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The Community of Detroit

Sorting through my thoughts about Detroit's bankruptcy (or whatever it turns out to be)

Different ideas about how companies can be organized and run are floating around. What resonates with me are institutions that support communities: "communities" of employees, of local citizens, of people interacting with the natural environment. Too often, though, companies barely acknowledge the importance of these communities while they bend over backwards to better meet the needs (make that wants) of investors.

Many people reflexively respond that the main (or only) purpose of a company is to make money, and that companies must be organized to serve the needs of the "community" of investors.  (They don't). Of course, investors may have no connection to a company at all -- they don't work there, don't live in the towns where their investments are put to work, they may not even like the products the company makes. Yet to business traditionalists -- but not to me -- investors' desire for making money trumps everything else.

I would like to think that when it comes to a real community -- I'm thinking of Detroit -- that we wouldn't even need to question whose rights should be considered ahead of all others: the rights of those who call the community home. Other discussions about social issues can take on a moralistic dimension: deficits somehow correlate with lack of character (though empirical evidence indicates it is appropriate to stimulate a stalled economy); poor people don't deserve to eat; ill-supported (and often mean spirited) advice like that.  

But when it comes to a city -- a place where people live, raise kids, and shape our future -- moralizing or scolding make even less sense. Police, firemen, and other pensioners contributed to the city for years -- some for decades. State law says their pensions cannot be reduced. Those not owed pensions are owed essential services, including timely responses by police and fire fighters, working schools, and working street lights. They did not cause Detroit's decline, but they have suffered greatly from a transformed auto industry and corporations' decisions to decamp to the 'burbs, taking with them their tax dollars.

With change, comes the opportunity to reflect upon new ways of doing business. Shifts in population growth and in spending have made companies aware of new markets in the developing world, if not yet in as dramatic a way at the bottom of the economic pyramid. Similarly, in the next several decades, large-scale transfers of corporate ownership provide an opening for a dramatic shift towards inclusive corporations.

And now Detroit is facing bankruptcy. This grim circumstance creates an opening, too. What kind of city does Detroit deserve to be? Most essentially, for Detroit to "work," people must work. And there is work to be done. With more than a quarter of Detroit's 140 square miles abandoned, projects to raze and re-purpose these properties are being undertaken. Detroit Blight Authority is taking a lead, appealing for federal funds. This is a perfect opportunity for the government to release funds, contingent upon the training and hiring of Detroit's idle workforce. What's more, Detroit can follow the lead of other downtrodden communities, including the South Bronx, to create a green, energy-saving, and even energy-creating city.

Detroit's schools are the next (if not the first) obvious place to make changes. Detroit Public School's newly appointed emergency manager can help foster an environment that couples academic rigor with real-life relevance. If you've followed this blog, you know how high I am on the Network for Teaching Entrepreneurship">, a model that creates life-changing educational experiences for low-income students. 

Even with ObamaCare, negotiating the healthcare maze will be daunting. Programs like Rebecca Onie's Health Leads demonstrate how non-traditional health care workers can help cut through red tape to ease the problems faced by the ill, poor, and elderly. Where Health Leads relies on college students to fill "prescriptions" for food, clothing, housing, etc., Onie suggests that local community members themselves can staff similar positions. Such staffing (jobs!) can avoid expensive emergency room visits and head off long term health problems. Suitably structured and financed (possibly with social impact bonds), hospitals can serve more patients, more effectively, and save money.

As Governor Snyder has been saying, Detroit's problems did not just occur; they've been unfolding over decades, caused in large part by a dis-investment in the city. Now at the point of crisis, we can begin to point Detroit in a new direction. Detroit's resurrection will take time, as did its decline. It will take investment, but investment in, and of, the community. Not investment aimed at making investors wealthy ahead of the needs of the city. 

The city that helped more than any other in winning World War II; the city that created a modern society through the automobile industry and industrial efficiency -- this city needs our compassion and support. This does not mean our charity: for by re-making a working, well-educated, healthier Detroit, we set the country on a stronger course.

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Some businesses go to any extent to get you to buy. The New York Times recently described the lengths stores will go to to make you uncomfortable so that you'll buy more. Why? "Experts" in marketing have discovered that the louder, the more repetitive, the more crowded -- hell, the more irritating -- the more people will buy.

Can't commerce be better than this?

David Merrit, a former University of Michigan basketball walk-on who became team captain, has designed his Merit clothing line, which is comfortable, stylish, and will make you feel good about buying.  Purchases help prep inner-city kids for college and then pay for it.  20% of his sales -- not profits -- go towards paying for kids' college tuition.

David is funding his first clothing line via indiegogo.com, a crowdfunding site. 

David's campaign runs out in 3 days, and he's not at his goal yet. As you may know, crowdfunding sites are all or nothing, so David makes his goal or returns all pledged purchases.

I recently bought myself, my wife, and kids clothing from Merit. Stuff that is tied to making a difference -- not to pushing us toward the edge.

How about you?  Buy good looking, comfortable clothing and other stuff, and help kids have a future they can only dream about. Break the cycle of one kid dropping out of high school every 26 seconds!

Do good with your purchases.  Annoy the marketers! Show them we're not fools.

Go here to buy stuff from Merit now. The campaign ends December 21.
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Presidential Debate: Focus on Inclusivity

If I were hosting the upcoming presidential debate on domestic policy, what questions would I ask?

