Archive for the ‘social business’ category

Delivering propane as a social business

January 6th, 2009

Vidagas is currently the leading distributor of propane in northern Mozambique … the least developed and primarily rural portion of the country. It has recently become profitable and is raising additional capital to expand into additional provinces of Mozambique and beyond.

What’s most interesting about Vidagas is that it’s a social business. It was started in 2002 by two NGOs VillageReach and Foundation for Community Development. They raised the initial capital and started this business not because they were looking for a great new investment opportunity, but because VillageReach had a contract to improve delivery of medical supplies to the rural clinics. The rural clinics needed a reliable supply of propane to power their refrigerators (to keep their vaccines effective) and for lights so that they could operate the facilities for operations and at night time. And there was no propane supplier.
Rather than simply funding the delivery of propane with government subsidies (if these could even have been obtained), they saw an opportunity to bootstrap a sustainable commercial business with a strong multi-year client … the Mozambique government clinics. So, they created a separate commercial business and then went about operating it like a commercial business selling propane delivery to other local businesses and residential customers. Today, less than 20% of their revenue comes from the government clinics and their customer base continues to grow as they deliver a valued service.

Triple Bottom Line
Vidagas is delivering a triple bottom line:
  • People. It powers equipment in local clinics greatly expanding their services and effectiveness. Households and restaurants which adopt propane for cooking eliminate exposure to smoke and particulates from burning wood or charcoal … a huge health issue.
  • Planet. Every use of propane for cooking reduces the use of biomass fuels. This means less deforestation and destruction of fragile mangroves which are currently having a significant environmental impact.
  • Profit. It generates surplus which creates sustainability and is reinvested into additional capacity to deliver propane (and, in the future alternative energy solutions like solar) in a socially, environmentally and economically enhancing positive cycle.
They created a business which delivers significant social value to people in an impoverished, unserved market. It’s no wonder the World Bank and UNDP have recognized Vidagas as a distinguished social business.

3 comments »

Posted in social business

Social business wealth sharing examples

November 9th, 2008
Unitus Leadership Summit 2008

In October, I had the opportunity to travel to Indonesia to participate in a leadership event (sponsored by Unitus) for CEOs and senior managers of some of the world’s most innovative and fastest-growing social businesses. Most of these businesses are in the microfinance sector with a few in other emerging social business sectors. Countries represented at the gathering included India, Mexico, Philippines, Cambodia, Tanzania, Kenya and Indonesia. We had great discussions on bottom-of-pyramid (world’s 4B poorest citizens) topics including: savings products, insurance products, mobile banking/payment, serving ultra-poor and capital raising in our current financial crisis.

I had the opportunity to lead a discussion on the topic of distribution of wealth created by social businesses. There were a number of interesting discussions and examples of how these leading social entrepreneurs are thinking about and acting to implement broader wealth-sharing initiatives. Here are some of the highlights:

Starting as a non-profit operation. SKS Microfinance, the fastest growing microfinance institution in the world with 3M clients based in Hyderbad, India, started in 1998 as a NGO. When they transformed a few years back into a financial company, they setup a trust to hold the cash generated during this process plus shares of the new finance company. The trust is managed by a group of trustees elected by the finance company’s borrowers with a mission of serving the borrower’s community. One of the issues they’ve faced is the ownership dilution of the trust’s shareholding in the finance company as the finance company has raised new equity capital. The trust does not have sufficient cash to invest to maintain their ownership level as the finance company valuations have grown, so by default they would own a smaller % of the outstanding shares after each new financing round. SKS’s management team and earlier social investors have creatively sought to reduce the trust’s dilution impact by issuing stock options to the trust. This has allowed the trust to maintain a 20% ownership stake in the finance company without having to buy new shares. The impact on the existing and new investors (including founders/management) is that they are effectively giving up some of their upside to allocate more upside to the trust. I believe this is a very interesting model for social businesses in similar circumstances.

