Social Entrepreneruship

Saving the world

Mar 12th 2009
From The Economist print edition

Entrepreneurs are trying to do good as well as make money

Illustration by Nick Dewar

THE Iskcon Sri Radha Krishna-Chandra Temple feels like a bit of ancient India preserved in the heart of modern Bangalore. The faithful wait in long lines, their faces daubed with paint. The air is filled with chants of “Hare Krishna” and “Hare Rama”. Monks in orange robes offer flowers and food to the gods and produce haunting sounds on conch shells.

In fact, India’s entrepreneurial revolution is as visible here as anywhere. The temple has a conference room equipped with state-of-the-art audio-visual aids. Its board of directors includes several leading software billionaires and their wives, providing it with money as well as connections. The monks are entrepreneurs as well as holy men, one moment talking about reincarnation and the next about sustainable delivery models.

The temple provides 200,000 local schoolchildren with free meals every day. It achieves this miracle of abundance by a combination of mechanisation and careful management. The temple’s 250 employees use giant machines to clean rice and prepare chapattis. They then pack the food into steel containers and load it into a fleet of custom-made vans which keep the food warm as they crawl through Bangalore’s traffic-clogged streets.

Entrepreneurship is reshaping the voluntary sector as much as the private one. Rich people have often turned their hand to philanthropy in their later years, but this old story has acquired some new twists. Today’s entrepreneurs routinely apply business techniques to philanthropy. Some of them are even using a venture-capital model, investing in a range of promising start-ups and making longer-term funding conditional on performance.

Riders for Health was created when a couple of motorbike enthusiasts discovered that the vehicles being used by health-care providers in Africa were not being maintained. The organisation now helps to provide 11m people with health care in inaccessible parts of Africa, often using motorbikes. Teach for America started when a Princeton student, Wendy Kopp, conceived the idea of persuading Ivy League graduates to teach in state schools for a while. The trick was to ask them to compete for the honour of doing something that, a few years earlier, none of them would have been remotely interested in. The programme has now been copied around the world.

Social entrepreneurs often blur the distinction between making money and offering charity. Some use the profits from their main business to cross-subsidise their charitable work. India’s Aravind Hospitals, which perform 250,000 eye operations a year, do 60% of their work for nothing. Other social entrepreneurs establish for-profit social enterprises, also known as “FOPSEs”, that try to make money as well as doing good.

Vinod Kapur, for example, has built a successful company with the purpose of feeding India’s rural poor. He invested $1m—and many years of his life—in breeding a superchicken. The result was the Kuroiler: multicoloured, resistant to disease, capable of surviving on farmyard scraps, strong and wily enough to fight off predators, and producing twice as much meat and five times as many eggs as ordinary chickens. Mr Kapur has built an entire supply chain around the Kuroiler, including specialist farms that breed them and vendors who sell them across rural India.

Shane Immelman has built a successful company by trying to bring the benefits of education to poor schoolchildren in South Africa. Appalled that 4m children did not even have desks, let alone schoolrooms, he invented a “lapdesk” that sits on the child’s lap and provides a stable surface. The desks are covered in advertisements, so Mr Immelman is able to hand them out free, but they have proved so popular that better-off people have started to buy them, and some of them are now being exported to other developing countries.

Take care of the pennies

In the long run, however, the best thing that entrepreneurs can do for the poor may be simply to see them as workers and customers. A rising number of Western companies are pursuing what C.K. Prahalad, a management professor at the Ross School of Business at the University of Michigan, calls “the fortune at the bottom of the pyramid”. Businesspeople have realised that billions of pennies can add up to a lot of money. Cemex, an innovative Mexican cement firm, employs thousands of poor Mexicans. Casas Bahia, a Brazilian retailer, specialises in serving poor customers. India’s ICICI Bank uses technology and customer service to reach poor rural Indians.

Allowing people to experience the benefits of the market sometimes means helping them to join the market economy. Hernando de Soto, a Peruvian economist who helped to inspire the World Bank’s Doing Business, has long argued that creating property rights in the developing world is a precondition for encouraging entrepreneurialism there. Regional development banks such as the African Development Bank and the European Bank for Reconstruction and Development claim they are trying to build local environments in which entrepreneurs can flourish.

This seems to hold out the prospect of a continuous cascade of prosperity as successful entrepreneurs discover new markets and then use the fruits of their efforts as social entrepreneurs to generate yet more successful enterprises. But the world is never as simple as that: entrepreneurship creates uncertainty and competition as well as innovation and prosperity.

Secrets

Magic formula

Mar 12th 2009
From The Economist print edition

The secrets of entrepreneurial success

KING MIDAS wished for everything he touched to turn to gold, which turned out to be a bad idea. His modern equivalents hope that everything they touch will turn to Silicon, which may not be such a good idea either. The world now glories in dozens of would-be Silicon Valleys: Silicon Alley in New York, Silicon Glen in Scotland and even, depressingly, Silicon Roundabout in London.

