An interview with Paul Polak
By Lauren Everitt
If extreme entrepreneurship were a sport, Paul Polak would be at the top of his game. From turning Somali entrepreneurs into millionaires (by in-country standards) with a lucrative donkey cart enterprise to creating a jet boat business for shipping cargo around Nepal’s whitewater rivers, the psychiatrist-turned-entrepreneur has dabbled in a little bit of everything. These ventures led to arguably his zaniest idea yet: a handbook on how to target one of the last frontier markets left – the world’s poor.
Polak has dedicated more than three decades to starting and running businesses that cater to consumers most businesses wouldn’t touch. He was an early standard bearer for the idea that market solutions, rather than aid or charity, offer the most effective way to tackle poverty. He’s also set out to convince entrepreneurs and investors that the 3 billion people at the bottom of the pyramid are, in fact, a worthwhile and lucrative market opportunity. But Polak is clear that the work won’t be easy, and there are plenty of risks involved. Those obstacles serve as the impetus behind his latest book, The Business Solution to Poverty: Designing Products and Services for Three Billion New Customers.
Polak and co-author Mal Warwick, an entrepreneur and impact investor, pull from their vast collective experience to offer a road map for entrepreneurs, investors and corporate executives to ethically and effectively help the world’s poor and make a handsome profit to boot. Polack is convinced that the premise isn’t too good to be true. He contends that a growing movement in favor of enterprises that serve the greater good is pushing aside business as unusual. In a wide-ranging interview with Poets&Quants, Polak discusses everything from whether B-schools are buying into the idea of social enterprise to what he learned from his most spectacular failure.
What prompted you to write the book?
My first book, Out of Poverty: What Works When Traditional Approaches Fail, mostly focused on what we learned with an organization called International Development Enterprises (IDE), which I ran for 25 years. We helped something like 20 million 1-acre farmers who lived on less than $1 per day increase their net annual income enough to move out of poverty. While that was a satisfying accomplishment, when you look at in the context of the size of problem–that there are 2.7 billion people who live on less than $2 per day–it ends up being just a drop in a bucket. I handed over IDE to my successor, and I’ve been focused on addressing what I consider to be the biggest challenge facing development: reaching meaningful scale. For the past four years I’ve been starting, incubating, and implementing a new breed of frontier multinational, which, if successful, is capable of transforming poverty and transforming business as usual.
With my partners, I am in various stages of creating four of those multinationals, each one is designed to transform the livelihoods of 100 million customers who live on $2 per day or less, generate $10 billion in revenues, and earn attractive enough profits to bring in commercial investment rather than charitable donations. My new book basically describes how to do that. It goes through the steps of how to design products and services with a radical degree of affordability, how to do last -mile distribution, how to design for scale from the beginning, and how to address other key challenges.
In The Business Solution to Poverty, you set high standards for entrepreneurs: finding a problem that affects at least 1 billion people, designing a solution with universal appeal, and creating something with radical affordability. What’s the return on investment for all this time and effort?
Well, I think this follows the rules of economics for frontier markets. Frontier markets are higher risk, but if the company is successful, the entrepreneur should get higher rewards. It’s very straightforward: These are virgin markets, so when you pioneer in a virgin market, you should, if successful, earn a very high degree of return.
From the position of somebody graduating from business school there are several options: He or she can seek a job in an existing company, which is in an existing and usually mature market. Or they can create a new company in a mature market by carving out a niche that’s unexploited. The downside to that is very brisk competition, but if you make it, you’ve got an infrastructure you can rely on. On the other hand, if you try to create a whole new market, you’ve got much bigger risks. But you’ve got the same kind of rewards that Sony got when they created the market for transistor radios, or that Apple got, at least initially, with personal computers, or that Ford had when he created a affordable motor car for the working man.
You put a lot of emphasis on getting to know the target customers and understanding their needs. Could you describe your survey process in more detail and why it’s so important to your work?
Before I started IDE, I was working as a psychiatrist. In my spare time I was also an entrepreneur–I still am. I created several businesses, which generated enough income for me to start IDE. What I learned from those businesses and psychiatry is that you actually have to listen. That should come as no surprise to business students. It’s well known that a successful business is one that understands its customers. I learned that from scratch. When I started IDE, I said I would interview in some depth at least 100 one-acre farmers every year, and I’ve done that. At this point, I’ve interviewed more than 3,000 families, so I really know this customer group in a variety of countries. The approach I use turns out to be more successful in some ways than those used by successful conventional businesses.
I will go to a village – if I don’t speak the language, I go with someone who is respected in the village and act as an introducer and translator – and I will select a typical family and spend seven hours with them. I’ll walk them through their fields, have a look at what they’re growing, compare it to market prices. The first thing is to form a relationship, and then I ask them all kinds of questions about their lives, including what they had for breakfast that morning, how many kids they have, and how far their kids are going in school. When we get to know each other better, I ask them about all their sources of income and how they spend it. Then I do the same thing with another seven or eight families in the village for only one or two hours. That process has never failed to come up with at least one transformative idea.