Starting as a for-profit business. Equitas, a fast-growing (0-100,000 clients in less than 1 year) microfinance company based in Chennai, India, setup from their start in 2007 as a shareholding finance company. The founders were upfront with their investors that their mission was to build a social business. At the start, they setup a separate trust which was granted 5% of the stock of the finance company with the mission of serving the educational and other needs of their target segment of the working poor. In addition to setting up a management stock ownership program, they setup up a employee stock option plan which reaches to all levels of employees. This is almost unheard of in India. Additionally, the founder is planning to allocate additional future options which he is granted by the board to the trust. These are a number of innovations which others can learn from.

Stock options for all employees? There was a lively discussion on whether it made sense to grant stock ownership opportunities beyond the senior management down to the broader employee base (in the case of microfinance, this would include entry-level loan officers.) Some leaders argued that junior staff: (a) were much more motivated by additional cash than stock options; (b) that giving something to employees which they didn’t value and cost the company something didn’t make sense; and (c) would develop expectations that the stock was worth something and if that didn’t materialize they would be angry. Other leaders argued that there are still very good reasons to offer stock options to entry-level employees and these above issues can be addressed through education and setting up share sale opportunities back to the company … with the goal of giving some significant upside sharing to these employees.

How to avoid mission drift. I was asked by one of the CEOs what I recommended they do to ensure that an organization continued on it’s social mission once outside investors got involved. After first stating that I felt like I was the least qualified person in the room to answer that question, I shared an observation … investors are first and foremost investing in the capabilities and potential of the executive team to deliver the results promised during the fundraising process. This means that the social business CEO has a LOT of power. You have the power to set very clear mission and performance measurements with your investor upfront. So, use that power to be very clear in setting expectations about what success looks like. And then make sure your investors are aligned with these objectives.

Please share additional examples in comments of creative approaches that social businesses are taking to share the wealth created when/if their business is successful.

No comments »

Posted in social business, wealth distribution

Distributing wealth created by social businesses

September 27th, 2008

There are an increasing number of social businesses which have the opportunity to have both dramatic positive social impact as well as significant generation of wealth. What I’m referring to are what I call “hybrid social businesses” … those which have objectives to deliver social impact and are structured as “for profit” shareholder-type entities. I have written previously that I think that one of the sectors with the most growth opportunity are businesses focused on the world’s poorest and how there is a growing debate on how the wealth created by businesses like Compartamos are distributed.

What I’d like to focus on here is the unearned investment income/assets rather than other wealth that’s created through employee compensation, cash philanthropy gifts of the business, taxes paid and wealth created by customers of business based on the business’ products/services.

Who should benefit from the wealth created by businesses serving the world’s poor?

Of course, there is not one right answer to this question. Here’s a short list of the constituents who could benefit:

  • Investors
  • Business founders
  • Business management team
  • Employees
  • Clients/Customers
  • Local Communities

In most situations, unless specific attention is given, the primary stockholders of any business are the investors, the business founders and the business senior management team. It is important that investors are compensated for the often high-risk capital they provide to fuel the business for without this the business wouldn’t exist. The founders also need to be compensated for the significant vision and sweat equity they have invested in this venture as well as likely other failed ventures (see my overview of hybrid social business for more details). And to attract the right growth-capable senior operating managers, they also need to be allowed to participate in the wealth they are leading the creation of.

Is this where wealth sharing should end?

If this is where the wealth-sharing ends, then the result is likely to increase the wealth share of “the few” creating higher societal wealth inequity. Since most of the countries where the highest potential social businesses are operating already have very high societal wealth inequity, this is perpetuating a severe concentration of wealth. Many people believe that the best approach to creating better societies is to encourage the creation of a very sizable middle class which results in many benefits including more accountable government, fairer laws/judiciary, more resilience to economic changes/shocks, increased freedoms/human rights and less violent communities.

