Should banks be more discriminating when lending to microfinance institutions?

Rogue microfinance institutions in India have recently caused banks to question whether they should be more discriminating when lending to these organizations. Recently in the southern state of Andhra Pradesh of India, officials have mentioned creating new regulations in the microfinance industry. Politicians in the state have told borrowers to stop paying back loans which is hurting the high repayment rates that most microfinance lenders expect.

Having a few bad borrowers that are unwilling to pay will affect the entire landscape of the microfinance industry. It's likely to affect more than just India if the trend were to continue. It raises several issues and questions about how to handle microfinance in these rural areas. Should banks have a more stringent process for lending to microfinance institutions? Should less money be allocated to the industry because of the higher risk if borrowers would be unwilling to pay in some of these areas? How can socially responsible banks continue to lend but ensure repayment from these microfinance organizations?

If regulation increases it will likely make it more difficult for some borrowers to get funding for their business. The structure of lending could change where sometimes funds are dispursed to a group of entrepreneurs and each is responsible to pay collectively. Other models require the individual to be responsible and use past history to determine how much is loaned.

Yet another issue with the regulation is making the cost structure more transparent for microlenders so banks can better determine who to lend to. Ensuring microlenders aren't charging too high rates to borrowers has also come into discussion as their isn't much regulation around what they can charge.

As banks continue to lend to the microfinance industry it's apparent more regulation or transparency needs to take place. Most importantly, how can banks ensure money loaned to the microfinance institutions is effective and responsible?

Using Bonds to Get Locals to Invest in Social Ventures

This article highlights a fund developed and serviced by Citylife, a charity in Cambridge, UK providing an innovative funding service in Sheffield, UK. The basic idea behind the fund is to collect money from individuals, companies, and other charitable foundations in the form of donations that are then repaid after a 5 year period, without profit or interests payments. During this 5 year period, the collected funds are used to provide loans to fund “community-minded projects.” The article highlights several different social ventures that have been helped by Citylife and its loan scheme. An example is the Sheffield city’s Centre for Full Employment, which has benefited from a 12 month loan helping 880 low income people find jobs. As a result of the project’s success in the city, similar programs have sprouted in other areas. Citylife also has an ambitious project to expand the scheme to East London on the order of £20 million. Of particular interest here, is the ability of this funding mechanism to allow those who want to help, but may not have the money to just give away, such as families with young children who do not need the money at the moment, but would in the future as those children move on to college, to recollect that money. Similarly, small businesses, middle class to wealthy individuals, larger businesses, and charitable foundations can help to provide funding that would later be returned.

The funding of social enterprises and small business through loans and microloans, as we have discussed in class, is gaining steam. Providing the capital for that funding, however, is a big issue and the major topic of this week’s class. This article highlights an innovative approach that allows for a new and perhaps very large source of that funding, in addition to the funding provided by venture capital firms, big businesses, governments, or large charitable foundations. Can such an approach working on a large scale in the United States and other countries? Do you see any improvements to this approach that could provide additional benefits?

Financial Innovation and the poor: Wary of corruption...

The Economist article titled "A Place in Society," described the recent push to

"yield a financial return alongside a social or environmental benefit."

This push comes for several reasons that we have discussed over the first half of the course. Though this idea sounds great, there have been issues with the funding of these endeavors. Chertok, Hamaoui and Jamison's article The Funding Gap, details some of these struggles. Though measuring the impact of a social mission undoubtedly causes some investors to shy away, I believe the fear of joint social/profit endeavors also takes a toll on social entrepreneurs pockets.

I came across an article in the NYTimes that started an intense conversation as to whether a profit seeking endeavor can stay true to a social cause. NyTimes "Fear of Profit" The comments that follow the article show the true conflicting feelings of many people regarding the answer to this question. Though the article was talking about micro-financing in particular, the comments listed are not different from any other discussion surrounding other subsets of social entrepreneurship.

Other than those who benefited from the Social Innovation Fund [pictured below], others have found difficulty "raising money to grow the social enterprise--$250,000 to $2 million or more."

I am sure that social enterprises will be more successful in fundraising as time progresses--but what will be the cause of that success? I think some of it will be due to people warming up to the idea of social enterprise/entrepreneurship and that will come from explicit measures of success. The methods outlined in Ted London's, "Making Better Investments at the Base of the Pyramid" as well as Geoff Mulgan's "Measuring Social Value" do a great job of outlining the difficulties, and also techniques to measure social value--which will definitely help social entrepreneurs attract funds.

However, even with all these tools and people becoming more accustomed to the idea of "profit with a purpose"--will social innovation stay clean? As I sat here writing I really wondered if the critics will be proven right in the end, or will this era of social innovation be full of progress and honesty. So that is my question, what will we be saying about social entrepreneurship 20 years from now? Great for all--or just like any other business?

Complexities of Measuring Social Value

I enjoyed reading Measuring Social Value by Geoff Mulgan and was reassured by his multi-faceted and flexible approach to measuring social value. The model that Mulgan proposes is informative and comprehensive. I often hear social value measurement referred to as static measurement that seems highly unrealistic. And, if “we are what we measure,” then a poor measurement is detrimental to a venture being effective.

