The following is an interview I conducted with Markus Dietrich, the founder of the Asian Social Enterprise Incubator.  This is a complement to a two-part blog post I wrote for Next Billion, seen here.

Develop Economies: How did you decide to start the ASEI?

Markus Dietrich: I have a background in business.  I attended Cass Business School in London.  After he graduated he joined a business selling cash registers in 1994.  I worked with a family to develop a national distributorship.  In 2000, we sold it to a UK company that was working on a global scale.  I stayed on to start an office in Switzerland, and then we spun off one division that was moving from distribution to direct sales.  We were no longer targeting dealers and enterprise integrators and instead going direct to the buyers.  We went from nothing to $10 million in sales.  I found that what I liked doing was starting something.  Later they made them director of Europe and the Middle East.  After 14 years, I decided that I’d had enough and quit the job in 2007.  I didn’t really know what to do, so I started traveling in India for a while.  I came across microfinance and was intrigued by the idea of fusing business with development.  It was the first I realized that there was a business aspect to it.  I realized that I could use the knowledge I’d gained to become involved.  I was thinking about my own personal impact, and felt that what I’d been doing wasn’t really making an impact on a wealth-creation sale.

I wanted to learn more about it, so I travelled to the United States and took an intensive two-week course on microfinance at the SNHU.  I wanted to get a feeling of the industry, and I liked what I saw.  I liked the people, the way it was going, and what people were doing.  With my experience, I saw that I could have an impact.  There were still a lot of NGOs out there that were struggling with the business side of things.  So I did a master’s degree with SNHU, which had one year in the Philippines to work with CARD Bank and Hapinoy.  When I came back I signed up for the class and three weeks later I was here in the Philippines.

Being here was more of an accident than anything else.  If the class had been in Indonesia, I’d probably be there right now.  For the third term, we would do a project, and in the fourth term we’d write a thesis about it.  I approached CARD and asked if I could do my project about Hapinoy.  He agreed, and I started working on researching Hapinoy in 2008.  I continued doing this until I graduated in 2009.  The result is a 150-page thesis on achieving scale for a social enterprise.

I was then getting more involved with the base of the pyramid and moving away from the microfinance element.  Academically, it wasn’t as interested to me anymore.  BoP and social enterprise, in contrast, was still new and innovative.  There is a ton of potential and everything was green field.  That was something that I liked – I wanted to be part of building a movement.

I decided to stay in the space, and felt it was easier to do it in the Philippines because I already had the network established here.  The social network community in the country is relatively small and close-knit.   I met my partner, JP Melgazo, at Hapinoy, where he was the logistics and distribution manager.  He worked with students and found that there were very basic administrative struggles for translating ideas into business.  His idea was to offer these kind of back-office admin services for them so that they can concentrate on their project.  I had quite similar ideas, but I wanted to offer more value-add services like strategy consulting and marketing support.  We both wanted to provide this support function for social enterprises.

We founded the ASEI in 2009, offering office space, back-office services, legal support, etc.  Then we tried finding potential clients, which is where we hit a wall.  We were finding companies that were either big enough to have their own spaces, or too small to pay for our services.  In the meantime, we were doing projects with Rags 2 Riches and Hapinoy, but in terms of sales, we were not getting anywhere.  Then we decided to step back and asked ourselves what kind of people we met.  There were a lot of projects that had business potential, but lacked the entrepreneur.

Many of the people starting these programs were agronomists or technical specialists, and the classic approach was capacity-building – to turn them into businessmen.  When we talked to them, they didn’t want to be business people.  They are out in the field, they have the community relationships, and they see the potential to scale it up on the social enterprise path, but didn’t want to be a businessperson.

That was when we started the active incubation model.  The passive incubation model just offers the facilities, the space, and the back-office services.  We take a much more active role in developing the business.  In our model, we start with an originator.

DE: What is an active incubator?

