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Motives for investing: Profit or altruism?

By James Melik
Reporter, Business Daily, BBC World Service

image captionGetting investment is one of the hardest tasks when starting any new enterprise

What makes someone hand over their money to an entrepreneur with a germ of an idea? Is it all about speculating to accumulate - or are some driven for the sake of the greater good?

With the slowdown in economic growth, the need for jobs has risen and the majority of them will probably be provided by small and medium sized enterprises.

These are often started by individuals being entrepreneurial and creating an income for themselves, and in the process creating work and income for other people.

Crucial to entrepreneurs are the investors who try to sniff out the best and brightest people with extraordinary ideas or, alternatively, a project which will provide economic empowerment to the poor.

Many investors are motivated by the prospect of making a profit.

Some of the ventures investors become involved with will work whereas others will not, but those investors are willing to take risks for the few remarkable successes which might come their way.

Allen Morgan is such an investor and the director of a company called Idealab which, among other things, created the photo-sharing site Picasa and sold it to Google.

He admits however, that it is not always easy striking gold.

"You are wrong more often than you are right, at least you are when you invest as I do at a very, very, very early stage," he says.

"I sometimes refer to the companies I invest in as 'usually consisting of a guy, a gal, a dog and a PowerPoint deck'. And at that stage, there is no market or product to analyse because they haven't built one yet."

Success is a combination of intuition about the market and an intuition about people.

Mr Morgan states that believing in people is most important and points to Google as an excellent example.

"We sometimes joke in Silicon Valley that Google is a 15-year-old overnight success," he says, "Google struggled along the way until it adopted what today are known as AdWords and AdSense."

Most companies fail through inadequate execution of an idea rather than an inadequate idea.

image captionEvery investor hopes to get involved with an iconic product such as those developed by Apple

"The difficulties lie in scaling up a company, not in coming up with a good idea," Mr Morgan maintains.

The outcome for investors can range from losing the initial funding, to getting their money back or making a little bit of money, or making a huge profit - often when a company they have backed is taken over by a larger enterprise.

Mr Morgan considers it a failure if he only gets his money back.

"You invest $1 to make $10 so if an outcome on a deal is less than that you feel bad because that was not what you intended."

Holistic approach

Not all investors want to make huge profits.

The international organisation BRAC, based in Bangladesh, specialises in building sustainable livelihoods.

They organise a branch network of groups of women and start lending to them.

They then build on that by rather than lending a woman $100 (£65) and expecting her to build a sustainable enterprise, they train her in basic community health practices and give her a basket of goods that includes first aid and sanitation and she becomes the first level of a health service. In turning over the goods, she pays her loan back.

The US-based Omidyar Network, the brainchild of eBay founder Pierre Omidyar and wife Pam, is a philanthropic investment firm dedicated to harnessing the power of markets to create opportunities for people to improve their lives and it has gone into partnership with BRAC in Sierra Leone and Liberia.

"What we really like about BRAC, is that certain of these ideas become sustainable social enterprises. Now we want to give them market-based capital - to start up such things as a feed mill and a poultry factory in Liberia," says Omidyar's Arjuna Costa.

"It is shocking to think they don't have a poultry factory and that they are importing chicks from Guinea and Ivory Coast."

"It is an old world business and relatively simple to do. Not only will it have the development impact, it also creates a market and that will lead to broad-based economic growth driven very much by a bottom up approach," he says.

Building bricks

The lack of critical developmental infrastructure to support entrepreneurs cripples the potential to create a stronger ecosystem or environment that encourages entrepreneurship across Africa, according to Arjuna Costa at the Omidyar Network.

The organisation aims at enabling people to improve their own lives, and make lasting contributions to their communities.

image captionBRAC offers a package of empowerment opportunities

"If you think about the global development landscape there is a ton of potential in Africa today," he says.

He points out that in the US, someone would work out of their parent's garage and max out their credit card to get the $20,000 (£12,940) they needed to exploit an idea, and cites Steve Jobs of Apple as being a testimony to that.

"Once you have tested the idea you need an angel [investor] who will fund it. At that point it requires more than financial capital. It needs a lot of human capital, a lot of mentoring which will help the entrepreneur make that idea into a living. That is the missing piece, the glaring gap in the system," he asserts.

"To reach that segment of the population most of the basic fundamentals have to be in place. They need to have clean running water, education, access to clean energy and financial services, and they need a transparent government which is working on their behalf.

"People are seeing social enterprises and the power of market solutions as a way to climb out of poverty."

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