Toward a practical, impact-focused classification of social enterprises

Below is an essay that I put together for Alex Nicholls’ Social Entrepreneurship course at Oxford’s Saïd Business School. It is verbose, thanks to an academic word count target. The nut graf, as my friend Ben has taught me to call it, is that I believe that social enterprises (businesses that hope to have a positive social impact with their work) are best sorted and supported according to the impact they would like to have. Jump to Part II to skip the literature review. - Mark

Abstract

In the decades since Bill Drayton first coined the term social entrepreneurship in the 1980s, much ink has been spilled attempted to define—or argue against the definition of—a field that has attracted the attention of governments, philanthropists, and businesspeople. Most of these definitional attempts focus on the edges, using the contrast between social and “mainstream” businesses as a way to clarify what should be considered a social enterprise. This paper moves from such contrast-based efforts to define social entrepreneurship and more academically-focused frameworks, and toward a practical categorization of social enterprises starting from their relationship to their primary beneficiaries, which I call an enterprise’s impact focus. Such a categorization, rooted in the practical needs of social enterprises themselves, can help practitioners and academics of social enterprise move past questions of definition to considerations of how best to support enterprises themselves.

Part I

Defining and categorizing social entrepreneurship: A literature review

Though the phrase social entrepreneur was used as early as 1972, Ashoka founder Bill Drayton is widely attributed with coining the phrase to describe the type of organization to which his Ashoka began donating in the early 1980s.[1][2] Since then, a number of authors have offered their own definitions of social entrepreneurship, in an attempt to define and often promote the field. In the first half of this paper, we will trace the evolution of those attempts to define and categorize the field, with extra attention paid to Kim Alter’s work on social enterprise operational models.[3]

In his 1997 essay The Rise of the Social Entrepreneur, British author evangelist Charles Leadbeater describes social entrepreneurship as a reaction by private citizens to the failure of the British welfare state to keep pace with changes in social and family structures in the UK.[4] He points to examples such as private HIV/AIDS clinics and a church-run drug treatment program. For Leadbeater, the absence of a profit motive is the primary differentiator of the : “[They] are not owned by shareholders and do not pursue profit as their main objective. Certainly [social entrepreneurs] run not-for-profit organizations.”

Writing at roughly the same time, American professor Greg Dees roots his analysis of social entrepreneurship in modern entrepreneurship literature: if an entrepreneur is an individual who reorganizes available resources in truly innovative way, then a social entrepreneur does so with an explicitly social mission, impact-driven metrics of success, and concern for all stakeholders.[5]

In large part, this is the definition David Bornstein employs in How to Change the World, first published in 2004. Though not an academic text, the book profiles a number of the social entrepreneurs supported by the Ashoka Foundation. For Bornstein—as for Dees—the true social entrepreneur is a Schumpeterian innovator but with an underlying social motive, rather than a commercial one. Bornstein’s book marks the beginning of a wave of literature on social entrepreneurship in the late 2000s. In their 2006 article, Peredo and McLean identify two increasingly distinct camps of social entrepreneurs: first, those where social mission is the singular motive; and second, where social mission is the primary motive but profit is permitted as a secondary concern.[6] Writing in 2008, Janelle Kerlin breaks this down by region. In the US, she notes, self-labelled social entrepreneurs are much more likely to be focused on for-profit activities that support a social mission than academics who consider non-profits to be the locus of social enterprise activity.[7] In Western Europe, the conversation is more nuanced, in part because of the previous strength of social purpose organizations such as cooperatives.

At the same time that authors such as Bornstein, Peredo and McLean were offering various definitions of the social entrepreneur, others like Alex Nicholls pushed back against strict definitions, pointing out that in different regions of the world, social enterprises sit at different points of contact of the state, markets, and civil society and therefore differ in each region.[8] As a result, Nicholls puts forth a simple two-sided definition of social entrepreneurship that rests on a “prime” social focus and an “innovative approach.”

The broadness and vagueness of such a definition has led other scholars to attempt to categorize social enterprises. Neck, Brush and Allen offer a four-part categorization of social enterprises based on their primary mission (social v economic) and their primary market impact (social v economic).[9] Such a categorization highlights the weakness of the definitions of Bornstein and Dees, as pointed out by Certo and Miller and by Paul White: a focus on the entrepreneur’s motivations, which are self-reported and therefore difficult to verify.[10][11] As recently as 2012, scholars such as Giovany Cajaiba-Santana have tried, and largely failed, to categorize social entrepreneurship in a useful manner.[12]

Alter’s social enterprise models

The most complete effort to date at categorizing social enterprises has been Kim Alter’s 2006 efforts, included in Nicholls’ book Social Entrepreneurship: New Models of Sustainable Social Change.[13] Alter lays out three ways of classifying social enterprises:

Relationship to Mission Mission Centric(Embedded)

 

Mission Related(Integrated) Unrelated to Mission(External)
Example A productive Haitian cooperative An American non-profit that offers high-end care to some customers to subsidize its elderly care to the poor A British organization licenses its logo externally to unrelated companies as a revenue stream for its activities. 

