Microfinance gets VC nudge
Seattle Times technology reporter
Chris Brookfield sees similarities between building a technology startup and lifting people out of poverty.
As odd as it sounds, the former Seattle venture capitalist is doing just that by applying his investing skills to microfinance.
"I have to take the same hard analytical approach to this as I did in venture capital," he said. "In structure and in the process, it's similar."
Earlier this month, Brookfield decided to leave the fast-paced, lucrative world of venture capital to work alongside Unitus, a Redmond nonprofit looking to dramatically change the microfinance industry.
Microfinance lends poor people small loans to fund businesses. A person may borrow $50 to buy a sewing machine to mend clothes or a buffalo to sell milk. The recipient pays off the loan with interest and, because the structure uses a group of borrowers that is responsible for each other's debts, the programs have an outstanding 95 percent or better average return rate.
Unitus has been working to take this model, which today relies mostly on donations, and turn it into an asset class similar to stocks or bonds. This would allow the industry to access the capital it needs to expand.
It has been raising an equity fund and invested in some microfinancing institutions in countries such as India, Kenya and Mexico.
Mike Murray, a former Microsoft executive, founded Unitus in 2000 with the aim of improving the industry. In microfinancing's 30-year history, loans have been distributed to 20 percent, or 100 million, of the 500 million people in the world who could benefit from the loans.
"In business, after 30 years, if you have only reached 20 percent market share, you aren't successful," Murray said. "That's not good enough. It works well, but the industry hasn't grown."
So Murray hired Geoff Davis as president and chief executive to devise a new model.
Davis, who has worked with microfinance organizations worldwide, realized one of the problems is that they depend on donations. Of the 3,000 institutions that make loans, 95 percent have fewer than 100,000 clients.
"That's not quite large enough to get economies of scale," he said.
Davis identified the constraints: not having enough resources to make more loans and not having access to capital.
"We designed a business plan where investors would fuel the growth, rather than donors," he said.
The model is called the Unitus accelerator, and it's similar to how venture capital works.
Unitus raises a fund and looks for small microfinance banks around the world that have good management teams and large market opportunities. It helps turn the bank into a for-profit entity, then it makes an investment.
The money can give the institution leverage to borrow more money from traditional banking institutions.
Unitus also takes a seat on the bank's board and provides consulting services to set up the infrastructure designed to support fast growth.
With the transformation in place, Unitus expects a bank that once served 3,000 people to help 100,000 to 200,000 people in five to seven years.
That kind of growth may need millions of dollars, a sum that would never be able attained through donations, Murray said.
To make it all work, Unitus had to create a new way it do business. It set up an equity fund that would be an affiliated for-profit entity, registered in the Cayman Islands. The fund raises money from investors who expect a return.
So far, it has raised $8.5 million in investments, anchored by Omidyar Network, an organization started by eBay founder Pierre Omidyar and his wife.
In all, Unitus expects to raise about $20 million. It is Brookfield's job to head up this investment arm of Unitus and use the skills he used as a venture capitalist at Northwest Venture Associates to pick the most qualified candidates.
The fund's investors are not donors; the idea is that they will get back their money and a return in a traditional way — by an investment going public or being sold.
This is the unknown factor. Few, if any, microfinance institutions have ever gone public in their local exchanges.
"Our bet is that there are going to be no shortage of exit opportunities in five years and going forward. You can already see some of the interest," said Steve Hardgrave, Omidyar Network's investment manager.
"I think things point in that direction. By being early players, we will be rewarded and make attractive profits in the space."
Hardgrave said Unitus is not the only one using this new for-profit model. The Omidyar Network has made investments in others, too.
Hardgrave expects the Omidyar Network will receive a 15 to 20 percent return, which closely matches venture-capital averages.
Unitus also has a nonprofit arm that gathers donations so it can give grants to microfinance institutions.
That operation expects to announce today that the Bill and Melinda Gates Foundation has made a $1.45 million donation.
Lisa Matchette, spokeswoman for the foundation, said the Redmond organization is a recognized innovator in the field.
"What we are hoping is to uncover more efficiencies in this field, and they will help the broader industry learn how to improve the model," she said.
From Unitus' worldwide headquarters in a small house in Redmond, Davis and Murray talk about the accelerator model.
As they sit in comfortable red leather chairs, those they assist share the room through the framed photographs hanging on the wall behind the pair.
Dawn McGee, Unitus' general counsel, points to a photo and recalls her visit with the woman. Shown sitting with two children in front of her house, the woman received two loans. The first was to buy a buffalo to sell its milk. The second was for new tires for a taxicab her husband drives for a living.
In many cases, these people make less than $1 a day before they get involved in a program. In fact, Murray says half of the 6 billion people in the world are desperately poor.
Unitus is already making a dent in those figures. In 2002, 2,566 clients received loans. At the end of 2005, Unitus, via its lenders, had helped more than half a million people. It said its goal is to help more than 3.4 million by the end of 2009 through both donations and its equity fund.
To do so, it must identify banks willing and able to receive an investment and grow to help thousands of more clients.
From its $20 million fund, Unitus expects to make 12 to 15 equity investments.
One of the first was in SKS, a microfinance institution in Hyderabad, India. Since it partnered with SKS in 2003, Unitus has provided $4.7 million to the program through equity investments, grants and lines of credit.
With that funding, Unitus was able to take SKS on a road show, which enabled connections with large institutions such as Citigroup, as well as other local Indian banks. Through those introductions, SKS got $66 million in credit.
With that extra funding, SKS has expanded its base of 10,000 clients to more than 200,000 clients. Its goal is to reach 700,000 by March.
"We can create a model that can be replicated globally," Murray said. "We want the Unitus way to be the way microfinance is looked at in the years to come."
Tricia Duryee: 206-464-3283 or email@example.com
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