[Update: Immediately after publishing this post, Geoff emailed me to say that the original press release from Unitus identifying him as the incoming CEO was incorrect. Geoff is currently advising Unitus on the structure of “Unitus 2.0” and his future role with Unitus has not been determined.]

By Geoff “Chester” Woolley

Thanks to Sean for allowing a few scribbles on Unitus and its directions moving forward. As Sean mentioned, I am a board member of SKS, and the quiet period extends 45 days after the public offering. With that said, there now seems to be plenty of available information on SKS and its IPO in the media. I stepped down last year as a member of the Unitus board, and my views represented in this blog are just that…my views. Please do not interpret my voice as that of the board, the organization, or its affiliated organizations.

After this disclaimer, to understand Unitus, it is important to understand the organization’s original mission and its DNA. Its original vision and mission were straightforward: Unitus wanted to demonstrate that microfinance was scalable and could be commercialized. The concept was simple: from the universe of the many thousands of existing MFIs, partner with select microfinance banks and provide them with management expertise, advice and capital to accelerate their growth.

Unitus believed in encouraging the entrepreneurial power of MFI management teams—without dictating the methodology, program content or structure. Unitus believed that this was the best way to reach millions of people lacking access to affordable capital. In short, the strategy was to provide MFIs with proper tools and let them run. The organization’s hope was that the rapid growth of partner MFIs would attract the coffers of debt and equity players in the capital markets rather than relying on limited non-profit funds. Maybe…just maybe… the enormous global commercial and investment banks would become interested in organizations serving the “bottom four billion” as commercial clients, rather than sending Unitus, our MFI partners, and other strong microfinance institutions to their foundations every time they were approached for financing.

Who knew then that ten years later, in Unitus’s primary market of India, the world’s best known banks and equity funds would be chasing MFIs as prime customers? Who would have guessed in 2002 that a small MFI with 5,000 borrowers (i.e., SKS) would conduct an IPO that would be oversubscribed nearly 15 times on a $1.5 billion valuation? Frankly almost no one except maybe the new prophets of the MFI gossip chain. :^)

Aside from Unitus’ original goals, a few important principles “thou shall not’s” quickly became entrenched into Unitus’ nucleus:

1. Thou shall not undercut commercial market development and distort markets using donor funds.
2. Thou shall not duplicate the efforts of – or compete with – other excellent microfinance NGOs such as Accion, Grameen, OI, etc.
3. Thou shall not purport to be the “end all” for assuring financial access for all the world’s underserved.
4. Thou shall not try to provide all the services and solutions our partner MFIs might need.

In short, the primary goal was to demonstrate, catalyze and counsel with our partners…then get out of the way.

Over the years, many individuals and organizations in the microfinance industry have disagreed with the Unitus philosophy and goals, while others have applauded them. But in the end, these goals and principles are what made Unitus …well, Unitus.

Over the last two years or more, it started to become evident to the board that Unitus’ original goals were being achieved. MFIs were scaling rapidly, and the commercial world was viewing the provision of financial services to the underserved as a market rather than a cause. Such developments triggered a series of internal strategy discussions and questions related to formulating next steps and goals for the organization:

• Should Unitus offer more consulting services to its partners?
• Was the Unitus mission accomplished in India?
• Was more concentration in major underserved markets such as Africa needed?
• Did Unitus need to add or reduce personnel and leadership?

Following these discussions, Unitus launched multiple pilots for various services and opened an office in Africa. Some of these experiments were met with moderate success, but none of them quite hit the sweet spot that had always been part of Unitus’ vision…that of acceleration and market demonstration.

In January 2010 following a long search, a capable CEO was brought on board to consolidate ideas and agree upon a go-forward strategy. Efforts were redoubled to create consensus on Unitus’ future by the 2^nd quarter of 2010. The highly skilled management and staff at Unitus looked deeply at areas adjacent to and outside microfinance, including: micro-insurance, SME lending, credit scoring initiatives, mobile banking, deposit-taking solutions, and many other programs targeting poverty alleviation. In light of Unitus’ capital base, expertise and mission, the board could not get comfortable with any of the proposed strategies as a fit for Unitus. To be clear, all these problems and potential solutions are critically important to poverty alleviation, but will require organizations with significant resources and the in-house expertise to take them on.

After this long search and the undeniable reality that Unitus was spending nearly US $700,000 each month, the Board began to ask some tough questions internally.

Unitus’ original goal was accomplished by almost all metrics. Most Unitus MFI partners had become self-sufficient, and many quality for-profit and NGOs organizations had moved into the microfinance space to provide various resources and services. Was it time to declare victory and reduce the organizations significant burn rate until a consensus could be reached on the Unitus strategy going forward? The board’s painful but truthful answer was to meet present obligations and reduce overhead. A majority of Unitus’ cost base was compensation, so reducing staff became necessary.

With major existing commitments to partners in India, some Unitus employees in India are likely to join other industry players – or even form a new independent consulting company – to fulfill those commitments. Unitus is very supportive of these efforts and may fulfill outstanding obligations to its partners through these existing firms or this new group. A small number of other Unitus staff members will be retained for Unitus 2.0 and ongoing operational work, while the remainder were let go (with a month’s notice and a solid severance package). Luckily, Unitus has been staffed with some of the world’s experts in microcredit so many folks already have multiple offers in hand.

