RDVP Finance SIG (10/28/2004)

Dave McClure, Margarita, Mans, and I met to continue the discussion of the local "MicroVC" model that we started last week. Most of the time focused on the nitty-gritty financial details of the model. We looked at four different general types of investment:

1. Businesses that serve the local economy in an urban setting
   
2. Businesses that serve the local economy in a rural setting
   
3. Businesses that support a tourist destination
   
4. Businesses that support expat retirement
   

We looked most closely at #3, thinking about the cluster of businesses needed to support "eco / cultural tourism." Mans objected to the term, arguing that what we were proposing was really just plain "tourism" and not the sort of "zero negative impact" programs that eco-tourism suggests. He's right--it's mainly to distinguish the proposal from existing tourism sites: what's proposed is creating small scale "destination resorts" centered around an area of natural beauty or with unique local customs. A reinforcing set of businesses (lodging, transportation, agricultural/cultural goods, telecom, food service, tourism/guide services, internet cafe) along with a basic infrastructure (water, sanitation, electricity) enable a community to receive international tourists that bring currency into the local market. Our model called for a local partner to find appropriate entrepreneurs to run these businesses, and invest in them, working with a fund of approx. $1M. The local partner would be responsible for putting up about 10% of the investment fund. In exchange, he would earn approximately $50K per year, plus 20% of profits (for his management role), and 10% of the remaining profit (for his initial stake). Not fully worked out yet is the revenue stream that accrues to investors. We assumed that for the first 3 years they would receive nothing during the "investment" stage. After that time, a combination of capital appreciation and cash thrown off as dividends would yield a 15% annual return. (Roughly 4X over 10 years).

The overall fund would be structured as a set of these local partners (probably about 20) with a few "corporate" employees with expertise in real estate, marketing, and perhaps key businesses like hotel management. We imagine that would add another $2M of expense to the overall. While we recognize that venture investing, especially in the developing world, is inherently risky, we hope that the "hard assets" (land and infrastructural improvement) that we would end up owning set a floor below which the overall value of the investment would not fall. We would seek locations where the government was favorably disposed to such projects (tax breaks?) and where property rights are sufficiently strong that we are confident of solid ownership.

Next time: We were undecided between doing a deeper dive on the "expat retirement" idea, and switching to a different topic for the week. Add a comment if you feel strongly for a particular topic.

RDVP Seminar: Paul Rankin (10/27/2004)

Paul Ranking, RDVP fellow '03, currently at Philips came to talk about his "Voices in your Hand" project, intertwining his general advice on how to succeed with a social venture (specifically, our RDVP projects). He started with a quick personal background, mentioning his Churchill Scholarship to study the impact of the internet on tribal cultures. As part of that project, he visited a UNESCO telecenter in Timbuktu, where he saw people waiting in line to use the machines, but found that many of them were illiterate, so needed someone to help them with the machine. Hence his goal: Empower the common person to use the internet without a scribe or other intermediary. He was looking for ways that more people per hour could be given access. His target market was both rural and urban poor, but since critical mass of users helped reduce expenses, he focused on the urban poor, looking at Favelas (slums in Brazil. See FavelaFaces.org for both stats and personal histories). These choices created constraints on his technology choices; it needed to be:

1. Cheap
   
2. Mobile
   
3. Voice-based
   

Slums currently house (if that's the right word) about 1B people, and are expected to double to 2B by 2030. Paul described the occasional warfare (with guns) with neighboring favelas, and the street childern employed as "watchers" to let people know that an unknown gringo had entered the district. But by winning people's trust, Paul was able to find supporters and even leaders in the local people. They heard his offer to help, and asked him whether it was real. In commiting that it was, Paul started a project that has stretched out for more than 2 years, with a pilot to start in January 2005. He has involved more than 28 people including Stanford students and Philips employees, and spent updwards of $1M designing and building. At that point, he says, it's up to the community to take over and make something of it.

What is it? From an end-user's point of view, it's a handheld device, an MP3 player with a full numeric keypad that runs for 25 hours on a AA battery. Content is stored in Flash memory cards, and consists of entertainment (music and radio programs), health information, educational materials, voice e-mails. The keypad is used to navigate the options and interact with content (like a "choose-your-own-adventure" book). The device can be docked to get updated content and send/receive email. People can share the devices but keep personal data on a flash card (which need not be shared). Conversely, public information, like AIDS/HIV prevention material, could be distributed on sponsored (free) Flash cards, with encouragement to share.

In addition to the hardware and networking challenges, it's really about the content and services. Paul has designed a markup language that lets him tag and route responses, for example. The toolset for producing this content is all new; and as he tried to determine how to make a viable business (new hardware devices are copied within 2 weeks of hitting the Chinese market, he says) he is considering maintaining proprietary control over tools or formats.

---

Advice on projects: Certainly user-centered design was a key aspect of the Voices in Your Hand success. He made multiple trips to meet with users, and conducted interviews with different types of users. He created storyboard panels on a pack of cards, enabling him to demonstrate different mix-n-match scenarios or ask the subject to group things that were related. He said that you need to resonate with the culture that you're working with: understand and appreciate and enjoy it. Keep the technical aspects simple: there are plenty of other risks without adding technical feasibility. The social eChallenge of BASES was a good way to gain access to students and advisors.

Interacting with others: as the scope and demands of this project increased, Paul managed to stay one step ahead, lining up resources and support to meet the new demands. Key groups were: Gatekeepers from the user community who saw what he was trying to do, and without fully understanding it, agreed to help. Philips, his employer, who dedicated dollars and people's time. A sign of Paul's success is that Philips has re-positioned itself as a responsible global citizen interested in sustainable development: Voices in Your Hand is a (the) pathfinder project for the New Sustainable Business Initiative. Being able to tie a project to the brand ensured greater followthrough, Paul said. While governments in developing countries might not be terribly responsive, multinational corporations that sense a PR disaster impacting their brand will swing into action.

All the while that the project was expanding, Paul tried to play contradictory roles: moderating expectations from the participants (about the only thing that was promised was a telecenter with a couple PC's), but all the time gaining the commitment of more "face" (public statements from higher level officials at Philips and the Brazil government) making it harder for either of these essential sponsors to back down or cancel the project. He talked about the challenge of working with different groups with different mindsets and evaluation criteria: especially hard when crossing the cultures of for-profit and not-for-profit.

World Affairs Council: Microfinance & Iraq (10/26/2004)

The second in a series of 3 sessions, this discussion covered Iraq and the Role of Microfinance (or listen to it online). The two speakers were:

• Brad Swanson, who had been in Iraq as a private citizen at the invitation of the Coalition Provisional Authority, and had a background in finance
  
• Thelma Tajirian, a US citizen born in Iraq, who had established a microfinance bank Al-Thiqa in Iraq for loans to small businesses

Due to getting a late start and traffic on the way up, I missed all but the Q+A session. Of the $18.4B for reconstruction, $3.3B was now set aside for security and economic issues. Approximately $30M had gone in to microfinance loans, some $6M from Thelma's organization. She restricts her lending to businesses that have been in business for at least a year. The loans are all secured, either by proerty (for loans over $2,500) or by the personal guarantee of someone with a government job. The average loan amount is $2,000, but sounds like it's dropping. They don't turn anyone down completely (except fraudulent), but sometimes give as little as $250.

The general sense was that security was a major concern, and had gotten worse in the last 3-4 months. Thelma had been forced to shut a bank branch due to security concerns, and said that moving cash between branches was one of their bigger risks. Brad said that only 5,000 soldiers had been trained for security (I assume that many non-soldiers have been as well, to come anywhere close to the official count of 100,000...) Insurgents have been succeeding, and each success rallies more to their side, though Thelma was quick to point out that many of the insurgents are foreigners who are trying to keep Iraq unstable. Of the Iraqi people themselves, she thought that it was about 50-50 for people wanting the US forces there and those not. People do think there will be total chaos if the US were to leave now. Asked about exit strategies, Brad said the best hope is following the January elections. If there's not enough stability for a large portion of the country to have free elections, then we will have to work with the existing power structure, including clerics and warlords. He felt that US troops should be protecting Iraq borders.

Regarding tech for Microfinance, Brad said that it wouldn't help much: it's the loan officers getting out to the communities making loans that provides scale. Equity investments are also essentially hung up on the security situation until it's safe enough to perform due diligence. Thelma said that technology has made them more efficient with email, and Microsoft office apps; IM has reduced communication costs. She does have a cell phone. In fact, she has 5! There's not a single network standard, so she has one handset per network.

As for the Al-Thiqa program, Thelma said that they only have about 10% women borrowers, low because there aren't that many women-owned businesses. They're not yet probitable, but do intend to be sustainable. They registered for NGO status before the June handover, but have recently been asked to re-register. They don't provide any training for their borrowers (they don't really have bandwidth to do so) but are thinking about helping some of them conduct focus groups and become more customer-centric. In assessing the loan amounts, they conduct an interview, site visit (to both business and residence), review the balance sheet and perform a cash flow analysis, and require two references.

They ended on a bit of an up-beat note, pointing out that monthly salaries (for a teacher, e.g.) have increased from $3 under Saddam to $150 now. Inflation is stable. There's revenue coming in from oil. Goods are coming across the border, and some 90% receive subsidized food rations.

