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23 September, 2013
This was an effort to think through a model of organization development that allows a tighter linkage with the host organization. Typically, the longer and the more frequently you engage with an organization you start seeing spaces of intervention that are left open due to lack of immediate pool of small liquidity. These spaces disrupt the flow of activity if not plugged, and actually allow for scattering / dissipating of organizational energies.
This is not true for all organizations. It will more strictly apply to organizations that are smaller, more mission-oriented and have a strong element of community linkages. In such organizations it is significant to ensure that the mission-dilution does not happen on account of lack of small-ticket, or, rather, incremental, temporary funding.
The sensitivity to these aspects of an organization is more prominent to those who are engaged regularly from an OD perspective rather than, say, a typical funder or an investor. In such cases, if those who are engaged in OD could also "invest at the margin", or alternately, "enable investment at the margin" then it amplifies the efficacy of the OD work in and of itself and importantly, allows a certain directionality to be set in. In most of my engagements, one of the issues that is exasperating after a point is to build a sense of continuity of thought and action as well as a sense of continued mindfulness on what the fundamental purpose is.
Where such continuity is hampered because of some small grant, seasonal working capital loan, or pilot funding then the case of 'investing at the margin' is quite high. Put another way, the ability to concentrate the social impact of OD effort is significantly higher if the OD worked is armed with access to such a 'swiss-army-knife' liquidity pool.
Investments at the Margin
Fund size: 5 to 25 lakhs
Propositions that constitute the skeleton:
1. Engagement to comprise of a consulting and financial component.
2. Financial component included with the intent to strengthen linkage with the organization:
2.1. Through being able to penetrate deeper into the organization --- an investment (finance-oriented) outlook forces one, by definition, to direct a more analytical and granular lens into the organization than would otherwise be really necessary.
2.2. Be able to determine, ask for and direct that specific micro-level decisions be consistent with "organizational" mission.
3. Financial component, for the proposed fund size, to be in form of
3.1. "Marginal Investment"
3.2. And one which is fully risk cognizant and fiscally convservative.
4. 3.1 means that
4.1. One unit of investment should be project rather than organization (the definition and typology of projects to be determined).
4.2. Ticket sizes to be necessarily small.
4.3. There are other external and/or internal sources of funding available but in spite of which there is a temporary monetary gap in some parts of the organizational system that is acting as a critical bottleneck and one which is solvable.
4.4. Consequently, the investment will be into very granular, specific and clearly-defined items on the P&l and/or the Balance Sheet.
5. 3.2 means that,
5.1. Support to be credit-based, and given the philanthropic intent of the fund, not to exceed the rate of interest in equivalent post-tax fixed deposit (which for most individuals should be the most probable (and not just a theoretical) cost of opportunity).
5.2. To invest in projects that have a demonstrated and reasonably analysable operating history.
5.3. Unless necessary, to stay away from all speculative ideas which includes (a) early-stage ideas, concepts, highly attractive visions, often clubbed as 'entrepreneurial'; (b) those, often, incorrectly labelled as innovative.
5.4. Corrollary: The definition of "entrepreneurial", "innovative" and "impact" to be very clearly defined up-front before the process even commences.
5.5. However, this does not rule out all ideas per se. If an idea has a sound basis and a proof-of-concept already established (in some other organization, or, previously, in the same organization) then the same can be funded provided the organization presently has the capability to implement the same. The fund cannot create such a capability de-novo given its size but can add to existing capability, consistent with its "Marginal Investment" approach.
5.6. Corollary: Again the term idea is to be defined as precisely as possible with all elements comprising the idea to be clearly identified. Some elements may be more innovative, research-oriented or speculative than the rest. Note should be taken of them, and, if possible, more risk-bearing capital should be sourced to support those elements. Those elements that are well-understood, and do have a proof-of-concept can be supported by the fund under consideration.
6. 3.1 and 3.2, in and of themselves, do not dictate whether the fund should invest in capital expenditure or provide working capital support.
6.1. Now, 4.3 and 4.4 indicate that the fund will invest into a project provided the project has secured a major portion of its funding but still a visible and important gap remains.
6.2. Now, as of today, it is far easier to secure funding for capital expenditures (i.e., physical asset creation) rather than working capital (most of which goes towards direct costs, SG&A, creation of management bandwidth and meeting temporary liquidity issues).
6.3. Of the group of four (i.e. direct costs, SG&A, creation of management bandwidth and meeting temporary liquidity issues) creation of management bandwidth and meeting temporary liquidity issues receive even lower priority than the other two in the group.
6.4. Hence, by definition, these are the two areas, from an organization development perspective, that are most relegated to the background. And paradoxically, when all other factors are in place, it is on account of these two that one can trace the weakening and/or pre-mature closure of a lot of well thought-out, well planned and almost well-run initiatives.
6.5. Focus on these two, then, falls clearly within the rightful understanding of the term "Marginal Investment".
7. In summary, then, the fund would actively look for such "marginal credit-based opportunities" within its network of clients and when the conditions as laid out in 4 and 5 above are met, then it would realize its investment potential as identified in 6.
8. Note: In essence, all of the above leads the way to the fact that, the fund will actually be an "idealized MFI" --- one that is both ethically and fiscally scrupulous and with very low cost of capital.
8.1. It is interesting to take note of two RBI restrictions on MFIs prevalent today:
8.1.1. Restriction on maximum ticket size
8.2.2. Insistence on lowering the cost of borrowing
8.2. There is much to argue either way for / against these two restrictions. But fact of the matter is that they imply that MFIs adopt a fiscally conversvative outlook and adhere to a sound (but highly restricted) social agenda.
8.3. However, what they also imply, and which one is not sure about, is whether the RBI realizes fully, is that if the ticket size is restricted it implies that it can lead MFIs to look at non-capex funding of the nature of working capital and household expenses as opposed to a strict focus on lending for capex alone.
8.4. What holds true for households and MFIs also holds for individual organizations and what is termed 'impact investments'. What is needed is a fund that can look into the non-capex like areas of the organization. The largest long-term value in any organization is created through development of a certain quality of management bandwidth and supporting a good idea during bad times.
9. However, one should not push the MFI comparison beyond a point. A fund of this nature is NOT a MFI but again an "idealized MFI". It should be borne in mind that these are two different entities. An "idealized MFI" can exist within any investment approach but usually fails to be so. The only thing different that a fund such as the one outlined does is to be explicit in realizing this idealization simply because it presumes (the very first proposition) that the financial engagement is a cautious add-on and extension of the consulting engagement.
9.1. Corollary: A welcome side-effect of having the consulting element is that the information asymmetry that characterizes any investment process (and especially a MFI-like investment where the more granular the ticket size the more granular the analysis has to be) is much reduced.
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