Archive | November, 2008

Social capital and social business

24 Nov

Note to readers: This blog post is almost twice my usual post and I was feeling a bit guilty about it. But then, I read Seth Godin’s post today and it makes me feel much better.  


As we have been trying to raise funds for running United Prosperity, we have realized how hard it is. We had applied to the Echoing Green Foundation last year. They received more than 1500 applications for 20 Fellowships each valued at around $68,000. Based on the feedback we received, my assessment as to why we did not get funded was that United Prosperity as a venture is complex and some of the Echoing Green evaluators did not want to risk their donation of $68,000 on a venture which seems extremely complicated.


Early this year, I was also talking to a Venture Capitalist who invests mostly in for-profit social ventures. He was quite willing to invest a comparable amount in United Prosperity provided we could turn it into a for-profit venture, which could give him a multifold return on his investment in due course.


This soon made me realize that we have reasonably good amount of commercial capital available for reasonably good and sometimes bad business plans, but ‘social capital’ or capital whose primary purpose is to ‘do good’ with little or no financial returns to investors seems to be in severe short supply.


But then, the need or market for ‘doing good’ is so large, how do we expect non-profits or social ventures to build infrastructure and IT systems to do good in a scalable manner when the ‘social capital’ to build such scalable infrastructure is unavailable? That seems to be the challenge most social ventures face.


I think there are a few ways one could make such ‘capital’ available:


  1. Collect the available social capital in a scalable manner over the internet: Organizations like Kiva, and ours are doing that.
  2. Reuse the social capital: Money given as a donation is used once. But as a Kiva loan or United Prosperity guarantee, the same ‘social capital’ gets reused with multiple entrepreneurs.
  3. Use some amount of ‘social capital’ which bears slightly higher risk to free up additional commercial capital: With United Prosperity, the ‘social capital’ provided by social guarantors frees up additional commercial capital with banks.

But still there is a problem. Other than the already stretched government grants, most of the ‘social capital’ available in the world comes from donations from individuals directly or through grant making Foundations set up by philanthropists or corporations.  And most of the leading philanthropists such as Bill Gates, Warren Buffet, Michael Dell or Pierre Omidyar have made their money from business. i.e. It is commercial capital which is eventually being turned to social capital thanks to the generosity  and public spiritedness of individuals. The same holds true with United Prosperity or Kiva – Our guarantors or Kiva lenders earn their income through commercial means and then choose to help poor entrepreneurs.


There is also an another interesting observation. Commercial capital seems to have the ability to take risks and multiply itself and expand the scope of commerce. Social capital seems to be incapable of multiplying itself and rapidly expanding the scope of ‘doing good’. To take our unsuccessful fund raising example, the VC with ‘commercial capital’ was willing to take risks and invest in United Prosperity but Echoing Green with ‘social capital’ was perhaps worried that United Prosperity will never see the light of the day in a reasonable time and unwilling to support us.  


Overall, all of us are in a situation where we have to rely on ‘commercial capital’ to transform itself into ‘social capital’ and do good for society. If our businesses are not robust and successful, we will have fewer high net-worth individuals and lesser ‘commercial capital’ getting transformed to ‘social capital’. Thus the importance of the role of business and the generosity of individuals is unquestioned in society but one major question is unanswered: Why cannot we get ‘social capital’ to multiply itself just like ‘commercial capital’?


I think it can and it should if we want to ‘do good’ in a scalable way.  One way Prof. Yunus talks about in hisNobel lecture and his recent book ‘Creating a world without poverty: Social business and the future of capitalism’  is through a new type of organization called as the ‘social business’. 