The success of the UK’s National Health Service, as Geoff describes, is centered in its ability to have an integrated approach to providing health services. A question arises for me regarding the implications for programs that bring social value that operate in silos. How do we (as supporters of social enterprise and innovation) provide tools and resources to incentivize more integrated approaches to these organizations’ work? If we are able to keep our eye on the prize, of serving more effectively the populations in need, more integrated approach to all services is an effective solution.

Geoff continues in the article to describe the “framework for thinking about social value” and how the “judgments” of the framework are categorized into four assessments: strategic fit, potential health outcomes, cost savings and economic effects, and risks associated with implementation. A tool based on judgments is what the field needs, but I am wary if this will appease funders who are used to a single bottom line and objective metrics. Geoff offers a necessary caveat that while NHS has clear supplies and demands, for many NGOs “supply and demand are fuzzier, and each field brings with it a different set of concerns.” Translated into how this affects funders, Geoff explains how “the greatest contribution that funders can make is often not to measure value, but to forge the links between supply and demand that will later generate value.” This method seems to be realistic and would be a boon for organizations as they collaborate with funders to increase their focus and ability to understand the complexity of their work, long-term impact and potential unintended consequences.

The idea of turning “latent demand into effective demand” is terrific and provides the hope and optimism for innovators to be effective change agents, supported, rather than hindered, by the foundations that fund their projects. What innovations would be likely to arise if funding constraints were assuaged and funders were able to better connect supply and demand?

What is government's role in Social Innovation Funding

Michael Chertok, Jeff Hamaoui and Eliot Jamison, in The Funding GAP, described 5 types of direct investors (Angel investors, philanthropic foundation, endowed nonprofits, international development agencies, pension funds) and 7 types of intermediary investors (social venture capital funds, community development financial institutions, social enterprise and nonprofit loan funds, international small-and-medium-size enterprise development funds, venture philanthropists specialized foundation, socially responsible mutual funds). But I noticed they neglected one important funding organization, that is government. They contract with non-profit and new-born social enterprises, outsourcing their public services and build public-private relationship.

Usually, government don't fund and select applicants directly. They are in favor of a third party, (non-profit incubator organization,etc) to organize and choose the best candidates for their public services. Especially in the emerging economics, government plays a role of supervising everything within the country. However, she can't take care of everything she wants, therefore, government contracting is prevalent these years in countries, like China.

Many new social enterprises in Shanghai will make advantage of these contracts, regarding it as continuous and sufficient source of their funding. On the flip side, government will limit their development regarding to some sensitive issues, which might leads these new social enterprises on the wrong track opposite to their original plan.

I shared two links which I believe government is behind them.

Social Innovation Fund

NPI Venture Philanthropy (I am sorry, this is Chinese version, you may use google translation :P)

My question for today's lecture:

1) How to balance the benefit between your investor and yourself? Since sometimes, we will meet the dilemma that if we got the money from someone, we will scarifie part of our ideas to meet their needs. Especially in public affairs, this leads to a problem Public interests vs. Private interest.

Hybrid Organizations...Applicable Just In Theory?

As the authors, Chertok, Hamaoui and Jamison of The Funding Gap explain, creating and funding hybrid enterprises can be complicated. A hybrid organization is defined in The Funding Gap as, “…a hybrid structure consisting of two distinct but related organizations – one a for-profit and the other a nonprofit – with closely related missions and overlapping operations.” The allure of hybrid organizations is simple. The nonprofit is able to solicit donations and grant funding, while the for-profit entity can attract investors. Hybrids are especially helpful, at least in theory, for nonprofits facing difficulty in maintaining or increasing funding, especially during periods of economic uncertainty. Stephanie Strom in the New York Times article, “Hybrid Model for Nonprofits Hit Snag,” writes, “It is virtually impossible to grow a social enterprise in any significant way relying wholly on donated money, earned revenue and debt financing, which are the only sources of financing available to nonprofits. These hybrid structures allow social enterprises to tap conventional investors interested in making profits while continuing to pursue their social missions.” The way in which hybrid organizations are intertwined however, is many and varied. The entities, because of tax and legal issues, are separate, but can function interdependently of each other in various degrees and can offer possibilities beyond what either entity could be on its own. As The Funding Gap explains, “The extent to which the two organizations share board members, staff, and offices can vary. And the way that for-profit’s earnings are shared with the nonprofit can take many forms, including dividends, royalties, license fees or donations.” However, a hybrid organization can be exceedingly complicated.

Hybrid organizations are time consuming, expensive and confusing. Imagine running a nonprofit or a business...now try to imagine running both things simultaneously. While navigating through confusing tax codes, recruiting and managing a Board of Directors, and writing complicated grants to foundations, imagine trying to raise capital, hire and manage staff and revise a business plan. Hybrid organizations are a wonderful concept, but the reality seems to be much different. Managing a hybrid organization requires a tremendous amount of due diligence. In February 2010, World of Good Inc., a hybrid organization that was praised in The Funding Gap was sold to Ebay for a $100,000 grant and its shares retired. World of Good Development, its nonprofit counterpart, is struggling to stay afloat and has even lost its name. Investors are notably concerned that individuals are profiting off of donations that were given for the intent of public benefit. “These tiered capital structures where you have some mission-oriented capital combined with commercial capital can be challenging. When everything is going well, everyone is getting along and interests are aligned. But when financial challenges hit, the fact that there are different objectives creates questions about how the pain is shared.” How do we merge two different models, one based in altruism and social value and the other driven by profit to create a hybrid that will not only work, but flourish? How do we combine the best parts of both models and alter the tax structure and legalities to bring about a sustainable business model rooted in a social mission? Hybrid organizations could be the answer to our driving urge to "do well and do good" as long as we take the time to structure it correctly. http://www.nytimes.com/2010/10/26/business/26hybrid.html?pagewanted=all

Has the push for private investors led India into a Micro-financial Crisis?

