Wednesday, August 08, 2007
There's Entrepreneurs and there's Entrepreneurs!
One of the widely-circulated and key ideas in the international development arena of late is the celebration of entrepreneurship among the poor in developing countries. The assumption seems to be that the poor could successfully run these small micro-businesses, if only the slightest amount of help could be offered, especially financial help. The thinking goes like this: Nagamma would be able to buy two cows if she had access to $200, then she would be able to supply milk to the community, make money, repay the $200 at 25% p.a., and have money left over to scale the business to a point where she can buy more cows, make it a viable business etc. This is the sort of thinking that forms the basis for the current hype for micro-finance and social entrepreneurship, though one most also add that real-world practitioners of micro-finance (some of whom are very good friends of mine) typically are free of any such delusions. I must also confess that I personally flirted with the ideas around micro-entrepreneurship for a while, before thinking through the problem and arriving at a different conclusion.
I think the fundamental problem with the thought process is the conflation of real entrepreneurship with micro-entrepreneurship. Entrepreneurs of the Nagamma variety are forced into entrepreneurship because they have no other alternative. In other words, survival becomes entrepreneurship. That does not mean, however, that Nagamma possesses the skills required to be a real entrepreneur. True entrepreneurship is a specialized skill which requires a very high degree of risk-appetite, and I'd argue that less than 1% of the population have these skill sets and risk appetites. I should know, having been involved in two start-ups in the mid-90's. I was an entrepreneur because I don't really like taking orders from others and I have always lived for the thrill of doing something very new. I am also extremely well-networked to knowledge, capital and people with solid management skills. To compare an entrepreneur like me with Nagamma is a bit absurd, isn't it?
To people who meet me and doubt this, I typically take them to meet some of these so-called micro-entrepreneurs who are being celebrated in the beautiful stories you hear from time to time. Some of them run their businesses pretty close to the ISB. Typically, they're small stores, tea-vendors and the like. Speak to them, and you'll realize that their margins on their businesses are typically $40-60, if not lower. Arguably, this makes them better off than their lives in the villages, but speak to them a while longer and ask them what they'd really like to do, and they'll tell you they'd love to be cab drivers running cab services to the ISB or Microsoft or some such, for example. Cab drivers working at the ISB (for car companies) typically make $120-150 a month, with benefits and the base income is not variable. The attraction of cab driving becomes immediately obvious.
So, if you really wanted to make a difference through private business, the real target should not be micro-businesses, but SME's. In the case illustrated above, the two potentially highly profitable businesses that need to be seeded are skills training companies, which teach these chaps how to drive a car and speak a bit of English (micro-finance could have a real role here), and large cab companies that can hire these guys as drivers to cater to exploding demand in Hyderabad. There is no point imagining this small guy sitting outside is somehow going to become the Starbucks of the chai business in India. Miracles do happen, but not with the regularity required to solve the problem of employing the poor in India. In other words, what needs to grow is the formal sector, which alone has the scale to absorb people in large numbers with reasonably paid jobs. The celebration of the wrong kind of entrepreneurship simply expands the informal sector, which we can all agree is a second-best alternative at best.
How soon the international aid/Base-of-the-Pyramid/Social Entrepreneurship crowd will understand this very important distinction is the real question. And yes, I do belong to this crowd, so I am trying to affect some change of thinking from within. Whether my thinking on this gains any traction or not remains to be seen.
I think the fundamental problem with the thought process is the conflation of real entrepreneurship with micro-entrepreneurship. Entrepreneurs of the Nagamma variety are forced into entrepreneurship because they have no other alternative. In other words, survival becomes entrepreneurship. That does not mean, however, that Nagamma possesses the skills required to be a real entrepreneur. True entrepreneurship is a specialized skill which requires a very high degree of risk-appetite, and I'd argue that less than 1% of the population have these skill sets and risk appetites. I should know, having been involved in two start-ups in the mid-90's. I was an entrepreneur because I don't really like taking orders from others and I have always lived for the thrill of doing something very new. I am also extremely well-networked to knowledge, capital and people with solid management skills. To compare an entrepreneur like me with Nagamma is a bit absurd, isn't it?
To people who meet me and doubt this, I typically take them to meet some of these so-called micro-entrepreneurs who are being celebrated in the beautiful stories you hear from time to time. Some of them run their businesses pretty close to the ISB. Typically, they're small stores, tea-vendors and the like. Speak to them, and you'll realize that their margins on their businesses are typically $40-60, if not lower. Arguably, this makes them better off than their lives in the villages, but speak to them a while longer and ask them what they'd really like to do, and they'll tell you they'd love to be cab drivers running cab services to the ISB or Microsoft or some such, for example. Cab drivers working at the ISB (for car companies) typically make $120-150 a month, with benefits and the base income is not variable. The attraction of cab driving becomes immediately obvious.
So, if you really wanted to make a difference through private business, the real target should not be micro-businesses, but SME's. In the case illustrated above, the two potentially highly profitable businesses that need to be seeded are skills training companies, which teach these chaps how to drive a car and speak a bit of English (micro-finance could have a real role here), and large cab companies that can hire these guys as drivers to cater to exploding demand in Hyderabad. There is no point imagining this small guy sitting outside is somehow going to become the Starbucks of the chai business in India. Miracles do happen, but not with the regularity required to solve the problem of employing the poor in India. In other words, what needs to grow is the formal sector, which alone has the scale to absorb people in large numbers with reasonably paid jobs. The celebration of the wrong kind of entrepreneurship simply expands the informal sector, which we can all agree is a second-best alternative at best.
How soon the international aid/Base-of-the-Pyramid/Social Entrepreneurship crowd will understand this very important distinction is the real question. And yes, I do belong to this crowd, so I am trying to affect some change of thinking from within. Whether my thinking on this gains any traction or not remains to be seen.