The coming scrutiny

I think that this is going to be an increasingly important issue to address as there is going to be increasing scrutiny of “excessive profits” earned by “the few” which are “generated from the pocketbooks of the poor” by populist governments and political parties/candidates. This is an easy “outrageous” story to sell for votes. So, it is wise to get ahead of this issue.

Going further in wealth sharing

I believe there are opportunities to structure social businesses in order to both generously reward investors, founders and managers AND create wealth for other important constituents. Here are a few thoughts:

  • Employees could have the opportunity to participate in the company’s success. There has been phenomenal wealth generated through employee participation in stock programs in many companies in the developed world. Of course, this has its risks (as we’ve seen with mismanaged companies like Bear Stearns), but there are many more examples of where this has benefited employees modestly or substantially.
  • For certain kinds of businesses it might make sense for poor clients/customers to also have a method to participate in the value being created. This is being done with some microfinance institutions where the clients earn or purchase shares in the company. This has to be structured right though to create a workable governance model. Grameen Bank has done this with board representatives elected by their bank clients. SKS Microfinance has setup a trust to oversee a substantial number of shares owned by their clients.
  • The local communities where a social business works are also a consideration for participating in the wealth created. [I'm not talking here about the common 1-2% of profits given philanthropically by many companies, but rather the enterprise value created.] Since most communities where these social business operate have huge common good investment needs, there is an argument to be made that a success social business could provide significant capital to at least bootstrap these community investments.
  • When a social business receives donation dollars or subsidized capital, there is an increased responsibility to share the wealth generated more broadly.

All of these new “shareholder” groups introduce more complicated governance issues. Some argue if that if you let these less educated shareholders “vote” that this will create problems for the business down the road. In response to this, some social businesses with substantial share ownership with these constituents appoint capable (and hopefully accountable) trustees to oversee the interests of these shareholders. So, yes, this creates more complexity, but then so does democracy!

I’m interested in hearing about examples of hybrid social businesses which are wrestling with the topic of wealth creation distribution and are experimenting with different models/approaches. Please post comments of examples.

3 comments »

Posted in social business

The funding gap for BOP businesses

April 18th, 2008

Well-run microfinance banks are now starting to attract new and interesting sources of growth capital from investors including Legatum, Unitus Equity Fund, AAvishkaar Goodwell, Vinod Khosla, Accion Investments, Sequoia Capital and many others. This is great news as the “elephant in the room” issue for microfinance is that globally microfinance is currently serving at most 15% of the demand. That is, 85 out of 100 families who could benefit immensely from microfinance have no access to microfinance. And most of those served are only provided basic microcredit business loans, not a range of helpful financial services. The only way this supply/demand gap is going to be narrowed any time soon is for global capital markets to be tapped … there just isn’t nearly enough philanthropic dollars to fund this expansion.

As I’ve written about earlier, I see microfinance banks as providing a new and large-scale, low-cost distribution channel to the world’s poorest families (aka as “base of the economic pyramid” of “BOP”) for products/services which provide opportunity for these families to step out of the multi-generational disease of extreme poverty.

The question is who is going to provide the most helpful and widely available new products and services for these distribution channels? History has shown us that it won’t be the current large incumbent corporations which almost never innovate and have a very difficult time prioritizing investments in emerging market segments due to the high opportunity cost compared with their current businesses. So most of the innovation is going to come from entrepreneurs forming new companies to bring their innovations to market.

So who is going to fund these entrepreneurs? Most of the venture investors (like those listed above) start investing once a venture is off the ground with product in the market. These investors want to make an initial investment of at least $1-3 million and often higher as their investment funds are structured for these size of investments. [This is often referred to in venture speak as Series A round or later.]

What about an entrepreneurs first $25,000, $100,000 or even $500,000 capital to build out a solid business plan, attract the right key talent, build the first generation product offering and other investments required in order to attract these institutional-type investors? These monies are often called seed or angel investment monies and are critical for the bootstrap and startup phase of any business which is seeking to build a meaningful high-volume business with necessary upfront startup investments.