Plummeting stock prices (well, only one company is traded on the market), cries for government regulation and politicians posturing to gain power, people's lives ruined, and an industry in crisis. Sounds familiar, doesn't it? Well, it's not what you think. India's micro-finance industry is experiencing a meltdown.

Grameen Bank, the gold standard for MFIs, has a banking license from the government of Bangladesh. Though their lending and ownership models are different from a traditional bank, they do operate as a bank and are subject to the same regulations and oversight. However, due to the way their banking system is structured, this is not how any MFI operates in India. MFIs in India are their own animal.

Last week I wrote my post around this exchange between Muhammad Yunus of Grameen and Vikram Akula of SKS Microfinance in India. Akula was arguing for the merits private money offered to MFIs, particularly in India. Yunus' contention was that by opening the door to private investors an MFI would lose sight of their social mission and become singularly focused on making a profit. In the two months since their debate at the Clinton Global Initiative it seems as though Yunus' concerns are being realized.

This is not to say that SKS is the lone culprit. In fact, while they are the largest, SKS is arguably the fairest MFI in India (their rates are at 24%; others charge as much as 60%). The move away from achieving a social mission through free market principals to just treating micro-finance as another vehicle to make a profit appears to be an industry-wide problem in India. There, MFIs are not banks. They were never subject to government oversight, or any regulating body for that matter(though that is changing). And it appears as time passed and more players and private money moved into the industry, this lack of regulation allowed the ideal of an MFI to be perverted. As Yunus claimed, it became "about exciting people to make money off the poor" and not accomplishing a social mission.

I don't mean to lay blame for this crisis entirely at the feet of the MFIs and their private investors. They are only one part of a much larger problem, as this article outlines in great detail (the parallels you'll see in that article to the financial crisis in the U.S. are uncanny). But the type of investing being done through the MFIs in India and the profits those MFIs were seeking ended up going beyond "impact investing" and "type 3 social ventures."

Though other factors enabled them, these MFIs still strayed far away from their original purpose to seek large profits and provide returns for their investors. I'm left wondering if that's not what the future holds for "impact investing." You'll likely always have those that are invested purely for philanthropic reasons and they will never expect much of a return. But how long before those simply looking to diversify their investments demand higher returns as other areas of their portfolio underperform? If they're unable to deliver, the social venture will lose investors and capital. If they purely seek profit, their social mission will likely suffer. Where is the balance? Is there a balance? Do investors with any expectation for a return have a place in "impact investing"? Is it even worth a social venture opening that door if it means that one day they might have to compromise their mission? Let me know what you think.

Thanks.

-Kyle

WOKAI—ENDING POVERTY IN CHINA, ONE LOAN AT A TIME

After read through “the Funding Gap”, Wokai, the first person 2 person micro-finance platform popped into my head and I am really thrilled to introduce you the NGO that uses micro-loans to change lives of people living in rural China.

Wokai Operating metrics:

Financial regulation strictly prohibits private financial institutions in China, therefore privately-operated microfinance institutions are not allowed. (The local MFI that Wokai partners with is “GONGO”, which local counties have a big say.) Seemingly, as a registered 501(c)3 NGO, Wokai is facing to 2 challenges: financial regulation and funding.

From the Wokai operating metrics, Wokai creates a very innovative solution to tackle these 2 problems.

a.  Loan contribution is from petty cash donation, from people inside and outside China.

According to the article, “creative entrepreneurs will find new sources of investment capital to fund its social enterprises; bold investors have pioneered new types of investment vehicles to fill the funding gap.”  Never before a MFI could thought of the idea the each loan be separately add up. Using internet, Wokai attract contributors from all around the world to donate their pocket money to help people in rural China start business: Loaner could follow up the borrower information, track loan repayment progress, from their blog and photos; Borrowers use capitals to start another business or continue their business after repayment. Internet brings loaner and borrower together, and replaced the normal method (eg. Joint liability group).

Attached file is one of my loan recipient’s blog

http://www.wokai.org/borrower/66

This year we have experienced a drought once again. We have to buy grass fodder. -- In March of this year, I borrowed the second portion of a 4,000 yuan microloan. I used the funds to continue my agricultural venture. This year I took my own dairy products to the market in town! Dairy prices are steady, and my income is OK. Because we have experienced another drought this year, I still have to purchase grass fodder.

The direct investor for Wokai is “angel investors” (from “the Funding Gap”), more specifically, individual but not necessarily wealthy. In one word, Wokai takes advantage of internet and find a creative solution to the sustainable funding for borrowers.

b.  Partnering with local MFI (GONGO)

Facing the regulation, Wokai currently works with two Field Partners, both of whom were established in collaboration with United Nations Development Program in the '90s.