So the truth of Unitus scaling down is fairly pedestrian. After meeting its goals and looking for a new focus, the organization decided to cut back until a new strategy was devised. Yes, it is true that most non-profits don’t operate in such a manner—but once again, it seems like this is a part of the Unitus DNA. A friend of mine who has advised non-profits over the last 30 years recently informed me that after advising more than 80 percent of his firm’s non-profit clients to consider merging, scaling back or closing, not one of these organizations acted on the advice.

In closing, I would like to shed some light on some of the questions/issues that have surrounded Unitus’ recent move.

1) Unitus Donations: All remaining and new donations held by Unitus will be used solely for non-profit purposes (e.g., grants, technical assistance). “Unitus 2.0” will not use funds for commercial purposes, equity investments, or start-up capital for new businesses. Not sure that doing such things would even be legal.

2) Unitus’ Non-profit Backing of SKS: It was recently stated in the press that Unitus used US $6.6 million of donor cash and services to assist SKS in its early growth. This figure is incorrect. Unitus gave a $150,000 grant, along with a $500,000 loan guarantee that was repaid. $6 million in equity was invested by Unitus Equity Fund (UEF), but no donor funds from Unitus were used to buy equity in SKS.

3) Unitus Proceeds from SKS: Unitus will receive economic benefit from the SKS IPO. Unlike Accion, which invested directly into Compartamos, Unitus is and always has been the general partner of a limited partnership called UEF. The US $23.5 million of partnership investment funds came from a unique group of forward-thinking limited partners (i.e. investors) who believed in UEF’s potential to have a demonstrator effect in private equity markets before anyone else was willing to do so. UEF’s limited partners pay Unitus a 2 % management fee and 20-percent carry from the profits of the Fund (i.e., a typical venture capital fund structure).

To further lay out the cash flows from UEF investments, Unitus sponsored UEF, which invested in SKS. The proceeds from SKS and other investments will go to the UEF investors, who in turn give Unitus 20 percent of the profits for being the General Partner. All those “carry” proceeds go the same place as donations, with some carry and fees allocated to the UEF managers under a contractual agreement that was agreed upon when the managers were initially hired.

So the true and proper story is that Unitus doesn’t use donor funds for equity investments. Unitus did use a small amount of donor funds to help launch and raise UEF as a demonstrator fund for the microfinance industry. Those donor funds were subsequently repaid by UEF’s limited partners as organizational expenses of the fund, after UEF’s fundraising was closed. Unitus, as a the GP of UEF, has received and will continue to receive fees and profits that will number in the millions, and will be used to fund grants that will back innovative solutions to global poverty. Not a bad deal for Unitus the non-profit.

Further for all those “profiteering doubters,” some Unitus board members did invest in UEF and have pledged all their profits to charitable works. I am confident this explanation doesn’t violate any quiet period rules around the SKS IPO.

4) Unitus 2.0: As stated before, Unitus is scaling down and not going out of business. Once again for the record, Unitus is down scaling not going out of business. Key individuals, experts, and board members are currently in the process of defining “Unitus 2.0.” Once the board decides on Unitus’ next major initiative(s), it will be communicated to the public in a timely manner. Individuals with expertise in the areas related to Unitus 2.0 initiative(s) and experienced board members will thoroughly study and formulate a strategy for deploying donor funds in an effort to generate the same impact Unitus has always strived for. This approach and answer may not satisfy some critics or seem opaque, but this is the reality of the situation and will allow Unitus to chart its course efficiently and effectively in backing innovative solutions to global poverty.

5) Stepping Down from the Board: I did step down from the Unitus board last year, after more than five years serving in multiple roles, including Treasurer and Capital Markets Chair. As Unitus Capital, Elevar Equity and Huntsman Gay Capital Impact (an impact investing firm I’m heading) have scaled up, the time I was able to spend at the non-profit was limited. Additionally, to avoid any improprieties and even the appearance of conflicts of interest given my involvement with the various for-profit entities that Unitus had spun-off (e.g., Unitus Capital, Elevar Equity) to generate impact and drive capital to scalable MFIs and social enterprises, I felt it was necessary to step down from the board.

6) PR Announcement: Unitus did a fairly poor job of announcing these changes… That is true, but I can assure you that the board did not announce the reorganization of Unitus in a way to minimize attention or as “bury the news.” The announcement was made prior to the July 4^th weekend, but it was not done for a strategic or calculated reason. The board candidly made its decision after long deliberation and discussions in the weeks prior to the announcement, and communicated the decision to staff in the few days prior to the weekend. While the board underestimated the impact the announcement would have in the media and microfinance industry, it was certainly not a calculated move to hide Unitus’ intentions or future moves.

Thanks again to Sean for allowing me to share a few thoughts on Unitus, and hopefully this sheds some light on what I have seen while working with some of the most dedicated and well-intentioned folks in the fight against global poverty.

From the story:

“The other nonprofit ensnared in controversy is a Seattle-based group called Unitus, which holds a stake in SKS that will be worth millions after the I.P.O. The group’s board shocked the nonprofit community this month by saying that all of the organization’s 40-person staff would be laid off and that Unitus would no longer be involved in microfinance activities.

…“If Unitus is closing down, that shows what is the real result of this I.P.O.,” said Muhammad Yunus, an economics professor who is considered the father of microfinance and has been critical of the SKS stock offering. “You are now encouraging the profit-maximizing part, and the nonprofits are closing down.”

