A couple of my friends have completed his course and their reviews have been brilliant. It would have been great if I had a similar chance when I did my MBA.

Sam is a very approachable person with a down-to-earth attitude with a great passion for Sustainability and Base of the Pyramid ideas. John O'brien acted as the conduit to help me meet up with Sam.

He gave a long and detailed insight into one his pet projects, Just Peachy which is built on the ideas of creating capital (human, economics, social and environmental)  or what he calls common-wealth through collaboration, community and capitalism principles.

I will write about Just Peachy more in the future.

Interestingly, he is the brother of Geoff Wells, a sustainability lecturer at UniSA and a good friend of mine. The world is a small place, especially in Adelaide!

Organised By: Cornell University, The Johnson School, Centre for Sustainable Global Enterprise & United States Agency for International Development

Key dates: October 5, 2008

For Whom: Open to all students and Professionals.

This Essay Competition aims at highlighting the hurdles faced by business in undeserved Economy and providing a solution to Innovative ideas in present business scenario. Essay must clearly depict the business challenge along with the resulting business model or initiative. The Initiative to the business problem should be unique by development of innovative product, service or technology or business model.

The essay should meet the following three criteria:
1) The business model should be locally transformational, should be wealth generator for both Enterprise and Community.
2) Element of Triple Bottom Line should be embodied in model addressing the environmental, social factors of community.
3) There should be scope for expansion of the business model.

Awards:

1st prize: $4000USD
2nd prize: $2500USD
3rd prize: $1000USD
Special Mention: $1000USD and many more

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Yesterday morning, Acumen Fund hosted a monthly breakfast for members of our Partner community featuring Acumen Fund Director of Capital Markets and Energy Portfolio, Raj Kundra. With 30 guests in attendance, this promised to be an engaging discussion.

Brian Trelstad, Acumen Fund Chief Investment Officer, opened up the discussion with reference to Acumen Fund Advisory Council member Peter Goldmark, who observed in 2006 that marginal changes in the climate will affect those on the margins first and most profoundly. Later that year – in no small part due to Peter’s influence - Acumen Fund made a Clinton Global Initiative commitment to launch an energy portfolio, and we began our work in energy 12 months ago.

Raj began the talk with a description of the Acumen Fund model, and how we raise philanthropic capital to invest in breakthrough enterprises that provide critical goods and services to the poor – with a focus on health, water, housing, and most recently energy. So while Acumen Fund acts like a venture capital firm, we differentiate ourselves with our focus on large-scale social impact, coupled with economic sustainability, as our primary objectives. We invest in management assistance to support our investees – both before and after we make an investment. And we believe in the power of sharing what we are learning, based on the recognition that in a world with trillions of dollars of capital, we will always, by definition, be a relatively small player.

Raj continued with a discussion of the poverty trap that poor people face with respect to energy. As of 2005, poor people spent more than 14% of their incomes on energy, and Raj estimates that these numbers have increased to over 20% with the recent surge in energy prices. In addition, the poor often use fuel sources that are expensive, inefficient, and dangerous (for example, kerosene lamps or burning wood for cooking in open spaces). Finally, with limited access to energy, productivity (whether on the farm or the result of the shortened day for studying or work) is simply lower, all of which contribute to a ‘poverty trap.’

Even though this problem exists, there’s a significant market opportunity in energy, with the poor spending roughly $433 billion a year on energy – or about $100 per person per year – most of which is in Asia. So a lot of spending is already happening today, and the question for Acumen Fund is how to find entrepreneurs who are looking to provide products that are better, safer, more energy efficient, and therefore lower cost for poor consumers.

Raj scoped out Acumen Fund’s focus areas as broadly divided between “Renewable Energy Generation & Supply” (micro hydro, wind, biomass, solar, biogas, and biofuels) and “Energy Consumption & Appliances” (high efficiency lights, cookstoves, and other household level applications). Broadly speaking, Acumen Fund sees opportunity in these two areas, though some areas (like large scale generation and supply, where the state plays a heavy role; or direct-to-consumer retailers) look to be out of scope for now. Raj went on to describe Acumen Fund’s portfolio of closed and approved investments, totaling $2.5 million, which focus on LED lighting and a micro-hydro provider in India; as well as our late-stage pipeline of about US$4 million of investments on which we are doing serious due diligence. We are seeing significant progress in the portfolio and expect it to grow considerably over the coming 12 months.

