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Archive for the ‘social enterprise’ category

Critiquing microfinance, Part I

April 20th, 2008

It is healthy and expected for any growing trend or endeavor to receive critique and microfinance is no exception. I’ve decided to do a mini-round up of some recent critiques for those of you who might not have seen them.

The New Yorker Article

The New Yorker recently published an article by James Surowiecki called What Microloans Miss. In this article, Surowiecki argues that while microloans definitely have positive impact they are not what poor countries need most in order to get richer. He observes that the majority of people in developed countries are salaried workers, not entrepreneurs, hence we need more new small/medium businesses which hire people (he calls the “missing middle”.) He also states that microloans are often used for non-business activities including providing consumption credit during lower income periods. He calls for more focus on equity investments vs. loans to small businesses in addition to loans. In summary, he says “for some people the best route out of poverty will be a bank loan. But for most it’s going to be something much simpler: a regular paycheck.”

Microfinance network Pro Mujer CEO, Ben Moyer posted a response where he argues that “the goal [of microloans] is not to make “poor countries richer”; it is to bring desperately poor people out of poverty by helping them to become self-sufficient.” He goes on to note that “For now, the impoverished semiliterate and illiterate women receiving microloans won’t benefit from investments in the ‘missing middle.’ Microcredit will continue to offer the best return on investment, because it eradicates poverty one person at a time.”

I think that this isn’t an either/or type of issue, but an AND … that is, we need to encourage the continued growth of microfinance and new growing enterprises which create income for families in poor countries.

Microfinance appears to be the best tool available to quickly grow the income of desparately poor families to the point which they can get above the poverty line. That is, they can become relatively stable in being able to provide for their basic needs. Microfinance requires relatively small amounts of capital and infrastructure which means that it can reach and serve large numbers of families very quickly. And you can start to see income improvements in terms of weeks, not years. So, while I agree that we should not over-hype and over-promise on how microfinance can reduce extreme poverty, I also think we should not underestimate the continued positive impact it is having. More importantly, there are many countries and regions where microfinance is almost non-existent, so we need to continue to encourage increased investment to bring this baseline financial service to these families.

There is indeed a dirth of financing options available for new small business … even high-potential ones … in emerging economies. I wrote previously about this “funding gap“. Also, there is a good article by Vinay Ganti which dives further into this topic. The reality though is that this is a medium to long term contributor to emerging market income due to the nature of starting and growing these businesses. It doesn’t mean we should not start investing now!

Also, to get perspective on the reality of timelines for dramatically changing systems, I recommend Hernando Desoto’s groundbreaking book on the history, state and importance of adequate property rights described in his book, The Mystery of Capital. Desoto reviews the history and complexity of the development of property rights in the USA (and other countries) not to discourage more acceleration in property rights in other countries, but on the contrary to help articulate the lessons learned in order to accelerate property rights in emerging countries. We want to deconstruct (in order to understand) the accelerated success of new business starts in certain Asian countries over the past 50 years in order to better encourage similar growth in countries which have not yet participated in poverty reduction growth.

Read Part II

Please post your thoughts in comments.

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Posted in microfinance, social enterprise

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.

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

Grameen update

October 18th, 2007

On Tuesday, I participated in a dinner event sponsored by the Seattle International Foundation featuring Nobel Laureate Muhammad Yunus, founder of Grameen Bank and author of Banker to the Poor.

Professor Yunus shared a number of updates and answered questions. Here are some of my notes…

On Grameen Bank in Bangladesh:

Now serving 7.5 million clients (avg. family size of 5 => 35M+ people)
27,000 staff
Now 80% of poor in Bangladesh are offered microfinance (all MFIs) and targeting 100% coverage by 2012

Most poor countries have 5-10% with the best being 15% coverage of microfinance for poor, so lots of work still to do

Bank is owned by borrowers
All capital loaned out comes from savings of the poor (and bank staff)
Each branch must drive their own savings for capital to loan out … require that each branch become profitable and capital self-sustaining within 1 year
Microfinance is very empowering for women … often first time in their lives that they have anything of their own. Borrowers (women only) decide who will inherit their savings if they die. Interestingly, most women choose their youngest daughter as she has the least opportunity.

On other Grameen-spawned businesses:

Grameen Phone is largest mobile operator in Bangladesh with 16M subscribers
Grameen Energy is focused on bringing solar energy solutions to the poor … reached 100,000 households so far and now aiming for 1M. Cost of solar panels continues to slow down growth of this business. There is great hope that some technology breakthroughs will substantially lower the cost and enable them to accelerate deployment.