Current Field Partners

Chifeng Zhaowuda Women's Sustainable Development Association (CZWSDA)

- Located in Chifeng, Inner Mongolia

- 3120 clients, all female

- Gross loan portfolio more than $1 million USD

- Over 99% on-time repayment

- First recipients uploaded to Wokai in October 2008

Association for Rural Development of Yilong County (ARDY)

- Located in Yilong County, Sichuan

- 2437 clients, 804 of whom are female

- Gross loan portfolio more than $900,000 USD

- Over 98.8% on-time repayment

- First recipients will be uploaded to Wokai in February 2009

WOKAI’s due-diligence team travels to each potential Field Partner to compile a comprehensive report on its governance, information and accounting systems, risk-assessment policies, loan portfolio and lending activities, performance, and efficiency. Once Wokai begins working with a Field Partner, the performance of that partner is continuously monitored. Wokai performs semi-annual on-site monitoring visits in which they conduct a thorough review of the organization and an audit of clients and financial reports.

Through detailed screening process, WOKAI dodge the regulation limit by partnering with local MFI, at the same time making sure the performance, credibility, and efficiency.

To sum up, from “the Funding Gap”, funding shortage for social entrepreneur could be resulted from actual funding and regulation limit. WOKAI created such a innovative pattern and I really want to share with the audience and hope all the readers could refer to the website donate, for the people in rural China.

Question:

Public funding may not be the best way for WOKAI to fast grow up and expand,

Q1: Is it a good idea to expand?

Q2: Should WOKAI reach out to “intermediaries”, personally I disagree because it seems their demand of return does not fit for WOKAI, since it is not a for-profit org?

Call for Financial Social Innovation

After reading the Manchester Bidwell Corporation HBS case study, I started to think about social enterprise replication efforts, and the difficulty that many social businesses/non-profit hybrids have in locating funding for replication. Having worked for a corporate foundation, I thought back to the grant-making process that I experienced, and very rarely were grants given out to scale innovative models. Almost all impact grants went toward demonstration projects. I then wondered how many corporate, private, or public foundations target grants toward replication? This question motivated my lengthy internet search, which proved slightly unsuccessful. I had a very hard time even finding information about replication grants, so I can imagine how much harder it is to actually apply for and receive replication funds. How could such a funding gap exist? This week’s readings were perfectly timed with my quest for replication funding; however, I still feel that a gap exists for helping scale socially innovative models.

Michael Chertok, Jeff Hamoaui, and Eliot Jamison distinguish between two types of funding: direct investors and intermediaries. While there seem to be many options for individuals or organizations to invest their own capital into social enterprises, the capability of intermediaries appears to lag behind. Conversely, intermediaries are investing other people’s money, which creates a conflict for impact investing: Can you focus on social impact over financial returns? Is there a Pareto efficient point at which you are maximizing both social impact and financial return?

In the past, the two traditional ways of financing were through foundations or venture capital. It is exciting to see and hear of new ways and methods to help finance innovation. I was especially intrigued by David’s blog post last week where he posed the question of having a charity stock market. I, too, have had thoughts about what this might look like. Would traditional investors get to use pre-tax profits from existing stock markets and use this money to invest in a social stock market? It seems from this week’s readings that social enterprise capital financing could be headed this way. Is this good for the social sector? Muhammad Yunus might argue no (see Kyle’s post from November 7).

Either way, it looks like all sectors are coming together to collaborate on how to finance these new socially innovative models. Just this past week, at the G-20 Summit in Seoul, South Korea, more than $500 million was committed to supporting the winners of the G-20 SME Finance Challenge. It is great to see that even capital financing has become a competition for innovative solutions. Definitely check out this link to see the winners and to see innovative new forms of financing. When reading through the articles for this week, did you come up with a solution for how to better finance social enterprises? Maybe one size doesn’t fit all – which sources of funding fit better with which types of social enterprises?

Farm Truck -- Driving a Market?

http://dowser.org/fighting-new-york-city-food-deserts-with-mobile-farms/

There have been many stalled attempts to bring fresh produce to ‘food deserts’ – areas where healthy food is often unavailable for purchase. As a result, people end up shopping at convenience stores where options are quite limited.

This article -- about a Farm Truck in NYC -- highlights the fact that even when there’s demand for healthy foods, supply chain costs pose obstacles to financial sustainability: Fresh fruits and vegetables can be expensive to grow and transport at small scales, so a fair price for the farmer is often too high for the low-income consumer.

Holton Farms seems to have found a solution, though, which reminded me of the Aravind Eye Care System example in one of this week’s articles, Creating Successful Business Models. The Farm Truck offsets its losses in lower income neighborhoods with profits from wealthier areas. “It looks for better-off customers who are willing to pay a little more for quality produce (mixed with a social purpose) -- a strategy known as cross-subsidization. And because it is on wheels it can reach different groups of customers easily.”

This ‘cross-subsidization’ sounds like Aravind’s approach: By charging wealthier patients more and poorer patients less, it has developed a sustainable business model. (p.13, Creating Successful Business Models)

Holton Farms has big plans for the future that extend beyond its Farm Truck. They want to partner with like-minded organizations to create “profitable centralized kitchens that prepare farm-fresh foods for low-income families cafeteria style.” This partnership may lead this for-profit farm (model 3) to enter into some hybrid business models (model 2). I imagine that these kitchens could provide a great opportunity for job training and local employment, too -- an idea akin to the Barefoot College business model cited as a model 1 example.