Siliconitis is the most common example of what is now an almost universal search among policymakers, local as well as central, for the secrets of entrepreneurial success. It is also the most instructive. A few attempts to replicate Silicon Valley, most notably in Israel, have succeeded. But most are embarrassing failures.

The most basic mistake politicians make in trying to foster entrepreneurship is to assume that there is only one model of a successful entrepreneurial cluster. There is no point in trying to create the next Silicon Valley without the Valley’s remarkable resources: two world-class universities, Stanford and Berkeley, and a big financial centre, San Francisco. Instead, would-be emulators should concentrate on their own particular strengths.

In addition to the classic Silicon Valley model, Monitor identifies three other successful entrepreneurial ecologies. One is the anchor-firm model. Alfred Marshall, one of the first economists to write about entrepreneurship, said that successful entrepreneurs are like large trees in a forest, towering over their neighbours and depriving them of light and air. In fact, the big trees usually produce lots of little ones. They spin off subsidiaries, provide experience to employees who then decide to go it alone, and nurture dozens of suppliers.

The research triangle in North Carolina was a successful exponent of the anchor-firm model, recruiting big companies such as IBM, Alcatel and Union Carbide which then either spawned or attracted lots of smaller operators. Hindustan Unilever, a food and personal-care giant, is another, less self-conscious exponent. The firm employs 45,000 women across India to market its goods to 150m consumers in rural areas. These saleswomen not only earn an income, they also learn about products, prices and marketing, sending a ripple of entrepreneurship throughout rural India.

A second, currently topical, model is driven by crisis. People become entrepreneurs when the economy stops supplying jobs. This happened in the San Diego region in the 1990s when the end of the cold war threw hundreds of highly trained military scientists out of work. Local start-ups such as Qualcomm hoovered up the talent and put it to new uses.

A third is the local-hero model in which a local entrepreneur sees an opportunity, starts a business and turns it into a giant. When Earl Bakken founded Medtronic in Minneapolis in 1949, he was creating a local industry as well as a company. Having developed the world’s first heart pacemaker, Medtronic grew into the largest medical-technology company in the world, spawning huge numbers of smaller ones.

A matter of luck

Two other things complicate the search for success—the role of chance and the importance of culture. The Indian Institutes of Technology were designed to create technocrats rather than entrepreneurs. It was more a matter of luck than good planning that they were churning out exactly the sort of people that the Indian software industry needed.

David Landes, an influential economic historian, has argued that “if we learn anything from the history of economic development, it is that culture makes almost all the difference.” You can build as many incubators as you like, but if only 3% of the population want to be entrepreneurs, as in Finland, you will have trouble creating an entrepreneurial economy.

This complicates policymakers’ work, but it does not make it impossible. Culture is not the only factor: economic policies matter too. Overseas Indians and Chinese thrived abroad in the 1950s and 60s even though their cousins were languishing back home. And culture can be changed. The Thatcher government shook Britain out of its anti-business torpor in the 1980s. More recently India and China have become the second and third most entrepreneurial countries in the world, trailing only America, according to Monitor.

What should countries do to improve their chances of getting it right? At the minimum, they need to implement the policies that the World Bank lays down in Doing Business to achieve things like transparency, convenience and rule of law. At best, they should emulate two qualities of some of the world’s most successful entrepreneurial clusters.

The first is a vibrant higher education system. Business is increasingly dependent upon knowledge, particularly technical knowledge. Some 85% of all the high-growth businesses created in America in the past 20 years were launched by college graduates. University research departments have helped to drive innovation in everything from design to entertainment.

The second is openness to outsiders. Emigrés have always been more entrepreneurial than their stay-at-home cousins: the three most entrepreneurial spaces in modern history have been the ones inhabited by the Jewish, Chinese and Indian diasporas. In today’s knowledge economy educated émigrés are at the cutting edge of innovation. They create more firms than regular folk; they circulate ideas, money and skills; they fill skills gaps; and they mix and match knowledge from different parts of the world.

Born global

In fact, today’s smart entrepreneurs start global. They search for materials, talent and opportunities the world over and define their competitive environment globally rather than locally. This reflects the fact that entrepreneurs are springing up in every corner of the world, complicating the battlefield still further.

Take EyeView, a quintessentially modern start-up, which was a global citizen from its very first day. The company uses “rich media”—a combination of videos and audios—to teach customers how to use websites. Most of the company’s customers are international, so the videos are produced in many different languages and watched the world over.