MD: In the social enterprise community, I haven’t seen too many incubators like this.  Most of the incubators are still operating within the paradigm of supporting the entrepreneur.  Since, in our projects, there is no entrepreneur, per se, so we are creating a “virtual entrepreneur.” We are split the tasks of the entrepreneur into two or three tasks.  The originator does what he or she is doing and what they do best, and we take care of the rest.

Usually the project is in the pilot stage where they have proven the idea on a small scale, sometimes running the idea out of their backyard with the support of an NGO.  They don’t necessarily see the opportunity for them to scale it up.  We take that project into the incubator, and run it as a division.  If you look at a standard corporate setup within a holding company, each business activity is a division.  So the person we put in control of the company works closely with the originator to develop a business model.

For example, if you don’t have original receipts and proper invoices, it is difficult to transact with corporate clients.  If people doing have original receipts, the corporate clients cannot transact commercially.

We try to understand the business model as best we can by going into the field, interviewing the clients, and finding out what best approach is to the BoP market.

DE: How does the Active Incubation model work?

MD: The project joins us and becomes a division.  The partners come in and run this baby social enterprise, to understand the story of it and identify the business model that could turn this concept into a business enterprise.  Our theme is to develop business into viable, financially-sustainable enterprises.

For our first incubee, within three months we were able to develop a prototype business model by understanding the specific value proposition.   With Invisible Sisters, it is something we created together with the founder and the women we were working with.  When we took it over, they had forty women they were working with who were crocheting.  It was a backyard business where they were cleaning and crocheting.  Ann Wizer, the artist, was working with the women and had developed one export order and were working with quite a few bazaars.

When we came in, we spent a lot of time meeting with the women, finding out their motivations and their constraints.  We found a lot of challenges on the commercial side as well.  There was no viable retail channel.   Bazaars were a costly channel to sell the bags.  The sourcing of bags was reliant on one school, which brought in bags, but couldn’t supply the demand that we were building.  It was a good idea, but it needed a lot of business sense to scale it up to a stable ground where it could continue to grow.

We began approaching retailers.  We worked with a jewelry chain that was looking for packaging.  Another was a shoe/bag importer that had about thirty retail locations.  They saw us on a TV show and felt that it was great from a mission/vision perspective.  They wanted a profound CSR and a sustainable element that was closer to their core business, which is fashion.  So we rolled out our pitch to them.  The theme of Invisible Sisters was “be part of the story.”  Invisible Sisters offers a lot of touch points for customers.  They could be involved with sourcing, can reach out to consumers and buyers, they can offer collection bins within their retail locations.  As a fashion house, they can start a process of co-designing and branding with us.  In the final phase, they could sell the project.  So we wanted to integrate Invisible Sisters into their business, incorporating themselves into the story.

So we wanted to figure out what the uniqueness of the Invisible Sisters story was.  We realized that it wasn’t just about making bags.  The value for our corporate clients was the ability to integrate the business into their operations.

In the second phase of the operation, we would hire someone to run the business on a day-to-day basis.  It was important for us to be certain about the business model ourselves, because then we could go out and find a social business manager.  So we found a great lady who was doing livelihoods projects for the last nine years.  She was doing trash to fashion work on a volunteer basis, and we brought her in to run this division full-time as a manager.  Ann Wizer, the originator, concentrates on product development, design, and reaching out to new partners.  Amy, our business manager, concentrates on developing the relationships, community expansion, growing the base of the women we are working with, the production process, and on sales and business development.   Our role (Markus and JP) is on the supervision, expansion, and strategic vision of the project.  We also support Amy in her role as the operations manager.  AUSAID is now providing shared services to this division in terms of accounting and general admin functions.  It is more of an in-house shared service division that offers an address, IT system, invoice-writing, bank payments, and so on.