As per Prof. Yunus in his Nobel Lecture, “Social business will be a new kind of business introduced in the market place with the objective of making a difference in the world. Investors in the social business could get back their investment, but will not take any dividend from the company. Profit would be ploughed back into the company to expand its outreach and improve the quality of its product or service. A social business will be a non-loss, non-dividend company. Once social business is recognized in law, many existing companies will come forward to create social businesses in addition to their foundation activities. Many activists from the non-profit sector will also find this an attractive option. Unlike the non-profit sector where one needs to collect donations to keep activities going, a social business will be self-sustaining and create surplus for expansion since it is a non-loss enterprise. Social business will go into a new type of capital market of its own, to raise capital.”


At this point, we need to raise around $2 Million of startup capital to sustain our operations over the next four years. If we are to raise capital as a social business, we will seek out non-dividend paying equity (or a 0% interest loan). We will find public-spirited investors who will put in the new non-dividend paying equity and provide stewardship to the organization.   And at some point, when United Prosperity achieves break-even from its operations, we might be able to buyback the equity from the investors. Or the investors may even be able to sell the equity to other later stage more risk-averse investors at a premium. Prof. Yunus also talks of a social stock market where such social stocks may be listed. Social business and social stock market have the ability to increase the pool of social capital available in the world and increase the scope of doing good. The Tactical Philanthropy blog had a post on a Non-Profit IPO in Canada.  I don’t know if the Non-profit raised donations or raised equity. But who knows, social business and social stock markets may become a reality faster than we think.

Release 1.2

14 Nov

Today we have deployed release 1.2.

Following functionalities have been added as part of this release

  • Quick Sign up – Investors can sign-up  just with their email address.
  • New Flash added to the home page.
  • Configuration changes so that javascripts and stylesheets are served by apache.

Helping Microcredit Programs Succeed

13 Nov



Continued from ‘The First Break-through’.



By February, we had gathered additional momentum. Chiradeep Vittal joined the team and soon after Amar Singh, Ramkumar, Ramya and Vinay started building the system at a fast pace. We would have quick two week development iterations followed by testing done by Suriya Prabha and Supraja.  


There was a ton of legal work to be done and we initially had a very hard time getting any law firms to help us. But after a little bit of struggle, things fell into place – Hanson Bridgett, UC Berkeley and O’Melveney and Myers started helping us with the legal work.


Meanwhile Natasha Ramarathnam joined us in India and we started talking to various Microfinance institutions (MFIs) who may need guarantees and also to the large banks who lend to these MFIs.


As we started talking to MFIs and MFI networks, we were soon struck by the enormity of demand and the amount of ground we had to cover. Rajkamal Mukherjee, a microfinance veteran and VP at Accessdev (a Microfinance network working with emerging MFIs in India), wrote to us:

The AmFA partnership presently has 110 partners aggregating to outreach of 2.4 million clients and gross loan portfolio of over a USD 250 million. These institutions represent a major chunk of the 40-50% annual growth segment in the sector. Our assessment of the immediate demand for additional credit among the AmFA partners is of USD 600 million.”


This bottom up assessment of the demand was quite stunning. One would expect that banks would quickly step in and lend to microfinance institutions adequately at a market determined interest rate. But that clearly does not seem to happen, despite the fact that banks in most developing countries have enough capital to lend. One outcome of this has been that bank lending has been heavily skewed to the larger MFIs while smaller MFIs have struggled to raise adequate bank loans to meet demand.


Prof. Mohammad Yunus summarizes the problem beautifully ‘The biggest problem we face in trying to expand the reach of microcredit is not the lack of capacity. Instead, it is the lack of availability of money to help microcredit programs get through their initial years until they reach break-even level.’ He further adds ‘Local banks cannot lend to MFIs because MFIs cannot provide collateral. However, if an international or domestic organization steps forward to act as a guarantor, local banks are happy to provide the money’ (Nobel laureate Mohammad Yunus with Karl Weber, Public affairs books, Creating a world without poverty : Social business and the future of capitalism, page 70, 2007).


I would take Prof. Yunus’s argument one step further. To make bank loans available to microcredit programs through their initial years, we need to make guarantees easily available. And to make guarantees easily available we need a scalable way to raise funds from socially responsible investors. I believe that our internet-centric model has the potential to raise socially responsible funds in a scalable manner and make it available to MFIs when they need it the most. Implementing it calls for a lot of hard work from a lot of people. I will write more on that topic in another post.