Thulsi Ravill, Dr. Ventkataswamy’s successor as executive director of the Aravind Eye Care System said, “…you have to transcend the stage where you are simply reacting to market demands, shifting instead to ‘market driving.’” It sounds like Holton Farms is headed in this market-driving direction if they can maintain affordable pricing for the new communities they serve. Afterall, “There’s real value in working with local players to drive product, distribution, and sales innovations in that ‘last mile’ before reaching consumers.” (p.5, Capturing the World’s Emerging Middle Class)

I’m interested in the fact that Holton Farms has been around for generations, and recently endeavored to capture this new market and more explicitly share and implement its social mission. I worry, however, that the Farm Truck model may not be sustainable. As organic and local products are more easily found at grocery chains, how will Holton Farms maintain its higher-income customers, who subsidize its lower income customers? Can the Farm rely on the do-good nature of its current customers? If they can prove out a high volume demand from lower-income customers, might they get involved with owning/operating/supporting a brick and mortar establishment (grocery store) in a food desert? Will the brick-and-mortar kitchens serve the same purpose?

America's Emerging Market

As mentioned in this week’s “Danone Expands Its Pantry to Woo the World’s Poor” article, the Danone corporation has recently focused on expanding its focus, from its traditional Western, high-income clients, to new BOP clientele (Passariello). The goal of doing so is to increase its profits through expansion into a relatively untapped market. Specifically, the company has provided, low cost, and often, high-nutrition products to consumers in developing countries such as Bangladesh and Senegal. Focusing on such countries may continue to prove quite profitable for Danone given that they continue to apply the four A’s of social innovation at the bottom of the pyramid: Affordability, Acceptability, Availability, and Awareness, as outlined in the MIT Sloan article (Anderson). In addition, I believe that such strategies can be applied to the development of low cost food products focused on meeting the needs of another type of “emerging” market here within the US. Within recent years, the obesity epidemic within the US has emerged as a new problem. With this problem has emerged a new and relatively untapped market, those that wish to provide healthy food to themselves and their families at a low cost. According to the CDC, nearly 27% of US adults are obese (CDC), with the epidemic most negatively affecting those who suffer from poverty. Trends have shown that “the states that are becoming obese are the states that are low income," (Osterweil). A key reason for this is that healthy foods are often “out of the financial reach of many Americans” thus forcing low income families to “rely on cheaper, high calorie foods to cope with limited money…lead[ing] to over consumption of calories and a less healthful diet” (Osterweil) (Center). Based on this information, I contend that Danone, and similar companies wishing to increase profits by focusing on the developing world, should also consider focusing on the new market of the obese poor within the US and other developed countries. I say “new market” because throughout history, being overweight has been associated with prosperity and being thin, with poverty (Center). Within the US, times have changed to the point where “the lower you go down the socioeconomic status ladder, [the fatter] people tend to be” (Center). To tap in to this market, Danone should consider targeting its products (or their “Americanized” counterparts) currently selling in Senegal, Bangladesh, etc., within the US. Doing so should both help benefit America’s poor obese population and increase Danone’s profits. Fellow classmates, do you agree that this population represents a viable market? Do you feel that doing so would be profitable? If not, what barriers to you foresee blocking profit? Sources: Anderson, Jamie and Markides, Costas. "Strategic Innovation at the Base of the Pyramid." MIT Sloan Management Review (2007): 26. CDC. Vital Signs. 2009. 09 11 2010 . Center, Food Research and Action. Hunger in the US. 07 2006. 09 11 2010 . Osterweil, Neil. MedicineNet.com. 19 03 2004. 09 11 2010 . Passariello, Christina. "Danone Expands its Pantry to Woo the World's Poor." The Wall Street Journal (2010): 4.

Lack of Stamina?

This week we learn 3 types of social enterprises from “Creating Successful Business Models”, and I am more interested in social business ventures.

In the handout, what distinguishes social business ventures from leveraged nonprofit ventures and hybrid nonprofit ventures is that social business ventures are set up as for-profit businesses from the outset, though they tend to think about the question of what to do with any profits very differently than mainstream businesses. Also, the handout talked about the downside of this model: replication. The reason why only a few social businesses managed to replicate and scale, in my opinion, is these businesses that the venture invested has to be profitable to survive. I found an interesting report released by Ernst & Young:

http://green.blogs.nytimes.com/2010/02/12/for-venture-capital-efficiency-is-in-vogue/

In the report, Investors shifted their money from capital intensive solar and biofuel companies into firms that use technology to reduce or monitor energy use, when facing the pressure from recession. Instead of searching high return profit, Venture capitals start to look more into energy efficiency companies because the funding requirements are lower and the returns are often faster.

The sad side from the report is that a well functioned enterprise with a prospective product or idea for the public good could have been killed simply because the investor changed his mind. The deeper message embed in the course handout would be in most case start-up social ventures are just like normal venture capital, they have high requirement of return profit (or they are self-interested). Today’s venture capital money is flowing toward safer bets on the energy front, tomorrow money could flow to even a different field (Biotech, healthcare etc) A sustainable impact is fostered under a sustainable company, the unpredictability of social venture put a shadow on creating social impact.

During my day back in PwC, when talking to venture capitalists who read 20 BP a day, they told me the current market allows less than 10% of successful start-ups. I am deeply worried as intuitively, social ventures take an even higher risk, since part of the utility come from the social impact they help created. We are not able to accuse the social ventures “Lack of Stamina” in the article because they are set up as for-profit businesses from the outset, however, for these investees who create social impact, how to deal with such unexpected change?

My question:

Bigger money from venture=> Bigger moves, promotion…=> Bigger social impact from investee

Is there a preventive way to secure the funding risk for the investee, AKA spread the funding risk out?

Yes you can...Change your business model!

As someone who has founded a social venture, SponsorChange.org, I spun my wheels on the question of how to structure our business. We consulted with many lawyers, advisors, and business leaders. We ultimately found that everyone we spoke to had very different suggestions.

Our business model consists of sponsoring the skill-based service of college graduates who complete short-term projects at non-profits in exchange for student loan pay. The sponsorship money can be raised from donors, host non-profits, foundations and corporations. From the perspective of the donor it is a benefit to give to a non-profit because of the favorable tax credit. Since service sponsorship is at the core of our mission, forming as a non-profit makes sense.

We are currently working to bring to life an online platform that would allow non-profits to use our system to find, recruit, raise online funds to support the student loan rewards for projects, and make direct student loan payments of their volunteers themselves.

This model certainly sounds like a for-profit play - where users pay a subscription fee to use our platform to add value to their volunteer recruitment and retention efforts. In fact, one lawyer we spoke to said non-profits are use to paying for productivity utilities, they are already subscribing to salesforce, constant contact etc. The challenges with this model is determining the right subscription fee, in a manner that generates revenue, without pricing smaller non-profits out of the market. Setting too low of a price at the onstart, then having to raise prices can be detrimental, on the other hand starting too high, can pose problems too. How do you control for this?

Taken together, we have decided to create a hybrid model. The nonprofit model will accept donations and be used to sponsor service and the for-profit side will generate revenue from offering a subscription fee. Revenue generated will be reinvested back into development of our platform.

Even as a type this, it all sounds daunting for anyone starting up a social venture, but after the reading the HBS article, Creating Successful Business Models by Elkington and Hartigan, we should all relies two things. 1# No matter what your business model is you can create social change and make a difference in the lives of many people, and #2 Businesses can and often change there model over time.

I pose the following questions for you?

How will you initially form your social ventures? What are the benefits and drawbacks of each model?

How do these models hurt or help your stakeholders?

Please post your comments.

How will you pay for your next social innovation?

We've talked a lot about innovations that can positively affect the lives of many underserved communities. These projects are critical to improving the lives of these people, but as always there's a bottleneck: money. How will these projects get funded? What creative ways can we come up with to fund new innovations?

Venture firms like Good Capital and Echoing Green try to fund socially innovative projects but there isn't enough money to go around. Creating a nonprofit can provide more access to financial resources but a new interesting idea has surfaced that is getting recognition: investing in an individual in exchange for a portion of their lifetime earnings!

This paradigm shift will definitely cause innovators to think about what they're willing to give up(or gain) by trading future earnings to fund current projects. Is it fair or ethical to accept money now for future earnings? Who will decide how much those earnings will be and how much they are worth now?

This type of financing is similar to NPV projects where we try and calculate the future earnings of a project, discount it back to present value at some rate, and then subtract the startup costs to decide whether or not the project is profitable. Only in this case the project is the person. Would you be willing to trade a portion of your future earnings to fund a current project? How much earning potential do you have and how much would you be willing to sell?

Harlem Children's Zone and the Implementation of the Hybrid Venture Model

Around this time two years ago, many Americans woke up feeling uncertain about their financial secutiry. A major economic crisis in country lead to the bankruptcy of behemoth financial firms, like Lehman Brothers. Lehman Brothers, a firm that had large "socially responsible" investments in non-profit organizations across the country. One notable beneficiary being the Harlem Children's Zone (HCZ). HCZ, founded by a social innovator with the "unreasonable" idea that he could end generational poverty through providing a pipeline of holistic educational services for one the most devastated communities in the country. In order to do this HCZ was heavily reliant on outside funding. As an employee of the HCZ, the news of Lehman Brothers was a real concern for me. Not only was the future of my job at stake but of the programs that relied on funding from Lehman Brothers. We inevitably experience set backs, with HCZ having to lay off 10% of its staff. A difficult decision, but was necessary to buffer the impact on the loss to program funding. Unfortunate as it was, to lay off staff, especially for those who came from the community which the organization served, HCZ fared far better than many other organizations in similar positions. But why? Geoffrey Canada, HCZ President and CEO, believed in scale through "leveraging resources" from private, public, and philanthropic sources (as well as some equity investments to help build an endowment for future generations of HCZ clients). Canada's ability to diversify resources empowered HCZ to be more resilient during times of financial crisis. But could he have done more? I recall a time, in 2007, when Canada spoke to an audience of over 80 college students, who were about to begin a 4-week paid winter internship. He spoke about a missed opportunity to invest in the cheap real estate in Harlem in the early 90's. He was working to expand the organization and at the time he couldn't foresee the kind of gentrification that Harlem is experiencing today. To Canada, this venture would have ensured that Harlem "natives" wouldn't be pushed out by the rising housing costs that come along with gentrification. Maybe he was right, or maybe he was lucky to have missed out. At the time, I thought it was a novel idea, an income generating investment that was aligned with the organization's mission--can't go wrong! However, as hindsight is 20/20, the impending housing market bust, would have been a major crisis to overcome for HCZ, but would it have been worth it?

Social Ventures Founded Under Corporate Auspices Have the Advantage. We Need More Grameens

This week, we read about the social venture, Grameen Danone foods, started jointly by Danone, the French food company, and the Grameen bank, a microfinance bank that extends loans to individuals and organizations looking to start new social ventures. This week’s piece on the three different business models social enterprises tend to follow allowed me to classify Grameen Danone Foods as a social business venture—a for-profit entity with a social mission. Both the Wall Street Journal article we read for this week and a recent article from the U.K. publication, the Guardian, chronicle some of the roadblocks the company hit when it tried to develop and market a low-priced, nutritious yogurt that South Asia’s poor could enjoy. These roadblocks included a rapid, unforeseen spike in the price of milk and difficulty engineering a product that the children of Bangladesh’s rural villages found tasty. All fledgling social ventures undoubtedly encounter these types of setbacks. However, the question arises: Are the ventures created under the auspices of multinational companies such as Danone best equipped to weather these setbacks? If so, can we conclude that the Social Business Venture is the more effective model?

Without question, social ventures founded by financially strapped idealists out of moral outrage over the conditions facing those without access to essential life-sustaining resources and life-improving technologies are laudable. Banks such as Yunus’s Grameen Bank make sure such ventures are able to get off the ground, and thank goodness such institutions exist. I am not sure it can be effectively argued, however, that these sorts of ventures are as likely to eventually fulfill their respective missions as are ones that have the full weight of multinational corporations behind them. Grameen Danone Foods cannot fail. As was mentioned in the WSJ article for this week, both Danone and Grameen have too much invested in the subsidiary company—both in terms of money and public relations—to allow it to fold. Therefore, when the company encounters setbacks, it can count on the resources it needs to overcome them. Upstart social ventures can often be killed by the types of hiccups Grameen Danone have already had, and will most likely continue to have. They are unquestionably less resilient than their corporate supported counterparts due to monetary concerns.

Obviously, a large corporation or corporate partnership with vast monetary resources cannot found every social venture. Yunus would probably say that, even if they all could be, they should not be. If we accept this argument, an important question becomes how to motivate the establishment of more microfinance institutions, such as Yunus’s, that are founded on trust.

Improving the world around you...one neighborhood at a time...

“I believe that you shouldn’t have to leave your neighborhood to live in a better one.” Majora Carter Bill Strickland and Majora Carter have many things in common; both are African Americans who were raised amid poverty, both are MacArthur recipients and both believed in something bigger then what they saw in front of them and took action to bring those dreams to fruition. I firmly believe that people will succeed and thrive if they are given resources to better themselves. I believe that Strickland and Carter are fantastic examples of how social entrepreneurship, social activism, economics and innovation can be combined to positively impact a portion of the world. Growing up in Pittsburgh, Strickland started an arts program in the ghetto believing that beauty could inspire youth to find a creative outlet, to acquire skills and to have a safe place that they could call their own. Creating the Manchester Craftsmen’s Guild, Strickland mission was to keep high school students in school and to see a future in attending college. Initially, Strickland taught the residents to throw pots and be creative. The MCG eventually expanded and merged with Bidwell Training Center and now over 40 years later, offers programs in everything from culinary training to renowned jazz musicians. MBC has become so successful that other cities are adopting Strickland’s model for their own cities to replicate. Carter was tired of the pollution and the hopelessness that surrounded her in her South Bronx neighborhood and vowed to figure out a way to change it. Through grassroots efforts and a small grant, this dynamic woman created the Hunts Point Riverside Park Project that’s goals were to not only clean up the park and allowing the South Bronx’s residents to have green space, but to create green job opportunities for it’s residents in park planning and urban renewal. Carter named this employment initiative the BEST Green Job Training Program. As Executive Director of Sustainable South Bronx’s, Carter saw amazing success, with job placement around 85% working in green careers and 150 students graduated. Hunts Point Riverside Park has become a source of pride in the South Bronx, the first park to exist in the neighborhood in over 60 years. Currently, Carter is running a consultant group that is targeting New Orleans as well as other struggling cities to create green space as well as train young men and women to pursue green careers. How do we view change as a society and really believe that we can take one thing and make a difference? Most people believe that to be an agent of change requires taking on monumental tasks, such as ending world hunger, curing terminal illness or abolishing poverty. However, people like Strickland and Carter show us that to create sustainable change, you simply need to choose one thing that you want to change, whether it's spreading the joy of art or creating a neighborhood park. What do you look around and see in your own neighborhood, in your own community and how would you like it to look? http://www.ted.com/talks/majora_carter_s_tale_of_urban_renewal.html

