Tales of a Social Capital Startup - Part 1
In mid-2008 I moved to Uganda and started a private sector incubator for East African entrepreneurs in software and technology called Appfrica Labs. For more more on my motivations for doing so check out this video interview I participated in with Jonathan Marks two weeks ago in Austin, Texas. In only two months we are well on our way to becoming 100% sustainable and completely profitable. It thought I'd write a bit on the philosophy behind my decision, why I used a for-profit model versus a non-profit model and why sustainability was my primary focus even before seeking investment.
For-Profit Versus Non-Profit Models
If you ask a lot of developmental aid workers in many BOP markets what's missing from the big picture, almost unanimously they will tell you: sustainability and accountability. While it's not my goal to criticize the non-profit or NGO model, I think there's a certain level of unchecked abuse from both sides. One adverse effect is that it leads to a sense of entitlement and expectation from local groups benefiting from the relationship. Here's a real example that a friend who directs an NGO shared with me last week.
This large organization here in Uganda gave some products to one of it's local partners for a temporary program. The products weren't intended to stay forever, but after the program was over they were left at the group's facilities. The group gets 100% of it's operational costs from this donor group so I suppose they just assumed these products would be treated the same way. Only that wasn't the intent, the Non-Profit eventually planned to move them elsewhere. And whether it was due to miscommunication or poor direction, the non-profit sent a message asking for the product to go somewhere else. The local group responded with a drawn out excuse about how they needed the product, now, because they'd built programs around it. In fact, they needed them so badly that it would destroy the program if they had to give them up. (I'm deliberately vague so as to protect the identities of both parties.)
And so it goes in a lot of other situations. The local group has become dependent upon their benefactor, as far as I know, there's not even a thought about sustainability. In this case that might be all that's expected of them, but I feel like this game plays itself out in far too many institutions here. My goal with Appfrica Labs was to apply a for-profit model to social development. Appfrica Labs is an incubator and VC space, we fund entrepreneurs but given the market we have to do more than that. Even at university level, education isn't perfect so a big part of what Appfrica Labs does is expose entrepreneurs to new programming languages, new techniques and new ideas, while also offering the facilities and equipment needed to do it all. We pay our incubated entrepreneurs so that they can focus on being innovative and experimental while not being distracted by other jobs or financial worries. It's an attempt to create opportunities in a market where there are a few, otherwise these self-motivated individuals will go abroad to find opportunity or they'll give up on their careers, neither of which is good for the local economy.
The reason I chose a for-profit model was simple. I would have felt like a hypocrite telling these guys to start for-profit businesses, if I wasn't running one of my own. The whole 'do as I say, not as I do' paradigm. It also teaches the lesson that failure is a harsh reality, and if you don't work hard the opportunities you've been given will go away. In my opinion, there's no need to sugarcoat that, it's the reality whether people choose to accept it or not. There's also my personal defiance to everyone who questions whether or not for-profit models can work in Africa, especially in areas of software and technology.
The Real Disadvantages
My biggest challenge, a problem I share with many blended model companies, is that it's sometimes difficult for non-profit organizations to find ways to work with a for-profit. They're bound by policies that say that they can only work with other non-profits. It seems like for-profit social capital, blended-model, or double bottom-line business is a huge gray area when it comes to funding. Most Large for-profit organizations want to donate or partner with non-profits so that they can ensure they are getting the tax advantages of doing so. Non-Profits and NGO's are often bound by strict rules that were created to ensure that they are legitimately non-profit entities. This means they can only contract other non-profit groups. Models that fit outside of those archetypes have a hard time raising capital.
For me the sustainable part of my model is two-fold. We can afford to pay the people we incubate because in addition to working on start-up ideas in a traditional incubator-angel-startup model, we also complete projects on a work-for-hire basis. For my company this works because the work-for-hire projects are often an opportunity to teach people new things while also adding to the bottom-line. It does mean we end up doing a lot of work that isn't innovative or 'our own', but that's the reality of starting up with a model like this. Once the model is proven everyone wants a piece, until it's proven no one cares. In a way, I'm still bootstrapping. Before I found an investor, this was also my business model, the investment just allowed me to scale up to an office and more employees.
I'm curious to hear from other blended-model start-ups. What are your experiences with funding and partnering with larger groups?
This is Jon Gosier's second guest column for Change.org. Jon runs Appfrica Labs, a tech startup incubator based in Kampala, Uganda, and writes on technology, Africa, and the perils and potential of working in a global startup.
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