The First Break-through

10 Nov

Continued from ‘Just do it’.


By the end of July 2007, the idea had grown on me and I started putting together a quick outline of all the things I needed to do. I was working almost 60 hours every week at my job and doing this as a side project was infeasible. My wife, Shubha and I discussed this, and by September, I had quit my job and was working full time on United Prosperity. Within two weeks, Michael Laycock and Suriya Prabha joined the brainstorming and over the next two months we started putting together flow-charts and interface specifications of the system.


Around the same time, I met Ashok Parameswaran at Silicon Valley Microfinance Network. He was very keen on ‘doing something for India’ and soon got involved with United Prosperity. We started putting together the business plan and finding law firms to help us with the incorporation.


Many of the business and operating philosophies started emerging during this phase. To name a few:

        United Prosperity will be open, transparent and will collaborate with any organization engaged in eradicating poverty.

        We will keep our operating costs low so that the poor can afford our product.  We would do that by:

o   Using a scalable, clean and simple ‘cookie cutter’ business model.

o   Automating transactions to a high degree, to reduce operating costs and minimize errors.

o   Focusing on individual contribution and collaboration with very minimal management roles.  

        We will work with only those partners who charge reasonable interest rates to their borrowers and treat their borrowers fairly and ethically.


As I started designing the system, I soon realized the complexities and decided to simplify features to keep the size of the initial release manageable.  I had initially hoped that we might be able to build the system in an ‘open source’ development model with volunteer developers.   But after some time I realized that it may not be possible. I started contacting several large software services companies to see if they might be willing to support United Prosperity as a part of their Corporate Social Responsibility initiative. I was able to reach fairly senior people within these organizations but made little progress for various reasons.


A friend of mine, Salil Punalekar emailed me one day. We did our MBA together and he was now working with Cognizant in Europe.  He said that he had heard that I was doing something interesting and he wanted to help. I told him that we are looking for help with the software development and wondered if Cognizant would be willing to help. Salil forwarded my email to the Cognizant President’s office. A senior level team from Cognizant evaluated our business plan and proposal, and within a few weeks we had a team ready to start building the system.


This was our first break-through. It was February 2008 now and the next few months we would be busy building the system. More tomorrow and thanks for stopping by.

Just do it

7 Nov

Continued from United Prosperity – The birth of an idea.


At the IIT conference which I attended, I got an opportunity to bounce the idea with several people. As with most IIT conferences, the enthusiasm was infectious and that got me even more excited. I quickly wanted to start validating the idea.


I did not know anyone directly working in microfinance and started looking up my contacts. Meanwhile I explained the idea to Michael Laycock, a colleague of mine at PMI.   Michael was a Subject Matter Expert at PMI and we had worked together on a couple of large projects. His knowledge of finance was immense and he was an expert in operations, accounting and business processes with a keen grasp of technology.


‘This is a workable idea’, he said. ‘This is about socially responsible investing, which is rapidly growing. Basically this is about people in the developed world stepping up to their plate and taking some more responsibility.  I don’t mind putting some money to help poor but hard working folks in the developing world and I am sure there would be others interested in doing the same thing’. And then very graciously he told me ‘I will help you with this idea if you ever decide to pursue this’. He then went on to explain in intricate detail of how I could apply for a brokerage license to do this or even better partner with a brokerage or bank to make this happen.


I also found out that Prof. Srinivasan, who taught me at management school, was deeply involved in Microfinance. Prof. Srinivasan, had joined IIM Bangalore where I studied, from Institute of Rural Management Anand(IRMA) and already had several areas of experience working with co-operatives and the rural sector in general. I wrote to him about the idea seeking his inputs and validation. His thoughts were that guarantees for microfinance institutions are relatively low risk, but there was always going to be political risk. He mentioned the case of how microfinance lending had halted for several months in the state of Andhra Pradesh in India. I set up time to talk to him and I had prepared nearly two dozen questions for him.


