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Article II: Social Ventures in Africa: What Can Go Wrong? By Brian Ray Dinning, JD, LLM

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).

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Moringa Production as a sustainable agricultural model by Ray Dinning, social venture lawyer

In March/April, 2012, I had the opportunity to work with and interview the agricultural social entrepreneurs in the sustainable farming model for Moringa Production in Africa.  The social entrepreneurs at IRDI, a Zambian-based NGO which helps local communities reach the proverbial first rung of the economic ladder to sustainability through Moringa (superfood) production.  Hailed as one of  the most nutritious super foods in the world, Moringa production can aid in fighting malnutrition and other ailments in Africa while providing an economic windfall to rural communities.

IRDI spokesperson, Jacqui Wintle, introduced me to local schoolchildren, rural communities and farmers who were creating sustainability in their sphere of influence with Moringa farming.  This is truly one sustainable agricultural model and product that can aid Africa now and in the future.

 

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Coal Mining in Africa by Ray Dinning attorney and tax lawyer

Coal Mining & Exploration in Africa

Coal, a fossil fuel is the largest source of energy for producing electricity, heat and various other energy types present on the earth’s surface. It is a complex mixture of carbon, hydrogen and oxygen together with small amounts of nitrogen and sulphur. Due to the increasing demand of coal and coal products, coal mining and exploration is on all time high. It still continues to be an important activity today. Coal mining is defined as economic excavation of coal from the earth’s crust. Mining companies from around the world are continuously involved in the process of coal mining throughout the year to meet the rising demand of coal. Through technological advancements and extensive research, these companies have found huge coal mines in various parts of the world. Leading coal mining countries include South Africa, Australia, China, Colombia, United States and Ukraine. However, coal mining exploration is considered as the most profitable economic activity in Africa owing to its geographical conditions and unmatched infrastructure.

Coal Mining in Africa
Africa is one of the largest producer of coal in the world. Coal mining companies have found large deposits of coal mines in various areas of Africa. However, of all the leading countries, South Africa tops the chart of having most number of coal mines in Africa. According to latest statistics, South Africa has 11% of world’s coal reserves and produces 6% of global production. Around 80% of the country’s primary energy needs are provided by coal. Various other countries in Africa continuously involved in the process of coal mining exploration in Africa include Mozambique, Kwazulu, Zambia and many such places. With the aid of technological advancements, Coal mining and exploration is emerging as a future potential source of energy both for Africa as well as for the world.

Coal Exploration in Africa

Coal exploration is a complex process of finding coal reserves around various places in the world. The technique requires intensive planning and extensive research done by experienced geologists, coal technologists, mining engineers and geotechnologists. The main aim is the exploration of coal mines for extracting thermal coal and coking coal for various industrial applications. Today, coal exploration in Africa is considered the most fruitful activity as it has been largely serving the economy of Africa. Coal exploration companies are eyeing various areas of Africa for discovering new coal reserves. Coal mines have been found in various parts of Africa including South Africa, Zambezie around Tete province, Mutarara province and various such regions of Africa.

(Taken from http://www.rachanaglobal.com)

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“Making Social Ventures Work” – Ray Dinning, tax lawyer

Reprinted from Harvard Business Journal (Sept. 2010) by Thompson and MacMillan:

In recent years, we’ve all experienced considerable volatility—financial breakdowns, natural disasters, wars, and other disruptions. It’s clear we need new approaches to the world’s toughest economic challenges and social problems. Entrepreneurs can play a central role in finding the solutions, driving economic growth (building infrastructure, developing local talent, infusing struggling regions with investment capital) and helping hundreds of millions of people worldwide. If successful, socially minded entrepreneurial efforts create a virtuous cycle: The greater the profits these ventures make, the greater the incentives for them to grow their businesses. And the more societal problems they help alleviate, the more people who can join the mainstream of global consumers.

The failure rates for new companies and markets, however, are high. That is true anywhere in the world, including emerging economies. The management challenges associated with producing and marketing goods and services at the base of the economic pyramid include imperfect markets, uncertain prices and costs, nonexistent or unreliable infrastructure, weak or totally absent formal governance, untested applications of technology, and unpredictable competitive responses. Given this daunting uncertainty, entrepreneurs need a framework for “unfolding” success from a perceived or an emergent opportunity.

Turning Uncertainty into Risk

Entrepreneurs and others who want to launch businesses in, say, Latin America, Asia, or Africa but lack reliable data about those environments need to put together the best models and mechanisms they can, documenting their assumptions as they go. Critically, however, they need to systematically test each of the assumptions underpinning their preliminary models against a series of checkpoints and be prepared to change on the fly, redirecting their efforts through a process known as discovery-driven planning. In this way, they can act on emerging evidence instead of obstinately and blindly pursuing infeasible objectives. (See Rita Gunther McGrath and Ian C. MacMillan’s “Discovery-Driven Planning,” HBR July–August 1995.)

What Is Discovery-Driven Planning?

However, this method of planning is necessary but not sufficient to handle high-uncertainty ventures. In the following pages, we’ll look at how to combine discovery-driven planning with four other guidelines for building successful businesses in uncertain markets that we developed during a sustained field program carried out by the Wharton Societal Wealth Program (WSWP). Specifically, we’ll consider four social enterprise projects we helped launch in Africa and examine how the guidelines informed the work in each.