…Omidyar Network [a big Unitus donor] had been concerned enough about the structure of the Unitus board that last autumn it paid for a study by a management consultant. According to two former Unitus executives, the study concluded that some directors had too many nonprofit and for-profit roles with Unitus — particularly one, Geoffrey Woolley, who was chairman of the investment fund running Unitus’s profit-making investments and was an investor in those funds and in SKS.

Mr. Woolley resigned from the board last fall, but Mr. Grenny said he would now be brought back to help plan Unitus’s future beyond microfinance. Mr. Woolley declined to comment.

…The unwinding of Unitus stands in contrast to the way Acción, another nonprofit group that focuses on microfinance, handled a $140 million windfall from the 2007 public offering of the Mexican microlender Compartamos. Acción, which still holds a 9 percent stake in the Compartamos, has used the money to expand its microfinance operations, and its executives and directors had no investments in the operation.”

You can read the full story here. A graphic showing the history of the SKS and Unitus is here. A graphic showing where the IPO money is going is here.

As I announced yesterday, I spoke with Geoff and he will be writing a guest post here at Tactical Philanthropy describing Unitus’ side of the story and his plans for the Unitus to tackle a new area of “maximum social impact”.

I’ve talked to a lot of people about the Unitus situation. Everyone that I’ve talked to thinks the world of the Unitus team, including the founding board members. I continue to withhold any judgment because so much of this story is murky. I did reiterate to Geoff my opinion that Unitus blew an opportunity to really claim victory for completing their mission of “accelerating microfinance” and instead left many people with questions about Unitus and the field of microfinance which they are leaving behind.

As much as I urge philanthropy to work to move faster, I also greatly appreciate that unlike areas like finance and politics, philanthropy is able to avoid the 24-hour news cycle and let stories play out in full before passing judgment. I look forward to hearing more about this story and most importantly trying to figure out what we can learn from it.

By Tim Ogden

Today, the world’s second microfinance IPO happened: SKS shares went on the market in India. All expectations are for a highly successful IPO similar to the blockbuster IPO of Compartamos in Mexico two years ago. Strangely tied into the SKS IPO is the demise of Unitus, a non-profit founded to help MFIs improve operations, grow faster and attract commercial capital. A few weeks ago, the board of Unitus declared “Mission Accomplished,“ announced it would be laying off its staff and examining a future direction for the organization focused on other poverty interventions. Unitus was a significant donor to and investor in SKS with both charitable and for-profit dollars.

The SKS IPO has produced largely the same rhetoric as the Compartamos IPO: Mohammed Yunus complains about profiting from the poor while polishing his halo and a few other experts point out that meeting the financial needs of the global poor requires access to commercial capital markets.

But that discussion is well worn and a distraction from the real issues that are raised by the SKS IPO and the Unitus shutdown. In the two organizations we are for the first time, I believe, seeing what the endgame for social entrepreneurship can look like.

Both SKS and Unitus majored on social entrepreneurship language: they explicitly targeted using commercial capital to meet social goals. This is somewhat distinct from Compartamos, whose founders tended to speak about pursuing commercial goals for their own sake, not primarily as a means to a social end. Just as important both organizations used the standard social entrepreneurship playbook, founding a nonprofit organization and funding themselves initially at least with charitable donations.

These charitable donations into the risky venture of microfinance have succeeded by most reasonable measures. SKS makes quality financial services available to a huge number of clients, while charging very reasonable interest rates given the cost of serving the clients it targets. Unitus was one of the first organizations to invest in MFIs to help them access commercial capital and to evangelize microfinance investments to the commercial capital markets. As the Unitus board noted in the announcement of its shutdown, a huge amount of commercial capital is now flowing to microfinance, some would argue too much.

That success in turn, as contemplated in the dreams of social entrepreneurs, has made it possible for the founders of Unitus and SKS to do well because they did good. But that’s where the story begins to get murky. That murkiness is based in a number of transactions that were necessary for SKS to take commercial capital and for Unitus to prove the commercial capital model. Along the way, the clients who owned 40 percent of SKS, have had their share diluted without it being clear exactly how they will benefit. Unitus, the non-profit, spun off the Unitus Equity Fund, a for-profit private equity fund, and seems to have given the for-profit some share of its investment in SKS. Members of the Unitus board who approved the creation of the for-profit fund spun out of the non-profit are almost certainly (though its difficult to determine for sure) investors in the Unitus Equity Fund who now stand to benefit from the SKS IPO.

Adding significantly to the murkiness is the strange tale of the Unitus shutdown. Seemingly announced in a way as to minimize attention, the story has gotten very convoluted. Apparently most donors and staff were utterly surprised by the move. The chairman of the Unitus board issued a statement trying to answer some of the very reasonable questions; several of his answers were almost immediately refuted by reporting done by Clay Holtzmann of the Puget Sound Business Journal.

That brings us to some big questions, that to date, many social entrepreneurs have been able to ignore. While we were all talking in theory about social entrepreneurship and using market mechanisms for social ends, and bringing capital and scale to poverty alleviation and other worthy goals, we could blithely ignore some thorny issues. After all, why worry about about the “doing well” part when no one had yet “done well?“ It’s happening now, though, and that’s why social entrepreneurs, their funders and policy makers need to be paying attention.

