The Realistic Optimist is a paid newsletter covering the globalized startup scene.
About the author of this piece
Timothy Motte is the founder of The Realistic Optimist.
The context
The Realistic Optimist is a publication covering the global startup scene. Most of the world’s population lives in emerging markets (EM). So the Realistic Optimist covers a lot of EM startups. When covering them, the same topic invariably comes up: development finance institutions (DFIs).
DFIs are development banks. They fund development projects. They can be bilateral and attached to a single government (France’s AFD, US’s USAID, Germany’s GIZ) or multilateral and attached to multiple governments (World Bank, IFC).
I already wrote about how DFIs have shifted to a more private-sector approach, addressing the dependencies they were accused of creating. This shift coincided with the rise of tech startups in their markets of interest. They hopped on the bandwagon.
This has had various consequences. The following fiction is a synthesis of everything I heard, read and saw on the topic.
As this is mostly a fusion of anecdotes rather than empirical research, I welcome any pushback on the claims I implicitly make.
Story time
Chapter I: the conundrum
Datastan is a country of 40 million people that gained independence about 60 years ago. So far, most of its economic growth has been derived from its natural resources. The country’s private sector isn’t very exciting, as large conglomerates and state-run enterprises dominate. That is one of the reasons why Datastan loses many of its best and brightest to exile. Leo and Zara are two of those exiled best and brightest.
Leo and Zara met at MIT, in Boston. They were from the same town in Datastan, but had never met until their freshman computer science class. Most of MIT’s Datastani students were eyeing prestigious finance careers in New York, but Leo and Zara demurred. They bonded over their shared sense of guilt. They felt wrong for contributing to the US’s prosperity while their home country was mired in inefficiencies, poverty and stagnation.
Leo and Zara were captivated by tech startups. As MIT computer science students, that was hardly surprising. They marveled at startups’ ability to disrupt antiquated industries, create jobs and stimulate the economy. They became convinced that Datastan could strongly benefit from a tech startup ecosystem. So they flew back home and decided to build it for themselves.
Leo and Zara tried setting up the country’s first incubators, seeding the country’s first VCs and funding the country’s first founders. They kept running into the same problem: no one wanted to invest. After all, a Datastani startup had never been acquired, let alone IPO’d. Prospective investors, local and foreign, wondered how they would ever make a return on investment.
One day, Leo and Zara were approached by Erik, who worked for the Brenmark development agency (BDA). Brenmark had colonized Datastan, but was now involved in development projects. In recent years, BDA’s mandate had shifted to “support Datastani entrepreneurs”. The BDA representative told Leo and Zara that BDA would finance the country’s first, proper startup incubator and that Leo and Zara could run it.
Zara felt uneasy with the proposal. She wondered what startup expertise BDA had. They were known for building wells and distributing food in Datastan’s refugee camps, not funding the hyper-growth tech startups Zara was seeking to emulate.
Then there was the political context: BDA was attached to Brenmark, Datastan’s former colonizer. Ethics aside, what would happen if Brenmark’s far-right candidate won the elections next summer? Surely he would cut BDA’s budget. He loathed Datastanis, especially the ones that moved to Brenmark. That would mark a premature end to Leo and Zara’s incubator.
Leo understood Zara but viewed it from a different angle. He saw the BDA funding as a means to an end. They had been turned down by every Datastani family office and large corporation. The Datastani government was interested, but they were negotiating an IMF bail-out and tech startups weren't the priority.
Leo had pitched some American investors he met at MIT, but they were scared by the very idea of Datastan. “Operation Civilization” (a movie about an American CIA agent in Datastan) had recently won an Oscar. Leo’s cousin even had a role in the movie: he was the terrorist the CIA agent was after.
Leo told Zara that if they wanted to build this incubator and get the ecosystem off the ground, the BDA money was the best (and only) option they had. Zara agreed, reluctantly.