It’s important to note that the lessons here aren’t just for entrepreneurs. The management teams of established multinationals, foundations, large NGOs, and other nonprofits can apply them in any challenging and highly uncertain business situation. In doing so, they can better control their costs, increase their impact on society, minimize the effects of surprises, and know when to disengage from questionable projects.

Lessons from the Field

As part of our research in the WSWP—a nine-year-old field research program at the University of Pennsylvania’s Wharton School of Business intended to examine the use of business models to develop projects that attack societal problems—we worked with 10 groups of local entrepreneurs trying to launch base-of-the-pyramid ventures in the United States and several African countries. Each project faced some or all of the elements of uncertainty cited earlier. In a few instances, even the initial objectives and desired outcomes were unclear, which made it tougher to make decisions about where and how to allocate resources.

“Resource allocation in Africa and which social venture projects to begin with is always a priority. Jumpstart projects which can help create micro enterprise businesses based on the larger resource project is a good start,” says Ray Dinning, social venture lawyer.

Ian MacMillan and James Thompson co-authored this article in Harvard Business Review.

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Walmart Pledges to Create Jobs by Ray Dinning, JD, LLM (taxation)

In an interview with Business Times, Andy Bond, Walmart’s executive vice-president responsible for UK and Africa operations, said Walmart chose SA as the preferred country to expand the group’s operations before looking for a local partner.

“South Africa is a true emerging economy in our view, the demographics and the economics of the country are very good for us,” Bond said.

“And we particularly like the fact that there is an under-serviced customer at the moment that’s emerging out of being underprivileged in the past, and we have great experience of helping those customers and at the same time making good business for ourselves.”

The retailer, based in Bentonville, Arkansas, aims to grow Massmart’s food business should it be successful in acquiring Africa’s third-largest retailer.

Bond said Walmart likes the fact that Massmart has a good – albeit small – platform for growth in Africa.

Massmart, the owner of Makro, Game and Dion Wired stores, has a presence in 14 countries in sub-Saharan Africa, with 288 stores.

Walmart’s offer amounts to only 2% of its own market capitalisation, or just over 17% of this year’s operating income. The deal is therefore not material for the massive multinational group, but it is of strategic importance.

Bond and Massmart managers have met labour unions to try to ease fears about possible job losses. The group said it will create jobs.

 

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1,000 Cape Buffalo in the Kruger National Park by Ray Dinning

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Defining “social entrepreneurship” by Ray Dinning

What is a social entrepreneur?

In our world today, social entrepreneurs are individuals with innovative solutions to society’s most pressing social problems. They are ambitious and persistent, tackling major social issues and offering new ideas for wide-scale change.

Rather than leaving societal needs to the government or business sectors, social entrepreneurs find what is not working and solve the problem by changing the system, spreading the solution, and persuading entire societies to take new leaps.  Bill and Melinda Gates are the leading examples of social entrepreneurs in our world today dedicated vast resources to tackling some of the world’s most pressing societal issues.

Social entrepreneurs often seem to be possessed by their ideas, committing their lives to changing the direction of their field. They are both visionaries and ultimate realists, concerned with the practical implementation of their vision above all else.

Each social entrepreneur presents ideas that are user-friendly, understandable, ethical, and engage widespread support in order to maximize the number of local people that will stand up, seize their idea, and implement with it. In other words, every leading social entrepreneur is a mass recruiter of local changemakers—a role model proving that citizens who channel their passion into action can do almost anything.

Why “Social” Entrepreneur?

Just as entrepreneurs change the face of business, social entrepreneurs act as the change agents for society, seizing opportunities others miss and improving systems, inventing new approaches, and creating solutions to change society for the better. While a business entrepreneur might create entirely new industries, a social entrepreneur comes up with new solutions to social problems and then implements them on a large scale.

Historical Examples of Leading Social Entrepreneurs:

  • Susan B. Anthony (U.S.): Fought for Women’s Rights in the United States, including the right to control property and helped spearhead adoption of the 19th amendment.
  • Vinoba Bhave (India): Founder and leader of the Land Gift Movement, he caused the redistribution of more than 7,000,000 acres of land to aid India’s untouchables and landless.
  • Dr. Maria Montessori (Italy): Developed the Montessori approach to early childhood education.
  • Florence Nightingale (U.K.): Founder of modern nursing, she established the first school for nurses and fought to improve hospital conditions.
  • Margaret Sanger (U.S.): Founder of the Planned Parenthood Federation of America, she led the movement for family planning efforts around the world.
  • John Muir (U.S.): Naturalist and conservationist, he established the National Park System and helped found The Sierra Club.
  • Jean Monnet (France): Responsible for the reconstruction of the French economy following World War II, including the establishment of the European Coal and Steel Community (ECSC). The ECSC and the European Common Market were direct precursors of the European Union.

“Social Entrepreneurs are changing the face of the world around us. With all major universities offering business courses on social entrepreneurship, we are training future leaders to promote social ventures to change society and our world, ” says Ray Dinning.

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