give birth to one calf every other year, making them extremely protective and dedicated to the infant’s survival.

Between technology start-ups and social start-ups

The turtles-to-the-sea model is brutal, but fair: everyone can start, but few will make it. Unfortunately, a lot of learning by the start-up is lost every time the plug gets pulled.  Social enterprise startups, by contrast, require partner capital that allows for mistakes and learning. Social start-up founders usually possess a lifelong dedication to redefining failures into learning.

Very high-risk Venture Capital investment is thus only interesting for ventures that can scale dramatically and yield outsized returns on investment. For other investments, it’s not the appropriate funding, especially not for entrepreneurship that wants to achieve social impact. Social start-ups are usually embedded in the material rather than the digital world, limiting their rapid scaling potential. Moreover, social start-ups often involve people networks that are not so easy to walk away from when a more interesting opportunity comes along. Supporting a social start-up is a different ball game than supporting a tech startup.

The differences between technology-driven start-ups and social start-ups can be found in their funding needs. The process for social start-ups often takes longer, because it takes longer for an idea to stick in practice. Social start-ups aren’t merely focused on the next step in the evolution of a certain technology – they are seeking to solve complex social-political infrastructure problems. It takes more time to understand, conceptualize, test and grow. But social entrepreneurs are driven to make it work. Tech entrepreneurs need cooperation, but social entrepreneurs need collaboration, which is more difficult. It’s a true partnership: you need to be able to build bridges, find middle ground and hidden levers that can overcome otherwise insurmountable barriers.

In social start-ups, different solutions have to come together to create a tipping point. One difference is that for social start-ups, the user and the paying customer are not always the same. The paying customer is the person or organization who wants the social problem solved, but the user is the person whose problem is being solved. Social entrepreneurs are often very attached to a cause and dedicated to finding a solution- that is why they are in it for the long run. Technology people can be passionate about reaching their goals or creating something new, but their attachment is usually not a lifelong attachment to a specific cause. It’s more hit-and-run and disengaged.

There is also a large difference in the timing risk. With proper business design, innovation for large social issues is less risky than technology innovation. With the latter, you have to run fast in order to get your product in the market on time. More often than not, you will be overrun by competition or the blue ocean you sold to your investors will become a murky puddle, at best. Large social problems unfortunately remain blue oceans for significant periods of time, requiring awareness-raising, community and trust building, funding, policy changes and creative leadership to overcome them. These assets are much tougher to deploy and grow than technology. The good news here is that if you’re not running a timing risk, you can think your product through, prototype, and thoroughly test it before scaling. 

Slow entrepreneurship

What, then, are the most appropriate structures to support funding, mentoring and innovations for social start-ups?  We propose the notion of Slow Entrepreneurship. In terms of investment, it’s a game that requires a long-term strategy and patient capital that is satisfied with a good return on investment. The game is not to invest in ten companies in the hope that one will bring in outsized returns. You want the majority to achieve a viable profitable success, while still having the chance that one will scale and have an outsized impact. You want the kind of support that is content with a smaller upside and balances this out with a high rate of success.

Today, there are many opportunities for capital-light or lean start-ups. Starting a business requires little: an idea, a small team, and a place. You can invest on a shoestring and have little need for outside capital. In fact, you want to keep independence and control over your company. This also applies to social start-ups involved in large societal issues, as technical innovation and online connectivity make it easier to stay lean.

The key to Slow Entrepreneurship is to offer the right support in terms of idea development, team selection, and mentoring of execution. One core element of this approach is to match track-record entrepreneurs with people with great ideas, energy and commitment. Most of the social start-ups that go through this rigorous program will make it.