Traditionally, these seed funds either come from the entrepreneurs own savings and some of their close friends and family members. Essentially, people are betting on “you” the entrepreneur. Another source of seed capital is from individuals who seek out very early stage venture investing opportunities. These “angel investors” often invest on the order of $10,000 to upwards of $100,000 in promising new ventures. Often the angel investors also become active advisors and networkers to help an entrepreneur get their business off the ground.

This seed/angel pool is working ok (not, great) for established business segments like technology and pharmaceuticals, but there are very few seed investors for businesses targeting the BOP market. Additionally, many of the highest potential entrepreneurs focusing on BOP businesses live in the markets where they will be building their businesses and have both limited personal and personal network resources as well as limited options for angel investor capital.

There are a few pioneering organizations which are targeting early seed stage investments in BOP businesses including Ashoka, Echoing Green, Acumen Fund and Mercy Corps’ Phoenix Fund. All of these funds are backed by philanthropic monies so they are quite limited in their fund size meaning that they can make either only very small investments or a few larger ones. They are also not setup to help their investees raise additional necessary capital which is often crucial to realizing the business (and impact) potential of these businesses.

Hence, there is a significant funding gap for seed level investment capital necessary to build the next high potential social businesses. I believe this provides a significant opportunity for developing venture-oriented seed funds which focuses investment in high-scale potential BOP businesses. Please post comments if you are aware of any additional seed investment funds in this category.

3 comments »

Posted in social business, social investing

Businesses focused on the world’s poorest

April 17th, 2008

I am increasingly convinced that businesses focused on serving the world’s poorest 4 billion citizens are a very good investment whether you are looking for financial return and/or positive social impact return. That is, for those of us who seek to end poverty, the scale and sustainability potential of businesses focused on this “market segment” have enormous potential for doing good AND doing well. We don’t live in a zero sum world.

Due to the recent increase in non-charity capital flowing to entrepreneurial microfinance banks, we are seeing continued and exciting new growth levels in access to microfinance for the world’s poorest. Correctly, I would argue, most microfinance banks are focusing primarily on client base expansion with basic microcredit products. One of Unitus’s microfinance partners, SKS based in India is now adding more than 100,000 new client every MONTH! This is creating a new large-scale, relatively low-cost distribution channel for delivery of products and services to the world’s poorest families.

The initial benefits of having microcredit loans have been HUGE for these poor households. Even while paying loan rates similar to their middle class fellow citizens (ranging from 25-75% in various countries), most borrowers are comfortably paying back their loans with significant growth in net income. And this occurs with generally nothing more than the loan … that is, no business training, no additional education, etc. That is, the women (most borrowers are women) are putting their existing knowledge and skills to work with a very positive income growth result.

I believe that there are at least two additional categories of significant benefit for these poor families which are on the verge of taking off: (1) products/services which increase the earning potential of the families; and (2) products/services which increase the purchasing power of the families. The first category includes many new opportunities which enable families to earn more for the same labor input and/or protect their existing assets. Examples include skills training, micro-franchises, new tools, supply chain integration, insurance products, savings products and many other products/services optimized for these families. The second category includes leveraging the aggregate demand of these families to attract the R&D, manufacturing and distribution investments to bring new, better and cheaper products to these families thereby enabling their money to purchase more. Examples include affordable mobile phones and better/cheaper food and other staples.

And when you combine these new economic growth and stabilization products/services with a the microfinance financing mechanism, you open up even more opportunities. One example would be a small scale renewable energy electricity generation system which could be operated as a business by a micro-entrepreneur (e.g. micro utility), financed by a microfinance bank and resulting in decreased cost of energy for a family in a rural village.