The three big questions that haven’t yet been answered in the SKS/Unitus situation are relevant to everyone in the space:

1) Who ultimately does well here?

2) What role did nonprofit funds have in enabling the people doing well to do so very very well?

3) And the biggest question of all: What responsibility do the people who took charitable funds have once they start personally doing well?

The social entrepreneurship space is still the wild west—everyone is making it up as they go along. I suspect that is going to change as the details about SKS and Unitus slowly trickle out.

To help you follow along, I’ve created this round-up of articles about the two organizations: A Guide to the Unitus/SKS Story.

Dear Unitus Donors:
 
On July 2, having accomplished our initial core mission, Unitus announced a major change in strategic direction. A decade ago, Unitus established two interrelated primary goals: (1) to bring commercial funding into the worldwide microfinance marketplace, thus greatly increasing the amount of money available for loans; and (2) help demonstrate on three continents that microfinance organizations can be scaled to serve hundreds of thousands of clients at the bottom of the economic pyramid.

Now, with $50 billion of microfinance capital available to more than 150 million of the world’s working poor—and a large and a growing community of philanthropic and (now primarily) commercial microfinance institutions serving this previously greatly underserved market—we feel the time is right for Unitus to seek out other transformative fields of endeavor.

Accordingly, going forward Unitus will no longer initiate new microfinance partnerships. We will honor all existing obligations and commitments to existing MFI partners, then move on to new high-value activities. With many fine organizations now serving this space, we are confident that MFIs will continue to increase and improve their activities of making capital available for microloans.

Unitus is not a conventional charitable organization. Our goal from the outset has been to identify promising young ideas (such as microfinance) and help them rapidly demonstrate their full potential. The Unitus board and many of our donors support this creative, innovative and risk-taking approach to improving our world. When we started ten years ago, microcredit was still somewhat of an experiment.

Today the commercial microfinance model has been validated and—as we envisioned—powerful commercial players are doing far more to expand access than Unitus ever could.
Because of this unusual approach and our recent announcement, we know many of you have questions. It’s our intent to be completely open and transparent with you. We also always appreciate your input, ideas and feedback as it helps us sharpen and refine our focus.

Is Unitus shutting its doors?

No. We are redirecting our efforts from our focus on accelerating microfinance to new areas where we hope to make new transformational impacts on reducing global poverty, in areas we are currently exploring. As a result, we are winding down our current organization, which was built to support dramatically accelerating access to microfinance. After completing our existing microfinance-related obligations, we will refocus Unitus in one or more exciting new directions.

Is charitable/philanthropic involvement in microfinance no longer relevant?

There are still many people in the developing world who would like access to microfinance services, especially where the commercial case has not yet been made. In these areas, donor dollars may still be required to demonstrate viability. And there are now many high-quality permanent players in this field. Some examples include ACCION, Opportunity International and Grameen. We are confident that these and other organizations, along with the influx of funds from the capital markets, will successfully fill this role within the next decade. This enables Unitus to shift our focus to addressing other pressing needs of the global poor that have received far less attention and require creative and innovative approaches that we are uniquely suited to provide.

Why was this change so abrupt? How long has Unitus’ board been considering this decision?

The announcement may seem abrupt, but Unitus leadership has been considering strategic options for a number of months as it became clear that our original goal of attracting commercial capital to microfinance was reaching a tipping point. In the end, the path we took and our timing represented something of a balancing act. On the one hand, we wanted to wait until we had a high level of confidence that we have done what we needed to do in order to ensure that our strategic partners were on a solid footing. On the other hand, once we had arrived at a definitive decision, we felt a fiduciary responsibility to right-size our expenditure of donor capital while ensuring that we had met our legal, financial and moral obligations to our partners and employees. The reality is that significant changes like this always feel abrupt when they are announced. We are sorry that we could not make this announcement feel less abrupt.

When was this decision made by Unitus board? Was it unanimous?

Our ultimate decision was made in the final weeks before our announcement. All members of the board agreed that this was the right decision.

Who did Unitus board consult before making this decision?

We have consulted with many Unitus stakeholders—friends, founders, investors and donors—about possible future directions. This decision incorporates the many diverse views generated by these conversations.

Is there a problem with microfinance—a financial bubble or something?

We don’t focus most of our energy and efforts on prognostication. However, we (in consonance with the reasoned analysis in The Economist and that of many other credible observers) do not see signs of a global bubble brewing in microfinance—notwithstanding the unavoidable individual anecdotal cases of over-borrowing and over-lending. That said, we and our partners have always strived to follow sound fiscal policy and due diligence processes, which we feel should be incumbent upon all lenders—not only for their own sake but also that of their borrowers. Most of our partners, and many more MFIs in the industry, are following sound lending practices (such as those outlined by the SMART Campaign).

Why are you letting go of the Unitus team? Aren’t there at least some people who make sense to keep on for Unitus 2.0?

The board’s view is that the directions we are exploring will not require an organization of the current size and shape. This downsizing has been without question the most painful decision we have made. Our employees are extraordinary, which doubles the pain. The fundamental reality is that the outgoing Unitus staff—bright, talented and passionate—was built for our focus on accelerating access to microfinance.

We are trying to balance what we feel is our moral obligations to our staff with what we see as our fiduciary responsibility to preserve as many resources as possible for new strategic initiatives that will have the greatest impact toward sustainably reducing global poverty. All employees are offered severance pay commensurate with their job and the length of time they’ve been with Unitus. Going forward, we feel that the most responsible thing to do is to gauge our human resource needs as the strategic direction of Unitus 2.0 evolves, and fill them on a case by case basis with the best possible people for that direction—whether or not those individuals are former Unitus employees.

