Business Plan Competitions Don't Work - Or Do They?

I don’t know if you’ve noticed, but lately, there’s a renewed interest in Business Plan Competitions (BPCs) as a means of identifying and funding entrepreneurs in Africa. As an example, Kenya recently sponsored a call for Expressions of Interest to screen 10,000 SME’s and fund a large number of them. Startup of the Year Africa 2018 has just been completed with 44 countries participating, and BMCE Bank sponsor’s the prestigious African Entrepreneurship Award and there are many more. But there’s a problem - Business Plan Competitions don’t work. BPCs do not necessarily select the strongest entrepreneurs, they do not guarantee success in business, they do not identify which companies will have the strongest investment performance over their lifespan, nor do they demonstrate which business ideas will have market appeal and grow into unicorns. 

BPC’s often do identify innovative individuals with excellent communications skills, and if the winner of a BPC grant is also successful in hiring a skilled management team with finance, marketing, product development and technology skills, while at the same time receiving the long-term advice and counsel of a network of mentors and advisers, BPC’s may achieve the intended outcome of creating employment and contributing to a growing economy. In other words, if the ecosystem is efficient and provides the proper level of support, companies in BPCs may be successful.

Here’s another thought: BPCs have a greater reach than just the entrepreneur community. They stimulate the imagination, enthusiasm, and inventiveness of people who may not yet even understand that they are entrepreneurs, and the competitions give them the encouragement they need to make their innovative idea a thriving business.

A successful BPC isn’t about injecting grant money into the economy, but rather stimulating entrepreneurship.  It’s about carefully analyzing the participant companies’ business models, selecting those companies that appear to have the best chance of survival, qualifying the technical innovations suggested by the proposal to ensure they are credible, understanding the challenges ahead of the company once it receives an award, and then coaching winning companies to grow into job creation machines generating employment, paying taxes, and helping middle income countries become high income countries.

And that is the point of a competition isn’t it - to select the most promising ideas, and by providing funding, help entrepreneurs find the training, financing, prospective management team members, mentors, and other resources they require to be successful, and create employment.

So, maybe BPCs don’t work, but they are a highly effective economic development strategy employed by the public sector to demonstrate leadership by providing start-up funding that will encourage private sector investment in the winning companies and help them grow rapidly.

MEST Incubator Rocks

Finding a successful incubation program is like discovering a rare gem. If nature has provided the proper environment, after thousands of years and a great deal of heat and pressure, a crystal with the potential to become a gem ifs formed. But it isn't until the craftsman applies the knowledge of cutting gemstones using the proper tools, that a work of art emerges. So it is with incubators, where the combination of a good program design coupled with high quality management can yield a great product and successful entrepreneurs.  I like to research incubators and accelerators to figure out why they do well (or not so well). Over the years I have started and/or managed several, and I think we could agree that a bad business plan, inadequate funding, or uninspired management can make even a good incubation concept seem bad. 

Tech incubators are my favorite, and a few months ago I spent some time speaking with Celine Duros, Head of Operations and Partnerships at the Meltwater Entrepreneurial School of Technology (MEST) Incubator in Accra, Ghana. I had learned about MEST from industry colleagues in Accra who had founded the GMIC (Ghana Multimedia Incubator Centre) a public sector program that is a success in its own right in the Ghanaian market - but that will be another blog entry. MEST is a private non-profit, the brainchild of Norwegian entrepreneur Jorn Lyseggen who founded it in 2010, and the reason I found the MEST incubator's story so compelling is that it's one of the few incubation programs that truly provides startup capital in addition to the other more traditional value-added incubator services of mentoring, office space, training, graduate support, etc. Most importantly, MEST succeeds at its mission.

MEST operates much like an accelerator in the sense that it has a competitive selection process and accepts applications from several countries in Sub-Saharan Africa including Nigeria, Kenya, Cote d'Ivoire, and South Africa, in addition to Ghana. The startups that attend are focused on establishing new businesses in SaaS, Consumer Internet, e-Commerce, digital media and healthcare IT (to quote from their website).