We develop this embryo of a social enterprise to grow into the child level.  We are looking at the pilot as more of a fetus.  When we bring it on, we develop it to a baby and raise it as a child.  We are coming up with our first Spring/Summer collection, which will showcase and standardize a few of our best designs.  We have corporate orders which are ready to be delivered in April.  We have a partnership with the Philippine Plastic Industry Association.  It is an association of Philippine Plastic importers and manufacturers.  They were looking for a moral organization that can help them explain the virtue of using plastic, but also segregating plastic.  Plastic is under a lot of fire right now in the Philippines – people want to ban plastic.  They came up with another proposal, which said that plastic has its other purposes, but it is difficult to get rid of plastic.  So what we were going to provide is a mode of recycling, by putting up collection bins in order to produce plastic bags.  We partnered with them and are going to launch this week in conjunction with the largest shopping mall chain in the Philippines, Ayalla Malls.  PPI is providing the collection bins and giving them to the Ayalla malls, who will put them in their malls and encourage plastic.  We will showcase what recycling plastic can achieve, which is producing something beautiful in the form of bags.  What that meant for us is that we had strong ownership in increasing our impact by becoming part of the recycling and segregation industry in the Philippines.  Now we are more than a social enterprise.  We have become part of something much bigger.  That is one of the highlights of the Invisible Sisters development.

We now have a proper payment system for the women.  Everyone gets paid on time.  We have quality assessments, we have training modules and are expanding into new communities.  We have different levels of crocheting, where you move from the beginner level up to expert, where you produce more elaborate bags and make more money.

The third phase is the spin-off phase.  By that point, they’ll be graduating out of the incubator.  We will take the division and incorporate it as its own commercial entity.  That will involve spinning it out as a social enterprise.  We will find new investors who want to invest in something very tangible.  At that point, the business will expand out of Manila into new communities, but that will require a new level of money that we see better as coming from outside of the incubator.  The new management will depend on the investor.  If the investor wants to put in a manager, they could do that.  The social business manager, Amy, could become the new general manager of the operation.  The originator and ASEI will then stay on the board of directors and provide shared services to the provider.

We are looking at impact investors who are willing to put in $50,000 or more to expand the business.  We have put together a flyer describing what the business is, what we have achieved, and how it is expected to grow.  Invisible Sisters is a classic triple bottom line social enterprise, and probably one of the strongest out there.  Trash is something people don’t usually like to deal with because it is difficult to work with.

So we started with 40 women initially and have grown it to more than 100.  It is quite scalable and easy to replicate.  There is always trash and there are always women with handicraft skills, so the next step for Invisible Sisters will be to grow it to 500 women.

DE: What is the market like?

MD: We have this collection launching and have three or four retailers lined up who will take these bags into their stores.  For the first time, our bags will be available in Metro Manila, so we don’t have to rely on bazaars.  A fashion house just gave an order for 300 bags and, if they sell, they will become a continuous customer for us.  We are considering export opportunities, but we have to scale up our operation to guarantee that we are able to meet large orders and guarantee quality.

DE: What about your new incubee, Tough Stuff?

MD: Tough Stuff is a social enterprise that started in Madagascar to produce a cheap solar panel with a modular system.  If you want to charge your phone, you buy a separate charger.  If you want light, you buy a lantern.  If you want to have a radio, you can buy one that connects to the solar panel.  It doesn’t start like a traditional solar facility, which typically starts with a lantern and a mobile charger, which makes it more expensive.  Tough Stuff actually starts with a very basic module that allows people to only buy the attachments they need.

DE: What are your key learnings?

MD: First, this active incubation model seems to be working.  The ultimate proof will be whether we are able to spin out Invisible Sisters.  If we are unable to spin it out, then we will become more like a holding company with a group of portfolio companies.  We would like to limit the role of the social incubator and push this graduation model.

Another learning is that you need to spend a lot of time working with the originators.  Originators are very attached to their project, and suddenly businesspeople are coming in with different ideas and different parameters for success.  We need to look at the market potential and the level of sales we can achieve, which might conflict with the aims of the originator.  For example, we went to a bazaar the other day and didn’t like the designs as much as the previous year.  But when we looked at it, we saw that our sales were 40% higher.

