Working with better guesses: Sizing up startups targeting emerging markets.

Developing new business in emerging economies, especially rural ones, is hard. An entrepreneur has to create products and services that are able to withstand the vagaries of the emerging market context: no electricity, no spare parts, hardly any logistics infrastructure, customers with very tight budgets, and with an over responsive sensor for glitchy value propositions, etc.

Just like for the entrepreneur, investors also have a hard time figuring out how to get a foothold and support successful emerging market business. When can a business be considered successful in these overly tough market conditions that make business development so risky and hard? On what basis can they judge that a business has made meaningful progress?

This question came to me when I encountered a new entrant to the Unreasonable Institute called Juabar. JuaBar is a social enterprise startup building a pushcart mobile phone charging station in Tanzania. They intend to implement a franchising system to entrepreneurs who want to develop a business out of charging peoples’ phones. In this article I will take this case of solar powered push cart solutions to illustrate the investment decision problem, and what I suggest is needed to overcome it.

The tale of 2 similar emerging market startups
JuaBar is not the only startup working on this specific idea. There is another startup called ARED, which is developing the same concept, but then in Rwanda. Both startups have been at it for several years, with Juabar starting about 6 months earlier. Essentially ARED and Juabar are building exactly the same business, if you look at the pictures below, they look more or less the same.

The Juabar solar charger
The ARED solar charger

Given that these businesses are so similar, how would an investor choose which startup to put their money in if they were given the choice to invest in either? What would they need consider?

Lets put ourselves in the shoes of the investor, and break things down a bit. These businesses are both riding the same promising market trends:

  • Mobile phones are spreading everywhere in Africa, and they need to be charged
  • The grid is only beginning to spread, and has yet to reach rural areas, let alone provide a reliable supply. There is a huge opportunity for solar powered products
  • Entrepreneurs in this market space operate on low and irregular income streams. They can use the pushcart to create multiple revenue generating opportunities like selling accessories, prepaid cards, and other services, which is crucial for keeping your livelihood afloat.

Despite the similarities, there are some marked differences in their business design. ARED is aggressively promoting some additional features to charging, that could arguably give it an advantage over Juabar. Here’s a couple of the key features and their related assumptions:

  1. ARED is more mobile: it can be mounted on a bike. Assumption: It’s likely to be beneficial to the entrepreneurs because she can cover large market areas.
  2. ARED has developed a technology for faster charging. Assumption: Both franchisee and their customers benefit from that, and think it is really important.
  3. ARED is explicitly promoting the advertisement option as a way for additional revenue generation. Assumption: this advertising creates conversion for advertisers, and enables the franchisee to directly earn extra cash.

The first 2 features make sense. You can intuitively see them add value. Yet at the same time they are features, which can be copied quite easily. They won’t protect ARED’s advantage for long.

But what about the third one? Growing the franchise could create a defensible moat for generating advertising revenue that competitors can’t readily copy. It seems like a really powerful feature, already glancing at the next stretch in developing the business after it would have successfully expanded from its current investment round.

Successfully growing ARED could mean that a new, highly granular advertising channel with ubiquitous emerging market penetration will be created if ARED succeeds in achieving growth. Imagine an ARED cart on every meaningful market place in East Africa! This coverage would be the key resource that keeps the competition at a distance; something any investor drools over.

But despite the attractiveness of this advertising channel opportunity, the make or break question here is whether the basic premise of advertising works: does it create conversion for advertisers with ARED’s low, and uncertain income target market? Is it an opportunity worth investing in to achieve that scale? What can we put to the table now to somehow back the validity of this assumption?

Looking for elementary market insights from elsewhere.
To back the opportunity of the advertising claim we need to look elsewhere, and move to Monrovia, Liberia, where we will find Alfred Sirleaf. Alfred is a famous figure on the market, because he mans a blackboard newsstand. Alfred scans the newspapers each day for interesting stories, and writes them up on the blackboard for people who can’t afford newspapers. He developed this during the Liberian civil war, when news was scarce. But currently in peacetime, it is still very much in operation.