The company currently occupies an upper floor of a nondescript building in Tel Aviv, but in its earliest years it lived on three continents. Two of the company’s founders were based in Boston, the third in Sydney and the fourth in Tel Aviv. The company made its first videos in Australia and its first customers were on America’s West Coast.

Illustration by Nick Dewar

Daniel Isenberg, of HBS, points out that today’s entrepreneurs are pioneering a new business model. In the old days globalisation was incremental. Companies first established themselves in their local markets and then expanded abroad slowly, starting in their own regions. Now a number of them span the globe right from the beginning.

Successful entrepreneurs are coming from some surprising places. Bento Koike has built Tecsis, one of the world’s most successful manufacturers of wind-turbine blades, in Brazil, his home country, even though both the company’s raw materials and its customers are in Europe and America and the huge blades are difficult to ship. He has taken out a patent on his innovative packaging technology.

New Zealand, despite its geographical isolation, has turned itself into an entrepreneurial powerhouse, leading the world in the creation of small and medium-sized enterprises, thanks in part to enlightened government policies. It has done particularly well with applying innovation to woollen underwear. Its Icebreaker brand is popular with young, image-conscious outdoor enthusiasts.

Successful entrepreneurs are also forming some surprising cross-border collaborations. Shai Agassi, an Israeli-American businessman based in Palo Alto, California, is promising to upend the car industry by going electric, in alliance with politicians, entrepreneurs and companies in Israel, Denmark, Japan and France. Israel and Denmark are both building networks of recharging stations. Danish entrepreneurs are working on technology that will prolong the life of batteries. Renault and Nissan are building electric cars.

Still, it would be a mistake to conclude from all this that entrepreneurship is killing distance entirely. Many of today’s start-ups have to grapple with logistical problems that used to be the preserve of large companies. Entrepreneurs need to travel the world to check on far-flung operations, organise globe-girdling supply chains and comply with a plethora of legal and regulatory systems.

Talk to any budding entrepreneur and you soon discover, too, that local cultures matter. The more globalised the world becomes, the more people look for comparative advantages that cannot easily be bought or replicated; and the more far-flung their business operations, the more entrepreneurs rely on bonds of trust with their fellow businessmen. One reason why Mr Koike decided to base Tecsis in Brazil was that the country has a thriving aerospace industry and a successful Aeronautical Institute of Technology. The two leading founders of EyeView, Tal Riesenfeld and Oren Harnevo, grew up in the same village in Israel and served in the army at the same time. They decided to concentrate their activities in Israel, rather than remaining scattered all over the world, partly because they thought that they needed to share the same “mindspace”, and partly because they wanted to do something to help their country.

Entrepreneurship

Lands of opportunity

Mar 12th 2009
From The Economist print edition

Israel, Denmark and Singapore show how entrepreneurialism can thrive in different climates

DOV MORAN’S desk is littered with the carcasses of dismembered phones. Mr Moran has already had one big breakthrough: inventing the now ubiquitous memory stick. But he dreams of another one: he wants to separate the “brains” of the various gizmos that dominate our lives from the “bodies” to enable people to carry around tiny devices that they will be able to plug into anything from phones to cameras to computers. Mr Moran sold his memory-stick business to SanDisk for $1.6 billion, creating a thriving technology cluster near his office. This time he wants to build an Israeli business that will last, challenging the giants of the camera and phone businesses.

Israel is full of would-be Dov Morans. It is home to 4,000 high-tech companies, more than 100 venture-capital funds and a growing health-care industry. Innovations developed in the country include the Pentium chip (Intel), voicemail (Comverse), instant messaging (Mirabilis, Ubique), firewalls (Checkpoint) and the “video pill”, which allows doctors to study your insides without the need for invasive surgery.

Even more than other countries, Israel has America to thank for its entrepreneurial take-off. A brigade of American high-tech companies, including Intel and Microsoft, have established research arms there. And a host of Israelis who once emigrated to America in search of education and opportunity have returned home, bringing American assumptions with them. Many Israeli entrepreneurs yo-yo between Silicon Valley and Tel Aviv; almost 70 Israeli companies are traded on NASDAQ.

The Israeli government helped by providing a ready supply of both human and physical capital. Israel has the world’s highest ratio of PhDs per person, the highest ratio of engineers and scientists and some of the world’s best research universities, notably Technion. The country’s native talent was supplemented by the arrival of 400,000 well-educated Jewish refugees from the former Soviet empire.

However, Israel’s main qualification for entrepreneurialism is its status as an embattled Jewish state in a sea of Arab hostility. The Israeli army not only works hard to keep the country at the cutting edge of technology, it also trains young Israelis (who are conscripted at 18) in the virtues of teamwork and improvisation. It is strikingly common for young Israelis to start businesses with friends that they met in the army. Add to that a high tolerance of risk, born of a long history and an ever-present danger of attack, and you have the makings of an entrepreneurial firecracker.

