Authored by: Moses Lee

Authored by: Moses Lee

In Professor Gautam Kaul's course "Finance and the Sustainable Enterprise" at the Ross School of Business, we recently had a lengthy and very profound discussion on sustainability and interest rates. (See/hear Professor Kaul discuss his course in the above YouTube video.) Yes, that's right: interest rates.  You didn't read this wrong.  (And please don't stop reading now. I promise you interest rates are very interesting.)

For those of you who have not taken an economics or finance course, an interest rate is the cost of borrowing money for a given period of time.  For example, when you take out a loan from the bank, the interest rate is the price you pay to borrow money over a certain period of time, say a year. A pretty simple concept to grasp, right?  

In class, Professor Kaul pushed us to think more insightfully into the concept of interest rates. Irving Fisher, the great economist of our time, stated that interest rates are important because time has value. If time is taken away, there need not be a discussion on interest rates.  So the first thing to keep in mind when thinking about interest rates is the value of today vs. the value of tomorrow. 

Take for example a risk-free treasury bill. Why is do you think the real interest rate (taking into consideration inflation) is greater than zero?  One word: impatience.  Time has value because we humans are innately impatient. We would rather have something today rather than tomorrow.  

Think about it. Would you prefer $100 today or $100 tomorrow? I'm sure most of you would answer today.  Impatience implies that interest rates are greater than zero. (Note: there was a point when interest rates were less than zero. It was during the depression, when the value of time was negative. Why do you think this was the case?)

After this brief discussion on interest rates, Professor Kaul presented to the class an interest rate equation that is a function of two items: 1) impatience and 2) technological progress. Consider the following equation:

Interest rate = ф + ηx

Where:

ф = impatience

η = elasticity of marginal utility

x = technological progress.

Again, as we have stated previous, people are inherently impatient and therefore ф is generally assumed to be positive. η is a coefficient and is generally assumed to be 3 by most economists. x is the growth rate per capita consumption, or the advancement of technological progress. x is also typically assumed to be a positive value.

However, is x always going to be a positive value? Perhaps the past 100 years has convinced us that tomorrow will always be better than today, and that the future holds a world of plenty compared to today. It's easy to believe that because when we look back in time, we have more today than we did in the past. Why shouldn't this trend continue? Philosophically, holding this belief that the future will definitely have more than today, it is easy to have the mentality, "Why not consume more today? Tomorrow will be just fine?"

But is this true? Will ф and x always be positive? Should ф be positive at all?

Consider this excerpt from the article "Deep Discount" published in the Economist:

If global GDP grows by 3% a year [in the next 200 years], the value of the world's output in 2200 will be $8 quadrillion (a 16-figure number). But in present-value terms (using a discount rate of 7%), that stupendous sum would be worth just $10 billion. In other worlds, it would not make sense for the world to spend any more than $10 billion today on a measure that would prevent the loss of the planet's entire output 200 years from now.

What this is saying is that to value the worlds output in 200 years using discount rate of 7% would mean that sustainability is only a $10 billion problem in today's terms.   

In class, Professor Kaul said that if we, as humanity, believe that sustainability is a big issue, and use a 7% discount rate to measure the problem, we might as well not even have the discussion. Why? Because if saving the future is only a $10 billion problem, do we really believe it's a problem? 

Perhaps we need start valuing the future more than we currently do (i.e. lose the impatience) and stop thinking that the future will be a world of plenty.  Because at our current rate on consumption, our future may be in jeopardy.   

Authored by: Moses Lee

I recently sat in on a webinar hosted by the Aspen Institute entitled "Sustainability Trends in MBA Education."  The seminar was rich in insights and highlighted the increasing demands by business students and faculty for coursework on the topic of environmental sustainability and social impact.  One of the challenges in launching sustainability electives or adding sustainability modules to existing courses in business schools, however, is a lack of available teaching materials or well developed pedagogical tools and frameworks.