Will Unitus be involved in accelerating financial services for the poor or something else? Will Unitus continue to work in India? Africa? Other places?

Our core underlying purpose of improving opportunity and quality of life for the world’s working poor remains unchanged. The Unitus Board is currently considering a variety of strategic opportunities throughout the developing world, including India, Africa and other important areas. Our primary goal/mission is still to maximize the socio-economic impact for those currently not being served by current solutions in the marketplace. As we solidify our direction, we will be providing further updates and announcements.

How will the remaining Unitus charitable resources be used/spent?

100 percent of monies donated to Unitus will be used for our charitable mission of reducing global poverty and enabling economic self-reliance. In the short-term, some resources will be used to complete our obligations to microfinance partners and to efficiently wind down the microfinance-related operations of Unitus. The remaining funds will be allocated to new philanthropic strategic initiatives determined by the board in keeping with our mission of reducing global poverty. As always, we will continue to be completely transparent in the ultimate uses of the dollars our donors have entrusted to us.

Who is helping create the new vision for Unitus?

We are fortunate to have strong founding board members and current or former board members deeply involved in this process: Joseph Grenny (board chair), Mike Murray (former board chair), Bob Gay, Tim Stay and Dave Richards. Geoff Woolley—a former board member who has been instrumental in much of the innovative work Unitus has done—has agreed to be actively involved. In addition, we are partnering with senior members of the Unitus team—and with many of you.

Please know that it has been a tremendous honor for us to collaborate with you in working to empower and improve the lives of so many working poor individuals and families through microfinance. We are inspired by your generosity and enlightened good will, and deeply committed to maximizing the effect for good of your contributions. As we envision Unitus 2.0, we welcome your insights and would be honored to continue to work with you.

All the best,
Joseph Grenny
Chairman of the Board
Unitus

Acting president Ed Bland said in the press release:

"The fact that we have become largely unnecessary in the microfinance arena is fantastic news and is a tribute to our generous, enlightened donors and the phenomenal staff at Unitus, who worked tirelessly to validate and refine the microfinance model, and advance the operations of our partners.”

I’ve talked with multiple sources familiar with the situation who say that Unitus is not having any financial problems nor are their any problems in their portfolios. However, if the decision is being made strictly for strategic reasons to maximize impact, it seems odd that the announcement would be so sudden.

I am certainly not familiar with the inner details of Unitus and I have no opinion about what exactly is going on. But given the 2009 media storyline of microfinance being a “bubble” and lacking impact, it seems critical to me that Unitus get a hold of the narrative around their closure.

If Unitus is exiting microfinance for negative reasons (which my sources say is not the case), then it helps validate the anti-microfinance narrative. If Unitus is exiting microfinance because they have indeed fulfilled their mission of accelerating microfinance given the vibrant market driven microfinance field and are simply moving on to the next “area of maximum socio-economic impact,” then the event is cause for celebration by microfinance fans.

If you’ve ever doubted the power of narrative, this is a case study unfolding. The way in which the Unitus story unfolds may very well have a significant impact on public perception of the overall field of microfinance.

I couldn’t agree more.

From the updated website:

1) It all starts with our Field Partners, which are microfinance institutions operating around the world. Our Field Partners approve and disburse a microloan to an entrepreneur in their community. They take a picture of the entrepreneur and write down the entrepreneur’s story.

2) The Field Partner uploads the entrepreneur’s profile to Kiva’s website. The profile, if it’s not in English, is translated by one of our hundreds of volunteer translators. After translation, the profile appears live on Kiva.org

3) Lenders like you browse the entrepreneurs’ profiles and choose someone to lend to, using PayPal or their credit cards.

4) Kiva provides the funds to our Field Partners by aggregating the loan funds from all contributing lenders. Most Field Partners then use the Kiva lender funds to backfill the loan they’ve already disbursed to the entrepreneur. Disbursals can happen up to 30 days before, or 30 days after a loan request is uploaded to the Kiva website.

5) Over time, the entrepreneur repays her loan. The Field Partner collects those repayments and lets Kiva know if a repayment was not made as scheduled. We give Field Partners the option to cover both currency losses and entrepreneur defaults.

To speed things up and to minimize the number and expense of wire transfers, Kiva works on a net billing system. This means that, for any given month, we subtract the amount of repayments that a Field Partner owes to Kiva lenders from the amount that a Field Partner fundraises for entrepreneurs on Kiva.

If the balance is positive, that means that the Field Partner has raised more than they need to repay, and we use those funds to credit your lender account with the repayments due to you. Tell me more

If the balance is negative, then the Field Partner has 30 days to send us a payment for the balance. As soon as we receive that payment, we use those funds to credit your lender account with the repayments due to you.

Repayment and other updates are posted on Kiva and emailed to lenders who wish to receive them.

6) When lenders get their money back, they can re-lend to another entrepreneur, donate their funds to Kiva (to cover operational expenses), or withdraw their funds to their PayPal accounts.

