Sarah Ho discusses the current ideology around start-up funding, and argues that a rethink could be invaluable
From Fintech to Govtech, from transforming economies to engineering organs, high-momentum start-ups have the potential to solve the world’s biggest problems. Let’s call these problems ‘wicked problems’, problems like poverty and climate change, which have layered social complexities and resist quick solutions. And though we need to see more entrepreneurial thought put into these ‘wicked problems’, metrics of success, as detailed by traditional venture capital terms, only applaud start-ups that demonstrate short-term profitability, a feat that solving ‘wicked problems’ struggles to achieve.
In an article published on the blog Medium, industry analyst Seyi Fabode criticises the current methodology which has been implemented almost universally throughout the start-up world, writing “founders are starting businesses every day but the system is now set up for them to only focus on solving problems that can be validated by focusing on the lowest Points of leverage”. In particular, this ideology manifests itself in what is known as the ‘Lean Startup’.
The Lean Startup approach preaches the targeting of low impact leverage points, through A/B methods of testing and frequent pivots, to get quick results and churn out the numbers for VC validation. In fact, pivoting has become such a ubiquitous part of the start-up journey that it’s almost a rite of passage. Unfortunately for humanity, solving ‘wicked problems’ involves intervening at high points of leverage, like redefining goals, or evaluating self-organization and culture. Essentially, by encouraging start-ups to pivot in circles from one hypothesis to another, the Lean Startup method propagates a culture that defines success as short-term positive economic value, and funds start-ups with ordinary solutions to ordinarily tame, soluble problems.
Case in point – you want to solve water scarcity, a perfect example of a ‘wicked problem’. To validate your new clean water tech addressing this problem, testing it in sub-Saharan Africa might take several years, and funds aren’t going to stick around and wait for the results. Furthermore, your disruptive entry into Africa is unlikely to be a trial and error situation but rather a one-shot attempt. Carrying such high risks without the promise of short-term profitability, in VC terms, is not considered viable. Hence, your project will not get the spotlight.
Only, this is not completely true.
Two entrepreneurs from Kenya, Brian Bosire and Victor Shikoli, founded HydroIQ to digitise water accessibility and distribution in Africa. They built a smart metering device to turn the traditional water system into a smart water grid, and was named Start-up of the Year Africa 2018, taking home €10,000 in cash and a €10,000 visibility pack. So how did they do it?
With start-up growth up 61% since 2014, investment programs are emerging left and right that do not necessarily share venture capital’s selfish metrics of success. The African Start-Up of the Year Award, for example, is an international innovative competition with a judging system that considers public votes, thus honouring start-up solutions with public value, giving power back to ‘wicked solutions’.
Awards and competitions like this are abundant. Many global companies, like McKinsey and Barclays, organize hackathons and business plan competitions for early-stage start-ups, and competitions like TechCrunch Disrupt and DEMO offer cash prizes, international recognition and access to key industry investors. Though many of these programs do pick start-ups that align with their strategic interests, their investors see more than just dollar signs, observing value in creative ideas and social impact.
Despite all this, Fabode is right to say that the funding culture teaches us to play it safe. In reality, all investors, whether they are VCs, competitions, incubators, accelerators, angels, or anyone else, go to where the money is. But if you find a solution that makes all of your stakeholders happy, then whether or not your problem is wicked or ordinary, and whether or not you take the Lean Startup as gospel, no longer matters. HydroIQ’s technology managed this. According to the WHO, for every $1 invested in water and sanitation in Africa, there is an economic return between $3 and $34. Thus, not only did their innovation address a basic human right and reduce upfront costs for consumers, the numbers looked pretty good too.
For positive change to happen, a combination of innovation and investment is required. What the world would benefit from is less focus on quarterly results, and new ways of measuring success. The students of today are the kindest generation, with the biggest desire to create social impact. Let’s pray ruthless monetisation does not change that.