Alfred Sirleaf; fellow blogger in Liberia

The interesting thing about Alfred’s business for our pushcart solar phonecharger case, is that Alfred offers advertising space with his blackboard. Apparently there are advertisers that get some kind of conversion from advertising to people who can’t afford a newspaper! Why would they otherwise pay for using that space?

Back to our discussion on ARED, you can see the similarity in advertising opportunity with Alfred’s newsstand. Both attract attention on busy marketplaces. Though this is still an open hypothesis about conversion, it could imply that there is a real case for the ARED advertising solution, and that it is investment worth pursuing.

Closing thoughts
From the arguments it is becoming clear that ARED is playing a stronger game than Juabar. It might be that Juabar is banking on its focus on rural areas, given that ARED is currently predominantly active in urban areas. If ARED is able to grow fast however, and expand beyond urban limits, then it will have created these advertising channels, whose ubiquity would make it a winning, maybe even invincible, business model.

But the point of my article is not about qualifying one idea over another. Juabar and ARED serve as a case about making better guesses on developing a business, sourcing insights on which to base those guesses, and showing what these insights could do to make better business decisions by entrepreneurs and investors alike.

We need to move beyond emerging market startup ecosystems that have to scramble for those valuable business model insights each on their own. It takes such a tremendous amount of resources to understand and validate these insights. You would spend equal, if not even more time understanding the marketing basics in your context, rather than actually building your business. This is a big constraint on business development, and it undervalues the potential of startups.

The good news is though that the market insights required to develop successful business at scale in emerging markets are already out there. They’re with shopkeepers, merchants, existing service providers, etc, currently running their businesses (remember our case of the Agrovet in Karatina). What if we had the chance to reach out to Alfred and discuss advertising conversion, and learn from him on what works and what doesn’t?

Such insights should be collected, categorized, and made available publically to any entrepreneur and accelerator program that supports startup entrepreneurs in emerging markets. In no way will this substitute for the groundwork that an entrepreneur needs to make to understand their customer. But based on such insights, entrepreneurs can make better bets, and everybody would get a more informed shot at developing metrics that are key to understanding business performance in emerging market contexts. It won’t make a bad business good, but it could make a good business better.

Now that you made it this far in the article, I would like to hear from you as a reader, what you think about a repository where validated emerging market insights (like on marketing, distribution, trust, and methods of market size estimation) are shared open source, and free for anyone to use. Would you think that it would be worth the investment to set up such a repository? Are you familiar with the lack of these insights? Would it support business development? Are the examples I have provided on this blog already triggering your next business hypothesis to test? Please do share your thoughts, and I hope to be talking with you soon!

[post publication edit: I have been in touch over email with the founder of ARED: Henri Nyakarundi. Henri emphasised that ARED’s strategy is to develop many more functional, income generating opportunities with their hardware for their franchisees. Currently they are exploring opportunities to build in WiFi connectivity into their cart, providing the growing population with smartphones access to the internet. The idea would be to have the franchisee function much like the Grameen Foundation’s Community Knowledge Worker, a human interface to guide people around the internet. This is a very important gateway for connecting people who are as of yet unfamiliar with what the internet is, and what it can do for them.

Last but not least, this point: Henri has been very actively, but unsuccessfully seeking investment to further expand his business, despite his obviously entrepreneurial talent, and despite ARED having several contracts and demonstrated revenue generating capabilities on the ground. Investors are apparently having a hard time sizing up his business! I you see any possibilities to help here, then do get in touch with Henri!]

Showing true colors in partnerships

Partnerships are an odd part of the business model. It’s often very difficult to understand them, or even figure out if you’re really looking at a partnership in the first place. Recently I encountered such a weird case, when I read a headline about booze multinational Diageo, partnering with a scrappy hipster startup called Bespoke Post. Lets find out more about this partnership in this blog post by applying the newly designed Partnership Canvas; an add-on tool to the Business Model Canvas

The two partnering companies
Diageo is a global player in marketing alcoholic beverages. It holds big brands like Guinness, Johnnie Walker, and Smirnoff. The company had sales of € 15 billion in 2013, with a strong growing emerging market presence.

