Who Wants To Be A Venture Capitalist? December 7, 2006
Posted by James Webster in : finance , trackbackI’m not sure when I first encountered the concept of microfinance but I thought it sounded like a great idea; providing low-interest loans to the world’s most economically disadvantaged people to enable them to engage in entrepenurial activities for the benefit of themselves, their family and their community. Traditional aid and debt relief programs are essential to tackling the issue of global poverty, but self-sustainability also needs to be addressed and I think microfinance handles that admirably. So it was interesting to listen to the latest instalment of the fantastic Venture Voice podcast by Greg Galant where he interviews Premal Shah of Kiva.
Kiva (a non-profit company) acts as an agent for a number of microfinance organisations working with potential entrepenuers needing access to small amounts of capital in various parts of the world; Africa, Eastern Europe, Asia, Central and South America. Details of candidate entrepeneurs are posted up on kiva and with nothing more than a PayPal account (PayPal waive their normal transaction charges I believe) you can contribute as little as $25USD as part of a syndicate providing seed capital to an entrepeneur aiming to provide a sustainable service to their community.
The money you lend is attracts a 0% rate of return so the real rate of return is actually slightly negative once you factor inflationary effects in. Kiva themselves charge a small amount of interest to the microfinance organisations to cover their running costs (but again remember they are a non-profit) and I assume the microfinanciers on the ground also have to cover their costs resulting in the entrepenuer repaying some interest on top of the initial capital they borrow. It would be interesting to hear from Kiva about what rates of interest the entrepeneur end up paying. In the podcast Premal mentions the desire to allow money to be lent at higher rates of interest set by the market surrounding Kiva; I would hope though that these rates are set by lenders such that they only offset the effect of inflation.
As with any investment there is a risk to your initial capital. According to Premal however rates of default on loans provided through microfinance mechanisms have historically been less than 4%. As always the best way to minimize specific risk and credit risk to diversify your portfolio. Kiva helps with diversification by providing a large number of investment opportunities.
If you have any other questions you really should listen to the podcast and then go to Kiva and provide an entrepenuer with the necessary seed capital to start a new sustainable business for the benefit of their community and family. And you too can claim to be a grassroots venture capitalist!
Grameen Bank is another well known pioneer in the world of microfinance; Iqbal Quadir of its grassroots telco spin-off Grameen Phone gave a talk at TED about the benefits of enabling the rural poor in Bangladesh the ability to set up their own local telephone network.
Some interesting companies to watch in the space of ‘P2P finance’ are Zopa (UK) and Prosper (USA). As far as I know there is no Australian equivalent just yet.
Comments»
James,
I am a big fan of Microfinance and have seen the practical results while working on Rural Marketing projects across India. Setting up a mobile eatery wagon, the likes of which are seen across all towns and cities, would cost no more than £500. The working capital requirements are already included within this and there is little need for further cash injections. The average payback period is less than a year and the returns are a modest 5-6%. But the satisfaction of having set up someone for life is immense. So instead of buying the new PS3 for your loved ones, maybe you should gift them with a certificate of investment for one of these ventures. What a great Christmas gift it would make !!
There was an interesting article in The New Yorker about microfinance month or two ago. Millions for Millions, by Connie Bruck. And yep, it’s available online.
http://www.newyorker.com/fact/content/articles/061030fa_fact1
In fact Prof. Yunus won the 2006 nobel peace prize for Grameen Bank you referred to above. Full story here -
http://www.grameen-info.org/Media/recivenobelprize.htm
[…] James Webster, a colleague of mine, has recently posted about Kiva, a non-profit organization that allows individuals to contribute towards microfinancing a venture in the developing regions such as Eastern Europe, Asia, Africa and South America. The thing that struck me about such microlending operations is that they all are non-profit organizations. Startup Journal’s post on microlending also speaks about the issue of associating philanthropy with such operations. […]
[…] my first post about Kiva, I have committed myself to contributing to one new loan per month. Recently Kiva added […]
[…] the end of a previous post on microfinance and P2P lending I mentioned the US firm named Prosper. Now TechCrunch reports that […]