Here at the Ross School of Business at the University of Michigan we have decided to do our part in addressing this "market failure."  Professor Gautam Kaul, the John C. and Sally S. Morley Professor of Finance at the Ross School of Business, has agreed to put his course entitled, "Finance and the Sustainable Enterprise," online for faculty at other schools to use.  The course is unique in that it looks at the issue of environmental and social sustainability through an economics and finance perspective. The course has already been taught five times at Michigan and has received rave reviews.   

The online resource will include access to teaching cases and notes, the course syllabus, commentary on class sessions, a community forum, and video (forthcoming).  I will also be working with Professor Kaul to keep a blog on the course and develop new knowledge pieces to further advance the field.

Professor Kaul has been at the Ross School of Business since 1984 and received his Ph.D in economics from the University of Chicago. He recently won the MBA Teaching Excellence Award at the Ross School of Business.   

Note: To access the website, you must be an educator. 

Course Description

The past decade has witnessed the emergence of the notion of "sustainable" business in both corporate and academic circles. Although still nebulous, a reasonable characterization of a sustainable enterprise is emerging. In its broadest sense, a sustainable business is one that achieves an optimal balance between profit and shareholder value, on the one hand, and broader economic, social, and environmental values, on the other.

So, why is there this need for studying a "sustainable" enterprise? This relatively recent, though increasingly visible and important, trend seems to imply that most (or at least a significant fraction of) current businesses are not sustainable. As a result, some business schools offer courses that deal with the strategic, marketing, and policy aspects of sustainable business. This course goes a step further and explores the financial issues unique to sustainability issues confronted by businesses. 

In this course, we will address the financial and valuation issues from the perspective of a typical firm, whose objective is to maximize shareholder value, but recognizes and confronts a whole slew of environmental issues with dire real effects. We will critically evaluate the viability of the assumptions and institutions necessary to ensure the success of any modern firm in achieving its objective of maximizing shareholder, without adversely affecting broader economic and societal values. More importantly, we will modify existing economic and financial frameworks in an attempt to evaluate the effects of new and emerging regulatory and strategic environmental issues on the value of projects and firms.

This process will make us realize that "business as usual," at least as we have known it for the past several decades, cannot lead to a sustainable world. We hopefully will also emerge through this experience equipped with a framework and a set of tools that can help us create and manage businesses that can deal with the complex and uncertain world confronting us today. Ultimately, our goal is to evaluate not only the private benefit, but also the social value, created or destroyed by a project and therefore the firm.

Authored by: Moses Lee

When you think about critics of the base of the pyramid (BoP) movement, the most notable name that comes to mind is Professor Aneel Karnani at the University of Michigan.  Aneel has written a number of articles that are highly critical of the BoP idea.  Some of his most prominent articles are "Romanticizing the Poor", "Microfinance Misses its Mark," and "The Mirage of Marketing to the Bottom of the Pyramid."

Now, as many of you know, I have been a very strong supporter of business and its role in addressing societal issues. Over the past two years, I have blogged on this quite extensively. I am even co-teaching a course at the undergrad level here at the University of Michigan on the topic of Social Entrepreneurship this fall. 

Since Aneel and I both work in the same building, I decided to stop by his office to talk with him in depth on his perspective of the BoP concept.  From that conversation (which went really well), we both decided to put our energy into writing a case study on the topic of vision correction in the developing world. In the case study, we looked at two enterprises - Essilor and VisionSpring - that are trying to address global uncorrected refractive error by selling eyeglasses.

In writing the case study we wrestled with three main questions:

1. How effective are Essilor and VisionSpring in addressing vision correction in the developing world?
2. Does either organization have long-term viability and ability to reach significant scale? Why or why not?
3. What other solutions might work better to solve the problem of vision correction?

Since we plan to use this case in the classroom, and hope that other academics will too, I'm not going to divulge our conclusions. If you are a student, perhaps one of your professors will use this case study in your class. If you are an educator, you can review the case study and the associated teaching note on by logging onto www.globalens.com.  (If you need help registering, you can shoot me an email).  If you want to simply read the case study without accessing to the teaching note, you can purchase it here.