The funding should be appropriate to the ambitions and signature strengths of Slow Entrepreneurship. At the moment, there is really only one dominant, but very high risk, model for financing technology: equity investment, where your collateral is the future profits of the company, if they ever occur. Social start-ups require creative and socially responsible sources of financing that also reduce the risk for investors. Much of the finance for social enterprises comes from government grants, project-based finance, infrastructure investments and social bonds – all sources of funding that enable real assets, services or intellectual property to be put up as collateral, thus reducing the investor’s risk and capping the friction between the “haves” (investors seeking to maximize profit) and “have-nots” (entrepreneurs seeking to solve a problem).

Social enterprise start-ups are also much more likely to build on the ultimate source of funding–revenues from clients–users and customers. This provides far more value than investments: it provides true indication of the company’s value to its clients and society, while also bringing the start-up closer to business sustainability, one euro at a time. This cannot be provided by any sort of investment or grant.

The table below summarizes the differences between fast and slow entrepreneurship:

We call this Slow Entrepreneurship in the modern sense of slow. “Slow food” is high-quality food prepared with care and enjoyed in the right company – the very opposite of fast food. While the Slow Food Movement was intended to counter fast food, the alternative it proposed is not merely a longer time frame, but rather a celebration of quality, diversity, health and wellbeing. This is what we propose for entrepreneurs and investors in Slow Entrepreneurship.

Fast entrepreneurship runs on adrenaline-infused quick returns and quick failures, burning through long nights of brainstorms and coding. It is exciting in its own right, but appropriate only for specific ventures. Slow Entrepreneurship treasures human relationships, health, and sanity, and strives for the good life. One optimizes for speed, the other for quality and wellbeing.

In social start-ups, there is really only an execution risk. This is the risk that outside investors need to evaluate.

Our vision for Slow Entrepreneurship is that by going through a learning program with the right mentoring and guidance, almost everybody with dedication will bring their project to fruition. In this they will be helped by faculty and mentors, as well as through the support and insights of a worldwide community. The rate of outright failure will be low, as people will continue to learn from failure and pivot to make their vision come true. There will also be some big wins, in which the focus on designing all projects for scaling will bear fruit. In supporting Slow Entrepreneurship, outside investors will be able to de-risk their portfolio, realizing both a good rate of return and a beneficial social impact.

By Mercedes De Miranda, Karim Benammar, Noam Gressel, Menno van Dijk

About the authors

Mercedes de Miranda has a general management background with a strong experience in developing and implementing new businesses, as well as growing businesses beyond the early stages. She has gained this experience while working in a number of different positions, ranging from consultant, to business development manager, managing director of operations and finance director and has held a number of board positions. She has experience in both the profit and non-profit sector and has been active in both corporate and the startup settings.

Karim Benammar is a philosopher specialised in thinking techniques and paradigm shifts. At THNK, curator and moderator of forum sessions and content producer. Studied philosophy in England, the United States and Japan. Former associate professor at Kobe University. Author of Abundance and Reframing. Follow Karim on Twitter: @KBenammar

 

 

Noam Gressel’s career focuses on designing, building and promoting environmental excellence in the business arena. In 2001 he founded Assif-Strategies as part of early efforts globally to create business value with environmental values. The firm provides cutting-edge environmental strategy, management & accounting services to corporations from a broad range of market sectors while also serving as a launchpad for startups focused on cleantech, energy, food and green business.

 

Menno Van Dijk, Co-founder and Managing Director at THNK. School of Creative Leadership. Menno is a Former McKinsey Director, working in strategy, organizational design and operational improvement in Media, High Tech and Energy. Functional focus: growth, innovation, digital. Was leading McKinsey’s European Media practice for 7 years. Created NM Incite, McKinsey’s first ever co-branded JV with a third party, Nielsen. NM Incite helps businesses harness the full potential of social media intelligence to drive business performance and is active in 22 countries. Work experience in most European countries, US, Australia, South Africa, China and India. Has lived in Netherlands, Australia and South Africa.

Sources

Slowfood.com

Show me the money: five ways to finance social enterprise

Making money doing good – reinventing capitalism

Image: newly hatched baby turtle toward the ocean from Shutterstock.com

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