Raj closed the presentation with a diagram of what it takes to navigate the carbon markets, pointing out that there are across the board opportunities for Acumen Fund to provide expertise and support to entrepreneurs; and also noting that there’s a particular role for patient capital to play in these markets, where a two year certified emission reduction process can significantly alter the economics of a given investment.

This discussion quickly shifted gears, touching on LED light prices (currently US$10 to $30, with the expectation that costs will continue to drop as companies scale); the role of mini-grids (by definition less efficient, but potentially effective in areas where the grid will not be built out for the foreseeable future); how to ensure that customers get access to energy; whether and how Acumen Fund should invest in biofuels companies (where we have been extremely cautious); how we think about environmental impact in this portfolio in particular; and how to compare various options at the level of the low-income household, to decide which interventions might have the greatest impact.

In the end, I was left with a sense that Raj and Acumen Fund have both a broad and deep understanding of the energy market, but that there are a number of truly complex issues where we and others still have a lot to learn. We hope to continue to learn by doing, supporting entrepreneurs with the passion, vision, and commitment to execution to help millions of people to escape the poverty trap.

How to Write About Failed Bottom of the Pyramid Ventures
Submitted by Rob Katz on July 17, 2008 - 09:47.
Published in: Microfinance | Miscellaneous

Like any business, base/bottom of the pyramid ventures fail - often. I have neither the space nor the inclination to list those I know of - besides, writers from Erik Simanis to Aneel Karnani to Anand K. Jaiswal have done some of the heavy lifting for me.

We don't talk enough about failed bottom of the pyramid ventures. After all, what CEO wants to risk his company by talking about all the things they did wrong?

Answer: Matt Flannery. The Kiva CEO is incredibly forthright when discussing what they've done well and what they haven't. His latest blog post is practically a how-to guide for talking about failure inside a BoP venture.

Ultimately, Flannery's self-effacing and honest tone makes me trust him and Kiva more, even as he discusses huge loan defaults in their portfolio. Why does this work?

1. Know what you did wrong, and say it. Don't equivocate. Matt comes out and admits - in plain English - that Kiva rushed into partnerships without sufficient due diligence.
2. Don't blame others. Sure, the political situation in Kenya is tough, and corruption in many African countries is high - but Matt isn't trying to pass the buck.
3. Be personal. Matt isn't using corporate communications lingo - instead, he offers a "(sh**)list of partnerships that closed in bad faith." Unprofessional? Only if you're a corporate communications consultant. To the rest of us, this is honesty, plain and simple.

For maximum effect - and to learn from the master - read Matt's post. While you're there, subscribe to his Kiva Chronicles blog. You won't be disappointed.

Base of the Pyramid Themes Underpin India's Election - From the Acumen Fund blog

The Future of Social Enterprise working paper - from Harvard Business School Working Knowledge

For-profits vs. nonprofits - from Sean at Tactical Philanthropy

An interesting graphic below about how you can combine the new social entrepreneurship with technologies and a hybrid business model.

Here Nicaraguans get cheap fruits and vegetables for important vitamins:

Here they get rice and beans for carbohydrates and protein:

Here they get used books to educate their children about the world:

And here...

... poor people get poorer. I think this is sad and shouldn't be allowed. It was jarring to see in the market next to a tortilla stand.

See our post on Banco Azteca for more perverse market energy (mis)directed at the base of the pyramid.

In a scathing review of their work,  Dr. Aneel Karnani provides an alternative.

Atanu Dey provides a good summary of the paper and the possible solution.

The consumption issue:

Karnani’s paper argues against the BOP proposition. He summaries the BOP proposition as: there are profits to be made by selling to the billions of the world’s poor, and by doing so, bring prosperity to them, thus alleviating poverty, and that multinational corporations (MNCs) should sell to the poor to do good while doing well for themselves.

Production opportunity:

Karnani denies that the BOP claim that there is untapped purchasing power at the BOP. He says that the way to help is to raise the real income of the poor. The poor must be seen as producers, rather than as consumers. That is, buy from the poor instead of selling to them. He cites Amul and ITC e-Choupals as examples of more efficient markets–where the poor are the producers—that increase real incomes. And if you have to sell to the poor, then make available lower quality goods which can be priced lower so that the poor can have greater choice along the price-quality spectrum.