Here’s a comment I just received from Mike Everett-Lane, former executive director of DonorsChoose Northeast:

The central issue, to me, isn’t that the pool of money is fungible (i.e., my donation goes into a large pool, out of which the partners are funded, out of which individual loans are made). Nor is the question of microphilanthropy vs. the need to fund overhead. The issue is that Kiva implies that the lender’s choice helps determine who gets a loan.

Kiva gives the impression that if lenders do not fund a project, that project will not happen. Right now there’s a project with $250 left to go, and it “expires” in 8 hours, 15 minutes. That gives me a sense of urgency. I might even give the whole amount. But if the loan has already been made, then the “expiration” isn’t true. There is no real choice.

I worked for a number of years at DonorsChoose.org, and I can tell you that giving donors an actual choice is hard. Good projects will go unfunded. You have to return credits to donors who have partially funded a project that never happened, and convince them to reapply those funds to a new project, which itself might not be fully funded, etc. Tracking it all is no piece of cake, either. But if you don’t do all of this, you’re not being transparent, and you’re not giving your donors real choice.

I don’t believe that microphilanthropy (or microfinance, peer-to-peer giving, etc.) is a good solution for most problems. DonorsChoose.org has an advantage, in that they are funding discrete classroom projects within public schools, but do not have to fund the infrastructure of the schools themselves. Most problems just couldn’t be solved in this way. (”I’d like to fund only the violas in the orchestra, please.”) But if you’re going to advertise yourself as giving choice to the donor, you’d better do it.

• Kiva and Matt Flannery’s follower counts on Twitter went from a couple thousand a piece before being added to the Suggested User list to 61,000 and 47,000 respectively today (just 12 days since they were added).
• To put that in perspective, the Chronicle of Philanthropy has a circulation of 34,000 (that’s paid subscription to the newspaper, not their Twitter followers. In may ways it is an apples to oranges comparison, but it does give a sense of reach).
• Acumen Fund, another new Suggested User, has seen their follower count go from a couple thousand to 52,000.
• After I published the post yesterday summarizing the Kiva controversy, Acumen Fund tweeted a link to the post. That link has been retweeted 37 times and generated 276 visitors to this blog (over the last 23 hours). A second Acumen Fund tweet to another post I wrote on the issue has generated another 75 visitors.
• Reading through the profiles of the people who retweeted the Acumen Fund tweet, it appears that many of them have some familiarity with Kiva, but are not regular readers of the philanthropy blogs.
• These new readers didn’t just click on the link and then move on. The number one outbound link on my blog yesterday was the link to the GiveWell blog’s graphical representation of how Kiva explains their process to donors compared to how they explain it to microfinance institutions. This link was halfway down the post, suggesting that many visitors read through the post and took action to learn more.
• Including all Twitter users (not just Acumen Fund), Twitter was responsible for 44% of all Tactical Philanthropy readers yesterday.
• Yet the official Kiva Twitter account has made no mention of the debate and Matt Flannery’s Twitter feed links only to the guest post he wrote giving Kiva’s side of the story on David Roodman’s blog.

A number of the new Tactical Philanthropy readers who came in via the Acumen Fund tweet left comments on my posts. A quick scan of other posts on the debate suggests that readers new to the philanthropy blogs found the debate engaging and are asking questions about important issues.

The Kiva debate is complicated. There is good cause to criticize them and good cause to defend them. What is exciting is that we now have a vibrant online debate about important issues in philanthropy and new platforms like Twitter are exposing non-traditional audiences to these debates.

At the time the Twitter Suggested User list was published, I suggested that the new members needed to realize they were talking to a new audience then they were before and they needed to adjust accordingly.

One small suggestion I would make is to point out that the members of the list are now speaking to a mainstream audience rather than social entrepreneur insiders. I know from my experience writing for the Financial Times, that writing for a mainstream audience is more difficult but also offers more opportunity than speaking to people who already “get” where you are coming from.

Imagine you are giving a talk to a small group of people who are passionate about social change. All of a sudden the walls around the room you are speaking in come crashing down and you realize that their are thousand and thousands of new people outside the room who are now crowding around to hear you.

What would you say?

The Twitter Suggested Users suddenly find themselves holding a powerful new tool. They have the ability to point people’s attention to the subjects they pick. This isn’t a small deal. The current debate is about the validity of Kiva, one of the most highly touted of the “new philanthropy” brands. I’m not sure where this all goes, but I think it is healthy to have so many new people being exposed to the discourse. And I think new winners and losers are going to emerge.

In other words, Kiva tells lenders (users of the site) that the money flows like this:

1. Lender picks entrepreneur to fund and gives the money to Kiva.
2. Kiva transfers the money to a local microfinance institution (MFI).
3. The MFI gives the money to the entrepreneur.
4. The entrepreneur pays the loan back to the MFI.
5. The MFI gives the money back to Kiva who returns it to the lenders account.

But in fact, the money flows like this:

1. An MFI lends money to an entrepreneur.
2. The MFI puts information about the loan on Kiva.org.
3. Kiva lenders (users) select a loan to have their money credited towards.
4. If an MFI reports that a borrower is delinquent, Kiva calculates the amount to deduct from the lender’s accounts.

You can see the two versions displayed in graphics in a post on the GiveWell blog. Note that Kiva shows version one to lenders and version two to MFIs. However, due to the debate, Kiva has updated the version they show donors to more accurately reflect the process [update: GiveWell's chart compares Kiva's updated version, but still implies that it is misleading]. In fact, in a guest post on Roodman’s blog, Kiva CEO Matt Flannery offers an excellent response in which he acknowledges that much of what Roodman argues is true, promises to be more transparent and then gives the back story of how Kiva’s model has morphed from the direct lending process to the more efficient process of having MFIs make the loans before asking Kiva lenders for the money.