On social businesses:

Yunus continues to be a strong proponent for social businesses … that is, businesses which exist as commercial entities AND have a mission to have a strong positive social impact
I think he is right and this is a great new opportunity for entrepreneurs

On microfinance in China:

China has very little supply for microfinance and, next to India, has the largest unmet demand for microfinance
Yunus recently met with senior people in China’s central bank on their request to hear about his ideas on microfinance
Central bankers were initially quite defensive … holding up their cooperative model as being quite effective in channeling financial services to the poor
Yunus said that that was quite interesting and that China must be doing something quite differently as in Bangladesh there was also a long-term cooperative system which was widely promoted by the government, but is completely ineffective due to corruption, bureaucracy and lack of relevance.
This caught the central banker leader off guard and she surprisingly agreed with his assessment and said that they would no longer rely on cooperative model as the cornerstone of China’s financial services provision for the poor.

Additionally, Grameen America was formally announced. See my earlier posting.

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Posted in grameen, microfinance, poverty, social enterprise, yunus

The world’s smallest yogurt factory

February 22nd, 2007

I heard about 6 months ago about the ingenious idea of Muhammad Yunus, founder of Grameen Bank and recent Nobel Peace Prize winner, to build a new yogurt business in Bangladesh.

The first factory just opened near Dhaka as part of a new venture called Grameen Danone Foods. The mini-factory produces a yogurt called Shakti-da (which means “yogurt with strength”) which is fortified with vitamins to address malnourishment. And each yogurt helping with be inexpensive … about 7 cents per cup … which affordable even for the poor.

The story I’ve heard goes something like this … Danone (major yogurt maker) CEO Franck Riboud was sitting next to Yunus at a lunch in Paris in the fall of 2005 and had asked Yunus to explain to him about microfinance and the Grameen Bank. At the end of the conversation, Riboud asked Yunus, “how might I help you?” Now this is a very dangerous question to ask Yunus! Yunus responded, “I’d like you to send your chief yogurt factory designer to Bangladesh to meet with me.” Riboud agreed. A short while later the Danone factory designer chief showed up at Yunus’ office in Dkaha to find out how he could help. Yunus said, “I’d like you design and build the world’s smallest yogurt factory to operate here in Bangladesh.” The factory designer said, “But, I design the world’s largest yogurt factories, not the smallest.” Yunus responded, “I need you to design the world’s smallest one. I’ll be here if you want to go off and think about it and come back later.” So, the factory designer left and went back to his hotel room. A little while later, he appeared back at Yunus’ office with the sketchings for an idea. And the venture was born…

This is setup as a for-profit, social enterprise joint venture between Danone and Grameen Bank. Danone is contributing $500,000 of seed capital. The plan is to re-invest all profits with the exception of paying back Danone their initial seed capital. The factory will buy milk from Grameen Bank microvenders (who’ve been financed by Grameen Bank to buy cows) and microentrepreneurs will sell the yogurt door-to-door. Each factory will employ 15-20 women directly and up to 1,600 people in an area. And the enterprise is designed to environmentally friendly using biodegradable cups made from cornstarch, solar panels for electricity generation and rainwater collection vats. If the first factory is successful, they have plans to launch 50 more in Bangladesh and then who knows where.

There is a good write-up of the story in Fortune magazine called Saving the world with a cup of yogurt.

Please post comments about other social enterprises you have heard about.

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Posted in danone, grameen, poverty, social enterprise, yogurt

Getting reading glasses to the poor

October 5th, 2006

Scojo Vision is a social enterprise. They sell hip reading glasses at first-world prices in developed countries and more basic versions at very low cost through a micro-franchise type network in developing countries. Scojo Foundation was recently recognized as a Fast Company 2006 Social Capitalist finalist (good overview of what they do and how they do it.)

The Problem: It is a physical fact that everyone eventually needs reading glasses … no matter where you live. Can you imagine trying to live a productive livelihood when you can’t read written material or do things with your hands (sew, cook, fix things, count money, etc.) … especially when it’s your source of income?

Scojo’s Approach: Scojo Foundation has two primary sets of clients: Scojo Vision entrepreneurs and their customers. Scojo Foundation trains Scojo Vision entrepreneurs to successfully operate micro-franchises selling reading glasses to the poor which more than doubles their monthly income. This newfound income enables them to invest in their families. And the poor clients now can see again and have untold improved quality of life.