The program unfolds in three phases that include a training phase of as much as two years, this is followed by an incubation phase in which the entrepreneurs start their companies, and then a mentoring phase. During their time in Accra, the entrepreneurs are exposed to local networking events, outside investors, industry experts and others who can help them think about making their business successful. In other words, the MEST folks are doing exactly what we in the incubator industry have always advocated - training, funding, and continuing support for those that have graduated. This is not something a lot of incubation programs are good at, and it's nice to see a successful program (MEST grads have been recruited to both Y Combinator and Techstars) that covers all the bases. MEST will also take equity in the companies with $50-200K being the range for a minority stake. Finally, the incubator companies have the ability to relocate to, or use temporarily, office space in the Meltwater offices in Silicon Valley and London - not a bad way to collect customer data when testing your minimum viable product (build, measure, learn...).

Another interesting thing about this program is that they have recruited a number of partners with both the staying power and the market reach to help them continue their expansion. Not many other incubators or accelerators can boast a list of partners that includes Samsung, Vodafone, Interswitch (Nigerian electronic payments business), Amazon Web Services, DLA Piper (legal), Microsoft BizSpark, and of course VC4A in addition to another 30 companies that are "ecosystem and event sponsors".

The organization is currently managing sites in Ghana, and Nigeria and plans to launch additional sites in South Africa and Kenya by 2018. Here's a Youtube link to an interview with founder Lyseggen:

https://www.youtube.com/watch?v=TE9v-NK4PmY.  

I think I'll keep an eye on this one. 

Artemisia: An Accelerator with a Truly Impressive Program

A recent consulting assignment of mine has been to prepare some incubator manager training. I took genuine pleasure in profiling a very successful Brazilian accelerator program named Artemisia. The organization is a spin-off of a San Paulo venture firm named Potencia Ventures, and it provides social impact acceleration and incubation to a select group of companies from the northern part of the country.

I conducted my research talking on Skype and e-mailing with Artemisia’s Acceleration Manager, Renan Costa Rego, whose job is to recruit, train, and monitor the progress of the companies. Renan explained that, among other duties, he’s responsible for recruiting companies in his territory of northeastern Brazil (near Recife) and this is a task the company takes very seriously. In a YouTube video interview (https://www.youtube.com/watch?v=GjIVxZhH5mQ), a colleague of Renan stated that they don’t just advertise for recruits, they identify who they want, and then knock on the prospective client’s door and encourage that person to join their program. 

They have three things they look for when selecting participants in their accelerator program:

1. Scalability - will they be able to serve dozens, then hundreds, then thousands of customers with essentially the same (or improved) business model?

2. Profitability - can they sell enough at a price that will result in income to the shareholders?

3. Direct social impact - does their product or service have a direct impact in creation of employment, making society better in some way, or improving the lives of their customers?

They encourage companies meeting these criteria to apply to their program. This year they received about 1,300 applications and after review reduced the number to about 230. This was later whittled down through the due diligence process to about 30, and finally, they selected 12 to participate in the 2016 accelerator cohort. That's what I would call "highly selective".

Each selected company pays about $2,000 USD in fees for the services they receive. In addition, client companies pay 2% of the proceeds of investment funds they receive as a royalty to Artemisia.

During the accelerator period of five to six months, the companies are in Artemisia’s Sao Paulo offices a few days each month, engaging in training to become sustainable. A primary focus is financial readiness preparation and includes training in several areas, for example: financial modeling; how to prepare a pitch deck or make a financing presentation; understanding investment criteria; and other topics are covered. Artemisia also has a large mentor program with over a 100 mentors participating, so the companies receive a highly personalized experience.

A key element of the accelerator program is to help the companies find financing, and being an Artemisia client includes some real hand holding. Mr. Costa Rego explained that Artemisia helps the companies pursue all the available and appropriate sources of financing for their businesses. This includes helping them qualify for economic development agency support, apply for government grants, engage in crowdfunding, seek bank loans, present to angels, and meet with venture capitalists. The government grant programs are generous, and successful grant awards for businesses could range from $62,000 to $308,000 USD - Artemisia has had two grant award winners in the past two years of the 20 or so who applied. He also told me that their batting average is high in that 52% of their clients successfully obtain financing. In addition, the accelerator provides introductions to investors from venture and angel funds (even to the extent of accompanying the clients to appointments). 

Here’s the most interesting aspect: When I asked Renan about investments by the parent Potencia Ventures, he said they don’t invest, but instead make investments in other funds that make social accelerator investments, and of course they make referrals to the funds they invest in. So, Artemisia creates deal flow for other investment programs in Brazil.