Next, Alter identifies seven types of operational models. The following four are embedded models:

  • Entrepreneur support, in which an organization supports entrepreneurship in a marginalized population (microfinance)
  • Market intermediary, which works with small producers to connect them to markets (fair trade)
  • Employment, which aims to employ marginalized groups (such as jobs that enable disabled person)
  • Fee-for-service, where an organization charges fees to end users or third party payers

The next two of Alter’s seven operational models are integrated models:

  • Service subsidization, where a for-profit service targeting wealthy customers subsidizes a similar service for poor customers
  • Market linkage, similar to a market intermediary and which can be embedded or integrated depending on its organization

Lastly, Alter points to one external model:

  • Organizational support, where unrelated business activities fund core socially beneficial activities

After laying out seven these seven core models, Alter identifies other more complex models, including complex models, mixed models, and enhancing models, (including franchise and private-not-for-profit partnership models).

Alter’s paradigm is helpful in at least three ways. First, it moves discussion away from what qualifies as a social enterprise and towards how we might categorize such enterprises. Second, Alter focuses attention on one the key tensions within the field of social entrepreneurship: namely, different structural ways to balance the dual motives of profit and social benefit. Third, it brings forward the structure of social enterprises as key identifiers, rather than depending upon the motive of individual entrepreneurs as a categorical determinant.

Alter’s categorization falls short, however, in two primary ways. Most importantly, it fails to provide insight into how we might drive appropriate resources to social enterprises, including capital, talent, technical assistance, strategic guidance, appropriate regulation, and media exposure. Second, it leaves out—or forces us to shoehorn in—some social enterprises, including: job placement agencies, cash transfer programmes, data analytics companies, companies whose products might have a trickle-down positive effect, and environmentally-focused organizations.

Part II

Toward a practical categorization of social enterprises

In the second half of this paper, I offer a practical categorization of social enterprises. It is practical in two ways: first, it stems from the author’s personal experience of having invested in twenty-five and analysed over four hundred social enterprises, and is therefore primarily a practitioner’s perspective. Second, it is practical in that its primary motive is a practical one: I hope for this categorization to help drive resources to deserving social enterprises employing appropriate models.

The rationale for a practical categorization

As interest in social enterprise and its sister field of impact investing has risen over the last ten years, the imperative has grown for practitioners to be able to effectively channel resources to enterprises. Building an ecosystem of support around social enterprises depends on that effectiveness, in a number of categories. Below we lay out six of those categories, referring to existing social enterprises whose needs differ widely enough to illustrate the necessity of practical categorization.[14]

Funding. Social enterprises demand an array of overlapping funding types. A bank making small loans to rickshaw drivers in India may require equity capital to become operational, and then a significant amount of debt to continue lending to its participants; a technology for more effective cold-chain distribution in the same country might seek grant capital for its initial research followed by equity capital to hire initial staff and working capital to finance vehicle purchases. Such companies face a shifting landscape of funders, many of whom continue to determine their own areas of focus, investment theses, geographic focus, and balance between profit and impact. Wealthy individuals and their asset managers, on the other hand, have little clarity into the types of social businesses that exist and (critically) their risk-return profiles.

Regulation. A company in California building partially pre-fabricated homes for urban in-fill may need to work with zoning officials; a carbon-trading platform designed to fund community-level economic development projects depends on the regulatory advancement of carbon credit legislation at an international level. In large part, social enterprises fall under the same local regulatory structures as other companies. As efforts to create country-level regulation of social enterprises pick up pace, however, lack of appropriate categorization may prevent beneficially specific regulation or inspire legislation broad enough to be open to abuse.

Talent. A medical device company developing more effective birth control insertion tools may want to hire experts in FDA clinical trials; an African-based small business software-as-a-service company might build local software development and sales teams. Today, practitioners advising those interested broadly in a career in social enterprise can offer little guidance on the skills and resources necessary to build such a career—given appropriate categorization, such practitioners could quickly point potential hires to the right categories of business to begin their search.

Media exposure. A company importing fair trade Central American coffee to the US might spend its marketing dollars getting coverage in high-end American coffee blogs; a company packaging health insurance and ambulance services to rural farmers in India might seek coverage on local-language radio stations or attend community meetings. Reporters covering social enterprise lack a common language with which to report their stories to readers unfamiliar with social enterprise, and cover an impossibly wide array of companies in terms of industry, geography, and focus. And entrepreneurs looking for media exposure need access not only to audiences of social enterprise enthusiasts, but to potential customers , investors, and industry partners.

Strategic guidance and technical assistance. A farm-to-table grocer in the United States might seek out Board members who have built for-profit, commercially-focused grocery chains in the US; an East African agricultural extension company might seek out former government ministers of agriculture. Developing a proper categorization of companies would enable third-party advisers of technical assistance and consulting to develop an area of expertise and market it effectively to groups of companies who might need it, and help identify potential Board members more quickly.

