Monday, April 27, 2009

Entrepreneurship Lessons from the Third World

Last month I had the opportunity to spend 4 weeks in Kenya, Rwanda, and the Democratic Republic of the Congo. And even though most of the trip was not business-related, I couldn't help but notice some significant entrepreneurship lessons in all three countries. These probably won't shock anyone as they aren't really new, but they helped me rethink some of the assumptions I make about my business, so maybe they'll do the same for you.

Right off the bat let me say that the lessons I saw were very clearly divided into two categories, call them micro-entrepreneurship and macro-entrepreneurship. Let me start with the lessons from the micro (individual business) level.

Nowadays we don't tend to refer to places like Rwanda as the "third world", we're more likely to call them "developing countries", and that's very appropriate. Most of the people I met were living perilously close to what we would think of as "just surviving". Incomes - when they had incomes - of $10 to $20 per month were very common, and things like electricity, running water (or clean water), health care, or even a second set of clothes were rare. No one I met was starving - food is plentiful and easily accessible, and things like flour and bananas may be boring but they'll keep you alive. But for people living at this subsistence level, any development that improves in their standard of living can be huge, so even though they may not have formal educations many of these people have lived through a crash course in entrepreneurship.

This was especially true with the people I met who were clients of (or who wanted to become clients of) GodCares' micro-financing program.
(a GodCares micro-finance client, who buys charcoal wholesale and sells it on a street corner in Kigali)

I have to admit I've never really understood micro-finance until this trip, so let me share what I learned in case you're in the same boat. Micro-finance programs are typically setup to loan small amounts of money (anywhere from $20 to $200 US) to entrepreneurs in developing countries. So how does this help?

The clearest example of a micro-finance success story I can share was the lady who sells used shoes. Before the micro-finance program she had a small stand in Kigali (capital city of Rwanda) selling used shoes (which is a big thing in a country where many folks don't have shoes). The problem she had was that her inventory was typically only 8 or 9 pairs of shoes, so when customers came by there wasn't much to choose from, and it was unlikely she would have a pair close to their size. The micro-finance program loaned her $40, which was enough to buy over 20 additional pairs of shoes for her inventory. Her monthly sales jumped from an average of 4 pairs to about 12 pairs, tripling her income (from around $8/month to $24/month).

In the village of Buqarama we talked to the residents who were requesting help to be part of a micro-financing program. They're a very poor village. The adults in the village mostly work as day laborers (even though some are way too old to be doing manual labor), and earn anywhere from 40 to 80 cents per day working in someone else's field. But if they could borrow $200 they would be able to rent their own "block" (a section of a field), raise their own crops, and sell them at the market. Instead of earning $50 for 6 months work, they would earn $200 - quadrupling their income, and their standard of living. (For perspective, pens cost 10 cents, and health care for kids is $2/year).

Micro-financing programs, when run properly, are highly beneficial to the recipients, and generally have a 90%+ repayment rate (GodCares reported 98% of their clients were paying back their loans, generally on time). But nothing is 100% successful, and what I noticed was that while GodCares screens the people who receive the funds and loosely checks their idea, they really don't have a good way to verify that the new business venture will be successful. They're counting on these budding entrepreneurs to come up with good ideas for how they will use the money to build a more effective business. Usually that works, sometimes it doesn't.

For example many of the clients we met had chosen some sort of distribution business, often buying goods in bulk and selling them locally. Several ladies in Kigali had setup businesses selling charcoal, which they purchase in bulk from a distribution truck and then sell in small buckets to local residents. That works well, but others in the Byumbe refugee camp had decided food distribution was their best option, so they would purchase rice, flour, or cooking oil in bulk from the nearest market (several days walk away), and resell it to local residents in the camp. Not a bad idea, but because several of them were doing the same business, and the residents of the camp didn't have enough money to support all the businesses, their businesses were unsucessful.

Lesson learned: Find something people need, and will pay you for, and you'll be successful. But keep an eye on your competition, and make sure there is a market for what you’re selling!

(at a gas station in Butare, this kid sells nuts, and does a little dance to get attention)
Kids are natural entrepreneurs, and this is very evident in Africa (and elsewhere). Not in the “lemonade stand” sense of entrepreneurial efforts but more in the “find a skill that brings reward” vein. Begging is an entrepreneurial skill, and is commonly employed by kids in many countries, but we didn’t see much of it in Rwanda. But instead, in the rural villages you’d find kids who had practiced specific english phrases, which they were taught would help them make an income from white visitors. “Give me money.” was not uncommon, but more often I heard “give me pen”, “give me paper”, and “give me bible”. Now the interesting thing when you hear these phrases – which by the way are difficult requests to refuse when given by a pitiful looking child – is that you forget these kids don’t really know english. So no matter how you respond, they don’t know what you are saying. They just hope that your pen, paper, bible, or cash will find it’s way from your hand to theirs. Trying to explain to them that you only have one pen, and you need it, will get you nowhere because they don’t know what you mean. They also ask for empty water bottles – the disposable kind that we throw away every day. In rural villages they’re useful, so much so that they can have a noticeable impact on a family’s standard of living. (Remember they often have to make daily treks to fill up a 5 gallon container with fresh water from a source that may be miles from home).

