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July 4, 2012

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July 4, 2012

Where are development’s venture capitalists?

July 4, 2012
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Where are development’s venture capitalists?
Research increasingly shows that on everything from how to stimulate economic growth to how to improve the quality of public services, there are multiple pathways to success. What’s more, what works in one place and time may fail in another. Rather than a search for a non-existent universal ‘best practice’, we need new ways of understanding how change happens that describe this complex, pluralist world. The best model I have seen is evolutionary theory, memorably described in Eric Beinhocker’s important book, The Origin of Wealth. Beinhocker shows that the evolutionary process of random variation, followed by selection of ‘fit’ variants (and the extinction of non-fit ones), and their rapid amplification, is a much better description of the economy than economics’ preferred paradigm, drawn from 19th century physics, of systems that always seek to return to a stable equilibrium.
What has such abstract thinking got to do with aid? Aid agencies tend to be risk averse – no politician wants to see newspaper headlines about taxpayers’ money lost or ‘wasted’ on failed projects; NGOs like Oxfam are determined to make every hard-won penny count (and worried about what our supporters would say if it doesn’t). But there is increasing recognition that such caution comes at a cost – all too often, low risk is accompanied by a low return on investment. Compare this approach to a venture capitalist who perhaps unwittingly, adopts an evolutionary theory of change by backing  10 projects knowing that nine will fail (and on the tenth ‘fit’ one, he/she will make enough money to more than compensate for the other failures). Could such a high risk/high return approach work in development?
I think the answer is an emphatic yes, not least because I’ve seen it in action on the ground in Tanzania. With DFID backing, Oxfam is running a programme explicitly modelled on evolutionary theory to improve the accountability of local authorities to their citizens. In the first phase, the programme sets lots of different hares running, from ‘farm animators’ to ‘active musicians’ to primary school student councils. It then selects the fittest variants (or allows natural selection, as projects multiply or die of their own accord). The final phase will be amplification: creating an enabling environment for them, promoting synergies between different initiatives, but otherwise staying out of the way so that new ideas and approaches bubble up from the grassroots.
So far, the results are extremely encouraging, and are having a profound impact on the way Oxfam works in Tanzania, according to programme coordinator Jane Lonsdale:
‘We’re doing something different now, not just rolling out a load of community scorecards, or public expenditure tracking – the usual kind of governance work. We’re pushing ourselves to really think through how change happens in Tanzania and try out different things. The whole team and partners are now talking in terms of power analysis. We’ve got the same language to describe what change looks like. Everyone is picking up trends and patterns – it’s a lot better than using conventional [impact] indicators.’
We would love to do more of this, but the problem is that DFID’s willingness to fund an experimental programme of this kind, with lots of (relative) failures expected, is exceptional. Most funders want to see, in advance, a plan with a set of activities and intended results, against which the recipient’s performance can be evaluated (and the donor’s cash thus justified). ‘We’ll try loads of stuff, ditch the less successful ones, and see where we end up’ is not usually a compelling funding pitch, even if it is a much more sensible (and accurate) approach to development work.
Philanthropic foundations ought to have some their cultural affinity with venture capitalist approaches, given that most of their founders were VCs or at least entrepreneurs back in the day. So if any of them want to discuss setting up a ‘social VC’ facility, feel free to get in touch!
Duncan Green is senior strategic adviser at Oxfam GB. He writes a daily development blog, From Poverty to Power.

This piece appeared in the June addition of @lliance magazine

Research increasingly shows that on everything from how to stimulate economic growth to how to improve the quality of public venture_capitalservices, there are multiple pathways to success. What’s more, what works in one place and time may fail in another. Rather than a search for a non-existent universal ‘best practice’, we need new ways of understanding how change happens that describe this complex, pluralist world. The best model I have seen is evolutionary theory, memorably described in Eric Beinhocker’s important book, The Origin of Wealth. Beinhocker shows that the evolutionary process of random variation, followed by selection of ‘fit’ variants (and the extinction of non-fit ones), and their rapid amplification, is a much better description of the economy than economics’ preferred paradigm, drawn from 19th century physics, of systems that always seek to return to a stable equilibrium.

What has such abstract thinking got to do with aid? Aid agencies tend to be risk averse – no politician wants to see newspaper headlines about taxpayers’ money lost or ‘wasted’ on failed projects; NGOs like Oxfam are determined to make every hard-won penny count (and worried about what our supporters would say if it doesn’t). But there is increasing recognition that such caution comes at a cost – all too often, low risk is accompanied by a low return on investment. Compare this approach to a venture capitalist who perhaps unwittingly, adopts an evolutionary theory of change by backing  10 projects knowing that nine will fail (and on the tenth ‘fit’ one, he/she will make enough money to more than compensate for the other failures). Could such a high risk/high return approach work in development?