Possible solution:

I agree with Karnani that you have to increase the real incomes of the poor by seeing them as producers. This I believe can be done by two ways. First, the “distribution” route: produce (possibly more) stuff, and give them a larger share. This lump-sum transfer will increase their real incomes. Second, the “production” method: help them produce more and also become more productive. The former is unlikely to appeal to the rich.

To do the latter, you have to make markets for the production of the poor more efficient so that they retain more of the value they produce. To make them capable of producing more, you have to educate them. There is where I believe the fortune at the bottom of the pyramid lies. Education has positive returns in today’s world. The return on investment in education is positive. That means, the cost of the education will be more than paid for by the subsequent increase in the real income. But the poor are credit-constrained. So the way to help the poor is to release that credit constraint through financing education. How to do that is a different kettle of fish which we will leave for a later date.

Another way of looking at this is:

The essential requirements of this model are:

1. The productive capacities of the poor are organized, developed and leveraged as inputs to business;
2. Such process contributes to creation of commercial value for business;
3. Such commercial value yields economic surplus i.e., the commercial
value exceeds all costs involved in its creation, and / or strengthens
the competitiveness/growth of business; and
4. The poor are remunerated in a fair manner for the goods/services that they provide.
Consequently, the poor do become an important part of the definition of business, to the benefit of business and themselves.

It should be a very clear case that consumption decreases incomes. It is work and production that can produce income. Then, the challenge is to create a way to facilitate this income generation for the poor.

First, unsurprisingly, he told me that Azteca branches have aggressive quotas and loan targets, and that variable pay (a significant portion of remuneration) depends on meeting those goals. In other words you get paid high bonuses if you loan more money. Why is that not surprising?

1. Because it's a trend in banking to pay bonus based on sales performance (selling more savings and credit products)
2. Because selling impulse credit to lower-middle class Mexicans with little financial savvy is much more effective with salesmanship/pressure

It would be hard to justify almost any Elektra purchase financed with an Azteca loan as being a rational, informed consumer decision. With Azteca interest rates of 80% - 110% and most purchases being non-income generating, customers would be better off saving their money and buying goods later with cash upfront. Sales, then, depend on aggressive salesmanship to attract the impulse buy, and salesmanship is motivated by performance-based pay.

Perhaps more interesting, the former Banco Azteca manager also told me that he left Azteca because they treated employees poorly. He told me that employees in Elektra stores are actually personally responsible for store robberies: if someone robs the place, the manager replaces inventory out of his own pocket.

My source also had one jarring story about an employee who tried to stop a robbery and took a bullet to the stomach and another to the leg. Instead of shelling out for the private hospital, Azteca put him in the public hospital (which is much lower quality), where he had multiple operations. When he came out of the hospital, instead of giving the guy pension and sending him home, Azteca put him back in a branch so he could work for his pay check. The other employees in the branch called him the mechanical man because of the awkward way he walked after all the operations. This is a little bit funny. It is also sad. The man must have felt betrayed by Azteca after doing his best to stop a robbery.

The purpose of this post is not to blast Azteca for inhumane employment practices. In fact, I'm sure Banco Azteca works out quite well for many successful employees. It's more to think about what is going on. Azteca has created an atmosphere where employees are held to strict personal financial accountability for both positive and negative performance:

• Positive performance because employees get paid high bonuses for lending more money
• Negative performance because employees are on the hook for misfortunes (such as robberies and even getting shot)

I'm sure this is good business. It attracts the most hungry people to manage the branches and push credit on customers. I'm sure the most successful employees have made substantial money in this business. It may not, however, lead to great outcomes for the consumers, convinced by talented and hungry employees to borrow under extremely expensive terms. All for a new TV or washer-dryer combo.

Azteca's good business practices, directed at the base of the pyramid, are not the solution to poverty in Mexico and ought to face tougher consumer protection regulation from the Mexican government.

Azteca lending occurs exclusively within the glowing storefronts of sister company Elektra, which sells electronics and other home goods. Typical purchases include stereo systems, bicycles, televisions, furniture, etc. Although some items in Elektra could certainly be used for production, the focus is definitely on consumerism. Banco Azteca, owned by the same parent, conveniently offers Elektra customers financing options for purchases. I'll list a couple of the aggressive lending practices without going into extensive detail (again, I highly recommend the article).