Aneel and are I planning to write an article based on this case soon, so be on the lookout! 

Authored by: Moses Lee

I'm always asked by students here at the University of Michigan how they can get more involved in the base of the pyramid movement. "I'm really interested in these BoP ideas.  What can I do to explore this more? How do I get more engaged in the community?"

Unfortunately, on most campuses around the world, there are not many opportunities for students. Some universities offer a single course on the subject (and it's generally open only to business school students). A select few schools provide field-based consulting projects. Most offer nothing. Indeed, there is a tremendous unmet need. 

In response to this need, the William Davidson Institute (WDI) has partnered with Acumen Fund and the World Resources Institute (WRI) to launch The Next: 2010 Case Writing Competition on NextBillion.net. The purpose of this competition is to engage students in writing high-impact case studies with their professors to help further the overall base of the pyramid movement. 

To make the competition meaningful and relevant to the field, the case competition will center on key questions that the three sponsoring organizations are currently wrestling with:

• Where can markets work best to address issues of poverty?
• What business models and business innovations are effective in developing scalable businesses serving low-income markets in the developing world?
• What are the consumer behaviors - in terms of spending and decision-making - that define market opportunities?
• How can market-based approaches to poverty alleviation achieve their goals while also protecting natural resources and preventing environmental degradation?
• How can the public and/or private sector best support the development of businesses serving the poor?

Bob Kennedy (Executive Director, WDI), Brian Trelstad (Chief Investment Officer, Acumen Fund) and Virginia Barreiro (New Ventures Global Director, WRI) have each agreed to be a judge for the competition. The hope is that these cases will be used to better inform their organizations, help academics teach this material to future leaders, and ultimately, make a tremendous social impact on the ground.  

And an added reason to participate in this competition? Prize money!  Prizes will be awarded as follows:

• First: $1000
• Second: $500
• Third: $250
• Fourth and Fifth: $100

In addition, winners will be interviewed and profiled on NextBillion.net and will receive an autographed copy of Jacqueline Novogratz's new book, The Blue Sweater. 

Cases are due April 30^th, 2010.  For more information on the competition, please click here or email me.

Note: To help drum up interest in the competition at your school, please pass this flyer around.

Sponsored By:

Authored by: Moses Lee

A few months ago I sat on a Net Impact panel discussing the topic of social ventures.  During the Q&A time, the topic of funding came up. 

A student asked a question along the lines of, "Is there a way for social ventures to attract the type funding that has traditionally been available only to for-profit businesses?"

My response: "If I asked you to consider investing in a company that offered below market rate returns and had a high probability of failure, would you make an investment?"

The room was silent. After a minute, the student said, "No."  And so did most everyone else.

The response shed light on the issue at hand.  Most people will not invest in a social venture because at the end of the day, people, even those who are socially conscious (I mean, these were students at a Net Impact conference!) want to maximize returns on their own financial investments.

Even as I think about my own investing behavior, it's hard sell for me to put money into a business that promises minimal to no return with a high-risk of business failure.  I'd much rather give to charity. Perhaps I've been just too conditioned with my background in finance.

I recently talked to Kevin Jones, a Founding Principal of Good Capital and Co-Founder of the SoCap conference, about the state of the social capital markets and he confirmed what I see in myself and others.  In his own experience, a lot of investors can give charitably, but cannot fathom making an investment in a social venture that does not have an appropriate risk-reward tradeoff.

So, what does this mean for social ventures? Will they never be able to attract the appropriate funding necessary to achieve significant scale?   

Currently, there are a few options for social ventures seeking to raise sizable funds, none of which are particularly appealing.

Option 1: Hope that the growing class of social investors will reach a critical mass

Today, there is a small, but growing subset of investors known as social or impact investors.  Brian Trelstad of Acumen Fund defines this group as the following: 

We define a social or impact investor as someone who takes a double (or in some cases triple) bottom line approach to their capital, and attributes real value to the social or environmental return in their investment decision-making. They will often, but not always, be willing to exchange a lower economic return for potential social or environmental impact

There is no doubt that social investors are a real class of investors.  As Trelstad puts it, social investors "are part of an emerging asset class that can generate serious deal flow, test new ideas, or expand into new market and in the process contribute to solving some of the most intractable environmental and social problems of our time; certainly a reasonable return on investment by most measures."

