Donors as scaffolding: Part 2, the value of coaching
[Continued from yesterday’s Part 1.]
Yesterday’s speculation on the incubation and development of successful mission entrepreneurial entities (MEEs) put forth the thesis that MEEs as businesses as mature when they can operate their business continuously, making money through each iteration of their mission activity.
This makes the MEE itself – the machine that manufactures new mission outcomes like affordable homes – a construction in its own right.
It takes a lot of parts to make the machine
Machines require design and building; they also require intellectual and financial scaffolding.
Phase 1: design-build the machine
I call this phase design-build because you’re doing as you’re planning and you’re planning as you’re doing.
Consciousness was a design-build auto-construct
In this, startups are fundamentally different from established companies, who have “the way we do things” and struggle to rediscover their initial flexibility.
This is how I do things
The design-build phase is expensive: it requires cash and it yields none. Cash goes out for:
FF&E – furniture, fixtures, and equipment. Everything from water coolers to desks, typewriters, phone systems. All this costs money that has to be paid before the business can ever open its doors.
The billing cycle. Expenditures happen before income. For a business to receive cash, it has to find a customer, get agreement for product or service, do the work, send out the invoice, and get paid. As a result, a typical business operates with a lag of 90-120 days between when it incurs a cost (say, salaries of its workers) and when it actually collects the revenue.
Failed experiments. When you start a business, you don’t know what you’re doing. Sometimes you’ll make mistakes. Ideally, you’ll make many mistakes, and make them quickly.
Try, try again
Think of it like filling the organization’s empty gas tank. You need gas to run the vehicle, and the gas has value, but if you sell the gas, you’re out of gas.
I have a liquidity problem
The cash, if wisely spent, produces value – capital intangible or intellectual – but in either case, the capital is not cash, and to turn it back into cash stops the machine dead.
Many businesses, started with thin capital, skimp on their initial costs: working out of the garage, not quitting the day job, or chasing the easy cash-flow work.
We got our start in a garage
Usually that’s a mistake.
Other businesses, luckier than some, get startup funding from venture capitalists, savvy investors who not only can spot potential winners, they also help coach the entities toward success. It’s no accident that nations with a well-developed venture-capital model have a higher rate of new business formation than those without that part of the ecosystem.
You really want him to own a big piece of your company
For their investment, VC’s demand equity – and large chunks of it. They’re motivated by profits.
Where are the venture capitalists of mission-oriented non-profit entities?
It has to be donors, in their role as social venture capitalists. To protect and enhance their investment, venture capitalists follow their money with advisory support – high-quality lawyers, accountants, and yes, financial advisors – who act like intellectual scaffolding, and like scaffolding, their arrival has to precede the structure, and their value is temporary.
What will we build tomorrow?
Consider the elements that define scaffolding as they apply to social venture capital:
1. Social venture capital is designed with a vision in mind. As shown in this nice little animation about How to build an arch, the scaffolding is part of a kit used to create a physical expression of a very particular vision.
The scaffolding defines the arch
In the same way, social venture capital is much less about creating the widgets – the homes, the toilets, the hookups – as it is about helping MEEs get themselves established and pursuing a vision. AHI’s Gates grant is intended to foster research into housing as the catalyst of urban improvement, and MEEs as the catalyst of housing change.
First you imagine the strategy, then you design the machine
AHI’s work as financial advisor to Slum Dwellers International essentially involves being the financial scaffolding for the development of their International Urban Poor Fund. When the Fund is established, each individual scheme that an SDI Federation undertakes is likely to have an intrinsic cost-value gap that will need to be covered with government resources if the business model is to be sustainable. Some of the federations we work with are quite advanced – with track records, experienced staff, strong political and community support, and the whole intellectual infrastructure of community development. Others have few if any of these assets, and the Fund is intended, among other purposes, to enable the aspirant Federations to design-build their way into being MEEs with recognized niches.
2. Scaffolding is flimsy and made of lightweight materials. Startup enterprises rely on goodwill and a cadre of smart, dedicated people, who cook up schemes on instinct.
Where’d you think of adding that?
Mature organizations have handbooks and detailed instructions.
This is how we do it
In between the inspired genius founder and the mature organization, knowledge as to be expressed outward, and experience has to be migrated inward, otherwise the growing organization collapses under its expanding weight.
Maybe we should have had a better business plan …
The advisory function of social venture capital provides that managerial scaffolding.
3. Scaffolding is rickety and risky. Most startups fail – even with help. Risks are extreme.
Risks? What risks?
Far too many little for-profit businesses start off not only with too little capital but with underpowered advisors. For social venture capitalists, the money is important, but so is the advice. It’s what keeps the organizational and intellectual scaffolding from collapsing.
I feel better knowing I have social venture capital holding me up
4. Scaffolding is modular and reassembled during construction. Advice and support delivered by social venture capitalists comes in recognizable components:
Business plan.
Board seat.
Funding mix.
The elements are combined and recombined, but they derive from universal or at least well-recognized and adaptable forms.
5. Scaffolding is moved through the development in stages. Any good venture capitalist does not merely provide money, it also coaches continuously.
Angel investors sit on boards; they provide ongoing management and strategic guidance. They recruit their friends to provide technical expertise at critical junctures. Their advice shifts as the organization’s needs shift.
6. Scaffolding is temporary, removed when the structure is completed. Donors, and donor capital, are essential at the beginning of an enterprise, not necessarily essential later. Said in reverse, donors need an exit strategy – a well defined time and status where they stop funding.
Without a defined halting place, the donor’s money can become merely a temporal crutch that substitutes for genuine learning, and leave the donor with no moral exit strategy, instead a continuous obligation to fund a money-losing venture. With a defined stop, the successful MEE can replicate its outputs … and then replicate itself.
Ahmedabad:
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