Discussing the post-acceleration life of a company in their portfolio, he told me they follow the companies for 18 months after graduation to track jobs created, changes in personnel, sales, and most important, the numbers of low-income people impacted by the portfolio company. So, they have a monitoring and evaluation process in place as well.

Artemisia is one of several such accelerators located in both emerging and established markets, and clearly one of the most successful in Brazil. I’ll definitely continue to follow them and observe their progress. 

Why Africa is so important to me...

Some of my friends have been asking me why I decided to leave a comfortable life on the Chesapeake Bay to relocate to sub-Saharan Africa leaving wife and family for more than a year, and living in the very poor country of Ethiopia.  Those who know me are aware that this wasn’t my first time in Africa. I have been there a few times and truly believe it’s a place with great promise. Unfortunately, much of that promise remains to be fulfilled.  I’m not exceedingly experienced in Africa, and certainly not with Ethiopia.  But, I am experienced in technology incubation and Africa seemed to offer an exciting opportunity to apply the concept. If the concept of technology incubation can be applied successfully in Ethiopia it could be adapted to any environment.

Africa is the second largest continent after Asia. There are over 1.5 billion people here in 54 countries. That’s a very large pool of intellectual capital and an even larger pool of potential consumers – can we afford to not pay attention?

When I think about Africa and the entrepreneurs I work with presently, I see the same enthusiasm and excitement that I once saw in Russia – that confidence in capitalism as a system, the belief that if one has a good idea and the market embraces it, one can become wealthy, create employment, make the world a better place, leave a legacy…it’s both contagious and exciting. It gives one pause to consider how powerful entrepreneurship is, and how rapidly incubation can become a contributing factor in raising GDP.  But, market forces aren’t perfect, and in most of these places, it often takes government intervention at the earliest stages in order to get things moving. That means establishing and supporting entrepreneur development programs until they become sustainable and support themselves.   International financial institutions like the World Bank and EBRD, and many NGO’s have done that in countries where the government needed assistance in funding incubation and promoting tech startups. The concept works, and people do believe in it.

The opportunities for high and low tech entrepreneurs are everywhere in sub-Saharan Africa.  Of the ten most impoverished countries in the world, this region is home to nine of them. While Ethiopia ranks above those lowest of low income countries, it isn’t all that much higher.  There are two MRI machines in the entire country to serve a population of about 90 million. Over 90% have no access to electricity, the cheapest form of energy for cooking. Most cook on stoves fueled by animal dung, charcoal, or firewood, but kerosene is also available. Generally, all the stoves fill their homes with smoke and fumes, producing many cases of asthma and other breathing problems for young and old alike. Try writing your e-mails by kerosene lamp and you’ll quickly get the point. Many Ethiopians also haul their drinking water to their homes on their backs, or perhaps on a burro.  One American entrepreneur who recently relocated here started a business manufacturing a sling that will at least distribute the weight more evenly so it’s easier to haul the water containers. Food and water security count for a lot when you’re hungry or thirsty and have no Safeway around the corner.

The Internet penetration rate of Ethiopia is estimated to be around 2.5%. The mobile phone penetration rate is around 25%. Internet service, even here in Addis Ababa is intermittent at best, and we often go two or three days with no service at all. Like a battle plan that’s obsolete after the first shot is fired, my CIC work plan was in shambles after the first couple of weeks because we’re so dependent on reliable telecommunications.  In many respects, it’s a reflection of the government’s priorities as they monopolize the telecommunications market instead of allowing competition – something that almost every other African country has already done to their collective benefit.

Deforestation is a huge problem, yet people need the wood for cooking – one reason the introduction of new high tech cooking stoves is an important innovation. Using animal waste to create bio-gas is another, and use of micro-hydropower in Ethiopia’s many rivers (along with larger hydro projects) is a third that can make this second largest country in Africa an economic power. The way to do this is with technology and that most important element of job creation, entrepreneurship.  When we speak of making an impact, it’s startling to know that with these new products someone doesn’t have to spend a couple of hours each day collecting firewood, and polluting the atmosphere in their home using a traditional stove, just to eat a hot meal. 