These new businesses serving the world’s poorest have huge scale potential … that is, an extremely large potential customer base. This means that if operated well even a small profit per customer could result in a large total profit over time. So, you’ve now got an attractive destination for capital combined with potential for significant social impact.

Now, I know that some people are concerned that these businesses will end up earning profits from these poor families and they feel this is morally wrong. I ask though what a better alternative is? For I think it is at least as morally wrong for us to withhold (or delay) the benefits of opportunity for these families in the name of protecting them from potential abuse.

Please post your thoughts in comments.

1 comment »

Posted in poverty, social business, social investing

Social entrepreneur business plan competition

February 5th, 2008

Intellecap is running their 3rd annual business plan competition for social entrepreneurs based in India. They are offering prizes totally $US25,000 plus an opportunity to get support and assistance in refining your business application.

Check out details at Srijan 2008 web site.

I think business plan competitions serve a very helpful purpose in motivating entrepreneurs to get more concrete about their vision and prepare for the necessary infusion of investor capital. I believe that social entrepreneurs will continue to have to a tremendous (if not the largest) impact on ending poverty in the next decade.

Please post about other social entrepreneur business plan competitions or the like that you are aware of for the benefit of readers of this blog.

4 comments »

Posted in intellecap, social business, social entrepreneurs

Social business model

February 1st, 2008

There is a growing interest in a new kind of business that is now being referred to as a “social business” or “social enterprise” (I am going to use the former terminology.) I’d like to explain and unpackage this idea a bit and contrast different definitions/perspectives.

The key difference between a social business and a traditional business is that a social business explicitly sets expectations with investors (usually in its bylaws) that it will simultaneously pursue two objectives — (1) specific positive social impacts/”returns”; and (2) financial returns. Generally, social businesses “warn” investors that the financial returns may be negatively impacted by the social objectives and therefore they seek investors who understand and support these dual objectives when they make their investment. By definition a business must be ultimately self-sustaining … that is, generate a profit/surplus which can allow the organization to continue without indefinite infusions of investor capital. I say “ultimately” because many businesses have periods of operating losses as they startup or pursue periods of forward investing with the goal of being more sustainable long-term.

So far so good. Then the definitions of social businesses by different people start to diverge.

Non-Profits and Earned Income. There are a few people which consider non-profit organizations which have income generating activities to qualify as social businesses, but most agree that while these may be good activities they are not in themselves social businesses as they continue to rely on donor income to be sustained. I think it is increasingly important for the viability of most non-profits to have a diversity of income sources which include earned income.

Self-Sustaining Non-Profits. There are a number of institutions which have explicit missions to “do good” and have sufficient resources/income to be self-sustaining. These include private foundations, endowments (e.g. universities) and, more recently, operating businesses organized in a trust-type format. An example of the latter are a number of successful microfinance banks which generate profits, often are subject to tax, but are run by trustees (as there are no shareholders) who by law cannot have a personal benefit from the organization. Generally, the foundations and endowments are not considered social businesses even though some of them do have some operational components. For true operating businesses run inside non-share capital structures, these are increasingly viewed as social businesses even though they may face future limitations due to their inability to accept investor equity capital.

Corporate Philanthropy. Many companies have initiatives to “do good.” Some organizations commit a specific [small] % of corporate profits to these initiatives. Examples of companies which have institutionalized this are Ben & Jerry’s, Google (1% of equity, 1%profits) and RealNetworks (5% of profits). These come under what’s known in the business world as the “corporate social responsibility” category. Generally, these initiatives are separate and unrelated to the company’s business. There is much debate about whether these are essentially public relations efforts vs. serious attempts to make a meaningful/optimized social impact. See my post on Bill Gates on Creative Capitalism. Most people agree that simply having some “do good” social programs do not make the business a social business.