However, the challenge that I see is that that these types of investors hold only a fraction of the total available investment capital. Currently, even large social investments funds are only able to invest capital in the range of $1 to $2 million in social ventures. This class of investors is indeed growing, but it is questionable if this class will reach that critical mass that is needed to help bring social ventures to scale - especially considering the business environment that we are in today. Social ventures may have to wait a long time for this to happen.  

Option 2: Seek out and rely on donor funding

If social ventures cannot attract enough funding from investors, where else can they turn?  Donor funding? This approach may seem counterproductive to the base of the pyramid movement, but the reality is that many social ventures are relying on donor funds for capital today.

The problem with this approach is that many social ventures take on a for-profit legal form, which makes it hard to attract donor funds. Contributions to for-profits are not tax-deductible; contributions to non-profits are.

 Also, by seeking out donor funds, a social venture has to compete with traditional non-profits.  And it is a highly competitive landscape in the non-profit world. Personally, I don't think this is the solution to the funding problem.

Option 3: Compromise on social outcomes in order to improve profitability

This is not ideal, but unfortunately, a lot of social ventures are forced down this route in their efforts to raise funds to scale.  In many cases, a social venture starts moving up the pyramid - to the middle-to-upper class population - to improve profitability.  And in the course of doing so, they reduce or even exit entirely communities that need their products or services the most.  This is not a good outcome.

Bleak picture, right?

These three options are not the only paths forward. There are a lot of people out there that are trying hard to create alternative options. I am optimistic about a new type of corporate entity has recently formed called L3C, which stands for low profit limited liability company. It's not perfect, but it is a promising corporate form that may open up more doors for social investing.  I'm also hopeful about the role of governments and their agencies in financing social ventures.

More of L3Cs and governments in follow-up posts.

Authored by: Moses Lee

At the William Davidson Institute, we recently completed the first Goldman Sachs Entrepreneurship Certificate Program in Rwanda, which is part of Goldman Sach's 10,000 Women Initiative. Goldman Sachs started this program with the overall goals of "increasing the number of underserved women receiving a business and management education and improving the quality and capacity of business and management education around the world."

Specifically, WDI's certificate program targeted 30 women entrepreneurs in Rwanda who were either starting or scaling up a business. Though I was not involved in implementing the program, I recently had a chance to sit in on a presentation from one of my colleagues, Sharolyn Arnett, who was heavily involved. 

During the presentation, one point that kept coming up was the difference in perspectives on  entrepreneurship between people living in developing countries like Rwanda and people living in developed countries like the U.S. 

For those of us living in developed countries, the idea of entrepreneurship is very romantic and idealistic. It's often thought of in the vein of "Making your dreams come true!" and "You can change the world!"  I would almost go so far as to say that entrepreneurship as we know it in the developed world is a luxury. (Not that this is bad or anything.  This is just the form that entrepreneurship takes in very rich and stable countries.) 

Not so in the developing world.  The motivation for entrepreneurship in the developing world is often for survival, not business opportunity.  An interesting point made in the Global Entrepreneurship Monitor in 2006 was that "early-stage entrepreneurial activity is generally higher in those countries with lower levels of GDP." Why is this? The report further elaborates that many in the developing world "are pushed into entrepreneurship because all other options for work are either absent or unsatisfactory (necessity entrepreneurs)."  

In light of the global recession, we from the developed world are getting a slight glimpse of what entrepreneurship means to people in the developing world like Rwanda. Today, many people across the U.S. are forced into entrepreneurship because they have lost their jobs; entrepreneurship has become a means to pay the bills. 