Impact Measurement. A small business software company in Kenya might measure its impact by the number of jobs created at the companies where its software is implemented. A company providing classroom software to teachers in low-income schools in America, by contrast, might track teachers’ self-reported levels of satisfaction with their product or educational outcomes attributable to its implementation. Today, some social enterprise funders use the IRIS/GIIRS impact rating system, though confidence in the system is currently such that few funds use it as a determinant in their investment decision process and even fewer social entrepreneurs see it as a useful guide to their decision-making.[15] Proper categorization can mean appropriate comparison within classes of enterprises, and appropriate focus on the metrics most important to individual companies’ impact.[16]

Such diversity in the types of organizations adopting the label social enterprise speaks to the need for appropriate categorization, without speaking explicitly to the type of categorization that would most clarify the issues raised here. Based on the academic research listed above and the author’s own experience with early-stage social enterprises, a number of possible classifications emerge:

  • Mission centrality, as argued by Alter
  • Ambition to scale: Dees’ Schumpeterian, paradigm-shifting social entrepreneur versus locally-focused small businesses
  • Entrepreneurial motive: Are entrepreneurs “impact first” or “financial first”?[17]
  • Geographic location
  • Industry, as defined by the mainstream commercial
  • Type of funding required: grants, debt, equity, or a combination
  • Company growth stage: idea, pilot, growth, maturity
  • Legal status:Non-profit, for-profit, or some form of hybrid (e.g. B-Corp, L3C, community interest company, flexible purpose company)
  • Relationship to beneficiaries: Is the enterprise trying to impact the producers, consumers, or recipients of its product or service?[18]

Impact Focus as a primary category

Of the categories listed above, I believe that the least-discussed and most instructive categorization of social enterprises is the enterprise’s relationship to the individuals whose lives it seeks to impact. If the enterprise is focused on social impact, are its beneficiaries its producers, consumers, or recipients? Once delineated, such a categorization can be put into conversation with other key characteristics—such as geography, ambition to scale, and industry—to determine the key resources necessary to support that enterprise’s growth. In the absence of a perfectly satisfying term, I call this an enterprise’s impact focus.

Producer-Focused Enterprises

For some enterprises, the primary beneficiary is a producer. Such beneficiaries may be smallholding farmers, people with disabilities, marginalized ethnic groups, survivors of domestic abuse, former inmates, or refugees. V-Shesh trains Indians with disabilities and places them in permanent employment. Under the Mango Tree trains smallholder Indian farmers in the maintenance of beehives as an agricultural productivity tool, selling the resulting honey in high-end shops in major metros. MobileWorks hires Indians for small, simple computer tasks sourced from American companies. Mirakle Couriers employs deaf youth in Mumbai as package deliverers.

Such enterprises approach producers in one of three ways: First, the enterprise may train and place them with other employers. Second, they may source products or services from them on a contract basis; this may be the most common form of producer-focused enterprise. Third, they may employ them directly.

Consumer-Focused Enterprises

For other enterprises, either the ultimate beneficiary is a paying consumer of their product or the advertising revenue stream of the company is dependent upon the beneficiary’s use of the product. Such payment distinguishes them from the next category of companies, which view beneficiaries primarily as recipients. Sevamob offers rural Indians affordable health insurance and emergency medical care. Spring Health India sells subscriptions to rural water purification-services. SMV Wheels offers loans to Indian rickshaw drivers so that they own, rather than rent, their vehicles. PharmaSecure attaches scratch-off codes to pharmaceuticals so that consumers in developing countries can verify the origin of their drugs.

Consumer-focused enterprises approach their consumers in one of two ways. First, the consumer may pay for the product or service herself. Second, the consumer’s use of the product may determine the advertising revenue that the enterprise can command. In both cases, the financial success of the enterprise is dependent upon the consumer’s on-going, optional use of the product.

Recipient-Focused Enterprises

A third category of enterprises approaches beneficiaries in much the same way as traditional non-profits and government agencies: as recipients of donated products or services. Better World Books donates to literacy programs around the world. Who Gives a Crap sells toilet paper to raise funds for hygiene programs. Toms Shoes sells shoes in the developed world that subsidize their donations of shoes in developing countries. Teach for America trains young graduates as teachers, placing them in underserved schools. Shelterbox USA sells supply kits to those working in disaster areas.

Recipient-focused enterprises may take a buy-one-give-one model, donating a certain amount of product per product purchased by wealthy consumers. They may also operate on a percentage model, donating a percentage of revenue or profits to a particular cause. They may also sell products to non-profits that in turn donate the product. Or their customers may be government agencies who use their service with their citizens.

Impact Focus in Practice

In the table below, we examine the effect of categorization by impact focus on our ability to identify appropriate resources and guidelines for social enterprises.

