Fireside Chat with Ben Powell, Founder and CEO or Agora Partnerships.

If you are interested in impact accelerator model application in the developing countries – here is the video of our fireside chat with Ben Powell that we had two weeks ago. Pardon the quality of the recording and enjoy the discussion. Katie Torrington, Senior Manager for Special Projects at FINCA Int, was moderating the chat.

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Rise of Impact Accelerators Offers Potential for Socially and Ecologically Conscious Enterprises in The Developing World

By Vera Chernova

Companies such as Agora Partnerships aim to give entrepreneurs in the developing world access to knowledge, networks and capital.

Companies such as Agora Partnerships aim to give entrepreneurs in the developing world access to knowledge, networks and capital.  

Innovation is always risky. This is especially true for the social impact enterprises that target bottom-of-the-pyramid clients. While that market has massive potential—and the idea of investing in companies that both provide financial returns and benefit society is very attractive—it remains difficult for entrepreneurs to locate capital for such ventures.

The problem isn’t a lack of money. Significant capital is available for entrepreneurs looking to build these businesses, but most investors wait until the businesses prove commercially viable before signing on. Impact investors are interested in later-stage investing opportunities, but few social impact businesses make it to that point. According to a 2012 report by the Monitor Institute and Acumen Fund, only 7 percent of impact investing funds offered the early-stage capital needed for a company to develop its core product and validate it through market testing. This creates a loop of “not enough quality companies in the early stage and… not enough effective support to produce later-stage investable companies.” However, this does not mean that early stage companies are low quality, but rather that they are too risky overall.

Is there a solution? A recent study by the Aspen Institute and Village Capital suggests that “impact business accelerators” can provide the early-stage support that these companies need.

Similar to regular accelerators, impact accelerators provide mentorship from experts, business skills training, access to potential investors, networking and usually access to shared work space. At the same time, impact businesses have a set of issues specific to their ecosystem. These companies usually operate near their target customers in the poorest regions, where the talent—skilled labor—is extremely scarce. While the founders may be the experts in their particular subject, like irrigation or greenhouse building, most of them do not know basics of running a business or ever had access to formal banking. Accelerators not only provide business expertise, but also can help locate the talent from other regions and create favorable relocation terms.

Moreover, the customers that these businesses usually target also require different marketing approaches. To sell to people with minimal income, the new product or service has to be endorsed by a trusted source and have a potential of making a significant difference in people’s lives. Pricing also needs to be very precise: affordable for the clients yet able to generate profit for the company. Impact accelerators help inexperienced founders gain valuable knowledge in all of these specialized areas.

Agora Partnerships offers a great example of an impact accelerator. Agora works with growing small businesses throughout Latin America, including Nicaragua and Guatemala—some of the poorest countries in the region. According to their mission statement, Agora only works with “early-stage impact entrepreneurs that are commit to solving social and environmental challenges through business.” Once accepted, entrepreneurs participate in a six-month accelerator program that covers all aspects of sustainable business growth and helps these businesses to scale faster and get attention of larger investors.

That said, Agora Partnerships is not philanthropy. They only accept businesses with credible leaders who have prior expertise in the subject, and scalable ideas that can generate value for both the society and stakeholders. The selection process ensures that businesses already have at least a prototype of their product, some market base and the capital necessary to begin growing.

Founders also must measure and monitor their company’s social or environmental impact using the same rigor with which they track other business metrics. This further differentiates these businesses from non-profits, many of which do not quantitatively track their impact. The goal is to build a business that can compete against other investment opportunities on the market—and also offer the additional benefit of creating a positive impact.

Impact accelerators offer great potential for new businesses that target bottom-of-the-pyramid customers. The spread of impact accelerators in the developing countries could help those businesses take off. Doing so would significantly expand the scope of impact investment opportunities, thereby accelerating market-based solutions to social problems.

Does Impact Investment Create any Impact?

By Vera Chernova

       “The responsible investing space is plagued by jargon and rhetoric. As few definitions are        universally applied, many are used interchangeably, causing confusion.” – Microrate

I recently read a great white paper by Sebastian von Stauffenberg, the CEO of MicroRate, which offered a fair dose of irony in regards to the terms used to describe the responsible investing options. The paper also makes one wonder what kind of impact accountability can an investment fund provide if even the terms are not universally defined.

