A Venture Capital lesson from the books

A story is told of a certain woman, who had lost her husband and had two kids to cater for with no job, no business, or other means to fend for her family. Her children were not old enough to be productive for the family, they are still dependent on their single mother, to make matters worse, her husband left a debt big enough to take whatever asset they owned as a family. Some of the creditors were very vicious, they were the kind we see in Mexican movies who can wipe off an entire family in lieu of debt owed.

The creditors had given a hard deadline for the debt owed by the woman's husband to be paid or they will begin debt recovery using any means available. She would lose everything she had, she would even lose custody of her two sons, the pain and shame might be unbearable for her so as a last resort, she ran to her late husband’s mentor for assistance in whatever means possible. The said mentor is quite influential and could intervene in her situation in many forms, he could help her pay the debt, he could appeal to the debtor to forgive the debt.

The mentor decided on another route, rather than follow any of the conventional routes, he decided to be a venture capitalist. He asked what are you good at, or rather what do you have. He gave her the following instructions:

1.   “Tell me what do you have in your house”: Product Identification (Minimum Viable Product)

The mentor asked the lady, what do you have that is of value. Our lady had nothing or rather she thought she had nothing except for a bottle of oil. Oil is something that is so common that every household has it, even our broke widow has some liters of oil. But nevertheless, it is a desirable product, the market size is huge, the market is repetitive if you can find a way to reduce your churn rate. 

2.   “Go, borrow vessels from everywhere, from all your neighbors—empty vessels; do not gather just a few”: Get as much equity-free debt as you can get (Family, Friends, Fools round)

After identifying the MVP which is oil, the Mentor told the lady she would need large storage capacity to be able to hedge the market. In the oil and gas business, product storage is a big deal, a visit to a fuel depot would definitely intimidate an average person who attempts to climb the tanks and the cost of setting up the storage is out of the reach of an average individual. The widow was not going to be trading in fossil oil, but she still needed finance to set up storage. The mentor told her to get vessels from all of her neighbors, wherever she can borrow from, she just had to get them and make sure she got them for free too. She learned to built capital from the goodwill of FFF.

3.    “Shut the door behind you and your sons”: keep trade secrets secret

This mentor knows quite well that exposing the trade secret might put the Widow’s potential for wealth in jeopardy so he instructed her to shut the door behind them before they commence the process. Shutting the door could mean a patent, a high-cost barrier to entry, a regulatory exclusivity or simply keeping the lips sealed. The only people allowed to know the secret are your most trusted allies, partners, most loyal early employees, in this case, the sons of the widow.

4.    “Pour it into all those vessels, and set aside the full ones”: Iterate development till you have a product-market fit

By now, the widow has a firm product, having borrowed infrastructure from her neighbours, she has been able to design and manufacture her product however she doesn’t have the market advantage yet. Going to the market with the same product as everyone without a Unique Selling Point would make her journey harder. The mentor knows quite well, the advantage this Widow can have will be in scale and pricing. She is able to manufacture at a cost cheaper than everyone so she will sell at some fraction lesser than her competitors, but the catch is once she runs out of this inventory, she will be subject to exactly the same market conditions as everyone else, hence she needs to keep pouring the oil till she reaches that stock level that will give her advantage. She needs to iterate her product till she has a product-market fit, a product that the market wants and is willing to pay for at a price she is able to make a profit.

Those were the words of the mentor to the widow, a solid lesson in wealth creation rather than poverty alleviation. The mentor focused on teaching the widow how to make wealth rather than just solving her immediate debt and hunger problem. At the end of the exercise, the Widow would have developed skills that can make her wealthier than a lot of her peers, she would already know about striking partnerships, she would already know about packaging, she would have already established a channel of distribution, she would have had a list of repeat customers, she would have known a lot about finance: moving her home from heavy debt to being cashflow positive. She can sell as much oil as will be needed for her to create wealth, not only from the one she manufactured under the guidance of the mentor, she will be able to buy at scale from other manufacturers and distribute faster through her channels.

Africa for centuries has been the widow in this story, seeking aids and reliefs, and that is what she has always gotten. We need to move Africa’s focus away from aids and reliefs to wealth creation through investment, research and development, home-grown solutions for our problems, through market creation.

The story I shared here is from the Bible, it is documented in 2nd Kings 4: 1-7. The mentor is a prophet, but he could as well have been a venture capitalist or at least an Angel Investor