 

Resource Area Impact Focus
  Producers Consumers Recipients
Funding Small amounts of equity or grants for initial setup, followed by significant working capital Grants for research, followed by significant equity capital and some working capital (more for financial service providers) Grants from foundations, corporate social responsibility offices, or marketing departments; sometimes equity
Regulation Employment, import/export Consumer protection, financial services, Traditional regulation of charities and corporations
Talent Human Resources, partnership-building, logistics Low-income marketing, rural distribution, income-appropriate design For-profit marketers, salespeople; non-profit management
Media Exposure High-end product placement in metro areas or developed countries Local language media, both traditional and increasingly mobile-based Marketing to wealthy purchasers of primary product or service
Strategic Guidance and Technical Assistance Rural supply chains, import/export, business process outsourcing, Rural distribution, relationships to in-country industry partners, community organizers Marketing of social cause, determining appropriate non-profit partners
Impact Measurement Producers employed, wage improvements, worker health and safety, bargaining power Products sold or used, combined with some research into the impact of products[19] Product or service distributed, with rigorous ethnographic research into the impact of products delivered

Limits of Impact Focus as a primary category of social enterprises

Multi-categorization. Many social enterprises have more than one Impact Focus. Jack and Jake’s of New Orleans, for example, seeks both to provide healthy food to schools and hospitals, and at the same time build a stable market for south Louisiana farmers’ produce. When pushed, however, most entrepreneurs will acknowledge a primary impact focus—in Jack and Jake’s case, farmers. The categories above can be used as a guide to ordering priorities, rather than choosing an exclusive focus.

Cross-subsidization models. Outside of Bangalore, Indian hospital Narayana Hrudayalaya uses its high-end surgical offerings to subsidize the surgeries that it provides low-income Indians from across the country. Such a model sits awkwardly between the consumer-focused and recipient-focused models, depending on the nature of the enterprise’s relationship with its low-income users and its donors, if it receives grants on an on-going basis.

Models with derivative impact. Medical device companies and educational technology companies may not have an explicit impact focus, but some funders of social enterprises invest in them on the thesis that the eventual widespread adoption of the technology will have significant social impact. Examples include maternal health products or language translation software.

Other social innovations. Two of the most interesting social innovations of the last half-century are cash transfers and social impact bonds. Cash transfers are unrestricted welfare payments given to poor families, occasionally with conditions attached. They are innovative and may have a Recipient Impact Focus, but they do not employ “markets” as social enterprises often do. Social impact bonds are more complicated structures, the most common model of which involves an investor lending money to a municipality which donates the money to a non-profit for a particular intervention, paying back the investor out of future revenues.

Conclusion

When put in conversation with other characteristics such as geography, industry, and growth stage, I believe impact focus is the most useful categorization of social enterprises. Such a categorization can help potential funders and supporters of social enterprises direct resources more effectively by clarifying the types of resources needed. Hopefully, its practicality can also encourage conversations between academics and practitioners of social enterprise, laying the groundwork for increasingly productive conversation between the two.

[1] Banks, Joseph. The Sociology of Social Movements, MacMillan, 1972

[2] Bornstein, David. How to Change the World, Oxford University Press, 2007

[3] In keeping with this paper’s effort to focus attention on function rather than definition, I will not adhere strictly to existing definitions of phrases such as social innovation, social entrepreneurship, or social business. I take social innovation to include any innovative approach to pressing social or environmental issues, and social entrepreneurship to mean innovations launched within new types of organizations. I use social business interchangeably with social enterprise, ignoring Muhammad Yunus’s efforts to co-opt the phrase.

[4] Leadbeater, Charles. The Rise of the Social Entrepreneur, DEMOS, 1997

[5] Dees, J. Gregory. The Meaning of “Social Entrepreneurship.” The Kauffman Center for Entrepreneurial Leadership, 1998.

[6] Peredo, A.M. and McLean, M. Social Entrepreneurship: A Critical Review of the Concept, Journal of World Business, 2006

[7] Kerlin, Janelle. Social Enterprise in the United States and Abroad: Learning from our differences, The Urban Institute, 2008

[8] Nicholls, Alex et al. Social Entrepreneurship: New Models of Sustainable Social Change, Oxford University Press, 2008

[9] Neck, Heidi; Brush. Candida; and Allen, Elaine. The landscape of social entrepreneurship, Business Horizons, 2009

[10] Certo, S. Trevis; and Miller, Toyah. Social Entrepreneurship: Key issues and concepts, Business Horizons, 2008

[11] White, Paul. Reshaping Social Entrepreneurship, Stanford Social Innovation Review, 2006

[12] Cajaiba-Santana, Giovany. Social innovation: Moving the field forward. A conceptual framework, Technological Forecasting & Social Change, 2012

[13] Alter, Kim. Social Enterprise Models. In Nicholls, Alex et al. Social Entrepreneurship: New Models of Sustainable Social Change, Oxford University Press, 2006

[14] By way of disclaimer: each of the examples used in this section and throughout the rest of the paper are enterprises funded by First Light Ventures, the author’s former employer; enterprises analyzed by First Light Ventures for potential investment; or other enterprises the author has come into contact with over the course of the MBA program at Saïd Business School.