It is important to stress that we are not taking over.  We are cooperating and integrating our services into the business.  If we were just taking over, then it would be easy.  The Harvard Business Review just came out that highlighted the fact that 70-80% of mergers don’t add value.  I was involved with a merger that actually did create value, so I have a background that will help to chart the process.  When there is a clash of cultures, there is always a challenge.  Fortunately, with Invisible Sisters, we speak very frankly and come to a conclusion that is agreeable for everyone.

When you put in new systems and procedures, there are always little surprises that come up.  There are jealousies between the women, or hierarchies within the communities.  It is the nitty-gritty of working with communities, but we can get around that.  It takes a lot of time to work those things through until we find a system that values what we believe in.

DE: What will the next two years look like?

MD: We hope to go into our next round of funding.  We are actively seeking funding that will allow us to take on more projects.  We are looking to raise anywhere between 250-500 thousand dollars.  We have about 8 full-time staff, and would like to expand as we add new incubees.  We have three FTEs in Invisible Sisters (general manager and two community liaisons).   The rest of the employees are on the ASEI side.

ASEI is set up as a for-profit business, so the income structure is that we earn from the fees of our shared services, including consulting projects that we take on.  We have a consulting project with IBOP, and we initiate the work that we are doing in this space.  We have a research project that we are doing on Urban Poor Housing that is funded by PCI, which is a construction industry association that wants to learn more about urban housing that is also part of their CSR program.

We are also in agreement with the originators to guarantee that ASEI gets a certain amount of equity in the business, which will allow us to sell some of the equity to the investor and earn money to bring back into incubator.

DE: What are your recommendations?

MD: Whether you manage a social enterprise or a business enterprise, there are a lot of similarities.  I have run a $15 million business, but at the same time I took a step back and did a masters degree in community economic development.  I think that that combination is still quite unique in this world, and so I can add a lot of value through ASEI by allowing social enterprises an opportunity to expand from Africa to Southeast Asia, as in the example of Tough Stuff.

With Hapinoy, I had to let go a lot of my assumptions.  It was almost a profound lesson.  If I don’t let go of my assumptions, of what is good or bad, what works or doesn’t, and don’t co-create something with the BoP, then I don’t add anything.  I realized that we needed to really co-create the programs and not impose my own experience on a context that doesn’t work.  There is a book I read that really helped called Theory U.  It described the development process and it is shaped like a U.  You start on the top left of the U.  You look at a problem, download a solution from your past, and try to apply it to the current context.  This works in a stable environment, but when you move out of your comfort zone, that mode of “downloading,” as it is called, no longer works.   At that point, you need to start opening yourself up and learning more by listening to the people more.  As you move further down the U, you come to a space called the “open heart,” where you accept the other person as having good ideas and capabilities, and begin to work with them on a much more profound level.  At bottom of the U, you actually create something new and have this halo effect where you come to agreement about what really works.  Then you move up the U with a pilot and implementation of the idea.

At the BoP, if we do not co-create, we are not going to be successful.  I’d read about it, and had thought about co-creation, but it was more profound to go through that experience myself and really understand what co-creation means within the BoP context.  So we applied that to our model, and it has become part of the ASEI.

DE: Is there anything else?

MD: I have started taking up teaching, working as part-time faculty at Ateneo, trying to build up the social enterprise space.  I am trying to spread the idea of social entrepreneurship in the Philippines and build this industry in general.  Here in the Philippines, people like to play around with titles.  So I like to think of myself of the chief evangelist for social enterprise.

There is a lot more corporate involvement at the BoP level, but these players don’t have as much flexibility.  By bringing in the fashion house to work with Invisible Sisters, we are trying to create a prototype where the corporation actually becomes more intimately involved with the BoP itself.  We think of it as a playground where the corporation can experiment with ideas outside of the rigid corporate framework.   So I think there is a lot of potential that has not been exploited yet.

Our corporate expansion program will be to move the model out to the rest of SE Asia, perhaps in 2012 and 2013.  We would like to localize this model in other contexts.  There are a lot of people like me out there that offer a similar set of skills, so we could offer the ASEI brand and some guidance.


Josh

"Josh Weinstein is a visionary. I read his blog every day." - Bono

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