Dear reader,
I hope your summer is going well, that you are relaxing, working, spending quality time with loved ones, or all three. As time off lends itself to reflection, the RO wanted to propose something a little different.
We usually produce tangible, operational, actionable insights from startups around the world. In this special summer edition, we dive into a topic that is of equal importance to founders and investors universally, regardless of geographic location, language spoken, or ecosystem maturity. That topic is trust.
Oil is referred to as “black gold”. Greek poet Homer purportedly christened olive oil as “liquid gold”. Bitcoin earned the moniker “digital gold”. Any resource earning the suffix “gold” implies it has scarcity, value, and is recognized by humans as precious. The examples I cite tie a direct, monetary value to that preciousness. The examples I cite are things one can purchase. The topic at hand today, trust, sits in a different category.
Trust is startups’ impalpable gold. I chose the term impalpable intentionally. As per the Cambridge dictionary, something that is impalpable is something that is “hard to feel or understand”. The concept of trust adequately fits that framing.
We like to think we’re rational human beings. We’re not. Our irrationality can be caused by multiple factors: ego, lack of sufficient context, emotions, trauma… This universal, human irrationality is a maze founders have to expertly navigate. In the startup context, the trust issue often revolves around a single idea: how can the founder prove to customers and investors that they will do with their money what they promised to do?
Since “irrationality levels” are unique to each human being, founders can’t algorithmically hack this. There’s no formula. There’s only disparate, well-informed bets founders can take, measure, and iterate on to increase coveted yet illusive trust.
Today’s piece was inspired by Noah Aire, an RO reader who just completed a Fulbright Research Scholarship in Budapest, Hungary. Noah wrote a fascinating analysis of the Hungarian startup scene, honing in on five themes:
- The post-socialist hangover creating universal distrust
- The limited awareness of the pre-seed maturity level
- Fluctuating government involvement creating market confusion
- Technical challenges with Hungarian NLP (Natural Language Processing)
- Academic and startup miscommunication
While we will focus exclusively on the first theme of trust, Noah’s paper is a fabulous read. Many of the themes discussed are relatable to countries the RO has written about. Readers will make parallels between the Hungarian ecosystem and their own, yielding useful insights. The full, final version of Noah’s paper (not officially peer reviewed yet), is available here.
This piece will compare, contrast, and enrich Noah’s writing on trust with snippets from existing RO pieces.
I) Traumatic regime change and loss of interpersonal trust
Noah writes that Hungary’s 1989 switch from a communist to a free-market economy scarred the population’s trust of institutions, businesses, and each other.
“Hungarian society has been plagued by a general distrust not only of political and business institutions but also of one another. This distrust was not without reason. Society split into two after the regime change along social lines with those who had sufficient capital before the regime being able to privatize state-owned factories and agricultural cooperatives whereas those who didn’t experienced worsening poverty (Bíró-Nagy, Dobszai, Kadlót, & König, 2016, p. 17-18).”
This is reminiscent of what is happening in the Syrian startup ecosystem. Following the fall of Bashar Al-Assad, the country’s economy and infrastructure aren’t the only thing that lay in shambles. Ahmad Sufian Bayram, an RO reader who’s part of the new Syrian government’s Ministry of Communications and Technology, issued a warning to foreign entrants:
“I warn aid agencies that they’re entering an ecosystem with no trust. The war has destroyed trust in institutions and between people. If they want to gain people’s trust, they have to be radically transparent about their intentions, where their money is going and who they’re working with. They should also finance existing, local startup initiatives instead of launching their own, siloed, branded ‘accelerator programs’.”
From Reviving the Syrian startup scene, published in The Realistic Optimist.
II) Businesses as inherently suspicious
This distrust extended to big businesses. Noah writes:
“The sentiment of Hungarians during the regime change reflected a low-level trust in ‘institutions wielding political power’ (Bíró-Nagy, Dobszai, Kadlót, & König, 2016, p. 8). Bíró-Nagy, Dobszai, Kadlót, and König (2016) discuss how support for the government stood at 42% in 1998 and by 2009 this number had fallen to 16%. Simply put, Hungarians became less trusting of political organizations during the regime change and this distrust extended to business organizations as well. ‘In 1998, over half and in 2009 already close to two-thirds of the population viewed large corporations with suspicion’.”
Noah is mostly referring to distrust for large corporations because they represent power-wielding institutions that Hungarians resent. Since startups fall into the realm of “business”, Hungarians view both large and small companies with similar apprehension.
Startups elsewhere also face initial mistrust, even though they aren’t power-wielding institutions (yet). The initial distrust can come from multiple factors, which founders have to intelligently, gradually assuage.
One factor can be distrust with the idea of purchasing a good online. This process can be unnerving for people who’ve only ever made purchases at physical stores. Understandably, the idea of paying for something you can’t “see” and trust the company to physically deliver it is a steep step to take.
To soothe that initial resistance, Pakistani e-commerce startup Dealcart leaned on two levers: social proof and physical presence. Here’s how Ammar Naveed, Dealcart’s co-founder, explained:
“For around 60% of our customers, DealCart is their first e-commerce experience. These customers see our ads but don’t have any “physical” space to refer to, which is contrary to the way they habitually shop. For new e-commerce customers, it’s scary to order online from a company you’ve never physically encountered. It feels phony.
We thus set up some DealCart kiosks at certain strategic locations to consolidate our legitimacy for that set of customers. The result of that experiment is that while it helps, changing customer behaviors takes time and effort. The transition to online shopping will happen but it won’t be instantaneous.
We’re also tackling this trust issue in the online world. We have a DealCart Facebook group where users can leave product reviews, ask questions… The goal is to build social proof that we are a legit company selling legit products. Both physical presence and social proof help customers change their habits from offline to online shopping.”
From Dealcart: social commerce in Pakistan, published in The Realistic Optimist.
Iraqi fintech Simma faced a double-trust issue: Iraqis inherent distrust of banks, alongside the novelty of “digital” money in an otherwise heavily cash-based Iraqi society.
A double-trust issue merits a two-pronged solution, which Simma implemented by prudently launching increasingly advanced features, while laser-focusing on the company’s value proposition: helping Iraqis buy stuff from abroad.
Here’s how Simma’s founder, Samer Tarazi, explains: