Archive for the ‘social investing’ category

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.

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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.

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Posted in poverty, social business, social investing

Ebay enables investing in microfinance

November 18th, 2007

Ebay recently opened a new web site called MicroPlace which enables individuals to make loans to the world’s working very poor. This enables what I refer to as Socially Responsible Investing version 2 … choosing to make a positive social impact with your investing.

Here’s generally how it works:

  • You can preview the investment options … currently there are 15 choices of microfinance institutions (MFIs) across 11 countries. The term of the loans ranges from 2-4 years and the interest rate paid ranges from 1.5-3% per annum.
  • To make an investment, you create an online account…email address, password and then [unfortunately] a lot of personal information which they are required to capture as a securities broker.
  • You can then invest a minimum of $100. This means that almost anyone can invest which is great! You fund your investment through Paypal (another Ebay company) or directly with a checking account transfer.
  • Once you’ve made your investment, you can track it on their web site.

I have written previously about Kiva, another way to provide loans to microentrepreneurs. I thought it would be helpful to compare and contrast these two services.

Here’s a summary comparison … Kiva let’s you loan directly to a specific borrower which is much more personalized. The downside of Kiva is that you are receiving no interest on your loan. On the risk (of getting your loan repaid) side, with Kiva you need to manage your own risk by splitting up your loans across multiple borrowers whereas you’re investing in a fund with Microplace so your risk is already diversified across a group of borrowers (although typically with one MFI). Generally, Kiva loans are shorter duration. Currently Kiva provides many more countries and MFI partner options … although because of its popularity there are often on a few borrower loans listed at any given time.

More resources

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Posted in ebay, kiva, microfinance, microplace, poverty, social investing

Innovative Microfinance Equity Fund

April 1st, 2007

Unitus announced last week that they’ve raised a US$23 million private equity fund to invest in microfinance. I was able to catch up with Chris Brookfield, Director of Unitus Equity Fund, last week to find out more about this announcement.

Dave: What is Unitus announcing today?
Chris: Unitus is announcing the closing the Unitus Equity Fund (UEF). UEF is formed just like the other venture funds I have been a part of. The difference is that UEF is committed to investing into sustainable microfinance enterprises. It is our hope that by demonstrating that microfinance can scale rapidly and produce returns for investors that much greater amount of investment capital will follow. By increasing the capital available to microfinance companies, we increase the number of borrowers that can be served. So each new investment dollar in will translate to a new opportunity for a poor person to become an entrepreneur.

The ‘close’ means that we have exceeded our goal and will now be focused 100% on finding new MFI’s to invest into. We closed on $23 million.

Dave: What are Unitus’ key objectives for UEF?
Chris: We have 5 key objectives:

  1. Demonstrate that non-profit microfinance banks can transform into sustainable commercial companies.
  2. Show that ‘professional’ investors are willing to invest in microfinance.
  3. Begin the formation of microfinance as an investable asset class.
  4. Attract larger, upstream investors to the space, and
  5. In the end, show the microfinance is a dynamic, high growth business and that the poor are an attractive market for future investment.

Dave: What is unique and ground-breaking about this announcement?
Chris: There a couple of firsts (as far as we know):

  • UEF is the first equity fund in microfinance to be financed 100% in the private market. Most others have capital provided by development agencies and the like. This distinction is important because of the UEF’s more ‘professional’ the investors, our results will have better demonstration effect and be more relevant to other professional investors.
  • We are taking a unique venture capital portfolio approach. Our intention is to partner with the best managers in microfinance and encourage them to innovate and grow rapidly.
  • The UEF is global in scope, but focused on India, Mexico, Brazil, Indonesia and Pakistan.
  • The UEF is a pioneer in creating a hybrid socially responsible investment vehicle that is also managed for risk appropriate returns.

Dave: How are the UEF monies going to be invested?
Chris: The UEF will invest in 8-10 microfinance companies and allocate $2-3 million per company. More than 50% of the companies will be in India, with the rest spread amongst other countries.

Dave: UEF has already made some investments. Can you please describe a couple of those and what impact you are expecting?
Chris: Our investees are SKS (India), Ujjivan (India) and Credex (Mexico). Overall, Unitus has chosen to partner with these MFIs because of the potential for very high growth. You can see some of the detailed goals on Unitus’ web site.

Dave: Who are the investors in UEF and why they have invested?
Chris: The UEF investors break out into roughly 4 groups each contributing about 25% of the capital:

  • Unitus board members and friends.
  • Omidyar Networks, the investment vehicle of Pierre Omidyar.
  • Professional investors who are leaders in technology VC, private equity and health care.
  • A group of socially responsible investors managed by Abacus Wealth Management.

Dave: Some people think that for-profit microfinance is (or can be) predatory or immoral … that is, earning returns for wealthy investors from the financial services provided to the working poor? How do you respond to this?
Chris: I believe that investors of all types need to practice the highest ethical standards in all that they do. The investors in UEF, its management and our Investment Committee are deeply committed to sustainable investing that will create ongoing opportunities for people in all of the markets we invest.

To this end, UEF places a strong emphasis on valuing its investment on a basis of the long term health of the underlying customer bases. Our banks can only do well they customers and communities do well. That’s really our bottom line.

Profits means that microfinance is sustainable in the long term. Not hostage to the whims of political agenda or the grace of donors. If microfinance can continue to grow sustainably, then it will be able to attract investment from the global capital sources. This is the only way microfinance will be able to serve the 2 billion people who need it.

Dave: Why do you like working with Unitus and the UEF?
Chris: This has been one of the most rewarding challenges of my life. It is not easy to raise money for an industry most people have never even thought exists or to make investments in multiple countries. While my international travel regimen is quite grueling, I am very energized. I can’t wait to see how the story of microfinance develops and what role our investments will play.

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Posted in brookfield, equity, interview, microfinance, poverty, social investing, uef, unitus, venture capital

Doing What I Talk About

April 11th, 2006

Our family recently decided to put some savings to work for social good … more particularly for helping out extremely poor entrepreneurs. We made two investments. Yes, investments, not donations. We didn’t get a charitable contribution receipt and we expect to get our investment monies back with earnings.

1. Unitus Equity Fund (UEF). This is a very innovative private equity fund just launched by Unitus — the global microfinance accelerator. UEF recently made the first close of US$9 million on an expected US$20 million fund. We chose this fund because it is the first (that I’m aware of) equity fund which has the following combination of characteristics: (a) raising purely private monies, (b) focused exclusively on equity (not debt) investments in microfinance institutions (MFIs), and (c) focused on very high-growth MFIs (= providing microfinance to the poor who are not currently served.) The fund is structured like a venture capital fund so your money is locked up (providing immense poverty impact) for up to 10 years and they’re targeting a return of 8-12% per annum … not bad! Our hope is that UEF will be successful as a demonstration effect for social investing and encourage more private capital to flow to social enterprises. I’ll write in a separate post about why equity investments are so critical going forward for MFIs.

2. MicroVest mPower Investment Program. MicroVest was founded by three non-profit institutions: CARE, MEDA and Seed Capital Development Fund to focus on capitalizing microfinance institutions. They have setup shop with Calvert Foundation to administer a debt fund called mPower. You make an investment (min. US$1,000), pick a term (1-10 years) and then pick an interest rate (0-3%) to be paid each year. This is a lower risk type investment (more like a bond.) The monies are then lent out to MFIs who in turn lend these monies to poor entrepreneurs. The entrepreneurs then repay their loans to the MFI, the MFI repays MicroVest and then MicroVest repays you, the investor. It is amazing to think that your savings can actually be put to work helping poor people in another country whom you will likely never meet!

So, finally, we’ve put our money where our mouth (really, heart) is.

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Posted in microvest, poverty, social investing, uef

Socially Responsible Investing v2

March 28th, 2006

There has been a lot of interest in the so-called socially responsible investing (SRI) approach to investing. One report I saw [can't remember source] is that 10% (or $1 out of every $10) is now invested with this philosophy representing north of US$2 trillion.

Almost all of this money to date is invested in what I’ll call “version 1″ of SRI (SRIv1). SRIv1 adheres to the philosophy of avoiding investment in companies which violate certain ethical or moral standards held by the investor. It is similar to the supposed philosophy of Google — “don’t do evil.” So SRIv1 investors are refusing to invest in companies which do “bad” things … e.g. gambling, pornography, polluting, manufacturing armaments, bad labor practices, cigarette business, etc. There are many options to choose from … some have a shorter or longer list of these “negative screens.”

Much of the SRIv1 monies have come from charitable foundations and individual investors who have clearer/simpler ways of determining what “bad” is. Unfortunately, it is difficult to find an investment screen which fits exactly with your values. I tried and gave up. And, frankly, while I’m interested in these negative screens, I’m more interested in doing good.

Socially Responsible Investing version 2 (SRIv2)

There is a new emerging class of socially responsible investing opportunities which focus on doing good (vs. not doing bad.) I call these “version 2″ types of SRI. That is, investing in ways which help make the world a better place … whether it be less poverty, better environment, better health[care], less war/crime, etc. There are a growing number of companies which enable you to invest your money, earn a return and have your money used to do good. Yes, these are financially viable businesses which have also have a social mission built-in.

One promising category of SRIv2 investing for lessening poverty is in the microfinance (also referred to as microcredit) business. Microfinance starts by providing small loans to poor entrepreneurs to help them build a small business generating profit to both repay the loan and to help themselves out of poverty. Read previous blog entry on this for examples.

I think that SRIv2 while small today has an even larger potential than SRIv1. I think that “doing good” is a superior motivator than “not doing bad.” In many ways, SRIv2 is a double win — you don’t invest in doing bad and you actually do something positive!

Now the challenge is getting out the word on SRIv2 initiatives!

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Posted in poverty, social investing

Personalized Development Donations

February 28th, 2006

GlobalGiving.com was setup as a grassroots organization to match small-scale donors with entrepreneurs addressing social problems in developing nations. They describe themselves as an “online marketplace for international giving.” They address projects in categories including healthcare, the environment and education. Donors can browse and select by geography. Global Giving is a non-profit, so gifts are tax deductible.

Global Giving (along with Kiva — read my previous post) claim that they have on-the-ground partners who are vetting the projects and people requesting funding to give you (the donor) confidence that your gift is being used for what it is intended and that the project is genuine.

Listen to Public Radio International’s The World Micro Finance Report which interviews the leaders of Global Giving and Kiva.

As you can tell from many of my other posts, I believe that microcredit (providing loans vs. handouts) is proving to be a more effective in creating long-term, sustainable improvements in developing nations. The reality is that microfinance in certain countries currently needs to be subsidized until the microfinance institutions gain scale.

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Posted in globalgiving, poverty, social investing

Personalizing Microfinance

February 12th, 2006

I discovered a new microfinance service called Kiva which is attempting to truly enable person-to-person loans between a loan provider in developed countries and a low-income borrower in developing country.

I am very interested in these kind of innovations because there are currently very few options for middle-class North Americans to invest (not donate) their money in helping very low-income microentrepreneurs start or expand their microbusinesses in order to grow their income and break cycles of generational poverty.

Kiva is using technology to keep the costs of this kind of personalized service to a minimum. Here’s how it works. You go to kiva.org web site and browse through a selection of pre-reviewed loan applications. You get to read an overview of the borrower (including photo), what business they want to invest money in, what size of loan they are requesting and how much they have raised so far. Once you’ve found someone you’d like to make a loan to, you can instantly (using Paypal) make a loan for a portion (minimum $25) or all of the remaining loan ask size. All of the money is managed by Kiva’s web service with human intervention so it is very cost efficient and scalable.

Once the borrower has received a full funding of their loan, then they are actually given the loan typically with a 6-12 month repayment (with interest) period. All of the pre-screening and on-the-ground loan management is outsourced to local Kiva microfinance partners. The partners assign a loan officer who is responsible for posting all of the loan “application” information on the Internet and to write journal entries (essentially a blog) along the way as there is new information to report. All of this information is available for easy access by loan providers (and anyone else who is interested) through Kiva’s web site. Additionally, loan providers are emailed with updates when there is a new posting with one of their loans.

I tried this out. I made a loan of $50 as part of a $500 loan for Steve Ogondo (see his picture on the right.) Steve needed working capital for his new butchery business he called “Gracious God Butchery” based in Tororo, Uganda. Steve has now raised his $500 and now has received his loan. You can now follow his progress on-line. You can also post comments back to him. An assigned loan officer, Moses Onyango, handles all of the translation and communication. I did my research and issued my loan all in about 15 minutes via their web site! And I received an email on Feb 3rd when his loan was granted.

This reminds me of the highly successful (and still innovative) approach to personalization which World Vision International provides with child sponsorship. By putting a face, a name, some individual details and an ongoing communication, both parties benefit from the human connection despite the geographical and cultural differences. World Vision has been able to sign-up the masses for just $26/month … something very doable for most westerners.

There are lots of questions that this approach brings up like:

  • how do you know the money is really going to the person in question?
  • will you get paid back?
  • is this ever going to be operationally sustainable because of the high cost of having the loan officers providing these updates?
  • doesn’t this cause privacy concerns?

Kiva attempts to answer these questions in their FAQs. The reality though is that many of these issues will take time to work out. Kiva is functioning as the “trusted intermediary” and are seeking to use open communication to facilitate this trust.

Kiva is also not yet (and for the foreseeable future) paying any interest back to loan providers … the most the you can get back is the amount lent. They are using the interest income generated to pay for operating cost which are substantial. Kiva is therefore a non-profit and is still heavily subsidized. This is a reasonable strategy. Most people won’t care about getting interest on a loan of $25-100, so this works fine. In the worst case of the loan not getting paid back, your loan becomes a charitable gift.

All of that said, I really do like the concept and innovation of this approach. Using web technology (and probably mobile technology shortly), there are amazing new possibilities for connecting people to make a social impact. Being able to personally be involved in helping someone in a far-away place with the opportunity to improve their lives is very powerful.

Please visit Kiva and consider making a small investment today.

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Posted in kiva, microfinance, poverty, social investing

Investing in Poverty Reduction

November 19th, 2005

A number of people have asked me about whether there are options available for people to invest their savings in ways which are helping to defeat poverty. Investment is different than making a donation. The assumption with an investment is that there is an expectation (although not without risk) that your capital is returned and possibly with some extra earnings. You don’t get a tax deductible receipt for an investment like you usually do with a donation.

There are a growing number of what are called “socially responsible” investment fund options. For instance, you can find mutual funds which explicitly don’t invest in the “sin industries” — tobacco, alcohol, pornography, armaments, etc. These funds utilitize which they call ” investment screens” which are requirements that a company must pass before they qualify to be invested in.

In my searching so far, I’ve only found one investment option* which explicitly focuses on fighting poverty … the mPower Investment Program run by Calvert on behalf of MicroVest. MicroVest was founded by CARE, MEDA and the Seed Capital Development Fund. This fund takes invested monies and loans them out to microfinance institutions (banks for the poor), so these banks can make more loans to the poor. This is a debt fund where you loan (minimum $1,000) to the fund for a term of your choice between 1-10 years and an interest of your choice between 0%-3% per year. Essentially, you’re expecting to get paid back your loan with the selected level of interest.

I have not been able to find any public funds (basically mutual funds or similar) where you can buy shares/units. I expect that this is because of the restrictions on mutual funds needing to be highly liquid (that is, you can sell at any time) and the lack of liquidity for investments that the fund would make in poverty-reduction businesses (like microfinance institutions.)

You might ask why I am interested in investment options for defeating poverty? Should we really think in terms of “making money” while defeating poverty? Why not just make a donation? The reason is that there just aren’t enough donated dollars to fund the initiatives required to defeat poverty. Unitus estimates that only 14% of the people who could benefit from microfinance currently have access to those services. It is only when we start tapping into the capital markets (which means your and my savings/investments) that we reach the capital needs for the one sector of microfinance.

*NOTE: There are an increasing number of private funds being raised for microfinance … both debt funds and equity funds. The issue for most people is that you have to be a “qualified investor” (read: very wealthy) in order to participate in these options. So, they are really not options for most people.

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Posted in poverty, social investing