Building Sustainable Startups in the Developing WorldPublished: January 14, 2005 in Knowledge@Wharton
Starting a new venture is always a risky proposition. Even in an advanced economy, failure is more common than success. In a developing economy, those risks are multiplied. Between bad roads, spotty electric service, corrupt bureaucrats, and impoverished consumers, executing even the simplest plan can be a challenge.
At the United Nations Global Compact Academic Conference titled, "Bridging the Gap: Sustainable Environment," which was held recently at Wharton, several entrepreneurs and business executives spoke about the challenges - and personal rewards - of growing a new venture in countries where even satisfying life's most basic needs is a day-to-day struggle for most.
Speakers included an entrepreneur who founded a for-profit cell phone service in Bangladesh, the founder of a nonprofit medical services delivery service in Mozambique, and an executive at a major multinational whose team found a way to deliver more productive hybrid corn to Mexico's poorest farmers.
For Iqbal Quadir, now a professor at the John F. Kennedy School of Government at Harvard and co-founder of Grameen Phone, the idea of founding a cell phone company in Bangladesh came to him in the early 1990s, during a computer network outage at the investment firm where he worked in New York City. As he waited for the computer network to go back online, he said, he remembered a time during his boyhood when his mother had asked him to walk to the next village to get medicine for a younger sibling. "I walked all morning, 10 miles or so, to get there around noon, and when I got there, the medicine wasn't there, so I spent all afternoon walking back," he says. Lack of a telephone had slowed him down then just as surely as lack of a computer network was slowing him down now in his office in New York. "Naturally, I put the two experiences together and I realized, connectivity is productivity," he says.
Later, Quadir found statistics that showed that adding telephones to an underdeveloped market could lead to tremendous gains in productivity and economic growth. "[O]ne new phone doesn't add much here. But interestingly if you add a new cell phone in a poor country, the GNP value is huge," as much as $5,000. Yet Quadir also discovered that development organizations such as the World Bank had few telecommunications projects in their portfolios.
To overcome skepticism about the value of building a wireless telecommunications network for poor consumers, Quadir needed to combat a few myths. First, he needed to expose the false belief that poor people could not pay for telephone service. If it was a productivity tool, he reasoned, investors shouldn't think about how much the consumers earn now. If it helps productivity, the tool should eventually pay for itself over time, the way a worker in the U.S. might not be able to pay for a car he needs to get to work upfront, but can pay for it in installments over time with money he earns driving to work.
Quadir also needed to show that while a phone - and a cell phone in particular - might sound like a luxury, the reality is that not having a phone is extremely expensive. "Poor people are actually paying a lot by not having a phone," Quadir says. Between lost time and missed opportunities, not having a phone can be very costly.
Another key insight was recognizing that access to service didn't have to mean ownership. Whereas most westerners have thought of the cell phone as a personal communications device, selling phones to individuals wouldn't work in such poor villages. Instead, Grameen Phone would issue cell phones to a few women in a village, who would then re-sell phone service by the call, and generate a small income for themselves in the process.
But as much sense as the idea might have made in a presentation, the venture wasn't easy to roll out. Although Quadir had the cooperation of Grameen Bank, a microfinance institution that lends small amounts of money to women living in Bangladesh's poorest villages, he said he didn't have much help from the government and the government's telecommunications system. To work around opposition from entrenched interests in the government, Quadir said he spent years before the service launched developing a coalition of supporters - nine other interests that stood to gain by creating better telecommunications service.
One point Quadir emphasized repeatedly, during his presentation and in the question and answer session that followed, was that outside entrepreneurs and investors frequently misunderstand the role of government in a developing economy. Far from being a force to help businesses start rolling, he said, in his experience, government frequently serves to hold development back. "There's a great deal of partnership in public and private sectors in poor countries," he said."There's too much partnership under the table, and that is a real problem."
In Quadir's view, the reason is that lack of economic power frequently translates into lack of political power. This means that although governments could theoretically deliver more to their neediest people, they can also get away with not delivering services. He argues that because of this dynamic, aid given to governments often actually further weakens the people it was intended to help.
Like Quadir, Blaise Judja-Sato has also thought a lot about the value of networks. Although his venture, VillageReach, performs some very tangible activities, such as trucking medicine to rural clinics in the poorest and most remote parts of Mozambique, Judja-Sato likens his Seattle-based nonprofit to a computer operating system. "We want to build an operating system that will ensure that service providers [working] in a remote area can concentrate on service," he said - a pitch that evidently went over well with one of his primary supporters, the Gates Foundation.
The intent is to build a logistics infrastructure in poor countries that can help make it easier for nonprofits to deliver services. The goal, he says, is to enable providers interested in helping the poor to concentrate on providing services and not worry about logistics or infrastructure.
Appropriately enough, Judja-Sato's venture started with a phone call. "Four years ago, there were some terrible floods in Mozambique and a friend of mine called me to come help. Everything flowed from there," said the Wharton graduate, who spent about 10 years in telecommunications before starting his nonprofit venture, VillageReach.
Like Grameen Phone, part of VillageReach's idea involved re-thinking some traditional concepts. In this case, one key was realizing that their non-profit venture would succeed best if it combined profit-making activities with the not-for-profit goals of the organization. For example, after realizing that the needs of health clinics in remote areas they supply included not just medicine but the energy needed to keep those medicines refrigerated, Judja-Sato's team founded a propane supply company. That company has not only made it possible to keep medicines from spoiling but has allowed restaurants and hotels to operate, and even fishermen to preserve their catches. "In the past, when fishermen came from the ocean, they had to sell everything on the spot. Now that they have refrigeration, they can keep their catch and command a higher price for their product," he said.
Global corporate giants looking to supply new products to developing markets face a different set of challenges. One of the biggest decisions is whom to help, and how. Eduardo Wanick, president of DuPont Latin America, said that the 5,100 scientists and researchers in product development at the 200-year-old Delaware company traditionally concentrated their products on the economies that serve the 800 million richest people in the world. However, a growing focus on environmental concerns and sustainable development had led them to begin looking for opportunities in the developing world as well.
The Dupont team decided to begin its effort to develop more products for the developing world by focusing on products for Latin America, and in particular, on Mexico. From a pool of 75 ideas, Wanick said, the team narrowed the focus eventually to 14 concepts, which were then studied in more detail. Eventually, the company selected a project to provide higher-yield corn to Mexico's poorest subsistence farmers who produce one-seventh as much corn per hectare as that produced by the country's most productive farmers. After interviewing some 150 farmers around the country and learning more about their needs, scientists at Dupont developed tailored hybrid seeds for farmers in each region of the country. By using the new corn, he said, farmers were able to increase their productivity from about 1.5 tons per hectare to 3 tons per hectare.
As Dupont researchers learned more about the farmers, however, they also realized that the farmers needed more than new seeds. "We think of corn as a commodity, something that is easy to sell. But remember, these farmers are traditional farmers, so they use their corn that they grow mostly in their own farms, in their families or to their animals and are not well connected with the distribution centers," Wanick said. So as part of the offering, Dupont helped the 17,000 farmers in the program develop a new distribution channel.