Bespoke Post is a online subscription-based product box startup. The startup has a highly targeted approach for selling gift boxes filled with artisanal, high-grade products, both food and non-food, to young US career makers with cash to burn, aged between mid 20’s to mid 30’s, and mostly male. This startup landed a seed round of US$ 850k early 2013, and is probably still figuring out how to generate revenue.

The big question is: what on earth are the elephant and the mouse trying for on the dance floor?!

On the face of it, it seems that Bespoke Post pitched the right concept to Diageo. Bespoke created a product box called Alchemy. It contains the essential wares in any mixologist’s den, as they put it. The pitch would be that Bespoke Post offers a joint marketing initiative, where they provide the hardware for mixing, shakers, and bar spoons and all, and Diageo would supply the required liquors to enable the mixing. The accompanying video with Diageo’s “head mixologist” applying herself to the toolkit would seem to give that impression. (Here’s how to make a Manhattan) Sketched out in a partnership canvas, the partnership would look something like this

Bespoke Post - Diageo partnership at first glance
Bespoke Post – Diageo partnership at first glance

But something odd is going on. With this given partnership foundation (the bottom 3 building blocks), it’s impossible to come up with a logic what new value this combination would be able to create. Couldn’t Bespoke Post just purchase the liquor, put one of their own staff in the video, and sell the box themselves, or vice versa? Is this actually a partnership?

Prompted by this caveat in the partnership logic I looked a bit closer at the Alchemy box. If you look at the box content, you’ll find that there is actually no liquor in the box. It’s just the hardware that gets sold with the Alchemy box, accompanied by some mix recipes, which promote the well-known branded alcoholic beverages. So what’s this all about? There must be some other value that gets exchanged to make this a partnership.

Legal print
The answer comes from elsewhere. Digging into some articles on the legal constraints imposed on marketing alcoholic beverages, I found this Wall Street Journal blog article, which explains new legislation for advertising, and marketing alcoholic beverages on social networks. Apparently alcoholic beverage advertisers have to meet a requirement that at least 71.6% of the social media advertising audience is old enough to legally drink alcohol. That’s quite a tricky limit to take heed of. A company could find itself easily crossing that limit, be it intentionally or not.

So my hunch is that this is where Bespoke comes in as a solution. Bespoke Post is a highly targeted initiative that addresses a key demographic of Diageo customers. Bespoke might be Diageo’s marketing experiment to avoid the risk of having the wrong audience engage with its social media advertising. This partnership could well be an experiment to see if an initiative like Bespoke could actually be a social media advertising tool for Diageo. Having this logic sketched out in a partnership canvas, you would get something like this, which makes a whole lot more sense partnership-wise:

Bespoke Post - Diageo partnership upon closer inspection
Bespoke Post – Diageo partnership upon closer inspection

Key take-aways
Apparently the experiment didn’t work out that well, as the Alchemy box is not offered anymore by Bespoke Post. But the example is interesting to show the potential of using partnerships for business model experimentation. This specific case highlights the following learning points about partnerships:

  • A partnership is not about the transaction between 2 businesses. It’s about a non-monetary value exchange that takes place between partners.
  • When figuring out a partnership, try to formulate the logic of the foundation of the partnership (the 3 bottom building blocks of the partnership canvas) first…
  • … but don’t leave your thinking at the foundation. Also think about the value that needs to be created based on this foundation. A partnership needs to create some new form of value as a result of connecting the existing values that partners contribute.
  • By connecting all 4 building blocks of a partnership in a single logic, you will make surprising discoveries on what the true color of a partnership is.
  • If you’re interested to explore partnerships for business model innovation, you can read the primer on the partnership canvas and download it.