Jun 6, 2016

Pioneer’s Premium

The mission of Katarsis Ventures, is to demonstrate to others, that it is possible to nurture innovation, enable enterprise and stimulate investment pipelines in hard places.

In the first piece, we defined a hard place.  You can read the piece here

We believe that talent finds a way.  This piece is about reconsidering and discovering some of the costs incurred by talented people resisting and working against the hardness of the place they are in.  We propose to call these Pioneer’s Premium.

Moral hazard – when the equilibrium of risk is out of balance

When we started out as a company we suffered “moral hazard”.  Our commitment and thirst to collaborate meant that we took on a disproportionate amount of the risk; and we paid the price.  Risk is a fundamental part of entrepreneurship.  It’s like air.  We have ears, but without air, we can’t listen.  Air is both a vehicle carrying what is actually going and an amplifier for what might be going on or about to happen.  We can’t listen in a vacuum, we can’t do enterprise without risk.

Entrepreneurs need risk because it helps them listen.  In hard places there is a lot of noise.  The air is thick.  Entrepreneurs in hard places, need to overcome this noise – they work with more risk.  Our moral hazard was one of the the costs we faced in going first, and as pioneers we enjoyed the learning.

Removing uncertainty to manage risk – clearing the air

We invest high level resources at the critical early stage to bring enterprises as close to their markets as possible, while working with them to match and raise further finance to deliver scale in those markets. As a member of the team, we stay with the enterprise through its growth and the change involved.  Their growth is linked directly to how we scale and evolve from the education and advisory firm we started towards delivering our mission.

Through this approach we are look for opportunities to navigate or remove complexity, anchor things, prove concepts with evidence, prove models with real feedback from repeat customers.  We do this to reduce uncertainty.  Uncertainty brings doubt into any risk-sharing deal and it is pervasive.  Doubt and uncertainty kills cultures and so with it the efficacy of conversations, relationships and transactions.  The vital networks collapse as a result.

Understanding the Pioneer’s Premiums of entrepreneurs, working in hard places, is critical to understanding how to support them and work with them.  Acting on this insight and empathy should be evident in the design of programming e.g. approaches taken to achieve investment readiness, the framework for exiting deals etc.  Ignorance of them and relying almost exclusively on the experience of doing business in a softer place, will create the conditions for more moral hazard.  This is a tax rather than incentive of the promise of entrepreneurship to catalyse change in hard places.  Hard places are hot and polluted yes.  But – we have to go further than wearing shades and a face mask.  We need to be able to breath the same air and endure the same light as the people with whom we are doing business.

The pioneers versus the prospectors

As Charles Handy put it in The Empty Raincoat:

“We cannot wait for great visions from great people, for they are in short supply at the end of history. It is up to us to light our own small fires in the darkness.”

In my 20s, I confused being inspired by being impressed.  I put visionaries on a pedestal.  Through my relationships with entrepreneurs I rediscovered inspiration, through their agency to envision things.  They make change.

It is true that some entrepreneurs want the buzz, the recognition, the plaudits, the clear and unambiguous exit, as proof of something and the just rewards.  They are prospectors, and that’s okay, no criticism, let’s just recognise it.  Entrepreneurs in hard places are pioneers.  They are interested in being first, where it is uncertain, and staying there at the cutting edge. Way back in 1999, the New Economics Foundation described Pioneers thus,

The pioneer’s fundamental needs are to stay on the move, enjoying the inner and outer journey. They continuously explore the new in the search for learning, enlightenment and personal development. The journey involves many choices, made on the basis of their awareness and their sense of purpose and responsibility. Learners seek out teachers: both combine to support and affect each other.

Those that seek to support entrepreneurs in hard places, can be prospectors or pioneers.  If they are pioneers, then they can build relationships with kindred spirits.  As pioneers in their own right, they will encounter and need to cover the costs of being first and remaining at the cutting edge – their own Pioneer’s Premium.  Prospectors, more interested in the buzz and “glamour” of entrepreneurship in a hard place, are different.  They are less likely to be interested in the Pioneer’s Premium – expecting others to pick up those costs, while they pick up only their awards.

The premiums

In his comment on the first piece, Samer Azar said,

One of the major challenges of working in “Hard places” is the layers of competing priorities of interventions one may identify. The people who stick through the grind end up developing truly multidisciplinary capabilities and ultimately become the change that their communities desperately need.

When I am criticised for writing a piece too long, I will agree, because in less than 50 words he has summed it up.

When the system of “support” that serves hard places is inadvertently or intentionally dominated by prospectors, this is a noise maker.  Samer is right, some people will stick with it and develop truly multi-disciplinary capabilities and be of great value to their communities.  They make this choice, and they meet this cost – on top of doing the things we expect of entrepreneurs in softer places and they do so because they are pioneers.  The cost of doing this is a Pioneer’s Premium.

