“Investors in Inclusive Business have to extend their horizons”

Irmgard Jansen
By on March 9, 2015

Professor Stuart L. Hart visited the Netherlands last week for a presentation at the Impact Academy and we had the pleasure to meet and interview him. Hart, the S.C. Johnson Chair Emeritus in Sustainable Global Enterprise and Professor Emeritus of Management at Cornell University’s Johnson Graduate School of Management, together with C.K. Prahalad published an groundbreaking article in 2002 that introduced the idea of the opportunities at the ‘Bottom of the Pyramid’.

At the launch of the BoP Innovation Center 5 years ago you were one of the key-note speakers. What have been the main developments ever since?

“The BoP Innovation Center has come miles and miles ahead over the last 5 years and I am really proud that I was at the launch. It started at Tilburg University with a few professors and consultants and they connected to Myrtille Danse (BoPInc CEO). BoPInC is one of the few BoP Labs that have successfully taken their initiatives out of knowledge institutes. This enabled BoPInc to collaborate with a much larger variety of partners, including businesses and technology developers. BoPInc has been able to put together a sharp strategy and to carve out an area of competence that you are extremely good at: business modelling, partnership brokering, marketing and distribution strategies. That is a great accomplishment and the way to create high impact.”

BoPInC is busy connecting inclusive business entrepreneurs, impact investors and inclusive business advisors. Which messages would you leave in the boardrooms to convince the executives of big and small enterprises of the value of inclusive business?

“You will find a lot of cynics amongst entrepreneurs and executives and you are not going to change the mindset in this particular group. What you need is a viable coalition of leadership that is at least open to Inclusive Business. You need a few people who believe that it is not only good for the world but that it also provides opportunities to the company. One life is too short to even try to convince the cynics. Fortunately, there are many entrepreneurs and senior executives that do think Inclusive Business is a good possibility.

Moreover, a company is not just the CEO. In larger businesses there could be a bunch of people that are enthusiastic about the whole idea. They can build a coalition and make it happen. Key is that you have to operate at a level where people can make at least something happen. You need to identify them and make sure that they become champions of inclusive business initiatives. You need people prepared to spend a hefty dose of their time on inclusive business and who have the ability to inspire and convince others.”

Many new inclusive business ventures need investments. In your blogs and articles you use the metaphor ‘hole in the doughnut’ others refer to the pioneer gap: the phase when innovations for the BoP are ready for market entry and the formation of a firm, but do not generate a positive cash flow yet. How can entrepreneurs attract impact investors and how can BoPInc convince them of accepting more risk and longer tenors?

“I think there are many aspects in creating a viable business proposition. The horizon is longer and that is the main hurdle. The fact that it is taking more time to generate a positive financial return is increasingly understood, but the iterative development cycles new inclusive business ventures are going through, are not always understood, even not by impact investors. Trust building and engagement on the ground are the most important activities you should focus on to be convincing.”

Stuart Hart during his presentation at the (Picture by Erwin Overbeek) https://twitter.com/ErwinvOverbeek

Stuart Hart during his presentation at the Impact Academy. (Picture by Erwin Overbeek)

BoP Innovation Center is looking into various forms of cooperation with bigger financing institutions such as FMO. How do you see these larger investors entering this space?

“Well, there is no shortage of money. There is a shortage of really persuasive deals, even for the real impact investors. They are willing to accept a lower return but their time horizons are really too short and they want to cash too fast which is stunting the prospects; the enterprises stay small when the investors exit too quickly. This perpetuates the cycle, because the ventures stay somewhat uninspiring. A venture capitalist or a private equity investor usually wants something bigger with more potential. A few things have to happen to escape from this vicious cycle.

Investors must accept the fact that they can only expect higher returns if they extend their horizons. Only then, entrepreneurs will be able to make the case for them. Traditional bankers and private equity investors who are sympathetic towards doing business in the BoP and really want to do deals asked me “Why do you propose deals that tend to be ‘small potatoes’? We need deals that can really go somewhere.”

We must explain to them that providing basic services to poor people will create collateral assets. The ability to have a foothold in these BoP markets represents collateral value that has commercial value beyond the one single business they are financing. This collateral value should be quantified in inclusive business proposals. Unfortunately it is not part of the thinking of investors yet and that is why entrepreneurs and investors sail past each other. Quantifying prospects for return beyond the current investment is the only way to scale up. This will take off the pressure from entrepreneurs to deliver too rapidly which – under current conditions – makes them scaling down instead of scaling up.”

How could investing in the BoP help to achieve the goal of doubling the impact and halving the footprint of investments?

“I would like to invite investors and other stakeholders to develop the Green Leap Technology Bank together. This databank can be a knowledge repository for entrepreneurs and investors and make them aware of the green technologies that have the potential to generate considerable return. The databank should include technologies that come out of the Bottom of the Pyramid and that have huge potential.

But you need to make the translation for investors into what these technologies really are. They require plain descriptions of what it is, what it does and how these technologies can be commercialized. Also the entrepreneurs will then be able to see how some of these technologies feed into their business plans. In many cases it is technology that holds back BoP entrepreneurs. Access to readily available technologies will reduce their time to market considerably. So let’s do it!”

What is your view on the Inclusive Business Accelerator that we have recently launched?

“The Inclusive Business Accelerator does exactly aim for the same things that I mention in my new book (Newly Released and Updated ‘Capitalism at the Crossroads‘). You have to think ‘ecosystems’. There are a lot of incubators and platforms out there. But the majority is not doing what the IB Accelerator does. Other platforms focus on products and business models or on goods and services that are not particularly meant for the BoP. The Inclusive Business Accelerator brings together the whole ecosystem as well as business development services and that is unique in my view.

It will help the BoP Global network and can boost the communication between the BoP Labs all over the world and bring together their initiatives. Sharing and leveraging information and expertise becomes easier with the Inclusive Business Accelerator.”

How will inclusive business in the BoP develop over the next 5 – 10 years?

“Well let’s first look back at the last ten years. Inclusive Business has started off as an underground activity. This sort of business was done by people that were ‘hiding’. With the BoP network and the labs we have succeeded to get it out in the open, to make business people aware and to motivate them. In the next years we have to get the model down that works.

That includes not only the underground part and the ecosystem but also the internal part. That will be an even more important phase: How do companies establish internal structures to be effective in inclusive business? Which metrics should they to use to measure success? How do you set up distribution? Who is going to be accountable? These are things we need to know to make it work at scale.”

If you would win the lottery tomorrow, would you invest in one of the inclusive business ventures you have followed over the last years?

“That is a complicated question because I am 63 and almost retiring. You should have asked me this question 10 years ago. Then I would have said “yes, sure”. Now I am thinking of a stable income stream starting 2 years from now. However, I would recommend it to younger people, younger entrepreneurs and investors. There are very many attractive opportunities out there and they will have the chance to reap the benefits in terms of financial returns and better prospects for the world!”