Tuesday, May 6, 2014

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…

Saturday, April 19, 2014

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?