The reason they ask for pens, paper, and bibles, as was explained to us by teachers at a school in Buqarama, is because they don’t have anything to write with, write on, or read. In school the teachers will fill a chalkboard with information, then wait patiently as the kids stare intently at the board and try to memorize what’s there, then they have to erase it and write the next lesson and the cycle starts again. Having a pen, a simple 10 cent pen, can dramatically change a child’s ability to learn, and so it’s worth all their time practicing “can I have pen?” just in case a visitor might one day give them one. Everywhere we went, whether we were talking to kids or parents or local officials, one thing was clear – the “reward” everyone was most interested in was a better education for the children.

Lesson learned: Investing in your own skills, whether it’s learning a few english words or getting through a difficult education, is the best reward for any entrepreneur.

Finally one thing that really stood out to me about my time in Africa was how much government matters in issues of entrepreneurship. Don’t get me wrong – even in the most inefficient & corrupt countries entrepreneurship can flourish (in fact you could argue that the Somali pirate situation is an example of unchecked entrepreneurship gone bad), but governments have the power to create an environment where entrepreneurship can grow and thrive, and as a result lift the entire economy. I call this macro-entrepreneurship.

Consider Kenya. Long considered one of the more stable African countries (despite last year’s violence), Kenya has advantages that help local businesspeople be more successful. First and foremost, because the government is (relatively) stable, there are some fundamental things that those of us in the “west” may take for granted. Authority, for example, so that crime is limited. A stable and connected banking system, so businesspeople can get loans, deposit money, send and receive money overseas, and even accept credit cards (a rarity among African economies). A fair justice system, so a business’s assets and rights are protected. And a democratic government (though some would argue that point), which means continued improvement because the voters demand it.

More specifically, Kenya’s leadership has recognized that Kenya has some unique assets that could help it’s businesses compete globally. It’s a former British colony, so most people speak english, and the education system is above average (for Africa). This means that outsourcing companies, similar to those that have been such a huge boost to countries like India, Indonesia, and the Phillipines in recent years, could easily setup shop in Kenya and take advantage of very low labor rates. The big weakness there for land-locked Kenya is their internet connectivity: right now everything is via satellite, which makes it very slow, and very expensive. Since 2005 however the Kenyan telecom industry has embarked on multiple projects to bring fiber-optic connectivity to the country, from the middle east (UAE) and from South Africa. When the first links begin operation this summer, the speed of Kenyan internet connections will dramatically go up, and the cost of internet connections will drop. It’s a win-win for any Kenyan with a Facebook addiction, but especially for businesses who will now have a level playing field with other BPO (Business Process Outsourcing) countries. This is expected to stimulate a lot of economic activity in the country, even during the current global recession. (See http://www.washingtonpost.com/wp-dyn/content/article/2009/04/16/AR2009041600941.html and similar articles).

Rwanda’s government is making similar efforts. Recognizing that their country lacks oil or minerals that might be a traditional way to improve their economy, the Rwandan government has decided their best hope for an improved lifestyle will come from positioning their country as the Communications and Technology hub for eastern Africa. Already Rwanda boasts a nationwide 3G cell phone network (very handy for me), which is not uncommon in developing countries – it’s cheaper and easier to build a network of 3G cell towers than to run old-fashioned copper phone lines to each and every village. Rwandan universities are turning out computer science and electrical engineering majors to help build and support tomorrow’s networks, and just in the last few months Rwanda has changed their national language from French to English. This was partly a political move (tension has been high between Rwanda and it’s former colonial powers, France and Belgium, since the 1994 genocide), but also an economic one as Rwanda realizes that English is becoming the world’s business language.

On the other hand you have countries like the Democratic Republic of the Congo. Poor despite possessing great natural wealth in it’s mineral deposits, corrupt at all levels of the government, and with an infrastructure wracked by years of war (5.4 million people have died in DRC since 2002), Congo is not exactly a haven for entrepreneurs (particularly in the east). But even here there are signs of change. Seeing the success of Rwanda to the east, and Kenya to the north, and realizing perhaps that they’re missing out on a better way of living, Congo has seen many signs of improvement lately, especially in terms of government, authority, and justice. Whether it will be enough, and whether the government will have the will to continue along this path is still up in the air, but the people I know there are hopeful that things will continue to get better.

So what does all this teach us as entrepreneurs in the west?

1) In concept, entrepreneurship is easy. Find something you can do that people are willing to trade value for, and do it.

2) In practice, entrepreneurship is hard. Competition, funding, suppliers, and customer loyalty are universal concerns for any entrepreneur.

3) Government can’t make entrepreneurs successful, but it can help create an environment that fosters innovation and growth. To do this requires authority, justice, banking, and infrastructure.

One last consideration: even in the current global recession, African countries are seeing economic growth far above any so-called “developed” countries. Even with a recently reduced forecast, the IMF expects annual growth in Rwanda, Kenya, and the DR Congo of between 4% and 10%. That compares with negative growth in the US and most European countries (i.e. recession). For true entrepreneurs, now is a GREAT time to bet on Africa. (See http://www.ratio-magazine.com/20081113290/News-Analysis/Rwanda-News-Analysis-IMF-Projects-Slowdown-in-GDP-Growth-to-6.html)

2 comments:

GENICA said...
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Scott Robinett said...

interesting perception of entrepreneurship at a fundamental level. Very useful. thanks