So here’s where it gets interesting for me. Roodman argues that while Kiva is misleading donors, the process they are using is good:

Tim Ogden, writing on Philanthropy Action, offers additional criticism of Kiva’s communications, but agrees with Roodman on the idea that Kiva’s practice makes sense:

So here’s the take away. Donors like to believe that they are helping other individuals. They want their money to go directly to benefitting the people they seek to help. We see this in the Kiva model, in the child sponsorship concept and even in the way that donors want nonprofits to spend nothing on overhead.

Taken together, it seems that donors simply see nonprofits as bureaucratic intermediaries who play a necessary role of linking the donor to the recipient, but who otherwise should get out of the way. Nonprofits, recognizing the way donors think, play into the illusion by reallocating overhead expenses to program costs and then trumpeting their low expense ratio or subtly reframing how money flows as Kiva has been doing to make their process better align with the donor’s illusion.

I’m really not sure what to make of all this. On the one hand, you can’t fault nonprofits for spinning what they do to best satisfy donors. This is exactly what for-profit companies do. Satisfying your customer or donor is the job of an organization. But at the same time, this illusion that donors want to believe in, that they can support individuals rather than nonprofits, is poisonous because it creates an atmosphere where the best nonprofits are the ones who can best stay out of the way rather than the ones who can create the most robust organizations.

According to Roodman, Kiva’s actual process is better at helping poverty stricken entrepreneurs than the illusion of direct lending that Kiva spins for its donors. But would you as a donor rather make direct loans? What should we think about the fact that what we want as donors is not what is best for the recipient? Especially when we tell ourselves that we want to take direct action because we think doing so is the best way to help the recipient?

One of the recent entrants is UnitedProsperity.org. At first glance, it looks like a Kiva.org knock off. But there is a hugely important difference. Whereas Kiva.org helps people make loans to entrepreneurs in developing countries, UnitedProsperity.org helps people guarantee these types of loans.

A loan guarantee means that the donor is essentially providing collateral so that a local bank will make a loan to the entrepreneur. The amount of the guarantee is less than the amount of the loan. If I make a loan of $100 to you, I might have a certain degree of worry about getting paid back. But if a third party puts up $20 in collateral so that even if I don’t get paid back I still recoup $20, than I will worry less and be more likely to make the loan. In theory, this means that UnitedProsperity.org can offer a leveraged opportunity to donors where every $100 in loan guarantee money they put up results in $500 in loans being made by local banks.

That’s nice in theory, but the setup assumes that there is local capital available in the developing world but that it is not being lent out due to risk aversion. So I asked UnitedProsperity.org CEO Bhalchander Vishwanath about this issue:

Bhalchander: There is enough capital on the ground to be freed up. In fact banks in most developing countries lend much less as compared to banks in the developed world. Some banks may be even over-liquid – i.e. They have more savings deposits than lending. Guarantees definitely free up that capital.

Having said that I would state the direct delivery of new capital to emerging Microfinance Institutions is also important as banks in some countries may not engage effectively with microfinance institutions and Kiva plays a very valuable role there.

Overall I see our approach and Kiva’s approach complementary in making capital available to poor entrepreneurs.

All of this is a great example of a concept I wrote about last October: The Securitization of of Philanthropy. I wrote the post as the world financial markets teetered on the edge of collapse, due in large part to misappropriate securitization of loans in the for-profit market place. In the post I discussed how grantmakers can inject “first loss capital” into nonprofit debt financing deals to help grantees. Noting the irony of advocating for securitization given the state of financial markets I wrote:

Like all tools, structured finance can be used in inappropriate ways. As El-Erian points out in his book, the “securitization” of home loans (pooling them and reselling the loans to investors) was a positive development. However, misaligned incentives encouraged excessive risk taking that is now coming back to haunt the mortgage markets. Structured finance is a powerful tool and powerful tools can be dangerous, but I think the development of social capital markets towards more sophisticated forms of structured finance is inevitable. Let’s work on getting it right.

I think UnitedProsperity.org has a fantastic concept. Let’s hope they get it right!

Mission related investing (MRI) is the term used to describe investments made by philanthropic entities in the pursuit of both financial and social returns. Unlike traditional socially responsible investing that relies on “negative screening”—the avoidance of public companies that do not pass certain social criteria—MRI implies proactively seeking investment opportunities that produce a blend of financial returns and social impact that are in line with the philanthropy’s mission. Still an emergent issue, MRI is characterized by limited deal flow, especially in deals that have minimums low enough to allow widespread participation. But MRI brings philanthropic advising directly into the domain of the wealth manager.

Today, it appears that the Calvert Giving Fund has taken a significant step towards increased deal flow and lower minimums that should make it much easier for wealth individuals and smaller foundations to participate in a strategy that has largely been the domain of institutional foundations.

The Calvert Giving Fund is a national donor advised fund. Like Schwab Charitable, Fidelity Charitable Gift Fund and the Vanguard Charitable Endowment, Calvert provides low cost donor advised fund administration without providing advice on where to give. While structured as a nonprofit, the group is affiliated with Calvert Investments, a leader in socially responsible investing.