Philanthropy Class: Cisco Corp (10/26/2004)

Laura started out with a brief rundown of the stats on corporate philanthropy: $13.4B overall, with $3.4B coming from corporate foundations. Philanthropy makes up about 1.2% of pre-tax income. These numbers don't include expenditures made from the operating divisions that are immediately expensed. Of the money that is given, 28% is for public/social benefit; 26% for education; 17% for human services and 14% for arts. Although many internet startups took heat for not donating, Laura pointed out that they really didn't have the revenue or cash flow to give. The implosion of sectors or companies can have a drastic effect on the local nonprofits. For example, Enron, in the year before its bankruptcy, donated $11M to Houston-based charities, with another $2.5M coming from Ken Lay's foundation, and another $5.5M from United Way contributions from Enron employees.

Turning to a more general discussion of corporate philanthropy, we discussed the stakeholders both internal (employees, shareholders, investors) and external (customers, non-profits, governments, communities, and business partners). Some of the corporate motivations included:

1. Community image
   
2. Building employee morale
   
3. Recover from PR damage
   
4. Build markets
   
5. Improve quality of available workforce
   

We got into a debate about whether non-profits should be willing to accept donations from companies with an "agenda" that might be doing harm in other aspects of their operations. Generally the "realists" won out over the "idealists". There was a brief debate over whether companies should receive tax incentives for their philanthropic work if most of it was to advance corporate agendas anyway. Our final debate was on whether CEO's should be permitted to directly control money from a corporate foundation, an occasional perq, often part of a retirement package. While people were worried about appropriateness and precedent, I'd potentially be more of a realist here, pointing out that if a retiring CEO were inclined to give a $1M portion of his package to his alma mater, the company would end up with a $1M expense, the exec would owe tax on the $1M received, and might not receive any tax benefit because of AMT or would likely get a reduced benefit. Therefore, the gift to the university might end up being the after-tax amount, perhaps $600K or less. OTOH, if the money comes from the corporate foundation, the company gets the tax benefit for the full amount, and the university gets the full amount.

Finally, we started talking about the Cisco case. It was mostly a big fan fest, with Laura calling Cisco "one of the most strategic corporate donors in the world." They won points for being more concerned with results than PR, with leveraging each aspect of their giving: financial, employee talents, products. Their matching program gets employees involved and keeps the corporate goals connected to this stakeholder group. Some of their initiatives were creative and effective: allowing employees to purchase discounted equipment for non-profits as long as they agreed to install and maintain it. The Cisco Community Fellows program is one that I have a lot of personal respect for: rather than issuing pink slips in the down economy, they offered people the option to work for a non-profit for 12-18 months (at 1/3 original salary) but maintain benefits and vesting. I suspect the downturn was longer than they expected, but I hope that this was a win for them in maintaining employee loyalty and not needing to incur recruiting expenses to fill positions that were created with the rebound.

Adding a couple of personal notes to the case: I've had the pleasure of meeting John Morgridge on a few occasions, and I'd give him a good share of the credit for establishing a culture of philanthropy. For example, he endowed the Center for Public Service at U. of Wisconsin at Madison. He's been a speaker at Digital Divide conferences. Also, Cisco is sponsoring RDVP Fellow Dipak Basu, also the Executive Director of NetHope.

RDVP Class: China (10/25/2004) and conference report

The readings (articles from the NY Times) focused on 1) The growth of China and its web of intertwined impacts on the global/US economy; 2) The disparities between rural China and the eastern cities (told from the tragic point of view of a promising rural student who committed suicide because he didn't have the $80 for tuition.). A few of us had gathered for lunch in the lounge before the official start of the session, and we started chatting about the readings. Jose and Stuart were impressed by the potential of China: the vast population (and available market), the educational attainments, even the apparent success the government is having in pursuing its development policies. Stuart wondered with the focus on development by the governments of India and China (accounting for about 1/3 of the global population) is there really anything that can be done outside the auspicies of the government (ie, does RDVP have a role?) Helen agreed that everything that happened in China (esp. by the government) was intended for development.

Stuart mentioned that he had seen an article on Microsoft's encouraging of the development of a China software industry, figuring that only when there was a local industry would issues of IP and piracy be decided in favor of content producers. Greg pointed out that this was like books in the US (in the colonies, when no books were written here, anyone could copy anything). The difference in IP rights led to a difference in development, and China is now in the position where it needs to figure out how to produce knowledge goods--then it will be truly competitive. This will also help provide rural opportunity and prevent urban migration. For now, the Chinese currency controls allow an artificially low cost of production.

Stuart asked about the role of microfinance in China. Helen said that it was less important, because there was family to borrow from, or failing that, moneylenders who charge "only" 20%. (I guess I've been effective in telling people that microcredit rates can often be 30-40%...) Greg pointed out that under those conditions, official microcredit rates would likely be lower, but it's not clear that capital access is the problem. Chinese business is very relationship dependent, and those are easier to build and maintain in an urban setting.

Jose commented that the rapid progress of China in the 2000's echoed Venezuela's in the 1940's after the discovery of oil. They invited US companies in to build up the infrastructure, had urban migration, but fast growth in the 1950's to 70's. Three mistakes Jose felt they made (along with suggested improvements) were:

1. Built huge, inefficient central government. China should focus on making local government more effective.
   
2. Huge migration to the cities
   
3. Lack of urban planning led to rings ov poverty around the cities. Building rural infrastructure may have prevented the migration.
   

Venezuela ran into problems in the 1980's, leading to a currency devaluation. Now some grassroots organization is starting to build and demand service from the central government.

Durga wondered where the real information about Chinese poor was, figuring that it was being suppressed. He said that a recent ESW meeting, Chinese microfinance was discussed, but that it was run by the government, only in the cities. Moulaye was skeptical, saying that even if the government states they're doing something, you really need to verify it with the people and determine the impact on them. How are they getting money from those who migrated to the cities? Is it being used to improve the production in the countryside?

Helen said that the Chinese government is looking to import management skills and advanced technology. Jose wondered if the Suvayar project would enable local (rural) production to be sold via eBay with a cell phone to commit the transaction. Yann asked about other problems of urban migration, like housing and education, wondering how they were dealt with.

Stuart said that he felt Helen's project had identified three key trends in China:

• Cell phone penetetration
  
• Small business expansion
  
• Urbanization
  

Helen characterized it as helping people to help themselves, by giving access to a disctirbution channel. Greg claimed the root problem was an excess of labor, and posed the challenge of how to use it effectively. Could it be in a secondary gift/volunteer economy? Health care and education are two labor intensive industries that should absorv some of the excess. He asked Helen whether her project (using e-marketplaces) could be equally well solved by giving everyone a 800-number. While that idea appealed to Helen, I'm not convinced that it solves the problem: it's not just inbound communication that's needed, it's outbound marketing. And while a listing on a crowded e-marketplace is not great outbound marketing, it's better than nothing.

That moved us to thinking about information listing services, like Craigslist.org. Jose proposed a craigslist per village. Renee asked whether Helen had gathered input from real customers (she later suggested contacting Kavita of the Global Fund for Women to see what sorts of projects they are doing), and Greg suggested that input would be more helpful if they had a prototype to react to. He pointed out that the goal was to create opportunities, not businesses, so Helen needed to operate at "one level above", and really engage the local community so that they will participate. Yann argued for the benefit of keeping a specific community in mind, rather than trying to do something generic that might help the whole country. Stuart and Greg returned to the idea of Craigslist in a box, with Greg proposing a kiosk (he even drew a quick storyboard, currently hanging near his desk.) Stuart said that solving market exchange is partially an information problem, but not entirely (as followed from the example of trying to purchase chairs--clearly it's not workable for an individual craftsman to advertise and sell his chairs overseas: shipping costs would kill any savings.) Helen responded that while global interactions were enabled, so were local ones, and physical goods would probably be entirely local. Greg highlighted that there was the underlying assumption that eBay access enabled more buyers. I volunteered that assumption could be tested without building the mobile interface, but just taking a PC with dialup access to a remote village.

---

Jose's conference report on IT Adoption by Non-Profits

He said that a key barrier was trying to obtain funding for IT support, especially for small NGO's. And when an organization did get some money, frequently experts would "parachute in" build something, and leave, without really training anyone there, and leaving no money for onging support. What was needed was a network of IT volunteers to support. He said that "single issue advocacy" (like banding togetehr to prevent a mall from being constructed in a neighborhood) was the most successful example of IT usage.

Jose said that perhaps the most valuable part of the conference was connecting with entrepreneurs, academics, and non-profits in San Francisco and East Palo Alto. He said that the digital village project in East Palo Alto was running into many of the same issues as El Limon. Some non-profits felt that their funders were pushing them to build a global net presence even when it wasn't strictly necessary. "You must be virtual to be real" (to the foundations) they lamented. IT volunteers and consultants often over-build. They really need to involve the community in the requirements gathering and definition.


Joanne Yoong from the Econ department gave a short pitch for interactions with her undergraduate class in Winter quarter focused on communication of economic policy institutions and economics of development. On the one hand she was looking for guest speakers (willing to make a 30-45 minute presentation), on the other hand she was offering student help for projects that would involve communication: program evaluations, web surveys or sites, PowerPoint presentations, etc. People interested can contact her at: jsyoong at stanford dot edu.