Yunus Definition of Social Business. In Muhammad Yunus’ latest book, he argues for a much narrower view of a social business. He proposes that only two types of businesses are true social businesses: (i) businesses owned primarily/exclusively by the poor; and (ii) businesses where investors are limited to only receive back their invested capital and no more. He says that type (i) provide social impact through the returns they provide to the poor through shareholding and don’t necessarily need to have a social mission (although having one would make them an even better social business.) For type (ii), he argues that if the investors have any potential for return above their investment that this will always trump any social objectives.

“Hybrid” Social Business. Then there’s a form of social business which has clear objectives for both social impact and financial return. One of the most prominent examples are the many “for-profit” microfinance businesses sprouting up around the globe. These businesses explicitly operate as businesses (with investor capital) and focus on providing valuable products and services to the poor (if not the poorest) citizens/communities. Some argue that these are simply “regular” businesses which happen to focus on a certain market segment … the poor. In some cases, businesses which focus on the poor/vulnerable are exploitive … e.g. moneylenders and their re-branded breathern, pay day loan providers. While there definitely are exploitive business models, there are a growing number of examples of businesses which genuinely seek a material positive social impact. [I will cover some controversial examples of highly profitable microfinance banks in a separate posting.] There are a growing number of social investors who are seeking out quality social businesses of this nature … a good example is Good Capital.

[There are some businesses which have a more indirect impact on a population ... example is mobile telcom operators which appear to increase GDP in emerging markets as subscriber penetration increases ... Merrill Lynch report 0.59% increase in GDP for every 10% increase in mobile penetration ... but generally these are not seen as social businesses.]

Why I Like the “Hybrid” Social Business Model

While I have a lot of respect for one of my current day heroes, Muhammad Yunus, I disagree with his narrow view of a social business because I think it is too limiting on the potential for social impact through the social business construct. Here are a few of my thoughts:

  • Investor expectations do matter. If you select investors who are incompatible with your objectives (e.g. they don’t value your social impacts), you’re going to have a challenge keeping focused on your social objectives. But, this is true for any business … you need to find the right investors and set expectations very clearly.
  • Investors take a portfolio approach. Almost all investors seek to have some diversity in their investment portfolio in order to mitigate risk. If I want to be a social business investor, I’m going to want to invest in multiple social businesses realizing that returns/results will vary. So, if I invest in 10 social businesses and 5 fail (no return, not unusual), 3 have modest returns and 2 have strong returns, I have less risk. I also potentially receive my capital back plus a return (both financial and social.) This means that the successful social businesses are overcompensating me in return (financial and social) and the unsuccessful social businesses are undercompensating me. If I agreed to only received my invested capital back with no financial upside, then I would be losing 50% of my invested capital in this scenario and this should be structured a charitable donation.
  • Social entrepreneurs may serially fail. As noted above, it is not uncommon for 50% of businesses (any type of business) to fail. Let’s say we have a very eager social entrepreneurs who starts 5 social business which fail and it’s only her 6th social business which succeeds. Let’s say that she creates huge personal indebtedness in starting the all of these businesses. Why shouldn’t she be able to have a reasonable financial return on the 6th business in order to compensate her for the risk and expense she took in developing all of these businesses? Aren’t we going to dissuade social entrepreneurs from the necessary risk-taking if they have no financial upside from their personal investment?
  • Accessing investment capital. While there is a considerable amount of money in foundations, donor advised funds and other like pools, these funds represent a very small amount of the overall investment capital pool. Most people need/expect to earn a financial return if they are going to commit monies from [their much larger] investment capital “pocket” (vs. their much smaller philanthropic pocket.) So, if you want to attract this capital, you need to offer a financial return even if it is potentially somewhat lowered due to the additional social impact return objective.

Since I believe that social businesses should not be artificially limited in their ability to provide financial returns to investors and staff, I am going to use the term “social business” (with the “hybrid” adjective) going forward to refer to businesses which have an explicit and material social objective in their DNA.

6 comments »

Posted in social business, social enterprise, social entrepreneurs, yunus