The Power of Yogurt

While focusing on venture development and growth, this week’s readings further explored the idea of providing social solutions for bottom of the pyramid markets without “going the nonprofit route.” In this post, I would like to highlight one such company that fits this model. Grameen-Danone Foods was launched in 2006 as a social business enterprise union of the international food giant Danon and the Bangladeshi non-profit Grameen, which is primarily known for its work in microfinance. Muhammad Yunus, the founder of Grameen, proposed a joint venture between Grameen and Danone with the objective of supplying nutritious food to poor Bangladeshi children. According to UNICEF’s 2008 State of the World’s Children report, 30% of all Bangladeshis and 56% of Bangladeshi children under the age of 5 suffer from moderate to severe malnutrition. To address this problem, Grameen Danone Foods Ltd. produces a yogurt called “shakti doi” (power yogurt), which is made from pure full cream milk that contains protein, vitamins, iron, calcium, zinc, and other micronutrients. This yogurt is primarily intended for children, but it can be eaten by adults as well. One of the most exciting aspects of this yogurt is its affordability. The price of each 80 gram cup of yogurt is 5 taka or 5 cents. Factories have been set up to produce this “power yogurt” all over Bangladesh, employing large numbers of people, and plans to expand this model to other countries are in the works. The Grameen-Danone Foods model is currently a “no loss, no dividend” one, and the company is confident that investment will remain strong. Because the product is suitable in much of South Asia and the model itself can be adapted all around the world, shareholders continue to invest although they are not currently being paid dividends. The framework for strategic innovation at the base of the pyramid, as discussed in the MIT Sloan Management Review article, stresses affordability, acceptability, availability, and awareness. I believe that Grameen-Danone’s success stems from its business strategy that focuses on these very areas. “Yogurt” for thought: Will paying shareholders dividends change the culture of the organization? If so, in what ways?

Social enterprises targeting the bottom of the pyramid

Building economic opportunity for the bottom of the global economic pyramid is a particularly challenging endeavor, which is probably why it yields such high impact. A few enterprises I have come across recently have been especially interesting to me in both their impact and their potential.

This weekend I had the opportunity to attend the StartingBloc All Fellows' Summit, where I met more humbling and fabulous social innovators than I could count. One of them was the founder of Generation Enterprise, who completed the StartingBloc program in 2005. Generation Enterprise is a youth-led network of small business incubators and community hubs that equip street youth to leave life on the streets, start sustainable businesses, and create jobs. Each site acts as an engine of economic development, integrating so-called "unemployable" young people into the formal economy as entrepreneurs, employers, and community leaders.

Last year, I had the pleasure of attending class with a colleague who was attending the Heinz College on a Fulbright Scholarship, and had interned with Listros. Listros takes a very different approach from Generation Enterprise by providing equipment for child street vendors to help them safeguard their money and goods, and also protect themselves from the hot sun. (I'm sure my colleague could describe the venture in greater detail; I myself must work from memory and Listros' German-only website.)

Both short-term solutions and long-term change are necessary to improve the lives of the world's largest people. These two enterprises seem well-matched in this way. To me, it seems that Listros assumes that the systemic change that gets children off the streets is a long way out, and tries to improve their quality of life now, while Generation Enterprise works for that systemic change.

However, I can easily see how people might complain about either solution. One does little to immediately help people, and the other doesn't make people stop needing help in the long-term. Which leaves the lingering question: how can immediate and systemic solutions work together to accelerate social change?

Could Outsourcing be a Social Business Venture?

This week’s readings help me to clarify which traits define a Leverage Nonprofit, Hybrid Nonprofit, and Social Business organizations. However, I think that Social Innovation field is moving and changing so fast that sometimes it is difficult to place experiences in one of these categories. Why do I say this?

Well, during this week I was thinking in an article that appeared last week in The Economist. I became interested in the case and I did a little bit more research about the mentioned company. The company’s name is txteagle. I classified txteagle according to the rules provided in Creating Succesful Business Models, actually it fits in the Social Business Cathegory.  Nevertheless, txteagle is different in its nature to the other examples provided as Social Business Enterprises. Let me explain you why.

Txteagle is different because is a kind of outsourcing company. The founder is Nathan Eagle. Nathan Eagle is a Phd graduated student of Massachusetts Institute of Technology, he spent some time in East Africa in 2006 teaching over cell phone programming.  Well, Mr. Eagle realized the potential cell phones had in developing countries and founded txteagle.

The potential he discovered was to employ poor people in simple and provisional jobs. Why in poor countries? Because there is a 4.6 billion of mobile phone users living in developing countries, and usually this poor people is unemployed, needs money and have a lot of time free.   The driving idea of txteagle is to enable mobile phone subscribers to earn smalls amounts of money by completing simple tasks for Corporations that pay them in airtime or with money.

What txteagle do?

A Corporation contract txteagle to get a job done. Txteagle breaks down this job into small simple tasks and send them to lots of impoverished individuals. Some examples: one person has the task of checking two street signs, he sends the information by text to txteagle, txteagle gathered it with other’s information, and then send them to a Satellite Navigation Corporation.  Another example, people in Kenya translates a couple of words into Kenyan dialect; then this information will serve companies as Nokia.  Another case, txteagle helped one media firm to monitor its television commercials across Africa; each time a person in rural areas watched a commercial, she texted txteagle.

At this point, it would be easy for txteagle to get into another kind of business, for example using his large pool of cell phones numbers, to sell advertising services from corporations, and probably they will do so for, we don’t know.

Txteagle is an interesting case because it is about outsourcing, which is different to the other types of social business we have seen in class. Txteagle is just the broker, the connection between a corporation and poor people, but we cannot reject they have a social mission.  The texteagle model could be replicated in many countries; it is successful from this point of view. Although, it does not provide a long term solution for poor people, because they can earn only small amounts of money, they cannot live one month only doing this. The jobs are temporal and irregular. So, how do we classify this experience? Do you think txteagle is a Social Innovation? Is it a Social Business Company? Or is only for profit?

These are the pages for txteagle and The Economist's article:

http://txteagle.com/
http://www.economist.com/node/17366137