Clean Water Access (10/25/2004)

I'm acting as a project advisor to Rebeca Hwang for her Public Policy 192 "Intro to Social Entrepreneurship" project. Rebeca's a Ph.D. student in the Interdisciplinary Program on Environment and Resources (IPER) division. With a bachelors in Chemical Engineering and a masters in Environmental Engineering, additional classes in the business school and law school, plus actual on the ground experience in studying water filters in Nicaragua, she's got a more credible background as a social entrepreneur than I do. So, following the philosophy that the best way to learn more about a field is to try to teach someone about it, I'm acting as the student, trying to learn the different approaches to water purification: chlorination, filtration; at the household, community, or regional level; for chemicals or microbes or viruses; paid for by government, NGO's, industry, or consumers. Rebeca has a wealth of knowledge, and the challenge now is to organize and zero in on the most promising directions to provide access to clean water for millions more people.

RDVP Finance SIG (10/22/2004)

Greg, Margarita, Dave McClure and I met to discuss "Issue 1" on our SIG list: Micro-VC.

Greg described a company that he thinks would fit the MicroVC model for investments:

• Yachana, in Ecuador. A for-profit subsidiary of a non-profit organization, this producer and exporter of eco-friendly chocolate is seeking an investment.
  

We talked a bit about the specific challenges that make this harder than traditional VC:

1. Lack of an exit strategy: These companies generally don't fit the profile of an IPO, and are located in countries where the public markets aren't as well developed as the US.
   
2. Social aspect: In some cases, the justification for an investment is not purely the financial return. The "double bottom line" of social or environmental return helps make the case, but traditional VC investors can't always make that argument with their limited partners.
   
3. Difficulty of evaluating and managing investment: Many VC's don't like to consider investments outside a few hours' drive from their office. Being able to perform due diligence and participate in the board meetings and strategy of the company requires face time.
   
4. Smaller investment requirements: On top of all these factors that make it harder, the deals are generally smaller, so there's less upside because less money can be put to work.
   

Greg mentioned that Equal Exchange had raised money by selling restricted stock to the public, which paid dividends in product (coffee) and could be redeemed after 5 years for the initial purchase price by tendering it to the company.

Margarita mentioned a couple of different funds such as The Angels' Forum which makes small investments by forming a distinct limited partnership for each investment chosen by some subset of its 25 wealthy individual investors. Also, The Investor's Circle is a social venture fund focused on sustainability. Commons Capital is a more broadly focused social venture fund. She mentioned TiE as an example of a minority group that funded some entrepreneurs. She added from her own experience that funding under-represented groups without having syndicate partners made it tough to ensure that portfolio companies would have access to the capital they needed to grow. She also talked a bit about her time at Horsley Bridge Partners a "Fund of Funds" VC that took money from pension funds and invested it in a set of VC's that was diversified by geography, industry, and stage of investment. By investing in ~15 VC funds, they were indirectly invested in 250-300 companies. Alex Mendoza had created a fund (NuCapital Access Group?) that targeted underserved groups and tried to have the resulting investment vehicle look like a dividend based investment for his investors.

Looking at the typical "solution" for these investment seekers today, the lucky ones that acquire funding either get "one-off" funding from an individual or find a foundation that is willing to make a "Program Related Investment". Dave wondered whether there were some way of including a portion of the hard (real estate) assets as a piece of the pledged backing for the stock, so that at a minimum, an investor would have a supporting "floor" of the value of the land. This might be especially attractive in eco-tourism investments, where the land and infrastructure in the community is being improved to serve international tourists.
This led us back to the challenge of the exit strategy. It seemed one of 3 viable approaches:

1. Create a FannieMae like secondary market where a quasi-government entity can purchase.
   
2. Target investors with a long time horizon, those that would be content to get a stream of dividends generated from the operating cash flow of the company rather than capital appreciation
   
3. Link the investment in the company to the ownership of its land, making a more liquid market.
   

We talked a bit about other aspects of the "mechanics" to make a deal work. Most investors would prefer to have a US-based company, where they were confident of the accounting standards and legal protections offered. But these investors are increasingly comfortable with a hybrid, where some work is done in the US and some overseas. Margarita identified this trend as "micro multi-nationals", and said that it's not just engineering/development operations moving overseas. But again the problem of due diligence and company management from the US, especially for smaller sized deals, seemed intractible. So here, we proposed pushing responsibility down to the local level: creating a local general partner for the developing community, someone with some experience in VC (A Kauffman Fellow, recruited from that community perhaps?) who would deal in smaller stakes (putting perhaps $250,000 to work) but since he or she has the local knowledge and contacts can do so more cost effectively, plus operate in a lower cost environment. Margarita pointed out that UPS has historically been interested in supporting the creation of small business (new customers) and so could perhaps be approached for something like this. By creating a network of these local "Micro VC's", a parent company (partnership?) is essentially a "fund of funds" with good geographic diversity.

It may be possible to create templates of viable business kiretsus (networks), such as:

• Eco-tourism (to bring new money into community)
  
  
  • Resort lodging
    
  • Specialty agricultural production with export interest
    
  • Transportation
    
  
  
• Retail (to provide increased options to local community). The local equivalent of the "Starbucks, Noah's Bagels, Jamba Juice" triumvirate, but with Mom-and-Pop instances of each of the categories instead of chains.

Having this kind of coherence to the on-the-ground investments enables some shared expertise across the fund-of-funds, and perhaps allow the creation of relevant infrastructure that can be shared by all (a reservation system for eco-tourist sites, for example). Margarita suggested that the Pacific Community Ventures might be a model worth looking at, since a key part of their focus is the creation/retention of jobs in the community. Is the diaspora community a viable source of capital and talent (the local VC's) that could make this work? Would the governments of the other countries be willing partners (with tax breaks, matching funds?) to encourage this type of foreign investment?

What type of profile are you looking for for the local VC's: education? experience? ability to raise a portion of the fund (from personal resources? local community? diaspora?) How would that person be compensated (salary plus management fee plus percentage of carry? Are profits considered purely locally or at the fund-of-funds level?) What geographies? Ones with protectable property rights, what else?

This is different than microcredit. It is targeting a different audience: not the poorest of the poor as microcredit does, but rather the emerging middle or even upper-middle class that has experience (proven perhaps by successfully taking and repaying multiple microcredit loans), financial savviness. It aims to generate a quantum leap in employment, not the incremental addition of a one or two people to a micro-venture.

NEXT TIME: We agreed to go deeper on this topic. Personally, I'd like to get an understanding of how the model works.

• Could we "run the numbers" for one of these local VC's?
  
• Is $250K the right amount: can it support all of the needed investment?
  
• Is the management fee and generated revenue stream enough to cover costs (and attract the right level of people to apply for these positions?)
  
• What portion should the local VC be responsible for?
  
• Does it make sense to specialize to either the retail model, the ecotourism model or should the local VC be given total discretion?
  
  
• What's the roll-up plan (ie, how does the fund-of-funds look?)
  
• How much global diversity do we shoot for?
  
• What roll-out rate?
  
• What are viable sources of limited partners for the fund-of-funds?
  
• Is anybody else doing this?
  

Philanthropy Class: Peter Hero, CFSV (10/21/2004)

Since taking over the Community Fund of Silicon Valley in 1988, Peter Hero has grown the asset base from 10M to 670M. The bulk of the money is in "Donor Advised Funds" and "Supporting Foundations". But by actively working with donors, CFSV is able to help ensure that local non-profits are funded. Before he gave his talk, the members of the class listed (from the case) some of the initiatives that he had taken to grow CFSV:

1. Focusing on Donor Advised Funds rather than trying to raise unrestricted funds
   
2. Forming ties with professional advisers (estate planners, etc) who might refer donors (the infamous "tuna fish lunches")
   
3. Offering a wide variety of "products" like charitable lead and remainder trusts, supporting organizations, donor advised funds, etc.
   
4. Providing research about the community and local non-profits (through "Partners in Philanthropy")
   
5. Convening meetings among non-profits (like arts groups that led to a joint endownment fund drive raising some $12M)
   
6. Working with companies, inspired by the fact that more philanthropy in Silicon Valley is influenced by the work life, not the religious life
   
7. Becoming a service provider for managing the endowments of corporate foundations and other non-profits

Peter said that he viewed the capabilities of the CFSV as a trusted intermediary who could:

1. Convene (meetings of donors, non-profits, community)
   
2. Connect (donors with each other, non-profits with each other, non-profits to donors)
   
3. Endow (non-profits)
   

He specifically mentioned SV2, a group of younger donors that was initially proposed by Laura Arrillaga, as an example of these connections. Some 170 people give $2,500 - $25,000/year each, and jointly choose where it is directed, typically in a highly "engaged" fashion (providing time and talent as well as money). This is an example, he said, of the philanthropic style reflecting the culture of the area. (He cited Annalee Saxenian's Regional Advantage, a good book comparing Silicon Valley with the Route 128 region near Boston).

He answered a lot of questions, such as the challenges that CFSV faces:

• Educating donors on payout rates (right now, it's much higher than the "sustainable" 5% rate)
  
• Encouraging donors to augment grant making with "field of interest" gifts
  

He also talked about some of the opportunities that CFSV is currently attacking or planning:

• Doing more research, a low cost, effective way to establish credibility
  
• Renewing ties with the older families that started the foundation and may have felt a bit ignored when high-tech wealth was the focus of the Valley.
  
• Receiving gifts of real estate from long-time property owners (they've received some $100M of such gifts so far)
  
• Talking directly to potential givers rather than always going through financial intermediaries
  
• Appealing more directly to minority communities (Hispanic, Indian) in order to help them find places in the local community that they can support.
  