In starting as an advisory firm, we obviously spend a lot of time, offering advice.  That is not always taken.  More interesting, their are reasons why even the best advice cannot always be taken.  Let’s consider just three well-publicised snippets of really good advice blogs pitch to entrepreneurs,

  • Fail fast, fail cheap, fail well.
  • You’re the average of the five people with whom you associate most.
  • Simplicity is really important.

Very few hard places, have governments creating the conditions for innovation, enterprise and investment. Having to create these conditions around your own enterprise is a pioneer’s premium. Failure, among other things therefore, is not efficient in hard places.

Being a pioneer in a hard place can be an isolated experience.  Whereas one might expect the entrepreneur to spend most of the time with co-founders, advisers, investors and customers, the days may actually be about dealing with the corruption, the bureaucracy, and wider inefficiencies and competing priorities of these and others.  The conditions in hard places push entrepreneurs down – this less than nurturing environment is a pioneer’s premium.

Unfair competitive behaviours, as negative as becoming a threat to life.  Corruption, that destroys morale and weighs on even the leanest model.  Gaps in the eco-system, you either have to patch up, or do without.  Getting caught in the traps created by incomplete development stories and inefficient aid programming.  Being too micro for macro funds, or having too macro an ambition for the micro funds available.  A lack of role models, and those that might be, protective and stood in your way to prevent your emergence.   Waiting in queues at checkpoints.  Taking the long-route for your own safety, or because that is yourroute.

These are not excuses, they are why hard places are not simple.  They are part of the wider competing priorities and MUST DOs of being a pioneer in a hard place.  They can be small and have a cumulative effect or large and instant.  They can be direct or indirect, impacting at the personal and enterprise level.

Splitting the cost of paying these premiums?

We propose that these costs be understood as Pioneer’s Premiums, and that they should be taken into consideration in the design of programming, due diligence, strategy and business development etc.  Not least because when we don’t do this, we add further layers of competing priorities and noise to the system.

If we wish to one day settle in this promised land, let us not just be prospectors.  We must frame our support for the potential of entrepreneurship in hard places, as pioneers.  As pioneers on all, we can enter into more balanced risk-sharing relationships.  Let’s not rely on our strong, inherited, card hands.  We should reshuffle the deck of cards.  We should deal again.  We should call for new dice.  Empathising in this way with pioneers in hard places, will lead us towards a new equilibrium.  Continuing to leave that equilibrium out of kilter is a form of neo-Colonialism.  Emotive concept that.  No need to feel guilty though, just don’t be complicit.

Pioneering practice

Best practice from elsewhere is less valuable than pioneering practice where it needs to make a breakthrough.  A good example is the partnership approach of DFID, spearheaded by the Development Capital Policy.  This takes risk by sacrificing some return overall (but not as much as a grant).  The aim is to build bridges for more risk averse private capital to cross in due course and cover both the costs of failure and pioneers premium as new markets and entrepreneurs emerge.  It is a way of market shaping, that is conscious of the pioneer’s premiums.  It’s not soft capital, its capital tailored for hard places.  Another would be USAID’s $2bn loan guarantee scheme, aimed at the diaspora from hard places.  Communities of people, that as investors have a much more acute insight.  They are not fools either, this scheme is doing very well, it makes a profit even though it was prepared to lose everything.  However on their own these policies will not breakthrough through – so pioneering grant makers and investors should be crowding-in.

We will get the results we deserve

Pioneer’s premiums are a fact of life in a hard place, they are not pure waste, but ignorance of them is wasteful.  They are part of the hardness that casts the diamonds.  These are the ones Handy wrote about, leaders creative and resilient enough to light their own fires in the darkness, rather than wait and follow others.  The removal of uncertainty and complexity on the entrepreneur’s side (conscious of the Pioneer’s Premiums) should be matched with removing uncertainty and complexity on the support side (conscious of the Pioneer’s Premiums).

Recognising the impact of pioneer’s premiums, and continuing to design systems that can truly nurture innovation, enable enterprise and stimulate investment, is a good basis for the emergence of fair-profit business models in hard places.  These are leaders and models worth unleashing.  They are pioneers, change makers with the multi-dimensional skills their communities need, amplified through their enterprises into systemic solutions to solve  complex problems in hard places.  They will be sustained in markets where others fear to tred or only go to prospect for quick wins and spoils.  They are one of the components to exiting from aid dependency.  They can deliver financial profits, leading to domino effects as those enterprises scale up.  That scale is the real route to wider impact, to social profits.