[15] Investors Circle is the single example of which this author is aware; they require a cumulative GIIRS rating of 80 before considering an investment.

[16] For an example of ineffective categorization, see IRIS’s list of social impact objectives on the IRIS website: http://iris.thegiin.org/indicator/social-impact-objectives-od6247

[17] This dichotomy, perhaps first used by KL Felicitas Foundation in 2007 (see link), has become part of the common parlance among angel investors in impact investment networks such as Toniic and Investors Circle. http://www.klfelicitasfoundation.org/test_EE/images/files/KLF_Pico_Bonito_Evaluator_.pdf

[18] The universe of environmentally enterprises has significant similarity to and overlap with that of social enterprises, such that Neck, Brush, and Allen consider environmental enterprises a subset of social enterprises. In this author’s experience, however, the entrepreneurs, funders, regulatory changes, and supporting agencies necessary to fuel the growth of environmental enterprises is so different as to merit separate categorization. Such an exercise is outside the scope of this paper.

[19] The difference in rigor expected here of consumer-focused and recipient-focused enterprises reflects this author’s own bias that when products are not sold directly to beneficiaries, their lack of participation in that decision places an extra burden of proof on the provider of such products to demonstrate their impact.

Latino Startups to Watch in 2014

This article was originally posted on Vista Hispano as part of a series on Latino startups. For the rest of the series, go here.

When Peter Wilkins of New Futuro set out to raise a round of venture capital this year, he found very few investors that understood his target market: US Hispanics. In the VC community, he still says, “there is no one that I know of focused on Hispanic market companies.”

That lack of understanding on the part of investors hasn’t slowed down New Futuro. Through its events, resources, and online community, New Futuro now provides educational advice and material it says reaches millions of Hispanics every year. In the footsteps of companies such as HolaDoctor, Xoom, Progreso Financiero, and Consorte Media, New Futuro is part of a new crop of Latino market startups that are raising cash, building teams, and charging into the Latino market.

The most active sector for Latino market startups is financial services. Regalii, led by Wharton MBA and Echoing Green Fellow Edrizio de la Cruz, follows in the footsteps of iSend in allowing families to have some a say in the spending of remittances. Currently in beta launch according to its website, Bucks Bill Pay allows customers to pay their bills in cash at local agents. And Juntos Finanzas, a product of Stanford d.school, empowers Latino customers to track their own expenditures by SMS, similar to India-based social enterprise InVenture.

Along with New Futuro, another crop of Latino market startups focuses on education: YogoMe is an educational app with plans to move into language learning. Backed by 500 Mexico City (which announced its new batch of startups just last week), YogoMe is one example of how companies are pulling in resources from both American and Mexican startup ecosystems. Sleek-geek has three educational tablet apps for teachers, and is one of seven companies in the first Manos Accelerator cohort that includes Antonio Altamirano’s InteresantePlaza Familia is another educational venture founded by Latino social media veteran Ana Roca Castro.

Beyond financial services and education, immigration services platform LexSpot has raised over half of its $750,000 convertible seed round. YaSabe, another 500 Startups portfolio company building a bilingual, local search engine, closed a $2.7M funding round in the first half of 2013. AssuredLabor, based in NYC and with operations in Brazil and Mexico, raised $5.5M earlier in 2013 to expand its job-seekers platform.

Keep an eye on these companies in 2014–no doubt at least one of them will soon stand with Xoom and others that have built successful businesses by serving a large and growing US Hispanic market.

The State of Latino Startups: Exploring the Challenges

This blog was originally posted on Vista Hispano as a series on Latino startups. Read the first one here

Startup struggles, generally speaking

If there is one topic that entrepreneurs love to talk about more than any other, it is be the trials and tribulations of being a founder. You work impossibly long hours; you wake up with cold sweats knowing that every moment you’re not working on your idea, your competitor is. You spend more time managing people than you do with the product that you wanted to build; you are constantly reminded by more ‘reasonable’ friends and family members that you are sacrificing prime earning years to chase a dream. Money is always in short supply, and no one–no one–can ever truly give you the peace of mind that you are doing it right.

In nearly one hundred conversations about Latino startups over the last eight months, I’ve also heard and identified a handful of other hurdles specific to Latino startups. Some of them are relevant to Latino founders; others are particular to startups whose primary customers are Latinos.

Latino founders’ uphill fight for funding?

Latino founders, just like their non-Latino counterparts, point to the lack of high-risk capital as a significant barrier to the growth of Latino startups. Unlike in conversations with white founders, however, hints at racial bias among funders are pretty common in conversations with Latino founders. Few accuse venture capital investors of outright racism. Instead, they make two arguments. The first, voiced by at least one venture-funded entrepreneur, is that venture investors have the same subconscious racial bias that Chicago Booth researchers discovered among hiring managers in Boston and Chicago. Venture capital (VC) investors retort that if they see a strong team with a good idea in a growing market, they don’t care about someone’s race or country of origin. In fact, Silicon Valley is so dependent upon foreign talent that they now lobby ferociously for immigration reform.