Peter also answered frankly the question about whether CFSV invested its endowment in socially responsible investments: No. The purpose of the endowment is to maximize the money available for grants, and constraining investment options in that way can have significant negative impact. Besides, he said, other than tobacco, it's hard to determine what is socially detrimental. Is Nike exploiting child labor or providing employment in areas without enough jobs?

RDVP Seminar: Pavi Krishnan (10/20/2004)

Pavi Krishnan screened her movie called Infinite Vision, the story of Dr. Venkataswamy and the Aravind Eye Hospital. [See also previous entry from David Green of Project Impact.] Dr. V. discovered that of the 45M people around the world who were blind, some 12M were in India, and most of them were "needlessly blind" (suffered from cataracts or other treatable disease). Moreover, the blindness was essentially a fatal disease, with people living just 2.5 to 3 years after the onset of blindness. Unable to care for themselves, they were often turned away by other caregivers.

The Aravind Clinic sees 1.4M patients per year, performing some 200,000 surgeries per year, 2/3 of which are done for free. The paying patients cover the costs of the others, and also fund the substantial growth of the hospital chain. All patients, whether they pay or receive free services, get the same high quality health care. The differences are in the accomodations and food provided during the hospital stay. Some 1,500 screening camps bring 600 - 1,000 patients to the hospital per day. By optimizing the process, (and providing support from 4 paramedics per surgeon) the doctors do about 2,000 surgeries per year, versus a national average of 220.

In addition to treating patients, they have started sharing their methods with other hospitals, reaching some 150 hospitals that now average about 5,000 surgeries per year; some reach 10-12,000 a significant factor higher. While the numbers are one piece of it, success also requiers a strong work ethic and culture established by the hospital's leadership. They also work with Aurolab, a non-profit manufacturer of Intraocular lenses (started in 1992) which has cut the cost of lenses from $200 to $5, and is exporting them to 85 countries.

Dr. V's family has been tremendously commited to the goals, with some 40 members of the family in 3 generations being involved. Pavi (the eldest of the 3rd generation) recalls weekly family meetings where children were required to make presentations to their elders. The film also showed the important role that spirtuality played in Dr. V's life.

Pavi readily admitted that this method was well suited to cataracts, and perhaps less so to thinks like pediatrics or cardiology, because cataracts inflicts people across the economic spectrum, so there is a segment of wealthier patients that can subsidize the poorer ones. Plus, cataracts requires almost no followup: after surgery, people are better. In contrast the patients suffering from diabetic complications do require more ongoing maintenance.

Turnover is high among both the surgeons and paramedics. For the surgeons, Aravind is an excellent training ground that gives them the skill to open a private practice. Consequently, the tenure is only about 4 or 5 years. The paramedics are girls age 18-22 drawn from villages at the rate of 500-600 per year. They go through a 2 year training process, live in a hostel setting in the hospital with enforced savings plans. They are selected for their willingness to work hard, discipline and family values. They typically leave after marriage.

Asked about current challenges, Pavi cited retention, scaling, and training, as well as passing the values on to the third generation (with the unstated fact that at 86, Dr. V. will not be around to provide the overall vision forever.)

Public Policy 190: Jim Thompson (10/19/2004)

Jim Thompson, the founder and executive director of the Positive Coaching Alliance, spoke at the Social Entrepreneurship lecture. He was a Stanford GSB alum who was running the Public Management Program (also at the GSB) when his experiences with coaching for his son's sports teams led him to write a book on the topic. He disliked the "win-at-all-costs" nature that had seeped into the youth sports organizations; instead, he advocated "Double Goal Coaching": Winning is the first goal, but learning life lessons and developing character is the most important goal. They've taught 2,000 workshops, but the BHAG ("Big Hairy Audacious Goal") is to reach 1,000,000 coaches, 25% of the 4M that exist today, over the next 10 years. He talked briefly about their methods (adding regional offices in NY, LA, Florida, Chicago; starting a certification program; reaching parents and public schools) as well as some of the theory behind it (social network theory, where Mavens are people who command attention by virtue of their authority, and Connectors are included in different networks of people.

He answered questions and closed noting that coaches that adhered to the PCA model had a higher winning percentage than those that used the "win at all costs" model.

Philanthropy Class (10/19/2004)

Lecture today focused on the grant-making process, especially the evaluation portion, as we considered different elements of the requesting organization (like its organizational capacity and financial management) and the grant itself (including the leverage and impact of the proposal).

From a foundation's point of view, we looked at the funding strategy and how that impacted the spending strategy and investment strategy. Leading to a (staged) debate between the goal of keeping a foundation around in perpetuity versus the plan to spend down within the donor's lifetime (or one generation after). The arguments for a quick wind-down were primarily that money was needed now for urgent needs, and so should be spent now rather than hoarded. Immediate spending was more likely to maintain the donor's intent and unlikely to succumb to excessive bureaucracy. On the flip side, maintaining the foundation in perpetuity enables it to serve future needs, take advantage of future innovation, build a knowledge base, and focus on problems and projects that have long time horizons.

We closed the class with a brief discussion of the 5% payout rate and whether "non-investment administrative expenses" should be credited toward the 5% of a foundation's endowment that must be spent each year, or whether only strict program expenditures should count.

RDVP Class 10/18/2004

Srinivas Sukumar substituted in for Stuart today (who was presenting at a conference at Harvard). The readings were on the topic of India and included:

1. India's Soybean Farmers Join the Global Village (NY Times Jan 1, 2004)
   
2. Debts & Droughts Drive India's Farmers to Despair (NY Times June 6, 2004)
   
3. The Best Job in Town by Katherine Boo, The New Yorker
   

We started off by describing how we had connected with/learned from the readings; Dipak mentioned the inequality observed in wealth and IT access. For me, it was the attitude toward debt and the extremes of failed repayment (suicide); following on that theme, Jose said that it was more tragic because in many cases the failure was due to circumstances beyond the farmers' control, like weather. Sukumar said that the personal nature of the transactions, which impacted the entire family's reputation, was part of the reason default was taken so seriously. Carlos spoke from his personal experience that as long as you continue to make an effort to repay, lenders will generally work with you. Margarita speculated that people needed more "successful" narratives that showed alternatives when conditions turned bad. Sumkumar cautioned that microfinance might create a bubble of money that could burst later, having unintended consequences.

We talked a bit about suicide as a response, with Mans pointing out that suicide benefits paid to the family sets up the wrong incentive, and if it really is weather that's problematic, they should try to shift the risk to larger entities that could bear it (e.g., weather insurance). Sukumar pointed out that Grameen typically does forgive loans under disaster conditions, that should be built in as part of the cost. Dipak argued that suicide was not unique to loan defaults, but a larger part of the fatalistic culture. Greg wondered whether India had an equivalent of the "Horatio Alger" (building ones' self up from nothing) story. Sukumar said there was, but it was more community oriented (the hero lifted his whole village with him). Helen pointed out that in China, as in India, people's caste or class really did limit their aspirations and capabilities. Durga pointed out that there's no social security in India, which Sukumar followed up to say that the equivalent of Chapter 11 didn't exist either.

Renee shifted the topic to talk about the cultural impact of offshoring, which Sukumar agreed was huge: the $200 monthly income for call center reps is a huge amount of disposable income, since the cost of living with parents is effectively 0. Loren Berlin, a guest visiting from UNC and with experience in working at ACCION in microfinance, agreed with Margarita's assertion that people will do things that aren't in their own economic interest in order to protet their family. Loren took the point even farther, saying that people favored the familiar, and some were strongly anti-Grameen, just because it was different/unfamiliar. This was evidence for Sukumar's point that it's hard to change culture/government, and that to have successful projects, we needed to understand the systems in place and work within them.

Greg argued for a market mechanism to provide coordination among non-profits. Not the same market that for-profits live in, but one in which the beneficiaries can give feedback showing which organizations best serve their needs. We considered alternative ways of achieving that coordination, with Loren pointing out that some foundations (e.g., Rockefeller) are, by virtue of the programs they fund and the collaboration they "encourage" among their portfolio of donees. Sukumar pointed out that the coordination could happen at 3 levels:

1. Foundation / Funder
2. NGO's or
3. Customer / Served community

Margarita said that the lack of shared knowledge among NGO's, the rarity of mergers, and the competition for funding led to a fragmentation that hurt progress in solving the issues. Carlos raised concerns that the market doesn't provide all the answers; people get cut out of the market, and we shouldn't assume that everywhere else has the same mobility or market development that we experience in the US. Mans echoed Greg's point that this "market" for non-profits was different than the economic one in which for-profit firms compete. He said we need some token "pieces of paper" or "squirrels" which people can award to good NGO's who can then demonstrate to funders that they're meeting the true needs of the community.

We moved from there to the blurring line between profits and non-profits, with Sukumar talking about the "for benefit" model where organizations move resources and people and delivering service in a cost-effective way, but plow any profits back into the operation to increase the scope of its served population. (e.g., Aravind Eye Hospital). Greg had seen a couple instances of non-profit foundations having for-profit subsidiaries that use accumulated net income to fund the non-profit's mission. Loren said that Accion was rolling out an investment fund, and countries like Peru have social investment funds that communities can tap for their projects.