• Aggressive marketing: anecdotal evidence suggests that customers are rushed into borrowing decisions and don't always understand the implications of all loan terms
• Misleading quoted interest rates: quoted interest rates are applied for the entire term of the loan to the original principal; this means that if you borrow $100 and pay off $50, you continue to pay interest on $100 until the loan is fully paid; Total interest rates (APR) are consequently between 80% and 110%, although Azteca quotes 55%; U.S. law requires banks to disclose APR to customers, although Azteca provides no fair measure of the real cost of financing
• Aggressive securitization: borrowers post all personal possessions as collateral against loans; if you stop paying, Azteca comes and carts away stereos, refrigerators, furniture, and anything else you own of value; goods are resold in Elektra's used section

Consumer advocacy in Mexico is not as strong as in the United States, and clearly, many of these practices would be deemed exploitative/illegal within a stronger regulatory system. Last year, instead of complying with a new law requiring greater disclosure of financing costs to borrowers, Azteca went to court and won individual protection from the law. This development brings up a different but related theme regarding the growing power of extremely wealthy individuals in developing countries (e.g. Salinas) and their ability to control public institutions. The richest man in the world, Carlos Slim, is Mexican.

The Azteca phenomenon reminds us to be careful when thinking about microfinance and base of the Pyramid business in general. Clearly the econ 101 model that says that any competitive business is inevitably good for the consumer is flawed. In this case, borrowers have extremely limited financial savvy and face extremely sophisticated marketing. Is credit always good for the poor? No. I know I'm running a fine line because I also believe strongly that the poor need to make their own decisions and learn to improve their own lives. As a general rule, the rich will not take care of the poor. The poor must take care of themselves. Part of that means making good credit decisions.

Nonetheless, some basic common sense should be applied. Common sense suggests that not all credit is pro-poor credit.

...with the world pushing for alternative sources of energy such as windmills or geothermal power, it will be easier to develop and implement these new technologies from scratch in Africa than to impose them on the entrenched power grid in the West. "The key about disruptive technology is that it really has a chance to innovate at the base of the pyramid," Naidoo said in his keynote address at the 15th annual Wharton Africa Business Forum. "The base of the pyramid is the bottom -- the millions who are underserved."
[...]
Naidoo showed his audience a map of global Internet connectivity, with bloated depictions of web-savvy western nations from Japan to Portugal to the United States. But the massive African landmass is virtually invisible. He insisted that the African void today represents a massive future opportunity for an entrepreneur who can develop a scalable solution for multiple nations on a continent that is currently divided into 53 different governments.

"Africa is in ... a unique position. It almost has a competitive advantage due to that very situation of not having the connectivity, of not having the electricity grid," Naidoo said. He cited the example of windmills as a low cost and innovative power solution that would work better in a local, start-up situation, such as a remote African village, than it would in the West, with all its regulatory and economic obstacles.

Like the previous post on Africa it provides a good example of business opportunities. More importantly, Naidoo provides a framework in which to capture the opportunities by connecting Africa's lack of electricity and connectivity as opportunities.

This is true to most other bottom or base of the pyramid markets. Like the example of Harish Hande who provides the numbers where solar energy is cheaper to poor people than the current prices they pay. Disruptive innovation makes sense in "base of the pyramid markets". (BOP)

Disruptive Innovations compete against nonconsumption – that is, they offer a product or service to people who would otherwise be left out entirely or poorly served by existing products and who are therefore quite happy to have a simpler, more modest version of what is available in the high-end markets.

- Stuart Hart and Clayton Christensen (Sloan Management Review)

If any technology entrepreneurs are looking for new markets, they should check out the BOP markets.

The Mint has an interview with Harish Hande, the founder of SELCO-India and the winner of the 2007 Social Entrepreneur of the Year award in India.

The problem: In a country where we spend thousands of watts of electricity for a day and night cricket match, use the power greedy heater to ward off the winter chill, there lies another India where villages are dimly lit by paraffin lamps and dim lights battling darkening chimneys. For this cash-strapped India an ignited filament powered by current is a rare luxury, for they cannot even afford electricity.

Finding basic electricity is still an issue in India. How do you convince those people that they need to cut down their carbon emissions?

Hande is working towards building solar home systems for poor people in India with technicians on the ground understanding the actual requirements. He is collaborating with banks to provide an affordable way to own these systems.

In terms of economics, Hande has some interesting cost figures.

For example, there are 20 million street vendors in the country. In Delhi, a street vendor pays Rs15-20 everyday for an incandescent light. We do not pay Rs600 a month for a single light, neither do we pay Rs2,400 a month for four lights. That means poor people pay more for energy. It is the same case with Bangalore street vendors who pay Rs15 every evening for a kerosene lamp they use for four hours whereas solar costs Rs5-6, that too for five to six hours. It is a grave reality that the poor end up paying more for energy. Surely, this needs far more serious intervention.