Chapter II: the tension
Leo and Zara got to work. They were excited to build what they envisioned to be “the Y-Combinator of Datastan”. BDA was financing the entirety of the project, so they had a say in the incubator’s strategy.
During the first strategy meeting, Erik told the pair that BDA wanted to focus the incubator on climate tech. After all, he said, climate change was the great challenge of our time. Zara didn’t disagree, but she failed to understand why climate tech was the priority. 99% of Datastanis still used cash. Zara’s idea was to focus the first cohort on fintech startups, who would lay the ground for all other startups to build (and bill) on.
She also didn’t understand the relevance of Datastani climate tech startups, considering Datastan’s CO2 emissions were infinitesimal (especially compared to Brenmark’s). Leo wondered if this was because Brenmark felt guilty about closing their own nuclear power plants and reopening coal ones.
Erik continued. BDA was aiming to support 500 Datastani entrepreneurs, all female and from underserved communities. Zara was confused: this was not how startups worked. Her goal was to incubate the first couple of Datastani startup success stories, so she needed 15 founders maximum.
She would poach them from the best schools in the country. It was even better if they had rich family connections. And Zara didn’t care if they were men or women, she wanted them to be outstandingly intelligent and ambitious. Zara was even thinking of recruiting founders out of Harvard’s graduating MBA class, which included 5 Datastanis. Hardly an “underserved community”.
Sensing Zara’s confusion, Leo asked Erik what BDA was trying to achieve. Erik answered that BDA wanted to “support the Datastani startup scene and train underprivileged communities with business skills”. Leo wondered how these two diametrically opposed objectives could be mixed within a single incubator. How would they birth the first Datastani exits by incubating poor founders that didn’t know about business? It made no sense.
Chapter III: the program
Despite their misgivings, Leo and Zara ran the program. They figured they had to start somewhere and that if the first program wasn’t good, at least they would have moved the needle.
The founder cohort was an eclectic mix: it included some of the MBA students Zara had managed to convince as well as women founders fed from female empowerment programs BDA had already run. It even included some refugees from neighboring Siristan.
Brenmark had gotten a bad rap on how it handled Siristani refugees, so Zara figured part of BDA’s mandate was to make amends with the international community. She just didn’t understand why that had to happen in her startup incubator.
BDA asked Leo and Zara for frequent “impact updates”. These included the number of founders in the program, how many conferences were given, how many “tutoring” hours each founder got… To Leo and Zara’s surprise, the actual financial performance of the incubated companies wasn’t considered in the impact report.
Leo and Zara felt more like they were running a subsidized business school than the Datastani Y-Combinator.
Chapter IV: the aftermath
Two of the Harvard graduates Zara had recruited into the program ended up leaving halfway through. They had teamed up to create a fintech product helping Datastani businesses accept digital payments. A “Stripe for Datastan” if you will. Unfortunately, that wasn’t very climate techy so they were booted out. They tried to raise money from BDA, but apparently the impact wasn’t clear enough. Out of money and burned out, both founders left Datastan and returned to New York.
At the end of the program, BDA held a pitch competition for the remaining participants. On the line was a cash prize of $5,000. Leo asked Zara if Crunchbase even allowed you to enter such a small number in your company profile. Leo tried to recruit some of his Silicon Valley friends to be judges at the event, but they responded they didn’t have SME expertise. Indeed, apart from the two Harvard founders, everyone in the program essentially ran a local SME.
BDA provided Leo and Zara with “startup experts” for the jury makeup. Interestingly, none of the names provided had ever worked at a VC-backed startup before.
The event went well, and Zara was asked to sign a bunch of papers with a bunch of BDA officials. Those pictures were posted to LinkedIn. She got a DM from another development agency that wanted to run a “refugee tech” incubator.
Zara wondered what the hell refugee tech was.
Conclusion
Readers familiar with the topic will decipher what I’m trying to say, in between the lines. All opinions welcome in the comments.
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