The profit/non-profit blur also shares a competition/cooperation side. Greg said that competition works well in the "economic" market, where driving cost out benefits society. In the more "creative" markets, however, cooperation is key, and traditional market mechanisms don't provide the right incentives. Brij Kothari (RDVP '04) claimed that funders were responsible for being the judge for competition among NGO's and should clear out the field by not funding the ineffective ones. Dipak stated that they were--the foundations are paying attention to NGO's overhead rates and performance on metrics. Greg pointed out that much of the challenge behind collaboration is the high cost of communication; as tools get better, access increases and tariffs go down, we should see more cooperation. Indeed, the open source movement is an example of that. Carlos warned against extrapolating from open source, claiming that the circumstances (millions of beneficiaries from a project) are too uncommon to generalize. Sukumar agreed with the basic point that access to information is critical, and the tendency of projects to focus on Infrastructure rather than Information is unfortunate. Renee said that it was not just making the information available, but seeing how people USED it. Dipak said that the spread of TV has raised people's expectations.

In response to a question from Durga, Sukumar said that it takes 20 years to get from market creation to profit, (10 years of tech development, 10 years of roll-out to scale) so a company that wants to benefit either needs to have deep pockets to fund 20 years of losses, or a buisnes model that lets the company make profits in various niches along the way.

RDVP Finance SIG (10/15/2004)

Recognizing that a number of our projects share a common theme in innovative uses of financial technology, we had an impromptu meeting on Friday. Although this is something that Greg, Margarita, and I had threatened to do, the precipitating agent was Dave McClure, until recently a Director of Marketing at PayPal, and the man behind their Developer Network. Greg invited him to campus, and he joined Greg, me, Mans, and Helen in outlining some of our topics of interest in this arena. This organizational meeting was fairly free-flowing, as we set the context for future meetings.

The proposed topics included:

1. Equity Funding for Ventures that don't fit the traditional VC Mold (aka "Micro-VC")

What sources of capital exist for social ventures that have demonstrated success on a small scale and are ready to expand but require $500K - $2M? What about for-profits that have more modest capital requirements than typical VC investments but also don't have the promise of an IPO liquidity event? Related issues:

• Understanding current US government offerings: SBA loan guarantees , SBIC (Small Business Investment Corp, private for-profit), Specialized SBIC (SSBIC's)
  
• Investigating appropriate metrics for describing investment opportunities
  
• Investment criteria used by venture capitalists (quanitfying and locating proxies)
  
• Creating a (secondary) market for such investments
  
• Bundling financial and real-estate investments
  

2. Securitizing output of a community

Investments made to improve the infrastructure of a community may not be directly tied to the success of any single company or individual. Is there a way to create financial incentives to make this type of investment? Could the value of the property itself somehow be included?

3. Microcredit

Microcredit has been shown an effective tool of poverty alleviation. What's the best approach to make it available to many more people? Increasing the number of borrowers at existing MFI's? Starting new MFI's following the traditional model (but perhaps with greater technology support and capability)? Bypassing the traditional MFI industry all together with a financial services provider like VISA or PayPal? Can the weekly visits from loan officers be eliminated or is it an essential part of the recipe?

4. Economic system for "surplus economy"

Most of the marketplace rules are based on the assumption of scarcity: buyers compete for scarce goods; producers buy scarce resources to make their goods; competition among suppliers drives down costs, which benefits consumers. While these assumptions hold for physical goods, they don't hold for other types: information or social goods. With marginal cost of unit production being essentially zero, "everyone" can have a copy. People can afford to have a copy of different versions. Social capital works similarly: using one's social capital to benefit one project doesn't necessarily decrease it relative to a second project. What new mechanisms, metrics, incentives work in this space? How do you account for contributions? Does the notion of a complementary currency fit in this space? What's the right mechanism for exchange to appropriately reward the creator? How can society encourage collaboration and building on ideas of others to solve big problems faster?

5. Accelerating digital market place startups

There's a fairly common set of requirements for setting up a new e-business. Is there a bundled set of tools that could enable the startup to focus on its unique IP, knowing that it has adequate systems in place to handle: web site shopping experience, online marketing, accounting, recruiting, lead/sales force management, bug tracking, web conferencing, personnel reviews, etc.

6. Global market access for the marginalized

Hundreds of millions of people could benefit from the ability to broadcast their goods to a broader (global) audience. While such global market places exist (e.g., eBay, alibaba, Froogle) they have fairly high hurdles for participation (credit card, checking account, reliable network connection and computer). What could be done to improve access to these market places? Can an individual with just a cell phone list goods for sale and complete transactions?

7. Education financing

Education is one of the largest investments that an individual makes. In the US there are student loans to cover some of the cost. But what if financial institutions made equity investments instead of debt investments? Rather than getting a fixed payback, the funder receives a percentage of, say, adjusted gross income, with each tax return that the borrower files. Mans said that Sweden uses a similar system. Dave recommended looking at MyRichUncle.com.

8. Remittances

Money sent across international borders, from individual to individual, are a major piece of many economies (e.g., $16B to Mexico, second largest source of foreign capital). The entrenched players charge high fees. How can the system be reinvented to provide a better deal to customers and use some of the excess to create a system of risk capital for these economies? Dave recommended looking at Payko.com.

We also talked a bit about some of the challenges in a payment system, such as

• Fraud prevention
  
• Transaction identification and auditing
  
• Reputation / reliability reporting for participants
  

We decided to target Weekly meetings, Fridays @ 10 AM (I think?) focused on one topic.

RDVP Seminar: John Katz (10/15/2004)

Jon Katz is not your run-of-the-mill development consultant. Over the last 10 years or so, he's gotten deeply involved in working with the remote mountain community of El Limon in the Dominican Republic. He's lived for long stretches in the community, where he has become a "pet gringo". His initial project (with students from Cornell) was to use irrigation canals for small-scale hydroelectric power generation, creating enough power for the 40 or so houses and community buildings. Adding phone and internet access were other critical steps for his continued involvement with the community and its development.

Jon spoke at a very practical level, describing the particular hardware that was used and its merits, as well as challenges that they ran into with unreliable service providers (both private and public). Improving reliability, ease of administration, and reducing power consumption (replacing hard drives with compact flash, e.g.) were design goals. But he also spoke about the changes in the community: children that used internet chat applications as a way to interact on equal footing with their peers worldwide; more students attending high school in the valley rather than topping out at the 7th grade (more like 2nd grade equivalent) offered in the mountain school. A base of people with technical skills is growing: Jon identifies techies early on and includes them in the planning and development stages, so that they are better able to handle the support; but he still finds that much of his time is spent on trivial hardware issues (perhaps twice as much as on grant-writing and the like).

He started off a bit on the philosophical side, pointing out that as globablization and knowledge work became the typical, rural people could contribute on equal footing with their urban counterparts, but lack of access, education, and transportation are leaving these people behind yet again.

Philanthropy Class: Paul Brest (10/14/2004)

Paul Brest, President of the William and Flora Hewlett Foundation, was a guest speaker on the role of strategy in foundations. Prof. Arrillaga started the class off with a quick rundown on the different factors that play into "accountability" (not just to the higher authority of "public trust" but also mutual accountability between donor and donee) and some of the factors of the relationship between donor and donee:

1. Honoring the donor's intent
   
2. Responsiveness
   
3. Accessability
   
4. Transparency
   
5. Disclosure
   
6. Honesty
   
7. Fairness
   

And all of these issues interact with considerations like: power, trust, cost, capacity, communication, culture, and management.

The class was split into halves representing either "Foundations" or "Grant seeking NGO'S", and a spirited discussion ensued, recapping most of the points from the reading, including:

• The desirability of measurements vs. the cost of obtaining them
  
• The request for "open channels of communication" vs. the reprisals that come when not all the news is rosy
  
• The need to fund operating expenses vs. the desire to be associated with innovative, effective programs
  

A quick wrap-up discussion highlighted some of the challenges in quantifying social ROI and arguing that evaluation should be viewed not as a freebie "add-on" but rather an important part of the overall program that is also appropriately funded.


At this point, Paul Brest led us through a quick overview of his process of planning for strategic change:

1. Start with a Goal
   
2. Create a theory of how to achieve that goal (aka a "Strategic Plan")
   
3. Evaluate the risks
   
4. Carry out the plan
   
5. Evaluate Progress: compare progress against milestones
   
6. Evaluate Outcome: Did it achieve goal? Did the intervention matter? (Compare to a control group)
   

Evaluation is an important part of the process, and needs to be considered at the beginning. What sorts of metrics will you use? What are the intermediate indicators?

He asked the class to participate in a 10-minute grant writing exercise, conceiving the goals, logic model, and evaluation metrics of a mentorship program pairing Stanford students with at-risk youth. At the conclusion, he mentioned that Wendy Kopp of Teach for America had viewed the most important outcome (moreso than improving quality of teaching) as the creation of a constituency that cares about education. In 10-15 years, these former TFA volunteers (recruited from top colleges around the country) will be in a powerful position to influence education policy and spending.

He also mentioned Innovation Network a non-profit that provide online tools and training to help other non-profits with the evaluation and planning of projects.

John Miner: Entrepreneur Thought Leader (10/13/2004)

John Miner, President of Intel Capital, addressed the MSE 472 class today. His focus was mostly on the global angle of their investments, pointing out that 70-75% of Intel business was outside the US. Of the 1,000 investments that Intel capital has made, about 40% are outside the US, in some 30 different countries. Indeed, Intel Capital has employees in 25 different countries. This reflects the growing importance of developing markets. Some 3B new consumers are now (or will soon be) viable prospects, with Eastern Europe, India, China, and Latin America all opening up and experiencing rapid GDP growth. While the US still has the edge in innovation due to its preferred access to capital ("Capital goes where it's treated well.") and higher education, it's not clear that the locus of a new venture should be the US. Miner encouraged people to think before assuming they should start in the local (US) market: it probably doesn't have the best growth, nor the least competition. Looking at key technologies such as mobile phones, cable TV subscribers, and telephone lines, China is already the #1 global leader in these categories. By 2006, it will add top honors in internet users, broadband and VoIP to this list.