My first thought after I read the paper was “wow, all this terms are confusing and were almost designed to be vague.” The white paper, titled “A Guide to Responsible Investing” does a great job organizing responsible investing options, but also highlights how confusing those are for non econdev professionals. In my opinion these terms need to be simplified and, most importantly, standardized. Once that happens, these terms can eventually become mainstream, at least among the people that care about social and environmental issues.

Maybe not a great example, but it reminds me of cage-free vs pasture-raised vs cruelty-free eggs. At first I was buying cruelty-free and thought I was doing a good thing. Then I realized that “cruelty-free” can mean whatever the brand wanted, so I switched to cage-free and pasture-raised. And I make sure to buy certified pasture-raised even if it means paying double the price. Because it is important to me.

As the generation of Tom’s Shoes and fair trade coffee matures and starts looking into investing their savings, responsible investing may have a unique opportunity to explode and even become the next cool thing to do. Demand will create supply, and competition will enforce accountability and transparency.  And for gen Y accountability comes in form of hard data. So if investment bankers would want to stay relative they will have to show exactly how much and what kind of impact they create.

From Microfinance to Financial Inclusion

DAVOS/SWITZERLAND, Muhammad Yunus, managing director of Grameen Bank, speaks during the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland.

DAVOS/SWITZERLAND, Muhammad Yunus, managing director of Grameen Bank, speaks during the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland.

By Vera Chernova

Over the past several decades, microfinance has gone mainstream. Even as microfinanciers are learning to manage the challenges of success, a second wave of microfinance ideas is emerging, learning from the success of startups in other industries and offering innovative new twists on for-profit and non-profit microfinance.

When Muhammad Yunus started Grameen Bank in the late 1970s, his goal was to help people raise themselves out of poverty, using a financial model that the wealthier part of the world already enjoyed: business loans. His revolutionary idea was to offer micro-loans in sizes appropriate for the entrepreneurs whose businesses were not official, had no employees or titles and often consisted of growing vegetables in their garden for sale or selling eggs from their chickens. Conventional banks didn’t see opportunity in offering tiny, unprofitable loans to poor people with no credit history or collateral. Yet, Yunus saw immense demand for microloans and put social impact before profit maximization.

Over the next three decades, the micro-lending industry grew quickly and expanded to most developing countries. The model was overwhelmingly praised, so much so that Yunus and Grameen earned the Nobel Prize for Peace in 2006.

By 2010, the rapid growth of the industry led to the perception that many institutions were prioritizing financial performance over their original social impact missions. Microfinance organizations were in danger of basically turning into commercial banks. Some leading institutions even faced claims that they pushed their clients further into desperation, as the borrowers were unable to repay their loans with extremely high interest rates. While most of the allegations appear to have been fabricated, the microfinance industry went through a period of soul searching.

Recently, the leading institutions in microfinance have begun transforming from product-centric to client-centric operations, trying to account for clients’ needs rather than for the most profitable products. Female empowerment and financial education have become new priorities, and products are becoming more tailored to different segments. For example, most poor clients are now offered leases on their business equipment instead of cash loans. Microfinance institutions encourage their clients to start micro-savings accounts and purchase micro-insurance for their families and property.

Microfinance has also started to build inter-industry relationships. Today third-party companies help small entrepreneurs that outgrow microfinance and continue scaling—all while ensuring that their growth benefits the community. Similarly, innovative startups are partnering with microfinance institutions to offer inexpensive solar, water purification and sanitation products to the poor. At the same time more consumer-oriented and targeted microfinance companies, such as KIVA, make microfinance familiar to the general public.

As the microfinance industry is evolving how it does business, its definition also got a makeover. The terms “inclusive finance” or “financial inclusion” gained popularity, emphasizing that the loans are only a part of the solution.

Over the last few years microfinance even entered the First World. KIVA ZIP allows someone to make direct loans to entrepreneurs in the USA. ACCION, which has over 30 years of microfinance experience in Latin America, Africa and Asia, now offers small loans for U.S. residents who have no credit history and to startups less than 6 months old. Bayou MicroFund, which was founded last year in Houston, specifically targets local micro-entrepreneurs and startups helping them receive interest-free loans.