He answered each of the questions patiently and also gave me a detailed overview of the scenario in India. Most of my concerns were also addressed to a reasonable degree.


I had run out of specific questions and also accumulated simply too much information in my head. I finally asked him, ‘What would be your advice?’


‘Just do it’ he replied.


I let all the advice sink in over the next couple of days. I was already thinking how I would go about executing this.


More later, and thanks for stopping by.

United Prosperity – The birth of an idea

6 Nov

Let me introduce myself and share with you the story of the birth of United Prosperity. My name is Bhalchander Vishwanath, ‘Bala’ to folks who know me. I came to the US from India 8 years back almost to this day. I worked with MphasiS and subsequently Infosys, building large software systems for financial institutions.


On the side, I kept coming up with startup ideas and would spend several months researching them – an innovation and idea management system, a website for comparison shopping of elective medical procedures and many more. I would typically spend 3 to 4 months researching each idea and then evaluate whether I should seriously pursue it further.


In 2006, I was working as a consultant with PMI, a Mortgage Insurance Company.  Borrowers who have poor credit scores and cannot put the 20% down payment towards a home  cannot get a mortgage. However, if the borrower or the bank buys mortgage insurance from PMI, the bank will make a loan to the borrower and the borrower can enjoy home ownership. Over the years, Mortgage Insurance or Guarantee as it is called has significantly expanded home ownership in the US.


My idea was simple, if guarantees could help people buy homes, why cannot guarantees help poor people get small loans from banks? I had heard a little bit about microfinance and I felt these guarantees could also expand the reach of microfinance. I started reading literature on microfinance and would spend endless hours reading articles and papers I could find on the internet.


Sometime in 2006, it was also announced that Prof. Mohammad Yunus, the pioneer of microfinance, had won the Nobel prize and that increased excitement in the field. But I soon realized that I had hit upon a massive roadblock – An organization which plans to offer guarantees needs to have adequate capital. How do I raise the several million dollars to set up a guarantee fund? I was a little disappointed that I had hit this seemingly un-surmountable road block and decided to move on to finding the next idea.


The next few months I spent time conceptualizing a website which would measure one’s carbon footprint.  It would be integrated with a recommendation engine which will then suggest upgrades to household appliances, changes in lifestyle etc. By then was launched. It had similar features though a little more basic than what I had envisaged. There was also another well-funded project on similar lines being done by UC Berkeley. Given these, I was not sure if my idea could compete against these well funded ventures.


I came back to the earlier microfinance guarantee idea – it simply would not go away. I continued to read more on guarantees and microfinance and figure out how I could raise funds for the guarantee fund. Sometime in April of 2007, I came across and a few days later Zopa and Kiva. Peer to peer lending fascinated me. Instinctively I realized that this held a clue to solving my problem, but I did not know how. By then I also became familiar with the guarantees offered by Grameen foundation and Accion. I also learned that the smaller Microfinance institutions (MFIs) were not having adequate access to capital and no organization was offering guarantees to smaller MFIs. This was a problem waiting to be solved.


But after all this research by June 2007, I was beginning to get a bit impatient. I had no business idea. I responded by setting myself a deadline – I would come up with an idea by July 3, 2007. There was an IIT alumni conference in the valley the following week, and in one of the tracks, VCs would hear and fund idea pitches. I hoped to have an idea by then. The next few weeks I kept thinking on how the peer to peer model could come together with the guarantee model. And finally on July 2nd or 3rd, the whole thing came together: The general public will guarantee loans to entrepreneurs on a website. The guarantee will allow the MFI to borrow from local banks and make loans to the entrepreneurs.


The idea made sense to me, but another reality dawned on me. Just taking an idea to a VC will not secure funding. I decided to first get the idea validated. More on that tomorrow.


Thanks for reading.