I particularly like a number of things about their approach:

They are driving down the price of reading glasses for the poor by using their buying power and an efficient distribution network

They are increasing the distribution (availability) of affordable reading glasses to the poor even into far flung rural areas

They are selling reading glasses to the poor at prices the poor can afford (things people pay for are utilized much more effectively than gifts) at non-subsidized prices (expansion to new areas is subsidized; glasses aren’t)

They are creating new jobs for reading glass micro-retailers in developing countries

They are taking some corporate profits from their first world business to underwrite expansion of micro-franchise business network in developing countries

The foundation expansion is not just funded by Scojo Vision, it is a 501c3 non-profit which raises money from other companies, foundations and individuals so that there is more capital and participation. [Many company-attached foundations could learn a lot from this!!]

The bottom line is that the Scojo Vision founders are building a social enterprise which creates products that people want at prices they can afford. This is a very scalable and sustainable approach to helping the poor … which is why I like it! I made a donation to Scojo to help them expand their distribution network. You can participate too!

Also check out the Foundation’s reference library on selling to the poor.

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Posted in poverty, reading glasses, scojo, social enterprise

MicroFranchising — Another Income Generating Tool?

May 27th, 2006

One interesting (at least to me) emerging idea for defeating poverty is to make it easier for a poor person to start a very small (micro) business.

Does microfinance have a limited market? Some of the critics of microfinance have argued that most humans (including the poor) don’t have what it takes to be an entrepreneur who can successfully start a business from scratch and then continue to grow it. The critics have pointed out how so many of the poor who take microcredit loans are starting copycat microbusinesses with low profit margins and therefore questionable sustainability. The advocates of microfinance recognize this as one of the results of a free market system where you have a bell curve of success — some are very successful, most are moderately successful and some fail. All this said, mechanisms, systems and approaches which increase the likelihood of success for a business entrepreneur are welcomed by all.

Kirk Magleby, a defeating poverty activist, has done substantial research into a way to “lower the bar” — making it easier — for the motivated poor to generate more income. He refers to this as MicroFranchising. Think about how the ubiquitous Subway franchises have sprouted up so quickly across North America … and then downsize this to the size of a stall or a very small storefront and you’ll get the idea of the “micro” version of franchising.

The reason that franchises can spread so rapidly is that the purchaser of the franchise is buying a well-proven system for setup and operating a business so they have to invent less themselves. They simply go to the training course, read the manual, pay the start-up fee, find their location and then setup the store/stall according to the manual. And, presto, they’re in business. Yes, they often have to buy products and supplies from the franchise owner (single source supplier) and they also pay them a percentage of your gross sales. But often this is a worthwhile trade as the franchisee has instant brand recognition, an operating business and many other risk factors are reduced as they follow the system and services provided by the franchise owner.

So, the idea is to “encourage” both national and international established corporations to more aggressively downsize their franchising model to enable a motivated poor person to run a microfranchise. If a franchise model is micro-sizable to a minimally educated poor entrepreneur, then the large companies should be expected to rapidly adopt this model as a lucrative new sales channel.

How would the poor person pay the upfront costs to setup the business, buying inventory, etc? Often the franchising company will over finance the setup and working capital as it is a highly profitably business for them beyond just the financing. The other most promising financing source is local microfinance institutions (MFIs.) MFIs should be very willing to finance these type of operations for their quality clients as these type of businesses have much less risk than financing a similar completely independent business. This is why I view microfranchising and microfinance to be highly complementary services.

Magleby identifies a vast number of potential microfranchising businesses including almost anything that is purchased by consumers and businesses. One example where microfranchising has been successful to date is for mobile (cell) phone franchising. Here is one Vodafone example in South Africa which Magleby references.

For-profit microfinance

May 15th, 2006

There is a major positive change starting to ripple through the microfinance industry … the trend towards running microfinance institutions (MFIs) as for-profit businesses rather than non-profit charities. Today, The Wall Street Journal ran a front page article on this trend highlighting a for-profit Indian MFI, SKS, which I have visited in Hyderabad last October. Unitus, a microfinance venture capital non-profit, was very instrumental in enabling this new direction for SKS and is an early equity investor in SKS.

This trend is incredibly good news for the poor! Why? Here are a few reasons:

For profit MFIs are much more likely to continue operating for the long haul … which means that they will continue to be servicing the poor when the donated funds for non-profit MFIs move on to the next interest.
For profit MFIs are forced to operate efficiently in order to create a profit. This means that they need to create an ongoing operational efficiency culture. Over time, (sometimes even short-term) this means that the cost savings can be passed along to their poor clients in the form of lower interest rates or fees.
For profit MFIs are forced to be more transparent with their governance. Generally, this is forced upon them by regulation and their investors who want to see how their money is being used and to reduce the possibility of fraud and mismanagement. A more transparent, healthy MFI is likely to receive better rates on loans from banks which lowers their cost of capital which over time can (and will due to competitive pressures) be passed along to poor clients.
For profit MFIs can accept equity capital. That is, investors can buy shares in a MFI. This provides very inexpensive and flexible capital for the MFI which enables them to make forward-looking investments in staff, systems, expansion and other things which enable them to grow and expand. And, unlike loans, the MFI doesn’t have to pay back this capital or pay interest! Additionally, equity capital can be leveraged to enable them to borrow more money from banks which is then lent out to poor clients. So, the net benefit to poor clients is more loan money at lower interest rates.
For profit MFIs are much more likely to focus on their poor clients as “customers” vs. beneficiaries. That means that they will care about things like customer service and creating financial products which work best for their poor clients in order to retain their customers over the long-term and help their customers be successful. This potentially is one of the greatest benefits to poor clients as their needs change and evolve.

