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The secret to success is failure

Novogratz_blue_sweaterWhen Jacqueline Novogratz, founder of the Acumen Fund, was in her early twenties, she turned down a promotion on Wall Street and went to the Cote d’Ivoire to open a new branch of the African Development Bank focused on microfinance for women. But the West African women she was supposed to work with shunned her. They talked about her derisively in her presence, letting her know exactly what they thought of an untested, unmarried, American woman with poor French skills being sent to lead them. They intimidated her, locked her out of the office, and (Novogratz suspects) actually gave her food poisoning to scare her away. It worked.

On her next assignment, in Nairobi, she spent hundreds of hours analyzing the loan portfolio of a young microfinance organization. Presenting her results, she recommended a drastic restructuring. A week later, she found her handwritten report had been “lost,” and all her work destroyed.

Any other 24-year-old might have gone home. For Novogratz, these heartbreaking episodes led to some profound revelations:

“I wanted to help,” she writes, “but that didn’t matter to anyone but me.” “Donors could convince themselves to give to nonperforming organizations based on a few good stories. The world needed something better than that.”

But the failures didn’t end there. She spent two months reviewing a UNICEF-funded loan program for income-generating projects in Kenya. She found hundreds of broken maize mills, empty schools and unsold baskets: countless “well-intentioned projects gone wrong,” a system riddled with kickbacks, and no accountability. In the end, government officials found her report “too pessimistic.” A World Bank official in Gambia rejected her proposal to lend to small businesswomen instead of giving them grants, using then-conventional wisdom that the very poor couldn’t pay back loans.

As Tom Watson, the founder of IBM, famously said, “if you want to succeed, double your failure rate.”

Because eventually Novogratz found big successes, like the bakery in Kigali where she helped a group of unwed mothers wean their operation off charity and become a real business. And Duterimbere, a micro-lending organization strong enough to survive the genocide in Rwanda.

Not to mention the success of the eight-year-old Acumen Fund, which Novogratz calls a “nonprofit venture capital fund for the poor.” Just as Acumen absorbs the depth and breadth of her experiences and the advice of her mentors, the strength of this deeply personal book lies in its rejection of simplified narratives, easy truths and personal dogma.

Novogratz has emerged as a leading voice of a “middle way” in development thinking: “Philanthropy alone lacks the feedback mechanisms of markets, which are the best listening devices we have; and yet markets alone too easily leave the most vulnerable behind.” She writes:

I’ve learned that many of the answers to poverty lie in the space between the market and charity and that what is needed most of all is moral leadership willing to build solutions from the perspectives of poor people themselves rather than imposing grand theories and plans upon them.

So read this book! It documents in wonderful detail this resounding and inspirational conclusion.

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10 Comments

  1. geckonomist wrote:

    Although I haven’t read the book, i am sceptical concerning a “third way”.

    I was hired once by a loss-making “third way business” in a poor country for an audit and a turn around of it by a philantropical zillionaire.

    The business had several aims:
    – give good jobs to local people;
    – offer better quality products than currently available on the local market
    – export, preferably under a “fair trade” umbrella.

    All aims were achieved, unfortunately the losses were accumulating faster and faster.

    My findings:
    – very high quality stuff they sold at a good gross margin;
    – but the local staff was stealing almost all the revenues!

    Result:
    the philantropical guy gave a bonus to the greatest thieves,
    and i was told to mind other things.

    I resigned on the spot.

    there is good business and there is bad business.
    There is no third way business.

    Posted December 2, 2009 at 6:25 am | Permalink
  2. George wrote:

    Agreed – and inspiring stuff.

    I know everyone who reads this blog also watches The Apprentice on TV. “Apprentice” candidates survive in part because of their performance in the boardroom (defending their work, fending off attacks from competitors), and in part because of their performance in the task (making the biggest profit). Most winning candidates are good at both, but what is demonstrated consistently is that being exceptionally good at one or the other, and particularly at boardroom performance, can get candidates a very, very long way.

