News & Insights
No Strangers to Failure: 3 Lessons Learned
by Mark Coffey, chief investment and operating officer, Global Partnerships
The topic of failure is not a popular subject for conversation. Yet, more and more organizations are encouraged to talk about it because it is in those failed efforts that we learn how to improve our practices and create more impact. Recent examples of organizations that have shared what they’ve learned from failing include “FAILFaire Nairobi: Mishaps. Mistakes. Migraines,” which gathered social enterprises from around the world to talk about lessons learned from projects and initiatives that have failed. More recently, a SOCAP 2013 panel included the topic of failure as part of its discussion on the “Doing Well by Doing Good” panel (video segment starts at 27:41). It’s clear that reflecting on the failures as well as the successes of our work is important and needed to create long-lasting impact.
While we’ve been fortunate to have a long and successful track record, we are not strangers to failure and we’d like to share some of the lessons we’ve learned. In thinking about our work, I wanted to highlight 3 things we’ve learned over the years with the hopes that this might help others in the sector that are committed to improving lives for people living in poverty.
- Be cautious of “industry darlings” such as organizations with rapid growth and charismatic leadership.
- At the first sign of things not going as planned, over-communicate with your clients and other knowledgeable industry participants, and dig deep until you understand the underlying causes.
- Don’t accept anything less than complete and transparent answers from your investees/borrowers.
1. Beware Industry Darlings
These are the organizations that attract the most attention at conferences. They need a lot of funding because of their high growth, and investors fall in love with them because they assume that the growth is a reflection of a smart business model or superior execution. They also tend to have high profile or charismatic leadership that knows how to impress investors. The one loan that we did need to restructure was one of our earliest loans and the borrower had both these characteristics. We learned that the way to see beneath the appeal of charismatic leadership is to question middle and senior managers, clients, and everyday staffers, to see if what they are actually doing is what top management is touting.
We also learned that the cost of high growth can be a lack of attention to details, which is critical in sound lending. Interestingly, in 2012 none of the 20 most profitable MFI’s were in our portfolio, but 10 of the top 20 in lowest delinquency rates were in our portfolio. There is something to be said for those organizations that pay attention to their customers, but only in terms of offering valued services and in ensuring that customers know and follow through on their obligations.
2. Over-Communicate and Dig Deep
Long before a payment is missed, there are normally early warning signs of trouble. In agricultural lending (coffee cooperatives for example) this may surface in terms of delays in harvest, processing, or product shipments. Tracking progress at all steps along the way is important in knowing what to expect next, and evaluating changes in risk levels and potential mitigation. In one case in our portfolio, a second tier fair trade cooperative didn’t monitor the compliance with certification requirements of some of its first tier cooperative members. As a result, the second tier cooperative was unable to fulfill contracts for organic and fair trade certified product, and had to sell product outside of the higher-priced specialty markets. Communication with the fair trade importer or buyers is essential in addition to regular communication with the direct borrower. We learned that our initial communications did not reveal the entire story of what might be causing delays, and that digging into each step of the process from farm to buyer is critical.
3. Demand Complete and Transparent Answers
One lesson I learned during my commercial banking career was to never “fall in love” with a borrower. In other words, always keep in mind that even great stories can lead to bad outcomes. In one case, we had a partner in our portfolio that was very focused on social performance, had an outstanding programs director, and had a long history of successfully serving clients at the base of the economic pyramid with integrated services. However, when the organization’s financial performance began to suffer, three of us paid an in-person visit to understand if there was a turnaround plan. Our questions were not directly answered, but management kept turning the subject to some of the interesting things they were working on, rather than how they would fix the problems they already had. When we began to ask the tough questions, the answers we did get didn’t add up. We asked them to pay off their loan, which they did, and subsequently the organization has virtually disappeared.
Customer Intimacy At All Costs
A lot of things can go wrong on the way to financial support of organizations doing great work. The most important thing a fund manager or lender can do is to be close to the customer, but not too close to “fall in love,” thinking that nothing will ever go wrong. Communicate, dig deep, and expect clear answers. Our work at GP would be much easier, if we focused just on the well-funded, lowest risk, and most profitable organizations. But our social mission requires that we accept risk and then manage it well, so that we support, sustain, and catalyze the organizations having the greatest social impact.