India will be adding 1M software engineers over the next 4 years. Miner views this as an opportunity, saying that there's always been a shortage, and that many of the dysfunctional factors of the enterprise software industry (e.g., changing your company's processes to fit to an ERP package) are a result of a scarcity of programmers that could build a package that would truly implement the processes that your company follows. New technologies like digital TV and wi-fi will also drive the need for more software engineers. Radio and TV may be at 90% global penetration, but cell phones, internet, will grow by half a billion users in the next few years.

	China	India	Russia
Focus	Domestic Consumption	Export Services	Natural Resources
VC maturity	Established	Established	Emerging
Capital Availability	"Bubble"	Flat	Low
Best of Breed	Computing / Communication	BPO and IT	Computation and materials

"Arguing against globalization is like arguing against the laws of gravity." -Kofi Annon

Responses to Questions

How does Intel protect its IP in China?

It's a calculated risk, one that they're not willing to take with all of their IP.

What are the key areas of opportunity?

10 CIO's from the F50 just said "A global, secure-across-the-firewall, collaboration solution." John added: management, security, and application deployment tools for grid computing.

Hosted Apps?

A reasonable solution for companies for whom IT isn't a core competence / competitive leverage. Some companies are starting to undo outsourcing relations, but others (small companies) find solutions like Salesforce.com a good fit.

Russia?

Although it appears that there are steps backwards in the political and economic stability front, Intel is not changing policies yet, but keeping an eye open to see how things develop.

Southeast Asia?

Rapid growth in the consumer segment, but still lacking the governance and capital protection laws that would make it ripe for VC investment.

RDVP Seminar: Lakshmi Pratury (10/13/2004)

Lakshmi Pratury, of the American India Foundation, came to speak on her experiences on working in high tech and venture capital, and making the transition to the foundation world and service in India. She spoke from a very personal basis, describing how key decisions (mostly avoiding something that she didn't want rather than affirmatively selecting something she did) and accidents conspired to create a life journey that none, herself least of all, could have predicted. After reveling in the freedom of dorm life at IIT Bombay, she realized that she didn't like the mathematics course she had signed up for, and switched to an MBA program. Her choice of a marketing role at Intel was made with reluctance and some necessity, but led to a decade long tenure of growth--both personally and for the company. She cited the discovery of the pentium flaw as the wake-up call to Intel and the 3 lessons that it taught:

1. The importance of communication at all levels
   
2. The power of branding (both the upside and the downside)
   
3. The power of the apology (once they offered to take the flawed chips back, most people decided that it wasn't worth the bother)

As a VC, she made an eye-opening trip to India, returning to her school, where she and her colleague gave a talk about computers, but discovered that only 2 of the 600 10th graders had ever touched one. That motivated her to work with Schools Online, raising money to build computer centers in underprivileged schools around the world. The Digital Equalizer program was not just about teaching technology, though, it was about using technology to teach the whole curriculum. Each subject had 2 periods per week in a computer lab. The 104 centers and 1,500 trained teachers have reached some 30,000 students. They've developed the plan to continue scaling up, relying more on state/government funding, and have made efforts to include the government along the way. The eventual target is the 1.98M schools in India, though as she mentioned, these sort of systemic changes are measured by the decade, not by the year.

Lakshmi's Personal Philosophy

While many of our speakers are doing good work (both from a social and academic point of view) and make compelling presentations, I felt that Lakshmi succeeded in making a heartfelt, personal connection with the fellows. Part of that success was in her willingness to share personally; here are a couple of snippets:

• Consider the tradeoff that is made between impact and personal recognition: Do you want to be a big fish in a small pond or a small fish in a big pond? (here I'm not sure that I quite agree with her example of Google! co-founders being in a "small" pond, but you get the idea, compared to the anonymous engineer that designed the satellite that enables world-wide communication)
  
• Think of the thing that you value most, then give it away. Giving is on-going, not one-time, and should be done recognizing that the act of giving itself generates personal happiness, not an obligation from the recipient.
  
• Your personal passion isn't something you wait to do when you retire. Why not do it now?
  
• Choose people that are good at what they are needed for, not just because they have degrees from impressive institutions.
  
• Your definition of what you are changes as you grow (both personally and as a company).
  
• Leave something when you're still happy with it (don't wait until you're miserable to make a job/career change.)
  

Advice for leading social change

• Be patient, these changes take time on the order of decades.
  
• Spend time with the people you intend to help, talk with them at their level, and when you get to know them, you'll probably find that their wants are the same as yours.
  
• Development activity is the seed capital of social entrepreneurship. Is there a revenue stream to make it sustainable? Another funder that can pick up subsequent rounds of investment? Are you building the skill set?
  
• We need to educate a whole generation of entrepreneurs in developing countries, but it's not the case that we can directly apply the same methods for teaching entrepreneurship from one culture to another.
  
• Raising money is hard and time consuming, but so is grant-making (to find appropriate groups to fund). OTOH, you can build an organization that's not based on direct monetary exchange (barter system or a developer network) but then you have to spend even more time and effort to make the social stuff work.
  
• The ideas really need to be locally owned in order to succeed. One option is to work "cleverly" with a group so that they think they came up with your idea (e.g., My Big Fat Greek Wedding). A better option is to choose the group your supporting carefully, so that the ideas that they really do generate are the ideas that you want propagated. Then let them take the lead and make key decisions on their own.
  
• For those of us coming from industry, realize that things go slower: If the time scale of the corporation is the fiscal quarter, the timescale of the NGO is the 3 or 5 year plan.
  
• Use connections shamelessly, have them help you find the real change agents.
  
  

The importance of India

With 1/6 of the global population, India is too big to ignore. We can't afford to have India become a non-democratic country. Therefore, part of the goal of the AIF is to connect the world's richest democrary with the world's largest democracy.

David Green, CEO Project Impact (PP 190, 10/12/2004)

David Green, CEO of Project Impact gave an inspiring talk on the provision of low-cost medical devices to the developing world. He has set up several sustaining businesses in developing countries. His efforts have (justifiably) netted much recognition, inclusing an Ashoka fellowship, Schwab Fellowship, and a recent MacArthur Genius Grant.

Although he has a basic medical/public health background (Bachelors and Masters of Public Health), his real expertise is in process refinement, both business processes and manufacturing. For example, he worked on the challenge of making cheap intra-ocular lenses (replacements for cataracts surgery). On the production side, his cost $4.50 compared to $100-200 for competitive lenses. The manufacturer, Aurolab, employs 400 people, and had net income of $2.2M on $4.4M in sales. By re-vamping the service process, the clinic that he helped was, with 6 opthamologists, treating more patients than a nearby hospital with 135. The Lions have sponsored this health care project; 75% of the clinics they sponsor are able to double their output and become profitable in Year 1. Green has similar successes in reducing the costs of hearing aids and sutures, though those projects are more recent, and haven't yet been rolled out at the same scale.

His central, repeatable lessons are:

• There's more money in the marketplace (from the patients themselves) than there ever will be from top-down donations.
  
• Multi-tier pricing means that those who are able to pay (generally self-selecting) subsidize those that receive cut-rate or free treatment. A typical example:
  
  
  • 47% are treated for free
    
  • 18% are treated at 2/3 actual costs
    
  • 35% are treated above cost
    
  The blended mix allows a small profit.
  
• Doctors are paid at the high-end of the market rate, retention is high
  
• Doctors also get the prestige of modern equipment, international partnerships, and typically more control (over personnel issues, financial issues) than they would at alternative positions
  
• Traditional medical suppliers ignore these markets:
  
  
  • Can get much higher margins in developed markets
    
  • Have come to rely on higher margins (higher cost structure)
    
  • Don't see the need to develop nascent markets
    
  • Are constrained to maximize ROI for shareholders
  
  
• The biggest challenge is finding a distribution partner (Project Impact is evaluating Grameen for the hearing aid project)
  
• Don't skimp on quality of service or technology. They have always gotten FDA or European equivalent, even when not necessary, to prove they aren't undercutting price at lower quality.
  

The 5 biggest challenges in starting a new venture:

1. Finding the right people to work with
   
2. Dealing with egos
   
3. Technical hurdles
   
4. Financing
   
5. Selling (esp. distribution)
   

Philanthropy Class (10/12/2004)

We spent the first half hour of class introducing ourselves. There are only a handful of grad students, and I was surprised at how many of the undergrads had experience in working at non-profits and foundations. Of the roughly 40 students, it seemed as though about 3/4 had some form of non-profit experience. A couple had worked at foundations that will be presenting at later lectures.

The case study for the day was the Broad Foundation, focusing on their strategy and grant making process, as well as its organizational structure. The case was "hot off the press", having been completed in August 2004. Dan Katzir, the Managing Director, had spoken at the Venture Philanthropy conference in September. Their focus is on improving K-12 education, especially in urban settings. They focus on making changes at the district level, working with superintendents, union leaders, and principals. By improving the governance, management and labor relations they hope to have a dramatic effect on the resulting education.