    While failure is sometimes acknowledged in the boardroom, unless it is done within a generally glowing account of success, and often laying the blame somewhere else, the candidate wont last.

    With “development” work, where ways of measuring task performance in the large majority of cases are inadequate at best, the boardroom performance becomes far more important. This has a knock-on adverse selection problem – the judges, those at the top of the development industry, are likely themselves people who excel at boardroom performance.

    In such an environment, having someone go to lengths to show evidence of why the team has failed at the task will face the risks that Jacqueline Novogratz faces.

    The Apprentice Theory of International Development has been copyrighted – Prof. Easterly welcome to get in touch if he wants to extend it or otherwise incorporate it into his work.

    George

    Posted December 2, 2009 at 7:26 am | Permalink
  3. Word_Bandit wrote:

    As every pragmatic self-help person knows, failure’s only a guide to getting where you would like to end up.

    Edison and his thousand tries at the light bulb, etc.

    For all the pooh-poohing and looking down their noses in the academy at self-help gurus and “New Age” prophets, in many respects, the perseverance principal is central to the best of their thinking, and why they’re popular.

    The academy tends to analyze and dissect ad infinitum, competition for prize spots too often its m.o. — if it learned the more graceful art of synthesis and incorporating all experience without judgment, we might have a stronger and more productive education system.

    Here, the women condemned Western elitism. In the Western world, the liberal elitists have a complex system for excluding fine thinkers who haven’t been socialized into their norms.

    We can learn from these woman and Ms. Novogratz: the temptation to look only at the inspiration, and not the biases we all carry with us. We fail to recognize the West African women in all of us, in more than one way.

    Loved this quote:

    “I’ve learned that many of the answers to poverty lie in the space between the market and charity and that what is needed most of all is moral leadership willing to build solutions from the perspectives of poor people themselves rather than imposing grand theories and plans upon them.”

    Much to be learned, here.

    Great entry.

    Please excuse editorial oversights and errors in rhetorical tone. Juggling at present,

    Posted December 2, 2009 at 11:15 am | Permalink
  4. Jeff wrote:

    The key to learning from your failures is admitting they are failures and honestly analyzing what went wrong. Too often in development we pretend failures are successes and lose the one potential benefit. Hence the tendency to repeat past failures and the sparse record of success.

    Posted December 2, 2009 at 11:24 am | Permalink
  5. J. wrote:

    I’m inclined to agree with the geckonomist – not sure I’m buying the “middle way”

    I can see why many would like this quote:

    “I’ve learned that many of the answers to poverty lie in the space between the market and charity and that what is needed most of all is moral leadership willing to build solutions from the perspectives of poor people themselves rather than imposing grand theories and plans upon them.”

    … but it reads to me as sort of it’s own grand theory.

    Posted December 2, 2009 at 4:43 pm | Permalink
  6. I’m grateful you mentioned Acumen. I’ve been leaving comments asking for someone here to address what they’re doing, because it seems like a direct attempt to do something positive about the concerns being raised here. As the comments demonstrate, this approach is intriguing — possibly disturbing for those not inclined to believe in a middle way. I think it warrants further attention and grappling with on this blog, so please do. I have yet to read the book, but I’d like to do that soon.

    Posted December 2, 2009 at 8:31 pm | Permalink
  7. Asif Dowla wrote:

    I agree. It is an wonderful book. I wish she wrote more about Acuman Fund. I agreed with most of her assessment. I plan to use it in my classes.

    Posted December 3, 2009 at 10:23 pm | Permalink
  8. Robert Tulip wrote:

    “markets alone too easily leave the most vulnerable behind.”

    The question this raises is the balance between aid focus on the most vulnerable and on making markets work for the poor. I suggest working to correct market failure is a more effective approach. A key question that should be asked more loudly is why firms at the margin of bank lending do not get loans, and what can be done to address this, so these firms can employ and serve more poor people.