I believe that it’s really important to talk to at least 100 customers in depth before you ever come up with an idea. Once we have the idea, we go through a routine process of building a proof-of-concept prototype, we test it, we modify it, and then we put it in the hands of a bunch of customers and find out what’s wrong with it and adapt it. Once a product is launched, all of our staff focus on continuous learning from the customer. We will change what we’re doing 180 degrees depending on what we’re learning. Customer focus is not unique to this population of poor customers. I think if companies did more of that with a product that services developed economies, they would do better.
Are business schools buying into the idea of servicing this 3 billion-person market?
There is a growing unstoppable movement in business schools where students are demanding to learn how to make a difference in addition to the skills they need to find a job when they graduate. Business schools are making courses available that give students hands-on experience with starting up companies. A lot of business schools have that already for companies in the West and an increasing number are opening up those opportunities in developing economies.
I worked for five or six years helping set up a course called Design for Extreme Affordability at Stanford. One of the principles was to form multidisciplinary design teams for deeper, more effective learning. This is being adopted in many places. Business students don’t just work by themselves, they may work with students in the humanities, engineering, or sociology departments.
In the Stanford course, there is a whole process of defining a problem, designing a solution, and pilot testing it. At the end of the course, the teams are judged according to several criteria: Did they come up with a business plan that is persuasive to actual commercial investors in the audience? Did they come up with a transformative product or service? Did they have an effective communication piece such as a PowerPoint presentation or video? When I was working on the course, we received 120 to 130 request applications for 40 positions. So I think there is both interest and opportunities for students to actually do different versions of businesses or projects that are relevant to this population. In fact, in the book we’ve included a study guide to help with doing just that.
Your book works off the assumption that these new multinationals will act ethically and empower the $2-per-day consumers rather than exploiting them. Is this realistic?
I not only think this is a realistic viewpoint, I think that unless more businesses adopt that viewpoint in the future, they will fail. The context of business is changing. For example, the assumption that businesses can and should undergo rapid growth without regard to planetary carrying capacity is no longer practical, and companies that continue to do that will get an increasingly bad name.
I think we need to develop a different model of business for the common good, and there’s a whole movement in that direction. There has been a prior movement encouraging investors to invest in companies that are good global citizens. The bottom line is this: A company that only exists to optimize profits for its shareholders is not going to be so viable in the future. That doesn’t mean I’m against profit. In fact, I think these new companies will be more profitable than the average company today, but I think that incorporating certain base values into the DNA of a company actually facilitates profit rather than inhibiting it.
What was your most spectacular failure and what did you learn from that?
My most spectacular failure would have to be a jet barge project we did in Nepal. About 40% of the people in Nepal live two to 12 days from the nearest road, but many of them live in direct contact with whitewater rivers that flow through the Middle Hills. They tend to get products in and out of their villages on porters’ backs. In the Snake River there are jet boats that bring rafters back to their original locations. So we built a jet barge, basically a 5-ton version of a jet ski specially designed for the rivers in Nepal.
We did an exploration project where we proved that 500 km of river previously considered unnavigable were traversable. But when we went to the commercial company phase, we failed. We learned that creating a high-tech transport business in a remote area was much more daunting than we expected: Water levels in the river would rise and fall by as much as 8 feet in a couple of hours because there were no dams on the rivers. We were able to navigate the rivers with world class boat operators, but to train the local people at that level of proficiency was difficult. We couldn’t modify the rivers when rocks blocked navigation in the dry season.
I felt very badly about that. But the people in Nepal I respected the most didn’t scorn me for failing; the head of the Agriculture Development Bank even thanked me for being willing to take such a risk for his country. I learned that if you’re in a remote area, unless you’re prepared to set up an infrastructure as complex as an international airport, you had better stick to simple, easily repairable and affordable products and services, so that’s what I’ve done. The whole process of talking to customers is a way of learning from mistakes, and mistakes are part of doing any business. If you don’t have a continuous process of learning from customers and correcting mistakes, you’re not going to be successful.
What personal characteristics does it take to be successful in developing products for the 3 billion customers at the bottom of the pyramid?
That person has got to be a real risk taker. Any entrepreneur is a risk taker, so multiply that by 10 if you’re trying to create a new market. You’ve got to be willing to chew through cement to get it done. It’s particularly attractive for young people interested in hands-on experience to make a difference. I’ve talked to a lot of students in business school who take a shot at something like this. Even if they fail at a social enterprise in a village, they come back after a couple years with such a depth of experience that it helps them get a job in a typical corporate environment.
Reprinted from Poets & Quants, a free online service for business students.