The class talked a bit about the assumptions of the foundation (that a knowledge worker had a more fulfilling job than a service worker) and the hazards of evaluating education quality by standardized tests. Also, a student from Oakland had first hand knowledge of the conflict that Broad-backed Oakland superintendent Randy Ward had faced. The Broad Foundation is unique in that it doesn't have an external board, and Eli Broad himself signs off on all of the grants. While this finesses the question of donor intent, it also raises some questions about succession. The Broad Foundation, like the man himself, has a reputation for being very demanding--the evaluation process is a big investment for both the donor and donee.

RDVP Guest Speaker Basaji Prasad and Thoughts on Globalization

Renee Chin had met with Syed Shariq (see earlier blog entry) and they had a visitor, Basaji Prasad, who had set up an NGO in India to help with rural development. He had previously taught finance at the college level. He described the program that he had set up, with students visiting villages for 2-way information exchange. They had also worked on issues related to:

• Watershed development
  
• Empowerment of women (through thrift/credit groups)
  
• Improving quality of Education
  
• Enhancing Leadership in Villages: Locally elected governing groups now have recognized constitutional status
  
• Community Based Organizations: e.g., Mother's committees, education committee, water committee
  

Prasad also focused on the challenge of developing local leaders, getting them to commit to meeting social development goals rather than attaining political power. The rewards can be even more intoxicating than money, a point that he made repeatedly.

He talked about the means by which changes occur. Coming in as an outsider with a point of view that you intend to inculcate yields skepticism and resistance. If you state facts and let people make up their own minds, it can work, but to do it well requires time, empathy, emotional concern, and being with the people. They need to feel it is their own program.

Prasad talked about the ill effects of globalization ("media intrustion") saying that even the poorest people who make 40 rupees per day (about 50 cents) might spend half of that on alcohol, soft drinks, cosmetics, and tobacco. He argued that development has "destroyed community, leaving only a crowd". Responding to a subsequent question about how to build community, he suggested that games, a focus on schools, retreats (where people get away from their village for a few days) and a shared sense of success are effective ways.

At this point, the talk took a controversial turn. I think he was deliberately trying to be provactive, but he asserted that though the west was no longer practicing direct physical exploitation (slavery) or direct political domination (colonialism), since it was determining consumption patterns of people in the vilage, the west had set up a kind of "neo-colonialism." He followed this up with "The day money was created was the darkest day in history" (arguing that without money, it's impossible to store significant surplus, therefore the vast inequity between rich and poor is not possible). He was even willing to sling arrows at Stanford and other institutions of higher learning, saying "if [they] closed, it is good for the villages." In his view, the universities bring nothing to the villages, except training people that might exploit the villages. He'd heard that our discussion topic was the "Fortune at the bottom of the pyramid" and he said that it scared him. If we had that attitude, it would be dangerous. He did conclude with a bit of a concession, saying that technology was needed to improve the quality of life and remove drudgery for the villagers.

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What follows is a rough draft. I'm not happy with it yet, but in an effort to get ideas out quickly and revise, I'm putting it out now. Comments welcome.

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I tried to resist my initial reaction to simply write off Mr. Prasad, and instead focus on some of the points that he'd raised. His talk reinforced some of my thoughts on globalization and got me to think a bit more deeply about others, so I'll use his talk as the foil for the first articulation of my own view.

Globalization will happen. People who stand to benefit from it have the power to implement it, therefore, it will happen (though there could be holdouts, see below.)

Globalization generates more economic activity and creates a larger global surplus. Trade is the exchange between two (or more) parties that both benefit from the exchange. Globalization provides more options (opportunities to trade) and therefore more opportunities to find exchanges that create a surplus, or to choose those exchanges that create the largest surplus. Options have a non-negative value, so more options are a good thing.

Some groups will be hurt by globalization. Local markets generated inefficiencies that some people benefitted from. For example, call center workers in the US Midwest or software developers in Silicon Valley. Both groups were able to maintain higher salary levels because people that were capable of doing the job and willing to do it for lower pay were excluded because they weren't physically nearby. Globalization mitigates that restriction, so these people need to compete with a global talent pool against workers that offer a better value for the paycheck.

It's possible (though unlikely) that certain communities could opt-out of globalization. If a region that is a priori rich decides to maintain its borders and exclusivity, it potentially could, and it could happen that each member of that society is better off as a result. Globally, however, the total surplus would be smaller.

Globalization and automation enable (but do not mandate) concentration of wealth. Automation in particular acts as a multiplier of labor/talent. That in general allows one person to extract a larger portion of the surplus. See, for example, Frank's Winner Take All Society. Globalization opens it up so the market is larger.

Globalization's desireability is a function of how the surplus is distributed. If you ask someone whether they are in favor of globalization, they'll probably consider whether they will personally be better off, or perhaps will have some pat political position that globalization is a good thing or a bad thing. Assuming you buy the argument above that globalization increases the pie, it becomes a question of how that surplus is distributed. There's a whole literature of different standards of fairness in the economics literature of social goods. I think that most people would agree that creating a fair division scheme is exceptionally hard. Given an existing distribution and one that has more resources to distribute because of globalization, you could create a scheme that makes everyone "better off"; but it might see preverse and unfair. (For simplicity, imagine that a widget maker has the choice of producing his widget in the US for $6 or overseas for $2 and he can sell it for $10. The wages are the value on which In the US production case, the "capitalist" makes $4, the US worker $6 (having put in 1 hour of labor) and the overseas worker $0. In the offshore production case, after the capitalist pays the $2 in wages, there is still $8 to split. The capitalist's share should be a minimum of $4 (at least as well off as before), the $4 surplus can be split among the 3 parties.

Enlightened self-interest can be enough to change the distribution to greater equality. There's Henry Ford's example of making sure that he paid his workers enough to afford the products that they were making. The whole philanthropic movement can be viewed in this light as well. People who recognize that abject poverty is a destabilizing force at the global level are also helping to combat it.

Some degree of wealth concentration is a good thing. Some projects require a lot of capital--without that capital in the hands of one (or a few), it's impossible to achieve the coordination to fund large projects. The Gates Foundation is doing good things.

Globalization's real impact is improving the productive capability of billions of people.In my opinion, the fortune at the bottom of the pyramid is not the trillion or so dollars of buying power that the 4B BoP consumers currently have. The real fortune is when these people become empowered economic agents, contributing to the production of goods and services that are marketed in the global economy and use the proceeds of these sales to obtain goods and services from the global economy. Moving the bottom 1B people from $1/day to the equivalent of minimum wage workers in the US ($5.15/hr, or about $10,700/year vs. $365/year) results in an increase of $10 Trillion.

RDVP Class (10/11/2004)

The readings for this class included two articles from C.K. Prahalad, see, for example: Prahalad and Hart, The Fortune at the Bottom of the Pyramid. A third article (from the NY Times) described CMU professor Raj Reddy's effort to build a low cost computer for the bottom of the pyramid, asserting that entertainment was the Killer App.

Stuart initiated the discussion by asking us to consider different major industries, and how they might innovate to serve the 4 Billion people at the Bottom of the Pyramid. Looking at "mega-health" the obvious product was low-cost meds, and possibly health insurance; though people raised objections about ability to pay. I think this somewhat misses the point: how do you create a viable product/service that falls within their ability to pay? For "Mega-Telecom", it was easier to see the fit: Grameen Phone has already proved out a model where a Phone Lady purchases a cell-phone and re-sells usage of it. Stuart pointed out that since the telecom industry already has a "pay-per-use" business model, it's less of a stretch for them to pick up this model in the bottom of the pyramid context. For "Mega-Media", it's already happening: programming is being broadcast, and consumers at the bottom of the pyramid are receiving it. Greg questioned whether there was advertiser support for the developed content, and pointed out that in the US, the trend his been to concentration of media, not dispersion. Mans wondered if the fact that there are fewer competing outlets would mean that there could be advertiser support for those that existed. Here again, though, I think that people are too quickly transferring their expectations of US-based media companies. What if the model were more like what Bruce Lagninan described last week? Local studios, with very low cost broadcast--think more like local access cable. Live coverage of football matches. Local political debates. Local entrepreneurs giving 1 minute infomercials. Talent shows. Local market information. Local weather reports. If busy Stanford students can run their own TV station, why not any other municipality of 40,000 people?

The "Computer" industry (and Jose's example of ISP's that give you a free computer with a 2-year dialup contract) led us into a more general discussion of the attributes of what could lead to a successful BoP company. Yann felt that the current approach has been very haphazard, and a framework (ala Michael Porter's 5 forces) is needed. We sketched out some of the points that might be included:

• Innovative Business Model
  
• Technology to support low-cost production and low-overhead transaction
  
• Well-established distribution chain
  
• The "Daily Dose": People prefer small transactions both for cash flow and to avoid wasting space with excess household inventory
  
• Revenue-generating: The way to succeed is to help the BoP consumers become BoP producers. E.g., Approtech's "MoneyMaker" treadle pump enables people to boost agricultural yields by irrigating more land.
  

This distinction between production and consumption was a key point (that will re-surface in the report of the guest speaker for the second half). Also discussed was how the local BoP producers could keep money in the community and compete against Multi-National Companies (MNC's) like Coke and Pepsi. We cited some examples of niche competitors (Inca Cola, Mecca Cola), but I think the model that we should be considering is those that we in the US have never heard of, but work at the local level.