    This question is excluded from large parts of the aid debate because those who care about aid tend to support charitable organisations, so they tend to see poverty reduction through the lens of direct support for the poor. The problem, however, is that charity does not produce sustainable development, so has low economic rate of return, and is more a matter of emergency response than effective change.

    Development NGOs tend to be driven by passionate commitment to making a difference in the lives of poor people. They often focus on ‘transformative’ strategies such as change in cultural norms, emphasising the human rights of the poorest. This is good, and I don’t really criticise it in itself. However, in terms of strategic analysis of poverty reduction, there is a compelling argument that indirect strategies aimed at lifting overall economic growth are the most effective.

    In my opinion the best ever aid project in the world was when Deng Xiao Ping asked Lee Kuan Yew for advice in turning Guangzhou capitalist, and Singapore sent dozens of experts to China to help eradicate the policy culture of Maoism. The result of this and related change in China has been an explosion of growth, with China single-handedly achieving the Millennium Development Goal of halving extreme poverty. The key was strategic policy. By comparison, lauded activities such as the Grameen Bank are piddling.
    So why don’t aid donors seek to replicate the Singapore-Deng model? Basically, rich taxpayers see aid as charity, a symbol of their personal generosity, and think that businesses should be ignored because they are already better off than the poor. Taxpayers are the principal and aid agencies are the agent, responding to the prejudices of the principals. So rather than fixing the business enabling environment in poor countries, taxpayers would prefer to help a destitute woman get a sowing machine to show they are helping directly, ignoring the gross dis-economy of scale in this approach. It would be better instead to focus on private sector development, removing the constraints to business expansion, so that firms can provide jobs and customers and services for the poor.

    We should not think of donors as ‘delivering aid’ but as potential catalysts of economic transformation at national or sub-national level, just as Singapore catalysed the growth of China, and Jeffrey Sachs spectacularly failed to catalyse the growth of Russia. This catalytic approach provides the economic growth that enables poor countries to raise resources for social services through local tax, avoiding the dependency that results from the ministrations of the charities of the world.

    Rather than microfinance, it would be better to address the market failure in the banking system by looking at why loans are not given to firms at the margin of bank lending. The overall issue is that poor countries say help our economies grow, and rich countries say that doesn’t play in Peoria.

    Posted December 3, 2009 at 10:50 pm | Permalink
  9. Shakespeare's Debtor wrote:

    Robert Tulip,
    Isn’t one of the advantages of microcredit that it can be done without government help, and sometimes even in the face of opposition by government?
    And even if governments have pro growth policies many businesses can use loans to improve their offerings and expand.
    John, Shakesepeare’s Debtor (aren’t we all?)

    Posted December 5, 2009 at 6:56 pm | Permalink
  10. Robert Tulip wrote:

    John said: “microcredit can be done without government help, and sometimes even in the face of opposition by government.”

    My concern is that development theorists prioritise microcredit over mainstream banking. Some excellent resources on this topic are an MIT paper on Banking Reform in India and the website The Next Four Billion

    Microfinance has high opportunity cost, deflecting donor attention from engagement with the banking sector. The justification for microfinance is more charitable than developmental, suffering from all the old aid project faults of establishing parallel systems that are inefficient and unsustainable. Sure, microcredit has a place where the state is hostile to development, but if a state wants to develop then it is far better off fixing its banking regulation to enable credit for dynamic firms than promoting microloans. Recipients of the microloans are better off getting a job from a capitalist. As Adam Smith pointed out in his famous parable of the pin factory, micro enterprises lack economies of scale.

    Links: MIT Paper: http://econ-www.mit.edu/files/510
    Next Four Billion: http://www.nextbillion.net/blog/2007/03/14/the-next-4-billion-market-size-and-business-strategy-at-the-base
    Adam Smith Pin Factory: http://en.wikipedia.org/wiki/Business_process#Adam_Smith

    Posted December 9, 2009 at 1:20 am | Permalink

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