Article 2: Social Ventures in Africa: What can go Wrong?
By: Brian Ray Dinning, JD, LLM and Social Venture Lawyer
June 29, 2012
Sometimes committing your life to a worthy cause like social ventures comes with many challenges and obstacles such as: differing world views, different goals and objectives (especially from banks and investors who have financial goals rather than the founders and social venture partners who generally have charitable and social goals as well as financial goals), the unpredictable nature of people and a limitless host of other complications and factors. Business and social ventures are hard work – let alone business and social ventures in Africa, where resources, personnel and supplies can be scarce and corruption, violence and theft are rampant.
The US Government published that over 50% of all businesses started in the US fail within the first five years.[1] New Venture Lab – Equipping Christian Entrepreneurs, quotes interesting statistics from Harvard Business School noting that the failure rate of businesses can be as high as 95% (depending on how you define failure). Their website, quoting a Harvard Business professor, provides:
“Most companies fail. It’s an unsettling fact for bright-eyed entrepreneurs, but old news to start-up veterans.
But here’s the good news: Experienced entrepreneurs know that running a company that eventually fails can actually help a career, but only if the executives are willing to view failure as a potential for improvement.
The statistics are disheartening no matter how an entrepreneur defines failure. If failure means liquidating all assets, with investors losing most or all the money they put into the company, then the failure rate for start-ups is 30 to 40 percent, according to Shikhar Ghosh, a senior lecturer at Harvard Business School who has held top executive positions at some eight technology-based start-ups. If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent. And if failure is defined as declaring a projection and then falling short of meeting it, then the failure rate is a whopping 90 to 95 percent.
“Very few companies achieve their initial projections,” says Ghosh. “Failure is the norm.”[2]
While this is the reality for businesses in the United States, a University of South Africa study indicates that the rate of small business failure in South Africa can be as high as 80%.[3] MIT and other business schools note that the failure rate of social ventures will likely follow that of other for-profit businesses.
The challenge is to continue working to improve the lives of the 400 million people living on less than $1.25 per day in Africa regardless of past failures or challenges. As Nelson Mandela states, “The greatest glory in living lies not in never falling, but in rising every time we fall.” Quoting Vinod Khosla, billionaire venture capitalist and co-founder of Sun Microsystems: “There needs to be more experiments in building sustainable businesses going after the market for the poor. It has to be done in a sustainable way. There is not enough money to be given away in the world to make the poor well off.”[4] Researchers on social ventures at Duke note that: “We live in an age in which the boundaries between the government, nonprofit, and business sectors are blurring. This blurring results from a search for more innovative, cost-effective, and sustainable ways to address social problems and deliver socially important goods, such as basic education and health care.”[5]
Furthermore, Dees and Anderson realize that social venture projects and social entrepreneurs focus on the social impact of social venture projects and business-minded people focus on the financial returns thereby creating complexity. “It is extremely hard to make strategic decisions about resource allocation or practical cost/quality tradeoffs when the social impact of these decisions is nearly impossible to measure in an efficient, timely, and reliable fashion. It can become all too easy to focus too heavily on the more familiar, tangible and straightforward economic measures of success.”[6]
Businesses including social ventures fail for many reasons. A New York Times columnist notes the top 10 reasons for small business failure:
“1. The math just doesn’t work. There is not enough demand for the product or service at a price that will produce a profit for the company.
2. Owners who cannot get out of their own way. They may be stubborn, risk averse, conflict averse — meaning they need to be liked by everyone (even employees and vendors who can’t do their jobs). They may be perfectionist, greedy, self-righteous, paranoid, indignant or insecure. You get the idea. Sometimes, you can even tell these owners the problem, and they will recognize that you are right — but continue to make the same mistakes over and over.
3. Out-of-control growth. This one might be the saddest of all reasons for failure — a successful business that is ruined by over-expansion. This would include moving into markets that are not as profitable, experiencing growing pains that damage the business, or borrowing too much money in an attempt to keep growth at a particular rate. Sometimes less is more.
4. Poor accounting. You cannot be in control of a business if you don’t know what is going on. With bad numbers, or no numbers, a company is flying blind, and it happens all of the time. Why? For one thing, it is a common — and disastrous — misconception that an outside accounting firm hired primarily to do the taxes will keep watch over the business. In reality, that is the job of the chief financial officer, one of the many hats an entrepreneur has to wear until a real one is hired.
5. Lack of a cash cushion. If we have learned anything from this recession (I know it’s “over” but my customers don’t seem to have gotten the memo), it’s that business is cyclical and that bad things can and will happen over time — the loss of an important customer or critical employee, the arrival of a new competitor, the filing of a lawsuit. These things can all stress the finances of a company. If that company is already out of cash (and borrowing potential), it may not be able to recover.
6. Operational mediocrity. I have never met a business owner who described his or her operation as mediocre. But we can’t all be above average. Repeat and referral business is critical for most businesses, as is some degree of marketing (depending on the business).
7. Operational inefficiencies. Paying too much for rent, labor, and materials. Now more than ever, the lean companies are at an advantage. Not having the tenacity or stomach to negotiate terms that are reflective of today’s economy may leave a company uncompetitive.
8. Dysfunctional management. Lack of focus, vision, planning, standards and everything else that goes into good management. Throw fighting partners or unhappy relatives into the mix and you have a disaster.
9. The lack of a succession plan. We’re talking nepotism, power struggles, significant players being replaced by people who are in over their heads — all reasons many family businesses do not make it to the next generation.
10. A declining market. Book stores, music stores, printing businesses and many others are dealing with changes in technology, consumer demand, and competition from huge companies with more buying power and advertising dollars.
In life, you may have forgiving friends and relatives, but entrepreneurship is rarely forgiving. Eventually, everything shows up in the soup. If people don’t like the soup, employees stop working for you, and customers stop doing business with you. And that is why businesses fail.”[7]
Aside from the ten reasons noted above, in my experience with social ventures in Africa, the ventures did not work out as planned because of differences in goals and objectives between the partners, tension between the profit-making side and the social aspect of helping people and outlandish, intentional and unprofessional (and sometimes criminal) behavior and actions of others which interfered with, delayed or handicapped the social ventures.
Of all the reasons for small business and social venture failure noted above, it would be the outlandish, intentional and unprofessional (and sometimes criminal) behavior and actions of others, which caused our social ventures in Africa to either fail, be delayed or become handicapped. In order to fully illustrate this point and to tell my side of the story, I will publish this seven part series complete with documents, video, photos, letters and email.
In addition to documents, video, photos, letters and email, there are also witnesses to most or all of this outlandish behavior including from the perpetrators themselves. While some of these people are looking forward to a day in court against me, they will have to take the witness stand (under penalties of perjury) and answer for their outlandish behavior and actions and, hopefully, they will understand how their actions harmed the social venture projects, other investors and donors and the local people of Africa.
Article 3 is entitled: Social Ventures in Africa: Wextrust Capital – The Good, the Bad and the Ugly.
[1] Small Business Administration
[3] Mabaso, NR, University of South Africa (March 2008).
[4] MIT Entrepreneurship Review: From the Lab to the Land: Social Entrepreneurs Explore Appropriate Technology Dissemination (Nov. 26, 2010).
[5] Dees and Anderson, Duke Social Entrepreneurship: “For Profit Social Ventures,” (2003).
[6] Id.
[7] Goltz, J., “Top 10 Reasons Small Businesses Fail,” New York Times (Jan. 5, 2011).
Social Entrepreneurship in Africa 