Tag Archives: Business

Some assembly required; synthetic business development, Part II

Deidre Lal Schmidt, Executive Director, Affordable Housing Institute (AHI)

In my last post, I described a distinction between growing a business organically and creating one synthetically and why in the context of affordable housing the synthetic approach is more and more prevalent.  Of course, building a business, and even a project or program, with the participation of multiple partners is inherently more complicated than taking unilateral action.  The following keys to success are based on my work in this field.

Coordinating the group effort; keys to success in synthetic business creation:

Catalyst – Most of us have plenty on our to-do list.  It often takes a trigger event, either positive or negative, to compel us to build something innovative with new partners.  Catalysts may include a funding event or the failure of an existing business.  However, catalytic ideas can also be created by visionary organizations or individuals.

Minding the Gap – All the parties involved in the creation of a new program or business need to agree on the existence of a gap; a space in the market that they are not able, or willing to fill by themselves.  The gap must be important to each of them, even if for very different reasons.  Note that if a gap exists that is more logically filled by an organic expansion of one existing entity’s activities, then it should be.

The existence of a catalyst and the recognition of the gap can be articulated together in an opportunity statement or other language that helps clarify early on why the synthetic venture is worth exploring.

Convener / Driver – Cooperative spirit is required for synthetic businesses.  However, without a single person or entity responsible for waking each day with progress on their agenda, all the best intentions will likely lead nowhere.   The convener or driver must be trusted, respected and persuasive – but also mindful of the group process.  Partners might be tempted to abdicate their responsibility to the driver / convener, but that can be as problematic as not having a responsible entity to keep things moving.   The convener / driver is  important during the vision and negotiation phase.  Eventually, this interim role will be replaced by a CEO or other leader of the newly created business venture.

Distinct Assets and Mutual Benefits – The partners need to understand the unique assets that they each bring to the effort.  These may include financial resources, market knowledge, political connections, reputation or “touch” within communities, etc.  They also need to value the complementarity of their partners’ assets.

A helpful exercise is to identify each partners’ strengths and the benefit that the business gains from their participation.  Creating a matrix can be a helpful tool in making this inventory.  It can also be helpful when advocating within individual organizations for participation in the new synthetic business, as it demonstrates to those not directly involved the advantages of working with complementary partners.

Visionaries and Worker Bees – It is critical to make sure that you have the right people participating as you envision, negotiate and launch a synthetic business.  One common mistake is to have only a visionary leader involved; thus leaving your venture vulnerable to undermining or sabotage by the people who have to actually make it work on a daily basis.  Likewise, if you only have buy-in by those who are your implementation partners, you (and they) might be caught without the resources that you need to proceed.  One potential approach is to create a dialogue and work groups at both the “executive” and “technical levels”.  This was you can work top-down and bottom-up simultaneously.

Consensus and Commitment Checks – While constructing a vision for the new program or business there may be a honeymoon phase.  People want to believe that they mean the same things, and that they want the same things, as their partners.  Group meetings can be dominated by a few outspoken people and the desire to be polite may mask substantive differences of opinion.  But particularly when joining forces across sectors, such assumptions can be dangerous.

For all these reasons, the group should develop a discipline of periodically articulating the goals set forth, definitions shared and decisions taken.  Likewise, each entity involved should be asked to affirm their organizational commitment to proceed based on the current consensus points.  Ideally these are affirmative actions in writing, by the people within the organizations who have authority.

These steps may seem cumbersome in the moment, but will reduce the chances of proceeding under the illusion of buy-in, only to find that when launch time arrives, you don’t have all of your partners at the table.

Start-up Cost and Long-Term Risk Sharing – It is difficult to create equity and commitment in a new partnership if one entity is solely responsible for the financial burden of exploring the new opportunity.  Note that I used the word equity not equality.  While it might be ideal to have all actors share equally in the costs of starting up a new enterprise or program, it is more important to have all partners make some contribution that is significant for them.  That might mean that contributions are sized according to the partners’ resources, anticipated role in the new venture and likely gain (financial or otherwise) from the synthetic business.

Likewise, equitably apportioning the long-term risk that the new venture will face is important.  The parties should come together to create a strategy for risk sharing that aligns the interests of the individual players with that of the new enterprise.  Setting the right incentives for performance is crucial to ensuring that each partner pays attention and plays the role that they’ve agreed to play.  Work out your processes first, then negotiate the compensation / risk sharing mechanisms in writing in layperson’s language.  Only once you’ve agreed to those should you call in the attorneys.

Some assembly required; synthetic business development, Part I

Deidre Lal Schmidt, Executive Director, Affordable Housing Institute (AHI)

AHI is in the business of seeding and supporting housing-related, mission-oriented entities, mostly in the global south.  Through this and previous work, I have learned some of the differences between growing a business organically and building one synthetically.

Organic business development occurs when one entity naturally expands its market (geographic, income segment, etc.) or its product offering (new products within existing business line or entirely new business lines).   This sort of development resembles evolution.  It is a seemingly natural process where logical extensions of an existing business are identified and pursued by a leader or leadership team who have authority and control over resources.

Synthetic business development occurs when an entirely new business activity is brought into being by assembling disparate human and financial resources, usually in the form of several existing entities and often times across sectors.  The old-school form of synthesis was merger and acquisition, but a new generation of synthetic business is being cooked up.  Social impact investing is driving more holistic definitions of success, requiring soft and hard, social and financial returns.  Ashoka, who is credited with coining the term “Hybrid Value Chain” (HVC) to describe the conscious collaboration of citizen’s sector and for-profit entities to serve social outcomes is supporting entrepreneurs involved in this space.  Similarly, there has been a growing interest in including the non-profit sector in strategic partnerships, driven largely by limited resources.

Affordable housing development and finance are logical sectors for hybrid value chains and synthetic business development because of the complexity of the activities, the incredible need / market demand in the lowest income groups and corresponding call for subsidy and or public / citizen sector participation.

Housing for the base of the pyramid constitutes a largely untapped market, particularly in the global south and is estimated at over $700 billion dollars[1]  However, serving these markets is not simply a matter of tweeking existing physical and financial products; making them cheaper, small or of lower quality.   It requires fresh new approaches in manufacturing, marketing, delivery and finance.  These approaches often mean synthesizing the strengths and contributions of multiples actors.  In my next post, I will share some of what, in my experience, contributes to success in these collaborative endeavors.

[1] JP Morgan Chase

Continued in Part II