The second, related argument is that the nature of many VC investors’ networks is such that black and Hispanic entrepreneurs are excluded not due to racial bias but because of the nature of social networks. In a recent conversation about the opportunity for a Latino-focused startup fund, one VC asked me if I was saying all VCs were racist. “No,” I said, “We’re lazy.” When some VCs proudly trumpet that a resourceful entrepreneur will find the right introduction to them, they are trusting their network to complete the first round of vetting of potential startups. In the aggregate, such a closed-network approach to deal-sourcing means out-of-network ideas are shut out until someone (a “broker” in network theory) connects them.

Before they approach VCs for scale-up funding, however, Latino founders point to another gap in funding. Unlike founders from well-connected, wealthy backgrounds, Latino founders have fewer wealthy friends and family members waiting in the wings to pump $20,000 into their startup. One Latina founder told me that, as the most educated and successful member of her extended family, asking her family for money would be laughable; instead, she is expected to be the one with a steady job providing cushion for everyone else. In this way, Latina founders, already carrying much of the weight of the growing Latino startup community, may be loaded down even more than their male counterparts by familial expectations.

The Latino market: large, nuanced, tough

What of startups that are not run by Latinos but focus on the Latino market? They too, face special struggles both in financing and execution. In seeking financing from VCs, Latino market startups struggle to get attention from investors rightly inclined to fund what they already know–e.g. tech, life sciences, solar, mass market retail, defense. Why educate yourself on a new, unproven market, exposing yourself to even greater risk? The answer, of course, is that not only are Latinos a large and growing group of upwardly mobile young consumers, but they are early adopters of new technologies and bellwethers for shifts in consumer trends; but as Antonio Altamirano points out, this case has yet to be made in a clear and compelling way.

Even given funding, Latino-focused startups face a special challenge: the Latino market may be huge, but it is incredibly nuanced and diverse. Most obviously, Latino market startups have to balance the needs of English-dominant and Spanish-dominant customers; the fluently bilingual customer support and content creators required to do this are tough to find and harder to retain.

Yet both Latino founders and those interested in the Hispanic market are plowing ahead. One example of such forward momentum is Manos Accelerator, which has recently accepted their first cohort of Latino startups. In our next article, we’ll take a closer look at a few of the Latinos and Latino-focused entrepreneurs blazing the trail–if you know of a few, send them our way!

Where are all the Latino startups?

This was originally posted on the Vista Hispano blog.

The US Hispanic consumer market is bigReally big$1.3-trillion-dollars-and-counting big. Major corporations like Best Buy, Yahoo, and The Home Depot are paying attention and have piled in, attempting with varying degrees of success to capture a piece of this large and growing market.

Over the course of the last six months, my colleagues and I have researched the Hispanic market with a specific hypothesis: Given its potential, surely there are dozens of startups launching clever, scalable businesses serving Hispanic consumers. As it turns out, we were (mostly) wrong.

Over a series of posts on Vista Hispano, I’ll discuss three elements of the Latino startup ecosystem: What barriers are blocking the creation of a Latino startup market? What startups are already plowing through those barriers? Where do they find the capital they need to start their business?

First, let’s clear up a bit of confusion about what we mean by Latino startups. When people say Latino startups, they mean one of two things: either startups operated by Latinos, or startups serving the Latino market. And when they say Latino startups, they mean either small companies with huge growth potential, or small businesses. The result is a conversation about four different types of companies, often all in the same conversation.

Latino startupsThe vast majority of businesses in the US fit into the bottom half of this matrix. Venture capitalists sometimes derisively refer to these small businesses as “lifestyle” businesses. But they are the blood pumping through the American economy, and Hispanics start such small businesses at a faster clip than non-Hispanics.

These companies are very different than the high-growth entrepreneurs on the hunt for venture capital or private equity investment–the companies we’re interested in here. Some of those companies, such as Marc Barros’ Contour, are Latino-owned but not Latino market-focused. Others, like pre-paid phone provider MetroPCS, find success by reaching out directly to Latino customers; but they are not Latino-owned. A handful of companies, such as Alicia Morga’s previous company Consorte Media, are both Latino-owned and Latino-focused.

Why do these distinctions matter? Because each type of business faces unique challenges, taps different sources of capital, hires a different type of employee, and demands a different set of skills. If we want to build a Latino startup ecosystem, driving resources to the entrepreneurs who create value and wealth in the Hispanic community, clarity of conversation is key.

In our next post, we’ll take a look at some of the challenges–both real and imagined–faced by Latino startups.

SVCO 2014?