Stuart stated that the focus on operations (franchising, distribution chains) is just as important as the IDEO-style user focus. Greg wondered if we could perhaps do more good by focusing on the supply chain for the goods the BoP producers already make, and ensuring that they get a bigger slice of the value-add (both by producing more finished goods and by eliminating middlemen). Mans gave the example of a coffee cooperative being set up by the Colombians as an alternative to Starbucks. He went one step further, claiming that appropriate free trade (eliminating subsidies, dumping) might be more important for developing producers to compete with MNC's than the marketing tags of "Fair Trade" goods.

Stuart posed an interesting example of an individual who offered to sell his consumption on eBay: basically a reverse auction for the right to provide him with electricity, telecom, etc. We chatted briefly about this (hazards of skimming off the most profitable customers, leaving non-profitable customers without affordable service) but were cut short by the arrival of the guest speaker (see next blog entry...)

RDVP Seminar (10/8/2004) David Kelley

David Kelley, founder of IDEO and professor at Stanford, spoke about the d-School, a new proposal for a Design school at Stanford. Design (along with medicine and drama) is a discipline where practitioners are sought after rather than academics (hence Kelley's ability to be a tenured non-PhD). As interdisciplinary research gains currency at Stanford, the momentum for the proposed program has gone from zero to unstoppable. Hasso Platner, founder of SAP, has recently commited to being a major donor in the campaign to raise $35-50M for transforming a building (550 Panama), and funding new faculty positions. Even now, the work has begun to figure out the agenda, curriculum, and point of view. It will build on the current project-based learning philosophy of Kelley's existing classes. The three main themes (proposed by a survey of 250 design program alums) are:

1. Super low-cost design for the developing world
   
2. Sustainable / environmentally conscious design
   
3. Projects to improve K-12 education
   

And while spin-off companies such as IGNITE Innovations are showcase success stories, Kelley hopes to judge the program by spawning imitators at other schools, as well as showing how the program changed the lives of the students, and those students subsequently changed the culture at major companies.

I discovered the difference between a d-school professor and a b-school professor: b-school talks always have 2x2 matrices. So do the d-school talks. But in the d-school, they rotate the axes 45 degrees, so it's an "X" instead of a "+" and it looks cooler. The matrix in question was "problem types" and the two axes were whether the goal was understood and whether the methodology was understood. So on the East point (remember, this is rotated 45 degrees...) we have the "Foggy" problems where neither the goal nor methodology is clear. On the West point, for "Paint by Numbers" problems both are clear. On the North point, "Movies" have a well-defined methodology (scriptwriter, producer, gaffer, best boy, etc) but an unclear goal. The South point describes the "Quest" problems where the goal is clear, but how to achieve it is not.

He also spoke a bit about some of the elements of IDEO/d-school culture that enable the creativity that his groups are so famous for. First, authority for rule making is pushed far down to the local units, so that everyone feels involved in setting the expectations for their studio. Second, diversity is incredibly important. (I'm still not completely sold that IDEO is a diverse place: they hire a LOT of Stanford grads and everyone that I've met there seems to fall into the "hip, iconoclastic" archetype.) Third, you need to establish strong channels for constructive feedback; especially getting people to defer judgment on crazy ideas long enough to say how they can be improved, rather than just that they won't work. Finally, we talked about how IDEO handles the recruiting/selection process. David admitted that they had a simpler problem than many, because fast growth has never been a goal of IDEO
(they've taken nearly 20 years to grow to 400 people). Plus, the pipeline from Stanford design program allows him to get a deep understanding of a student's potential over several courses and years. But as they expanded to looking for people outside the mechanical engineering/design discipline, they used more of a group consensus model: hire junior people, but get buy-in from 10 current employees that they think the candidate should be an employee. The candidates are "lunched" multiple times to give exposure to the new colleagues, who, if they vote yes, have a vested interest in seeing the new employee succeed. Therefore, it's like instantly having 10 mentors.

Interesting heuristic from Bob Sutton on measuring how innovative a company is: Go to meetings and see what fraction of the attendees talk. Higher the fraction, the more innovative.

Philanthropy Class (10/7/2004): John David Goldman

We spent the first part of the class talking about different philanthropic structures, and their commonalities and differences. Quick summary:

Donor Advised Fund

Typically within a Community Foundation, a Donor Advised Fund (DAF) allows the donor to take a tax deduction as soon as the donation is made, but still retain semi-control over how and when grants are made to non-profits. The donor can make suggestions, which the foundation typically honors, unless they're improper (not to a 501(c)3 for example). Donor has limited say in how endowment funds are invested (perhaps choose 1 of 4 available investment pools). Can be established with as little as $10,000.

Supporting Organization

Like a private foundation, but one within a Community Fund. Easier to set up than a private foundation, and lets you leverage the expertise of the Community Fund staff, but gives control not only how the funds are dispersed (as in a DAF), but also how the endowment is invested. Typically requires millions of dollars.

Private Foundation

A new organization, that needs to file its own tax returns (or PF 990). May have its own staff (though most foundations do not have staff). Control over how the money is dispersed and how the endowment is invested. Typically requires $10M+ in order to be worthwhile to pay the accounting, set up costs.

Funding Intermediary

An organization like the Global Fund for Women that aggregates donations from many people but pays out everything collected in the same year. Program officers evaluate organizations to select worthy ones, and the power of pooling enables the intermediary to make a sizable gift.

Federated Giving

An organization like United Way that collects donations from members of a community and re-distributes them to essentially all of the non-profits within that community. Donations are paid out in the same year, and the donors have no say in how the funds are allocated.

Donor Directed Funds

Similar to DAF, but typically set up at a financial institution (rather than a community foundation) as such, provides no expertise, but comparable tax benefits and control of grant requests.

During the second half of the class, John Goldman spoke, describing his views on which structures worked best for what types of grants (smaller, recurring grants out of a DAF, larger, more strategic grants out of a private foundation or supportign organization.) He also gave some background on the Jewish Community Federation (making $23M grants annually) and its Endowment fund (paying out $80M per year, with a $750M endowment). He answered questions about the grant selection strategy (moving more toward a program of objectives and assessments in the style of venture philanthropy), as well as thoughts about payout rates (feels that at least 5% should go to grants, not counting overhead, and has pledged 10% of his own). He stuck around after class to field additional questions, a bit more personal, describing his motivations, transition from the corporate world, and inclusion of his (young) adult children in the philanthropic process.

RDVP Seminar (10/6/2004): Bruce Lusignan

Bruce Lusignan is the director for Stanford's Communications Satellite Planning Center, and has, for 30 years, been lecturing on rural connectivity worldwide. He mentioned several times "Oh, he was a former grad student of mine..." in the context of key government officials planning telecom policy around the world. He spent most of his time talking about a recent project in Peru, covering the regulatory environment, and the technical specs of the way the system could work. A couple of the fellows, Yann and Greg in particular, seemed familiar with the details, though much of it was over my head.

Fortunately, Bruce returned to language I could understand, talking about the business opportunities that exist both in running the infrastructure as well as those that were enabled by it. As I understood the technical part: VSAT satellites (like the PanAmSat and IntelSat networks) provide cheap global communications, but should be used only when the link cannot be made by multiple hops (via wi-fi) between "Smart" base stations. A single base station (equipment costs ~ $30K) can handle ~200 cell phones, and this is a manageable level for an individual entrepreneur to set up a store providing telecom to a region. Even at 1 or 2 cents per minute, the calls are still 50% profit.

(Quick ROI calculation: need 3M minutes of calls to recover the $30K initial cost. 3M/200 phones = 15K minutes per phone, or 250 hours of continuous usage. Assuming 1 hour/day of usage, cost recovery in 8 months. Sanity check: in a village of 2,000 people, each person is making $30 of calls to cover $15 of expense. Assuming $2/day income, an 8 month recovery is 6% of income on telecom expenses, and that person made 1500 minutes of calls 25 hours in an 8 month period--that seems a bit high. Probably need more like 4,000 people, (1.5 hours per month).)

Bruce pointed out that a big percentage of the cost was the solar panels, and that in many cases, there is a local grid that could provide the power more cost effectively. The cost for just the communications equipment is closer to $8K... The current revenue sharing model provides only 8% of the total to the store merchant who does most of the maintenance; the local telecom affiliate gets 20% for providing the pre-paid cards (though it's often the merchant's job to pick them up....) Bruce noted that once this infrastructure is in place, there are additional services that can be easily added: FM radio, for example, requires only a 200 watt transmitter (about $200) and individual radios are about $1 each. There's a built-in local market for football coverage. Even TV broadcast becomes feasible with more TV sets having builting MP3 decoders.

This also led to a discussion of internet cafes, and the assertion that a community of 1-2,000 people could support one. The fellows all piped in with their experiences of hourly rates for cybercafes around the world, ranging from about 25 cents/hour (China) to $1.50 (Mali) to $8.00 (NYC and business centers in Chinese hotels). We talked about systematically collecting the info to produce a "CyberCafe Index" like The Economist's Big Mac index that also factors in local salaries.

Bruce said that there had been a sucessful market place for cut flowers between Peru and Europe, where the growers would deliver according to orders placed on the internet, with barcodes to track logistics.

There were some questions about Voice over IP (VoIP) as being the ultimate solution and "spoiler" for much of telecom's sunk cost infrastructure, and a means of getting around the monopoly / regulation. Also about the effectiveness of daisy-chained wi-fi conenctions for data transfer, since latencies can be long. Greg pointed out that for asynchronous applications (like store and forward email) this was not a problem (because it had been explicitly taken into account at design time). So, in many respects, this model is a return to the early days of the internet in the US when communication links were not redundant and reliable.