In 1939, two Stanford graduates named Bill Hewlett and Dave Packard built an audio oscillator in their Palo Alto garage. They sold eight of these electronic sound testers to Walt Disney Studios for $5,000. With the money they started Hewlett-Packard, a.ka. HP. They also gave birth to Silicon Valley.
Two guys in a garage tinkering away, taking risks, working ungodly hours -- it’s an image that has become symbolic of startups everywhere. Unfortunately, it’s also changed the way people think of startups -- overshadowing small business efforts made by nonprofits, existing companies and governments. Today, most people wouldn’t consider a small business in a developing country to be a startup.
The definition should be much broader. Startups are human institutions designed to deliver new products and services under conditions of extreme uncertainty. They do one of three things: employ new technologies, repurpose technology in an innovative way, or open a new market. All are inherently risky -- and successful ventures are the exception not the rule.
Money, money, money
If you want to open a restaurant, the process is relatively straightforward. You develop a concept, then a business plan. You go to a bank and ask for a loan. You can supplement a loan with established private financing: angel investors or restaurant associations. You won’t always get your money, but people know what you mean when you pitch opening a restaurant.
Once you open your restaurant, people will know what to expect. Even if you only serve cupcakes, French fries and cocktails, customers may not understand your concept, but they know what cupcakes, French fries and cocktails are. More importantly, they know why they want them. (On a side note, this is a real restaurant that just opened near my house -- gotta love San Francisco!)
For a startup, getting financing can be nearly impossible. Banks often don’t fund startups because their business plans aren’t as established and market data can be sparse. Instead, they have to depend on networks of small, or angel, investors. But those willing to invest are likely only individuals who have themselves grown a successful start up.
Seed funds are another option, but aren’t widely available. Venture capital (VC) is the most appealing type of funding. But these investments usually are in the millions rather than thousands, and for most represent an aspirational second stage of financing. In the end, friends and family usually remain the only option.
Okay, so you got some money...
Now comes the hard part. Startups, particularly those working with new technology, undergo an extended period of incubation during which a product is created and piloted. Kinks are worked out and you begin to form a following among like-minded, tech-savvy consumers. This whole time, you’re not actively making any money.
What now? How do you get your products to a larger market, experience explosive growth, sell to Google and make millions? For most, the short answer is you don’t. The incubation period is like the island on Lost, nobody knows why, but it ends with you never leaving. Fantastically innovative companies and genius engineers have stalled here, many with the potential to do real social good.
At Kiva, our work is grounded in the belief that sustainable, socially-driven business models are the most effective vehicles for creating long-lasting change. Our Strategic Initiatives team, of which I am a part, looks to partner with organizations that create social good by serving more and more marginalized groups, not only with finance but with the products they need.
With this goal in mind, we are pursuing more partnerships with startups and early stage organizations that require financing to help them emerge from incubation and jumpstart genuine growth. These startups are riskier, and we do our best to disclose these risks in our Field Partner profiles and through blog posts. We also monitor these partners to ensure that growth drives further expansion.
So far, the greatest need we’ve seen for this type of gap financing has been in the clean energy and mobile transaction services sectors. A number of our newer partners have established products, but are exploring new, hard to reach markets. They sell solar lights to households without electricity, facilitate money transfers to families across countries and use apps to give farmers up to date prices for their crops. All require technology transfer and extensive marketing to create demand.
Our lenders allow Kiva to offer flexible capital to companies so they can offer more products to more people, more quickly. And speed is important. An estimated 1.6 million people die every year from indoor smoke inhalation. That is one every 20 seconds. Solar lighting, biodigesters and clean cookstoves can help mitigate these effects -- if only we can get them to the right people in a way they can afford.
Partners like Sistema Biobolsa and Zoona are innovative startups with an appetite for risk and a mission to serve the underserved. Kiva loans offer a unique way for these companies to grow quickly and expand their good work. We’ll know we’ve succeeded when other funders come into the mix, supporting their innovative ventures and helping them reach their target markets.
At the point where Kiva capital is no longer transformative, we’ll turn our attention to other startups in need of capital at the same critical point in their development. This point is not always obvious, but we’re working hard to ensure that our limited funds are going to the worthiest, cash-strapped social enterprises out there. We invest because, in truth, some companies are just too important to be stuck in a garage.
This is part of a larger series on Kiva’s strategic initiatives and innovative loan products, which are designed to expand opportunities for more borrowers. Kiva is excited to partner with companies and organizations innovating to support communities access life-changing products.
Top photo courtesy of D.light Design.