In the second edition of “Capitalism at the Crossroads” Stuart Hart makes a very strong case for MNCs to start thinking about the bottom of the pyramid (BoP) and environmentalism as opportunities. The book, which is subtitled “Aligning business, earth and humanity”, manages to cover the most significant global issues of our time – global warming, global poverty and terrorism – in a way that is comprehensive and insightful. Hart argues, in a very compelling manner, that to be successful tomorrow, the businesses of today need to embrace green practices and target the world’s poor. As if that weren’t enough, Hart goes on to provide unique guidelines for how businesses can go about transforming themselves. The title reflects Stuart’s argument that businesses have a choice to make; they can invest to become the leaders of tomorrow, or they can continue to operate under the status quo and miss the next big wave of growth. Read more »
The global economic slowdown all began with a credit bubble. The over-simplified version of what happened is that too much credit (loans, etc) was given out while spreading the risk over many players. As a result, no one had a clear understanding of the cumulative risk across the system. This lead to an increase in delinquency rates because too many bad loans had been approved. As more people stopped repaying their loans, banks felt pressure because they had less money to repay their own debt. The entire ordeal was much more nuanced than I describe, but essentially a rise in loan defaults was one of the first signals of the financial collapse. Banks across the world were all connected to the crisis in some way, but somehow the microfinance industry remained unscathed. Despite the economic downturn, the world’s poorest continued to generate an excellent track record and repay their loans. Read more »
Most social businesses share the ultimate goal of solving global poverty by fixing various underlying development issues. Each organization is a piece of the puzzle, but how do we know whether social businesses are having any success as a whole? In his book “Small Change: Why business won’t save the world”, Michael Edwards argues that business is not the answer (as described on Social Edge here). Though I believe that Edwards is wrong (Full disclosure: I haven’t read the book yet, but am eager to report back once I do), how can we demonstrate that social business is the answer to the problems of the world’s poorest?
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The meat aisle at a 'grocery store' in Vietnam
If you’ve ever traveled to a developing country, you’ve experienced how different and unique the culture is. Even simple day to day activities such as shopping for food or buying a souvenir can involve a process that is brand new to you as an outsider. Sometimes your shopping experience is enlightening, while other times it may just seem down-right crazy. As an example, when I was in Zanzibar, an arts & crafts market was being shut down by the government and cops were literally destroying all the arts and crafts that the merchants owned. Despite the fact that their goods would soon be destroyed, the vendors were completely unwilling to budge on prices with me. Read more »
Photo Credit: Flickr User JAS662
Many of us in the developed world want to do good by donating money to help the cause of solving global poverty. Unfortunately, donations, if applied to the wrong cause, have the potential to do more harm than good. That isn’t to say that we should stop all charitable acts; there are still plenty of very impactful projects that rely on the largesse of the wealthy. Rather, donors should be careful to make contributions that do not impede the progress of market based solutions. This blog argues that the solution to global poverty is through a new form of capitalism that includes those at the bottom of the pyramid (BoP) as both consumers and suppliers. In this new system, donations have their rightful time and place, but economic incentives are the primary drivers of progress.
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I’m pleased to announce that Floating Doctors is launching as this post is being published!
We wrote about Floating Doctors previously in Rising Pyramid, but their launch was delayed. Apparently, there must have been a reason for their delay, because the disaster in Haiti occurred just as they wrapped up final preparations. Floating Doctors has adjusted their course to stop at Haiti first and to provide general aide. The majority of doctors providing support in Haiti require lodging and food, but Floating Doctors come with their own “house” as well as $3M of supplies.
Safe sails Floating Doctors, Rising Pyramid wishes you all the best!
Tuesday’s 7.0 magnitude earthquake in Haiti was a travesty of epic proportions, but it also paves the way for humans to show their compassion in a meaningful way. I’m still feeling shocked by the sheer size of the death toll. Early reports indicate that the earthquake could have resulted in as many as 100,000 deaths, which is over 30 times the number that died on September 11th and nearly 50 times the number of deaths from Hurricane Katrina. As in past disasters, the survivors need support now more than ever before.
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As we enter a new decade, let us take a moment to pause and reflect on the true intention of social businesses. As we’ve stated before, a social business is any business that is focused on providing goods and services that will help those developing countries rise out of poverty and improve their standard of living. Taking a step back, what does this really mean? What is the definition of “development”? How do we measure poverty? What is the true purpose of a social business?
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Stockholders measure the success of businesses by their ability to return consistent profits that will grow over time. Managers are constantly focused on driving results at the bottom line. Incidentally, two terms that make managers salivate are “margin expansion” and “top line growth”. Profit growth depends on either reducing costs or increasing revenues over time.
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Like all businesses, social businesses require funding and capital to get started and to scale up. However, unlike typical businesses, social businesses aspire to more than just financial returns. Often, their primary mission is to maximize the social and environmental benefits of their companies, sometimes at the expense of maximizing profit. Whether or not social businesses should offer financial returns to investors that are on par or at a discount to typical businesses is a topic for future posts. What is certainly true in the industry right now is that for-profit social businesses often return less to an investor than the stock market would. Additionally, social businesses are generally a riskier investment, which leads investors to expect higher rewards. Operating in developing countries with unique businesses models and distribution channels can lead to a lot of unknowns and unexpected bumps along the way. Therefore, it takes a special kind of investor to put capital into social businesses.
I firmly believe that in the long run, it will be demonstrated that companies focused on consumers at the bottom of the pyramid (BoP) can be successful and will experience rapid growth. In the meantime, investors are wary of BoP companies. Therefore, bold and unreasonable investors must prove the benefits of investing in the BoP to the typical investor. These unreasonable investors must care more about building the case for investing in the BoP than about receiving dramatic financial returns themselves.
The Acumen Fund is doing just that. They are a pioneer in the social business industry with the innovative concept of patient capital. Essentially, the Acumen Fund is a venture capital firm for social businesses; they invest money in early stage social start ups, with a goal of exiting the business after 5-7 years, or longer if necessary.
Along they way, they are accomplishing two honorable goals:
- In the immediate term, the fund is backing companies that are directly having an impact on the standard of living for those at the bottom of the pyramid. The Acumen Fund portfolio of companies is helping to alleviate poverty across the world.
- More importantly, in the long run the fund is making the case for other investors to put money into BoP focused companies. By doing so, the fund will eventually make it easier for socially minded companies to access capital, which is exactly what is needed to encourage rapid expansion of the industry.