What are other benefits of a for-profit vs. non-profit? What are the downsides of a for-profit? Please post as comments.

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Posted in commercialization, microfranchise, poverty, social enterprise

Productivity tools designed for the poor

March 24th, 2006

KickStart, a non-profit based out of Kenya and San Francisco, is taking an innovative approach to fighting poverty by inventing tools optimized for delivering productivity for the world’s poor.

I met KickStart’s CEO and Co-Founder, Martin Fisher, a few months back at an education event sponsored by Seattle Social Venture Partners. Martin has spent most of his career living in Africa working with various different NGOs focused on development initiatives with Africa’s poor. He became very frustrated that despite working very hard and trying to be creative, he just didn’t see any material results in their efforts helping the poor out of poverty. He came to the conclusion that the development community was missing out on the basic fact that for the poor to become independently and sustainably non-poor that they needed to be able to earn income. No income = continued poverty. Handouts, while often life-saving in the short-term, aren’t a long-term solution. And development agencies are addicted to handouts.

KickStart’s first invention was a very efficient, low-maintenance, low-cost manual water pump which they named the MoneyMaker. This pump was designed for micro-farmers (the majority of farms in Kenya are less than 2 acres) at a low enough price point (a couple of hundred dollars) and an incredible return-on-investment … up to US$5,400 profit in the first year! How is this possible? Basically, the manual pump enabled micro-farmers to feasibly irrigate their fields resulting in a transformation from a single, subsistence crop per year to 3-4 “cash” crops per year. They have since introduced improved versions of the pump which enables farmers to reach deeper wells and to irrigate larger fields.

They claim that your donation of $200 will help one family out of poverty permanently.

I challenged their assumption that they needed to subsidize their products so much. If there really is such an amazing (only 1-2 crop) payback, why don’t they finance the full cost of the pumps with microfinance. Martin said they are looking into this possibility.

I think this is a very interesting social venture enterprise. I’m impressed with their focus on building (and selling) helpful products to some of the world’s poorest in order to help them help themselves out of poverty.

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Posted in kickstart, poverty, social enterprise

Yunus: statesman for the poor

September 21st, 2005

I had the opportunity to hear Muhammad Yunus, founder and director of The Grameen Bank, earlier this week speaking at an event in Seattle.

Yunus is very much an activist for practical solutions to defeating poverty. He recounted his story of starting The Grameen Bank, now one of the largest banks in Bangladesh with now over 5M micro-credit borrowers. They also launched a mobile phone company in Bangladesh called Grameen Phone targeting the rural poor which has now become not only the largest phone company in the country, but also the largest company and tax payer! More than 200,000 micro-entrepreneur “phone ladies” are now operating in villages all over Bangladesh renting out phone minutes to fellow villagers. This is a significant service to the rural communities, a profitable business for the phone ladies and a profitable business for the phone company — a triple win.

The Bonsai People

Yunus is very much an advocate for the potential of the human spirit in every person. He believes that people are poor not because of their own actions but because of the systems that have denied them the ability to reach their potential. Yunus provided the analogy of the bonsai tree. He said that you can take a seed from the largest tree in the forest and put it in a small pot, limit its water and it will grow up as a dwarf tree. Yunus said that this is a good analogy for how potential is not realized by poor people.

Dream Your World

Yunus was asked about how he would talk with well-off children about poverty. He said that we should encourage our children to dream about the world they want. Then we should encourage our children to pursue making that world. Wow!

Social Entrepreneurs

Yunus was asked about what he saw as the next major movement. He talked about a new kind of business person who was building a business to make a profit (for no business will survive without profit) but also to equally value providing a social return. This contrasts with the Wall Street approach of focusing exclusively on maximizing profitability. He envisions an industry developing around social capitalism to run alongside the traditional profit-only focused industry.

Previous post on Grameen and beggars

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Posted in book reviews, grameen, microfinance, poverty, social enterprise, yunus

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