For some time the Calvert Giving Fund has offered social responsible investment options to their donor advised funds, as well as “community investment notes” that pay a below market rate of return and finance community development projects. Now they’ve added a Global Impact Ventures Platform. The platform currently offers access to five mission related investment options:

• Acumen Fund: 10 year Senior Note (debt), 3% interest either paid or compounded into the principal
• LeapFrog Investments: Equity Investment into Limited Partnership with 10 year life
• MicroVest: 7 year equity limited partnership
• Public Radio Fund: Promissory Note, 3 years at 0% or 5 years at 4%
• Root Capital: Promissory Note, 3 years at 3% or 3 years at 0%, senior tranche

The investments all offer social impact in addition to a financial return. You can read summaries of the social impact potential here.

The really big news is that there is a minimum of only $25,000 to invest in each fund. Community foundations and national donor advised funds have a huge opportunity in the MRI space, because they can aggregate their donor/client’s investments into an investment in a fund like those above and count as a single investor. In other words, while a certain investment might have a $250,000 minimum, a community foundation or national donor advised fund can bring 10 of their donor advised funds in at $25,000 each and reach the minimum.

If an investment advisor or individual wants to invest in traditional profit driven investments, they can open an account at Schwab or Fidelity and have access to thousands of mutual funds, every publicly traded stock and bonds. If you buy stock, you don’t have to call the company, you buy it directly on the broker’s platform. Same thing if you buy a mutual fund. Now the Calvert Giving Fund has created a platform for mission related investing that integrates with existing financial markets.

Very cool. I hope that they are successful in marketing the program to advisors and individual philanthropists. I also hope that institutional foundations that care about mission related investing make some investment on the Calvert platform to help them grow.

During my presentation I’d like to engage the audience by actually giving some money away through a live demonstration of one of the online giving platforms. So I’m putting out a request for help from one of the platforms. I’m looking for someone who will run through a demonstration of their site during the class. I’ll put up a small amount of cash to give and ideally I’d hope that the group might have a budget so that we can make multiple gifts.

If you are interested in helping out, shoot me an email. I assume I’ll get multiple offers of help, so I’ll just have to go with the group that has the most interesting offer or makes the case that from a learning perspective, their group best suits the needs of the class.

If you like, you can register for the one-day workshop here.

Thanks!

I just read the great book When Markets Collide. Published this year, the book comments on events that were occurring in the financial market as recently as the spring of this year. Author Mohamed El-Erian is the former head of  the Harvard endowment and current co-CEO of PIMCO, one of the largest investment managment companies in the world (he also spent 15 years at the International Monetary Fund). In the book, El-Erian says that when asked what career he would suggest a young women go into he replies “structured finance” without hesitation. His point is that while we are in a cyclical move away from structured finance due to excessive risk taking, the stuctured finance movement will continue to dominate financial markets over the long term.

All of this brings me to a great session I attended yesterday in which my friend George Overholser of NFF Capital Partners described how grantmakers can injected capital into a nonprofit debt financing deal to make it more attractive to for-profit lenders. The idea is that if a profit seeking lender will only lend to a nonprofit at a 10% interest rate, they may be willing to lend at a lower rate if a philanthropist puts up capital that will act as a “first loss” cushion. Let’s say that for example the loan is for $5 million. The philanthropist might put up $500,000 that the lender could lay claim to if the nonprofit was unable to fully repay the loan. This reduces the risk to the lender and therefore lowers the interest they are willing to accept to complete the loan. The philanthropist is willing to put up the money because the injection of a relatively small cash cushion can unleash much larger new cash flows into the nonprofit system. While the provider of the “first loss” cushion can acheive a maximum financial return of 0% (just getting all their money back if the nonprofit doesn’t default on the loan) and a maximum loss of 100%, this actually compares favorably to the guarenteed 100% “loss” that occurs when you make a grant. While a first loss capital cushion is not superior to making a grant, it is another tool to be considered by high-impact grantmakers.

This brings me to a recent announcement by Schwab Charitable (the national donor advised fund) of its pioneering program to allow their donor advised funds to put up capital to guarantee microfinance loans. The program is being run in collaboration with the Grameen Foundation. According to the press release:

“We are excited to be partnering with Schwab Charitable to expand the reach of microfinance loan programs around the world,” said Alex Counts, President of Grameen Foundation. “Historically, guarantee programs have only been open to large foundations or to the very wealthy. This program opens up participation to a much broader range of donors, democratizing access and building a solid base of ongoing support.”

…Donors who agree to participate will recommend that up to 10 percent of their Charitable Gift Accounts be set aside for a period of 24-36 months to help guarantee microfinance loans. Any funds used to guarantee microloans will stay in their accounts, will continue to be invested for the entire period and will be applied to the guarantee only if the microfinance program has losses in excess of reserves. In addition, Schwab Charitable will report back to participating donors on the social and economic impact that these microfinance loans provide to their various recipients.

Like all tools, structured finance can be used in inappropriate ways. As El-Erian points out in his book, the “securitization” of home loans (pooling them and reselling the loans to investors) was a positive development. However, misaligned incentives encouraged excessive risk taking that is now coming back to haunt the mortgage markets. Structured finance is a powerful tool and powerful tools can be dangerous, but I think the development of social capital markets towards more sophisticated forms of structured finance is inevitable. Let’s work on getting it right.