When I ran PortTechLA we worked with one Southern California small business that was trying to manufacture a high-tech cooking stove for lesser developed countries.  In my naivety I thought it was unique. Having seen many stove innovations in the past year, I now know that’s just not the case. Their hearts were in the right place, but they had no idea how strong the competition is among African engineers and scientists to solve their own problems.  In our recent proof-of-concept competition for seed funding, two of our eight finalists were developing stoves.  Other competitors were making bio-fuel from invasive plant species, organic fertilizer from municipal waste, reducing deforestation by manufacturing plastic lumber, etc.

A final thought. There is a developing middle class in Africa that wants to live better lives, have more conveniences in their homes, wash their clothes with a washing machine, charge their mobile phones, and access the Internet with their laptop computers. They can’t afford even the least expensive washing machines, generators, photo-voltaic charging stations or gas stoves, but they do have some level of disposable income, and they are clustering in twenty or so 1,000,000+ population cities around Africa. American ingenuity has solved many problems in the past – why not develop some new consumer goods that serve their economic level – after all, there are more than a billion of these prospective customers. It seems to me to be a nicely sized market to go after. I’m betting that some entrepreneur in an incubator somewhere (perhaps in the US, perhaps in Ethiopia) has a product that will meet their needs. I’m here like the boy pawing through the straw in the stable, thinking with all that manure around there has to be pony in there somewhere!  I have to go – gotta find that pony…

The Not-so-New Accelerators

Have you read much written lately about business incubation?  My head spins trying to decipher all the different names for what is essentially the same set of services. It seems every time I think I have a good idea of what another business incubation organization does, I find out their intention is really to be something else. Incubate, accelerate, something in between…what do they really do and what do they offer their clients?

The new "accelerator" often refers to a program of 90-120 days of intensive mentoring with a small amount of cash (usually $15-20,000) and the opportunity to do some proof-of-concept testing while learning how to be an entrepreneur. If the sponsors/investors deem the project successful, additional funding may be in the offing.  This new use of the term accelerator is an appropriation of an incubation concept that has traditionally described the delivery of services to speed the development of an established company. I find it hard to consider acceleration to be a new idea. And, I find it even harder to apply the term accelerator to entrepreneurs who may not even have solid business model yet. The confusion becomes even greater when I try to apply this accelerator concept in businesses other than the development of mobile phone apps and other Internet-related software.

Here's my take on what happened. Several years ago, some new ways to deliver mentoring came into being with the development of start-up programs such as Y Combinator, TechStars, Launchpad LA, and several others. Entrepreneurs with innovative ideas could apply to these organizations for a shot of intensive assistance and a relatively small amount of money to develop a business model or do proof-of-concept development.  The great benefit of this new accelerator concept is that it helps entrepreneurs take an idea far enough to see if there's a business idea with legs without investing a lot of money in salaries and rents. I see it as an inexpensive way for investors (both angels and early stage funds) with more money than time, to work with interesting, but usually inexperienced entrepreneurs and determine if further investment is worth the effort. It tests the entrepreneur, (at least partially) vets the technology, and develops the business concept with a minimum amount of effort. At the end there's at least the beginnings of a business model.  It's nice PR for the investors, and sure beats having to read business plans all day.  

Here's my problem with it: it's so early in the development of the company that the chances are good there's no IP protection in place, the management team (if there is one) are put under intense pressure at such an early stage that it's sink or swim before there's much of a concept to test. It could easily break up a good team with very little real testing of their skills other than what may be introduced by the short timeline adding drama to the process. One question being asked lately is “How many IPOs result from these high profile, highly touted programs?” It’s a good question, because the numbers aren’t very impressive (in one study the mean was 4%).

These things have become so prolific that in some places anyone with some spare office space now has an accelerator. Sorry, but I just don't believe every law firm in Southern California and the Bay Area should be running an accelerator. In late 2012, we did a count in the Los Angeles region -- there were 12 in Santa Monica alone. Some exceptional entrepreneurs and very good ideas just don't come of age in ten to twelve weeks. How many good ideas are lost because the investor grew bored, or the gestation period of this new product took fifteen weeks instead of twelve?  Give me good old business incubation where you take the time to develop a relationship with the client, help them think about how to overcome their challenges even if it takes a year instead of a few months, and watch the entrepreneur gain maturity as a business owner with each sale.

Sure, there are companies that benefit from this type of acceleration, but how many are just “one-app” wonders?