Image

Prompted by Oxford professor Marc Ventresca, a list of potential topics for Silicon Valley Comes to Oxford in 2014:

  • Machine learningand its effect on different industries (automobiles & finance being the most obvious both in application and in local networks)
  • I heard quite a bit of noise at SVCO this year about Bitcoin. What about a virtual currency theme along with a fintech theme?
  • 3D printing would be a playful theme, with an emphasis on building real things rather than not apps
  • Building healthcare, how about genetics? Perhaps in conjunction with the Wellcome Trust
  • If we want to mimic the development of the internet, how about we track DARPA’s focus on robotics?

My turn? Rafael Correa angles for regional leadership in South America

Just for kicks, this is a writing sample I put together in Feb 2013, two weeks before Hugo Chavez died. 

My turn?

Rafael Correa angles for regional leadership in South America

This week, Ecuador’s president Rafael Correa routed divided opposition to win his third presidential election, finishing thirty percentage points ahead of his closest rival. That victory, combined with the return home from Cuba of Venezuela’s ailing president Hugo Chavez, has South America-watchers wondering: could Correa, a Chavez friend an ally, soon become South America’s leftist rabble-rouser-in-chief?

Correa has reason to lay claim to the title. When he first took power in 2007, eleven years had passed since an Ecuadorian leader had finished out a term, and Chavez had begun trumpeting the coming spread of 21st Century Bolivarian Socialism only two years before. Correa fell smartly in line, importing many of Chavez’s tactics: limiting press freedom, purging opposition figures from Ecuador’s diplomatic corps, and railing against American policy. He has worked to raise his international profile by providing asylum to Julian Assange, founder of Wikileaks, and tossing out the American military from its Ecuadorian base in 2009. Within the Alliance for the Peoples of Our America (ALBA), the regional group committed to Chavez’s socialist doctrine, Correa’s clout is growing. He is one of few leaders to see the Venezuelan dictator on his Cuban sickbed and has seen fit publicly to endorse the leadership of Venezuelan Vice President Nicolas Maduro. Correa’s selection of Jorge Glas, a childhood friend, as his own vice president will give the charismatic Ecuadorian leader more freedom to focus on foreign policy in his third term.

But it is unclear whether Correa can step into a Chavez-sized regional leadership gap or whether such a gap will exist after the Venezuelan leader’s demise. Maduro, likely to inherit control of Venezuela’s resources and army if not the personal devotion of its people, will work to maintain leadership of the regional bloc. Outside of ALBA, the economies of more moderate neighbours such as Colombia and Mexico have galloped apace, as has their political clout. Mexico, for its part, has been instrumental in the creation of ALBA alternatives such as the Community of Latin American and Caribbean States (CELAC) and the Pacific Alliance.

If Chavez’s passing does create a gap in South American leadership, Correa faces more local obstacles to assuming the throne. First, Ecuador lacks the deep oil reserves of Venezuela; without the ability to purchase the loyalty of other ALBA members, Correa would struggle to keep them in line. Second, Correa is constitutionally term limited. While changing the constitution has proved no difficulty to date, an attempt to wrestle another term might at last galvanize scattered Ecuadorian opposition and distract the president from his regional ambitions. The colourful Rafael Correa may be Ecuador’s most powerful leader in a quarter-century, but true regional influence will remain out of his reach.

The Case for Catalytic Funding of Latino-focused Startups

[Note: If you're interested in the updated and much-improved version of this pitch--especially if you're a Latino-focused entrepreneur--my gmail address is mark.c.hand.]

This year, the Saïd Business School at Oxford launches GOTO, an ambitious project to focus the university’s attention on a particular topic of global import. The first topic is demography, with a focus on aging. In my first post, I argued that discussing the effects of aging demands discussing immigration, too. In my second, I took a look at demographic trends in the US and North America more widely. In this post, classmate Andrea McKinnon and I look at the case for a new source of funding for Latino-focused startups in the US:

An Emerging Opportunity

Latino communities in the US are relatively young populations that represent strong economic power and opportunity for growth. Shifts in migration to the US, alongside sweeping proposed immigration reform, results in significant emerging opportunities within these communities.

The establishment of an angel-stage Latino-focused equity fund signifies an opportunity that will be premised on three goals:

• Investing relatively small amounts of capital ($50-200K) in Latino-focused startups, providing an attractive financial return to investors
• Using that success to draw high net-worth individuals into startup investing
• Contributing the development of a Latino-focused startup community

The aim is to invest in 3-4 startups over the course of the next two years. Given success in those ventures, the hope is to raise a fund in the second half of 2015.

Rationale & Potential for Success

This year the US Congress is likely to pass the most sweeping immigration reform in nearly three decades, granting legal status to eleven million mostly Spanish-speaking undocumented immigrants. An estimated 1.5 million of those call themselves Dreamers: immigrants brought illegally into the country as children and who, despite in some cases having graduated from American universities, remain undocumented and unable to work. At the same time, Latinos’ income levels are rising. A population that has been relegated to the economic sidelines will in this decade have an unprecedented opportunity to contribute to the US economy, leading a wave of entrepreneurship and growth.

