Funders Shouldn’t Pigeonhole Organizations In Name Of Illusory Efficiency

When trying to reinvent systems or create new value networks from whole cloth, funders often want small and nascent organizations to focus, focus, focus and stick to their knitting. Rather than fund an organization to vertically integrate, funders see it as more efficient to deploy capital by funding other entities to fill in the gaps in new ecosystems.

The problem with this approach, however, is that it can turn out to be penny wise yet pound foolish.

In The Prosperity Paradox, Clayton Christensen, Efosa Ojomo, and Karen Dillon write that in emerging markets—where value networks are often underdeveloped—to be successful organizations must often vertically integrate their operations in ways “that might seem unnecessary in more prosperous countries.”

Tolaram—the makers of noodles—for example, integrated to supply “its own electricity and built a distribution and retail network to guarantee stable and predictable supply.” That undoubtedly meant a much higher set of expenses up-front, but the alternative was likely failure because the standalone engines of electricity, distribution, and retail were all unreliable at best.

The same overriding principle is true in system reinvention. Just as in emerging markets, my observation is that funders are often overeager to be capital efficient. And that ultimately results in expensive failure.