Danish dynamism

Compared with a lion like Dov Moran, Frederik Gundelach is a mere cub, but he has some of the same sense of purpose about him. Sitting in one of Denmark’s “growth houses” (incubators for entrepreneurs), he places a flask on the table and launches into an elaborate explanation.

Illustration by Nick Dewar

Mr Gundelach claims that he and his father have discovered a novel way of boiling water that does not require the application of heat. He hopes to sell the flask to outdoor types and soldiers, but that is not the limit of his ambition. The chemical reaction that heats the water can also be used to heat or cool houses, he claims, radically reducing the cost of domestic heating and the threat of global warming.

It is too early to say whether Mr Gundelach’s flask will turn out to be a miracle in a bottle or a pipedream, but the Danish government is doing everything it can to give him the support he needs. Denmark is engaged in a social experiment to test whether it can embrace capitalist globalisation yet continue to preserve its generous welfare state. The Danish economy has traditionally been divided between big multinational companies (such as Carlsberg, a brewing behemoth) and a welter of small family firms. The government now wants to add a third economic force: start-ups with the potential for rapid growth.

The government has done everything a tidy-minded Scandinavian country can to cultivate these start-ups. The World Bank ranks Denmark fifth in the world for ease of doing business. There is a network of growth houses—ready-made offices that provide start-ups with many of the advantages of large companies such as consulting advice, legal services and conference rooms. The government has created a public venture-capital fund, the Vaekstfonden, and is now trying to change attitudes to entrepreneurs and promoting “education for entrepreneurship”.

When Muslim countries boycotted Danish goods in 2005 after a Danish newspaper published some disrespectful cartoons of the prophet Muhammad, wags joked that this hardly mattered because the only things that Denmark produced were beer and bacon. But the government’s embrace of entrepreneurialism is clearly changing the economy. Denmark is already home to about 20% of Europe’s biotech companies. It also has thriving clean-technology, fashion and design industries. As a proportion of GDP, Danish companies attract more venture capital than any other European country.

Sizzling Singapore

At first sight Denmark and Singapore do not have much in common, yet they share not only the same official enthusiasm for entrepreneurialism but also many of the same policies. Singapore’s government has invested heavily in digital media, bio-engineering, clean technology and water purification, creating huge incubators and enticing foreign scientists with fat pay packets, as well as setting up a public venture-capital fund that has in turn brought in lots of private venture capital. More than 5% of Singapore-based companies are backed by venture capital.

The government has done everything in its power to make life easy for entrepreneurs, which has earned it first place in the World Bank league table for ease of doing business. It is also trying hard to encourage a traditionally passive population to become more innovative. Schools teach the virtues of entrepreneurialism. The universities put ever more emphasis on business education and links with industry. The Nanyang Technological University (whose chairman, like that of the National University of Singapore, is an alumnus of Hewlett-Packard) offers a graduate degree in technopreneurship and innovation.

Singapore sees entrepreneurialism as a prerequisite to future growth. It has spent the past few decades climbing up the “value chain” from manufacturing to services and from trade to finance. Its biggest test yet may be to create knowledge industries and produce companies that can commercialise intellectual breakthroughs.

All three countries have both advantages and disadvantages when it comes to embracing entrepreneurship. Israel depends too heavily on America and is being hit hard by the downturn there. Denmark is too egalitarian. A top personal-income-tax rate of 63% drives the most successful entrepreneurs out of the country.

Singaporeans have even deeper cultural problems with entrepreneurship. The best and brightest have little appetite for risk-taking entrepreneurship, and most people suffer from an excessive fear of bankruptcy, according to Monitor. The country’s consumers are anything but venturesome: for all the island’s cultural diversity, they remain obsessed by Western brand names. The country is paying a heavy price for this. A Singapore-based company, Creative Technology, invented a digital music player, the NOMAD, two years before Apple launched the iPod, but Creative’s NOMAD looked like a clunky CD player rather than a miniature fashion accessory. It received $100m from Apple for patent infringement, but that did not make up for the loss of a mass market.

Still, the governments of all three countries remain enthusiastic supporters of the entrepreneurial idea. The Danes and the Singaporeans regard it as their ticket to success in a global economy and the Israelis as a matter of survival. All three are also helping to spread the creed in their regions. Arab countries are beginning to realise that the best way to deal with Israel is to copy its vibrant economy. Denmark serves as a model to European leaders such as France’s Nicolas Sarkozy who want to combine dynamism with social protection. The Chinese regard Singapore as a useful laboratory for reform. In the 1980s China asked Goh Keng Swee, Singapore’s former finance minister, to advise on the development of its special economic zones; today it is keeping a watchful eye on the city-state’s model of state-sponsored entrepreneurship.