With all this being said, it's so important that we think about entrepreneurship in the developing world though the correct lens. In a previous post, I mentioned that one of the best things that we from the developed world can do for the poor is help cultivate an entrepreneurial environment for them.  To do so, we must first acknowledge that entrepreneurship has a significantly different meaning and purpose in the developing world than in the developed world. By having this correct perspective, we will be able to better support the local entrepreneurial spirit - and ultimately make a greater impact.  

Authored by: Moses Lee

Why do people play the lottery?  Some play because they love the thrill of it. Others play because they truly believe that they can beat the odds. If you're an economist, you'll probably answer the following: the potential for an enormous economic payout. Though the probability of striking gold is marginal, the expected payback (probability of winning multiplied by the payout) is high enough for someone to pay a few dollars for a ticket or a scratch card.

Likewise, if you ask an entrepreneur why he or she starts a new venture, the primary reason will be the same: the potential for an enormous economic payout.  We all know the stories of entrepreneurs who leave their stable careers or their college education to invest their time and energy into a new venture for the possibilities of making it rich. Just think of celebrity entrepreneurs such as Steve Jobs (Apple), Mark Zuckerberg (Facebook), and Bill Gates (Microsoft).

Indeed, it is easy to understand the incentive of an entrepreneur trying to start a new venture. But what about the social entrepreneur? What is the incentive for him or her?

Continue reading this story...

Authored by: Moses Lee

Last month, Aneel Karnani wrote in the Stanford Social Innovation Review an article entitled, "Romanticizing the Poor."  In it, he states, " ...romanticized views of BoP people as value-conscious consumers and resilient entrepreneurs are not only false, but also harmful." In the article, Karnani spends a lot of time debunking the view that people in dire straits are well-informed and rational economic actors. In the end, he exhorts governments and policy makers to get more involved in the fight against poverty.

Personally, I think a lot of what Karnani says in the article is true.  Particularly on the topic of entrepreneurship, (which is what I'd like to focus on in this entry). It's just wrong to assume that the majority of those living at the BoP are entrepreneurial. Recently, I spoke to a friend who is working on a BoP project that seeks to help the poor start microenterprises.  The project selects a handful of people from a poor community and puts them through an entrepreneurship training program.  I asked her what was one of the biggest challenges of the project.  She responded, "That we're trying to train a lot of people to be entrepreneurial who are simply not."

Continue reading this story...

I recently had the chance to work on a case study with Late Lawson, Director of Economic Development for CARE, and Professor Ted London at the Ross School of Business at the University of Michigan. The case study centers on CARE considering how to best incorporate an explicit market-based approach to poverty alleviation within its portfolio of poverty alleviation activities.
 
In 2005, CARE started a three-year pilot initiative in Central America to assess whether revenue-generating ventures could provide large-scale, sustainable, and scalable poverty alleviation outcomes, as well as an opportunity to generate excess revenues for the organization itself. One of the primary catalysts for CARE to move in this direction was CARE’s experience in microfinance. In 1998, CARE had founded EDYFICAR, a microfinance institution in Peru. The MFI quickly became a business leader in the country, providing thousands of low-income families with access to much needed capital.

During the three-year pilot project, CARE started or supported many social ventures, primarily co-ops in the agricultural sector. Many of the ventures, however, had become overly dependent on CARE for support and struggled to find a path towards financial and operational independence. Furthermore, the ventures did not seem to offer any prospect of generating revenues for CARE. Part of what contributed to these problems was that CARE had not developed a systematic approach to helping ventures reach maturity.  As a result, many in CARE felt that the organization lacked the skills and culture necessary to do this work well. There were some, though, that still felt that revenue-generating projects were an effective complementary strategy that could yield sustainable and scalable poverty alleviation in the long-run.

This tension is common to many large intermediary organizations that are trying to adopt a market-based approach to poverty alleviation. One of the reasons for this is that many of the organizations that jumped onto the BoP band-wagon did so without understanding all the factors involved with implementing such as strategy. And understandingly so. The BoP approach is relatively new to the poverty alleviation scene and does not yet have extensive research and study behind it.

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