Donors as scaffolding: Part 1, need for startup capital
What with AHI’s Gates Foundation grant, AHI will be spending a fair bit of time developing and expounding the theories and practice of how mission entrepreneurial entities (MEEs) make change with bottom-up pressure and pilot projects and schemes. One element, for which I have a new sensitivity by virtue of our work as financial advisor to Slum Dwellers International, is the role of donors in stimulating MEEs from concept into incumbency.
Remains of an aqueduct in Sillyon,
A few weeks back, the Boss and I were enjoying a rare holiday in and around
The
So magnificent was the engineering, such a marvel of its time, that the emperor Justinian (who commissioned and paid for it) exclaimed, “Solomon, I have surpassed thee!” and Hagia Sophia remained the world’s largest cathedral basilica for 1,000 years thereafter.
How ever, in the sixth century, was that dome built?
How was it created?
Over the years I’ve found myself increasingly intrigued by the how’d-they-do-that? achievements. How are arches made?
Roman’s signature the world over: arch in
Or suspension bridges?
How’d the cables ever get across the span?
Scaffolding.
That’s how it gets maintained and repaired, too
Somewhere between Hagia Sophia and a Gates-Foundation-sponsored workshop on water and sanitation a week later, in London, it struck me that the scaffolding metaphor applies not just to physical creations, but also to intellectual and economic ones, like MEEs.
Scaffolding is designed with a vision in mind, flimsy and made of lightweight materials, rickety and risky –
– modular and reassembled during construction.
Scaffolding is applied in stages, the same scaffolding being reused as the construction advances. It’s temporary and it’s removed when done.
MEEs are businesses:
They have a product or service – mission-related, to be sure, but nevertheless a tangible output.
They have a manufactory – an organization that can create successful projects.
They maintain and self-repair the machine – people come and go, market environments shift, and successful MEEs adapt and move on.
This is gonna cost you
So far in my career, I’ve founded two organizations – Recap and AHI – that are now established successes. Once a business has made it to establishment, with a market position, established reputation, set of business lines, it’s hard for newcomers to imagine that it was once nothing more than a conception in the mind of a hyperactive founder, or that the business went through multiple experiments and incarnations before finding its mature form.
I’m still exploring possible role models
Organizations grow in three phases, one after the other:
1. Design-build the machine.
2. Operate the machine.
3. Repair the machine.
Even though the order of phases is immutable, I’m going to take them out of order, starting with Operate – which is the action of a constructed enterprise – as that will better illustrate the crucial Phase 1 development-construction role of donors as the financial scaffolding of enterprise.
Phase 2: operate the machine (turn the crank)
Just as most creatures spend most of their lives as adults, most workers and most businesses – and MEEs are businesses, remember – spend most of their existence in a stable, operational phase. They have work they can do well, be paid for, and on which they can make a profit. This they do, repeatedly, varying and improving but essentially replicating their core competencies.
Strad didn’t need to vary ‘is violins
Key to viability in the operational phase is that each time you turn the crank, you make money. Each deal should pay its own way. Businesses that do not adopt this Law of Economic Gravity do not survive.
The Law of Economic Gravity does not mandate growth. Some successful and stable businesses – Recap was one for a decade – achieve an optimal size for their market niche and do quite well at their scale. Growth is a byproduct of ambition (what do the leaders want?) and environment (what will the resources support?). Growth is thus constrained by factors like:
Talent – who’s skilled enough to shape a violin
Capital for reinvestment – often derived from profits, sometimes from finance
Market size – how many people play the violin, anyway?
Competition and market share – what else are you going to buy, a Guarneri?
The differences are manifest … aren’t they?
In the realm of affordable housing and community development, where the properties have an intrinsic cost-value gap, MEE volume is usually constrained by availability of gap-filling soft debt and soft equity. US non-profit community development corporations and housing owners grow when they can do the next deal, and survive off their property management and asset management ancillary business lines (vertical integration comes to affordable housing).
The key is this: operations presuppose that ongoing revenues exceed ongoing expenditures. The financial boat floats … or it sinks.
Phase 3: repair the machine
Markets change all the time. They are never static, and seldom in equilibrium. If responsiveness is an essential attribute of life, adaptive responsiveness is an essential attribute of intelligence, which in a competitive environment remains critical to survivability.
It takes all the adapting you can do to keep up with the competition
Management is tough enough, just doing the core business; when the world changes, management often benefits from help. That’s why AHI has advisors, and companies have directors, and emerging businesses have venture capitalist activist directors.
Our MEE boat has to change course now and then as the market seas shift, and it has to stay afloat. These are challenges enough, but before they can be confronted, the boat must be built – which is where Phase 1 comes in.
It may appear that this post on scaffolding is still under construction …
[Continued tomorrow in Part 2.]
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