If recent history is any indication, however, Latinos will continue to punch below their political and economic weight, thanks to the absence of fundamental financial services and practices. One of those critical building blocks is early-stage, high-risk “angel” capital for untested startup companies: wealthy individuals making big bets on an entrepreneur with an idea and high potential. Such capital empowers an entrepreneur to develop a vision into a successful company.

Of the eleven million immigrants who will benefit from pending comprehensive immigration reform, some will dream of launching tech companies, large-scale product companies, financial services firms, and other high-growth businesses. These are the type of businesses that empower a community to generate wealth and economic influence, and these are the entrepreneurs best placed to offer goods and services to the growing Latino market.

An angel-stage, Latino-focused equity fund will facilitate the process of transitioning these dreams into reality.

Risks

As with any fund there are a number of associated risks. Given the structure of the proposed fund a number of particular risks have been identified:

• Adverse selection of entrepreneurs unable to get funding from mainstream investors
• Bad early bets on companies or geography
• Potential for lack of understanding in critical cultural differences (business practice norms, appetite for risk, loyalty)
• Lack of reputation without big-name backer
• Tension between social mission (building up angel investment in Latino populations) and financial mission
• Not enough homogeneity among Latino populations
• Shakiness of US market relative to high-growth economies in Colombia and Mexico

Next Steps

The next stages of the development process will involve:

• Determining the existing landscape of funding for Latino-focused startups
• Identifying high-potential entrepreneurs
• Building an Advisory Board
• Locating investors
• Determining fund structure
• Finding a co-founder
• Finding institutional partner/backer
• Analyzing the sector-focused v. sector-agnostic approaches
• Determining optimal location(s) within the US

On a broad level the goal is to test the feasibility of the fund’s goals by investing in 3-4 startups over the course of the next two years. Given success in those ventures, the hope is to raise a fund in the second half of 2015.

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Demographics in North America: Not just US

This year, the Saïd Business School at Oxford launches GOTO, an ambitious new project to focus the university’s attention on a particular topic of global import. The first topic is demography, with a focus on aging. In my first post, I argued that discussing the effects of aging demands discussing immigration, too. In my second, I take a look at demographic trends in the US and North America more widely. Reposted: 

With its population of 311 million and GDP of $15 trillion, the US accounts for nearly 60% of North America’s population and over 80% of its economic output. It is tempting, then, for Americans to think of our problems and opportunities at a national, rather than hemispheric, level. Putting US demographic changes in a more regional context, however, isn’t just about being a good neighbor: it helps us understand the changes taking place within our own country and more accurately forecast their effects.

The headlines in the US, of course, are of shock and alarm at our falling birth rates, slackening immigration, and ageing workforce. Thanks to a virility-sapping, multi-year recession, demographers now expect the US population to grow 10% more slowly in the first half of the 21st century. And immigration, the finger in the dike of American demography, is slowing.

What about the rest of the neighborhood? Looking northward, Canada’s has for years added a little over 1% to its population of 35m, for many of the same reasons as the US (e.g. a declining birth rate, later first births). My colleague and classmate Greg FitzGerald argues that ensuring Canada’s ongoing attractiveness to immigrants is a large part of how Canada will mitigate the challenges of an ageing population–no mean feat given competition for brains and labor from emerging economies.

South of the American border, the demographic story of Mexico and Central America is starting to mirror that of their English-speaking, northern neighbors. Whereas Mexican women used to give birth to (and export) astonishing numbers of people, the birth rate among Mexico’s 100m people has dropped to 2.4 children per women, and may fall below the replacement rate of 2.1 within next ten years. That demographic dividend, combined with the fact that net emigration to the US has dropped to zero in light of Mexican growth and tougher conditions for migrants in America, means that Mexico may be headed into the prime years of one the healthiest, best educated, most productive work forces in its history.

Keep moving south, and the story gets less clear. The seven countries that make up Central America are home to some 40m people, but research on their populations’ growth and movements is scarce: front-page Google search results for the query “Central America demography” include papers from as far back as 1986, before the births of over half of the region’s population. One recent study suggests that El Salvador’s population growth mirrors that of Mexico: ageing, growing more slowly, getting slightly more wealthy. Guatemala and Honduras, by contrast, remain stuck in a cycle of low-incomes and high fertility rates.

What does all this mean for the United States? Perhaps not that much: after the 2000 census, the big shock was that the US population was growing much faster than expected, heralding environmental doom. A recovering economy may yet pull immigration numbers back up and inspire more Americans to bet big (biologically speaking) on America’s future.

Even if the American economy recovers, it will be tiny Honduras and Guatemala, rather than Mexico, that will most strongly feel the pull of El Norte. If Mexican growth holds, American companies will have to look elsewhere for cheap labor. That may include the non-Spanish-speaking countries that make up the immigrant base of Canada–which, if it follows Greg’s advice, will fight hard to keep them.