And on the role of government.

In terms of central and state governments, the biggest plus is that they are not interfering. I have seen it in other countries like Dominican Republic where the government suddenly appeared on the scene, subsidized it, and spoiled the whole programme. However, the government can help by replicating our work on a mass scale. For that, we need many similar social enterprises and government policies that can creating caps in financial institutions, in much the same way as they did for agricultural financing 40-50 years ago.

‘We don’t think it’s right that families are using kerosene in 2007,” said Tozun, who added that kerosene and candles are polluting, bad for respiration, can cause fires, and often have very dim lighting. “With today’s technology available, it is possible to have safer, better lighting. We want to provide that.” The product, called Forever Bright, will have a retail value of about Rs500 and is small enough to hold in your hand, said Tozun.

Uused in modern appliances such as the numbers on digital clocks, images on a television screen, and traffic lights, LEDs are tiny light bulbs that fit into an electrical circuit, but unlike ordinary bulbs, they don’t have a filament or get too hot.

According to Light Up The World, an international humanitarian organization whose goal is to light up the world’s poor, benefits of LEDs include ultra low power usage, durability and extended lifetime.
[...]
The for-profit company was formed a year-and-a-half ago, after Tozun and a few colleagues took the “Entrepreneurial Design for Extreme Affordability,” class at Stanford University’s design school. They learnt to design for folks who earn a dollar or two a day.

D.Light's plan is a good example of socially motivated, highly educated entrepreneurs to target a base of the pyramid market. And it's just not easy.

Sam Goldman, the CEO and founder, is sharing his experiences on his blog.

Some lessons to sell in India from him.

There's plenty of budget airlines and a quarter million cell phones being made a day. India is 'calling all entrepreneurs.' And yet its not that easy. Razor thin margins, an older bureaucracy, whole neighborhoods of C&D (copy and develop instead of research and development), and the little things - like trying to get a cell phone present constant challenges. I was shocked by how demanding the Indian consumer is - requiring high quality, low price, and service guarantees even or $10 purchases. If we can crack this market - we can crack any.
[...]
India is the ultimate retail market and quite a challenge. As far as base-of-the-pyramid and rural marketing is concerned, I have found a few surprises. The first is how sophisticated the market has become. For example, the Chinese imports coming in as emergency lights have received a terrible reputation for low quality, and although they are still sold by the tens of thousands, newer Indian brands are springing up. Although the Indian brands are higher priced (often 2X) they come with guarantees (6mo-1yr) and often service warranties (up to 3years). Consumers are not only demanding high quality at low prices, but they want to be able to easily and inexpensively repair their products. If you are offering products that cannot be easily repaired – it is going to be hard to crack this market.

Economic Times has an Interview (I don't know with whom) on the consumer markets in India.

What’s happened in India is different from in a market which typically would have grown in pyramid form: first FMCG, then durables, then electronics, then luxury goods. In an emerging economy, if you look at a hierarchy of needs, there’s FMCG which is akin to basic needs, in the initial stages of development.

Funnily, in India, you actually have large businesses in durables and services, which are larger than FMCG. In category after category, the top-end is where the growth is coming from — fancy TVs, music systems... The market is the top 10 million people. So growths are coming from a dubious small base, but they’re becoming larger categories.

I think if you now look at the last five years, there are entry level employees who are drawing Rs 25,000 a month. Now you’re creating markets — because this is an individual income, being spent on lifestyle goods and services that are superior in nature. So now there are maybe about 60 million people who can afford goods and services, but it’s still a very narrow class of 5% of the population, therefore they don’t become the growth drivers of mass categories like FMCG — the base is too small.

Even though India is a large population of 1,200 million people, the real market for goods and services is a very small part of the population. This is where Innovation is required to provide goods and services to the vast majority of the unserved population.

One issue which is being missed in all this discussion in India is the "sustainability" of the growth. The executive in the interview mentions that "When 100 million people can afford Tropicana every morning, that’s when the FMCG sector will start booming."

This is good in one sense, but if these Tropicanas are created and sold like in the west then we may be looking at a large scale environmental damage scenario.

This weblog's previous version concentrated on rural India and the base or bottom of the pyramid markets. In the coming days, I will write more on these issues.