Following the trends with tech startups, microfinance lending is also becoming more social. Puddle, a San-Francisco startup still in beta, allows users to create “a line of credit on-the-fly with your friends.” Once the pool of money is created, it is available for borrowing based on the terms and interest rate set by the group.

The microfinance industry is almost 40 years old, but it only recently began expanding beyond its original mission to help poor entrepreneurs in the developing world. Given that over 3 billion people still live at or below the poverty level, the industry’s potential for further growth and evolution remains immense.

The question is, what exciting new non-profit and for-profit models will come next?

This post originally appeared at 1776 website.

Micro-Lending Model Finding New Traction in First-World Economies

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(Photo courtesy of 401(K)2012 / Flickr)

By Vera Chernova

When we think of microfinance, we usually consider it a poverty alleviation tool for developing countries. Yet, micro-lending also offers many benefits to wealthier countries.

Over the last few years, an increasing number of companies have started offering micro-lending services to Americans who do not have the traditional collateral to secure a loan from a bank. But is there enough demand for microfinance in the U.S. for the model to be viable? Can it be useful in a society in which one’s credit score is usually evaluated squarely on numbers?

Consider these numbers instead: one in four households in the U.S. have limited or no access to banking services. As the U.S. comes out of the financial crisis, the need for micro-lending services is much greater than it may seem. The housing crisis damaged credit scores for many Americans, preventing them from getting a loan for the following seven years.

At the same time, banks became wearier of issuing business loans for small businesses. The House Small Business Committee named access to capital “the root problem” for small business growth, stating that only 19 percent of businesses with less than $500,000 in annual revenue that sought a business bank loan were approved. Every day, banks reject 8,000 small business loan applications

Yet, microfinance organizations that work in the U.S. offer entrepreneurs an alternative to formal banking. Micro-lending products and terms range greatly and often are tailored to specific audiences—for example, minorities, particular industries or locations.

Grameen America opened its first branch in New York in 2008 and is a textbook example of a micro-lending model. It replicates Mohammed Yunus’s Grameen Bank providing group loans to impoverished women so they can start or expand their businesses. Upon completion of basic financial literacy training, they receive a group loan in which every member of the group is responsible for the other members repaying their shares of the loan and interest. The women have weekly group meetings with the Grameen America staff to pay the loan and continue business mentoring. As an added benefit, the loan repayments get reported to the credit rating agencies, improving the women’s credit score.

However, most companies that provide microloans to American entrepreneurs do not require training or forming a group to receive a loan. Among the newest additions to the micro-lending market is Kiva Zip. Many recognize Kiva as an online crowdsourcing platform that provides microloans to “entrepreneursacross the globe.” In 2011, though, Kiva launched its Zip program to provide the same opportunities to American entrepreneurs.

Unlike traditional microfinance, Kiva Zip loans are interest-free—but follow the common principle of microfinance because they still use social collateral to determine a borrower’s credit. According to the Kiva Zip manual, they “believe that an entrepreneur’s character and network of support and relationships are just as valuable as traditional financial metrics.” To ensure a borrower’s good character and reputation, Kiva Zip requires the endorsement of a trustee—someone respected within the community—to back the borrower’s credibility.

Jonas Singer, cofounder of the Union Kitchen culinary incubator in Washington, D.C., has been a Kiva Zip Trustee for a year. He shared with me that many of the UK startups have benefited from microloans, but he says there is both demand and wariness when it comes to micro-lending.

“There is demand because credit is hard to come by, capital is absolutely necessary, and financial institutions are, frankly, not delivering on the commitments they say they are making in our communities,” Jonas said. “The wariness is because there is trepidation about money. People don’t understand the loan terms or how they work or what the benefit is to the lender. Confusion and distrust—or, more generally, just ignorance—stand in the way of microfinance. But that will change with time.”

Microfinance is only beginning to enter the American market as a way for small businesses to access capital. Now may be the perfect moment, however, for our financial institutions to apply this model to help American small businesses grow.

This post originally was published at 1776dc.com.