I think the answer is an emphatic yes, not least because I’ve seen it in action on the ground in Tanzania. With DFID backing, Oxfam is running a programme explicitly modelled on evolutionary theory to improve the accountability of local authorities to their citizens. In the first phase, the programme sets lots of different hares running, from ‘farm animators’ to ‘active musicians’ to primary school student councils. It then selects the fittest variants (or allows natural selection, as projects multiply or die of their own accord). The final phase will be amplification: creating an enabling environment for them, promoting synergies between different initiatives, but otherwise staying out of the way so that new ideas and approaches bubble up from the grassroots.

So far, the results are extremely encouraging, and are having a profound impact on the way Oxfam works in Tanzania, according to programme coordinator Jane Lonsdale:

‘We’re doing something different now, not just rolling out a load of community scorecards, or public expenditure tracking – the usual kind of governance work. We’re pushing ourselves to really think through how change happens in Tanzania and try out different things. venturecapitalThe whole team and partners are now talking in terms of power analysis. We’ve got the same language to describe what change looks like. Everyone is picking up trends and patterns – it’s a lot better than using conventional [impact] indicators.’

We would love to do more of this, but the problem is that DFID’s willingness to fund an experimental programme of this kind, with lots of (relative) failures expected, is exceptional. Most funders want to see, in advance, a plan with a set of activities and intended results, against which the recipient’s performance can be evaluated (and the donor’s cash thus justified). ‘We’ll try loads of stuff, ditch the less successful ones, and see where we end up’ is not usually a compelling funding pitch, even if it is a much more sensible (and accurate) approach to development work.

Philanthropic foundations ought to have some their cultural affinity with venture capitalist approaches, given that most of their founders were VCs or at least entrepreneurs back in the day. So if any of them want to discuss setting up a ‘social VC’ facility, feel free to get in touch!

[And if you want to run the Tanzania programme, Jane’s moving on and her job is now looking for star applicants, closing date 20 July]

4 comments

  1. Probably as a first Western NGOs, how about reading out Matthew 25:14-30 (Parable of the talents)to DFID? Perhaps ask Samuel L Jackson if he would volunteer to do the reading? 😉

    It sounds like a wonderful programme.

  2. Are you really wondering why no VCs are in development? All you have to do is look to people established in the development field, and I write this being in the field for several years. Maybe if we were not so stubborn and ‘clique-ish’ we would let somebody new, with a new idea, a new method in to the field to do new things. No VC wants to fund an old, tired idea (clearly what development folks have been doing for the past 40 years has helped millions survive, but we haven’t helped them thrive), but they also don’t want to fund a new, innovate idea – no matter how wonderful – unless it has a buy-in from and cooperation of practitioners in the field. Maybe those in the development field need to realize that not just academics, who i do greatly respect, and trust fund babies who could afford to give years of their life to unpaid work have some sort of ridiculous, manufactured monopoly on helping the poor. Those who know how to make money can and WANT to help too, not just governments. VCs see that cloister effect and don’t want to throw their money away and I don’t blame them. Yes, ‘success’ in this field is not the same as success in funding a first-world business venture, but that’s not actually the ONLY reason why VCs haven’t gotten involved. The development field as a whole may want to take a good look at ourselves instead of placing blame solely on ‘corporate evils’ Idealism is wonderful, but when was the last time you could pay a national debt, open a manufacturing plant, or support an infant industry with a payment/checque of idealism?

  3. I run a small not-for-profit that is involved with precisely such intersecting interests in the Republic of South Sudan. We are attempting to partner with local entrepreneurs, women’s associations and farmers cooperatives to help them start and run businesses, by facilitating access to investment, vocational training, equipment, etc.

    I know that your post was addressing this with regard to aid organizations, but it applies to the private-sector side as well.

    From my own experiences, I know that there is a great deal of potential for investors and local entrepreneurs interested in filling the niche between what communities want, on the one side, and what relief humanitarian aid groups can provide, on the other.

    Your comments about risk aversion are certainly true. Even for those willing to think in terms of long-term profit rather than quick short-term gain and obligation to provide for community partners, it is hard for interested groups to see where the opportunities are, where there are opportunities are, how to understand them, and the context, risk and costs. To fill this gap, there have to be organizations that know the country well and establish trusted relationships with the involved communities – this knowledge and these relationships are worthwhile in any case, but it does add to the cost of doing business.

    The risks for investors are not just the eternally headlined war and famine. Investment in developing areas often means entering into a contract and moral obligation with communities. Even when investor intentions are good, if those community rights/interests are misrepresented by government officials or local businessmen, the VCs don’t just lose money – they also risk public labeling as exploitative vultures, greedy capitalists, imperialists, etc. It is important that malicious or careless organizations be deterred by the threat of exposure and loss of capital, but the same deterrents can affect legitimate actors.

    A thought provoking post, to be sure. Many thanks.

    PS. should mention that the South Sudan Law Society has put out a handbook for potential investors that deals with precisely these pitfalls of “uninformed companies and disorganized communities” (http://www.southsudannewsagency.com/news/press-releases/south-sudan-law-society-launches-a-new-handbook-on-community-engagement-for-land-deals-in-south-sudan). I think South Sudan is going to be a proving ground for a (hopefully) new and better way of doing business right in Africa.

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