They would center on inclusivity:

  • How can we challenge the economic beliefs that are holding back our economy?
  • How can we include the poor as a source of resourcefulness, innovation, and business opportunity?
  • How can we better identify and support local (social) entrepreneurs?
  • What urban centers are taking the lead in creating sustainable, inclusive communities?
  • What innovative approaches to education are working and can prepare students for meaningful careers?
  • How does social wellness use existing resources to create more inclusive health for us all?
  • What does inclusive leadership look like?
These broad questions deserve our unwavering attention. No matter how you keep score--99 to 1, 53 to 47, or something else--too many are struggling to have decent life. 

What if I were asked these questions--how would I answer them?

Glad you asked: In my new book Inclusivity: Will America Find Its Soul Again (written with Christian Sarkar, who also created paintings for the book), we tell fifty stories about those who are taking giant strides in tackling these issues. These vignettes tell of entrepreneurs leading a resurgence in Detroit, Tony Hsieh (founder of Zappos) reinventing Las Vegas and David Orr (a leader in the environmental movement) creating the most sustainable community anywhere in the US, the midwest community of Oberlin, Ohio. We tell how poor kids--in our inner cities or equally poor rural areas--are being given new educaitonal opportunities and are rising to the occasion. We tell how doctors are writing prescriptions for food, how struggling high school students become devoted and successful tutors, and how a national entrepreneur identification and training program in South Africa could become a model for the United States.

More inclusive education and health care would go a long way towards fully using the talents of our populace and creating expanded opportunity for everyone--wealthy and poor alike. More inclusive places to live coupled with more inclusive economics would create not just a fairer, but a stronger, country. Those blazing the trail of inclusivity exhibit a kind of leadership that is uncommon--creating value for others first. But it is within the reach of us all.

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A World of Empathy

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I spent last week at the Skoll World Forum in Oxford, UK, a gathering of social entrepreneurs bent on changing the world. 


Ask them what's on their mind, you will often hear "scale."  After all, isn't helping more people better than helping fewer? (And to get investment funding or donations, you better be thinking that way, too.)

Yet I think this emphasis is somewhat misplaced. If you could feed 1,000 hungry people, say, and others who were acting independently of your efforts could do the same, it would only take one or two million such efforts to reach the poorest 2 billions people on the planet (if that was the group everyone was trying to reach). One or two million people acting to end hunger seems like a reasonable number

What about funding? Most funders think with denominators. Again, simple math says that it's not just the number of people that you serve, but the level of benefit in relation to their cost. So, if you and I provide similar support but you're three times as cost-effective, your efforts should be rewarded--no matter which of us has greater scale. And, by the way, the numerator--quantifying the level of benefit--is much harder to determine than the denominator.

All that said, Ashoka's thinking about scale is breathtaking. I had the pleasure, once again, of listening to its CEO and Chair, Bill Drayton, at Skoll.  

If someone other than Drayton were proposing the idea, I might dismiss it out of hand. But, then again, he suggested the idea of markets for tradeable pollution rights--something still considered too avant-garde for reducing carbon in the atmosphere--in the 1970s. He coined the phrase social entrepreneur and, more than anyone else, has made social entrepreneurship a field that is growing in prominence and importance.

And now: He wants to make everyone a "changemaker" by teaching empathy. Everyone? Yes, with an emphasis on teaching empathy to all school-aged children.  

Research has shown that recognizing your own feelings as well as others' sets a strong foundation for creating change. Mary Gordon (no relation) shared the stage with Drayton. Her program, Roots of Empathy, has elementary school children observe a very young baby over the course of a school year, learning to see the world through the baby's eyes, and "experiencing" its needs. In so doing, the school children come to understand their own feelings, leading to less aggressive behavior, better social/emotional understanding, and become more caring.

Drayton believes that our repetition-based way of life is near its end. Instead of following directions by rote, to be a contributor in the emerging world--whether you're a waitress, bank clerk, social worker, or friend--you need to understand the needs of others, and view their "problems" from their perspective so they can become challenges you're equipped to take on.

This is the planetary movement that Drayton speaks of, and is creating. If this sounds audacious, his methods aren't. Relying on a team of teams, selected schools will implement empathy programs in the manner they see fit, sharing their practices, successes, and concerns. Their success will invite others to follow. Ashoka has 700 of Fellows, including Gordon, already working on issues that center on children. Their efforts will be incorporated in this larger effort.   

If one school that is successful in teaching empathy is modeled successfully by two others, and they in turn are each successfully modeled by two more, in just twenty such cycles, more than two million schools will be teaching empathy. (And who better than children to teach new behavior to their parents?)

Two million schools teaching empathy could teach nearly a billion young children to have the essential foundation for successful team work, leadership, and becoming changemakers. These young changemakers will be positioned to have significant impact on the world's toughest problems.   

Within this decade, Drayton expects the world's children to have been taught empathy. This is a model of what he describes as collaborative entrepreneurship, with teams of teams working locally but also in collaboration. With small local gains contributing to staggeringly large effects in aggregate.

Just imagine.  Drayton has, and he's been right before.   

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Detroit, Ghana, and Fashion

Unusual post today: short thoughts and some shout outs. 


Jake Cohen  generously gave me an hour of his time yesterday answering questions about Detroit Venture Partners (DVP),  the Gilbert family of companies, and rebuilding Detroit through entrepreneurship. At the end of our conversation, he mentioned some other people to talk to. One was Jerry Paffendorf, a name that was completely new to me.  After a bit of Google stalking, I've learned that he's doing some truly interesting things including crowd sourcing the ownership of land in Detroit for a buck an inch.  My is-this-synchronicity side noted that he tweets under the name WELLO,  the same name as Cynthia Koenig's company to deliver water to the poor of India. I've been interacting with and supporting Cynthia for several years.
  
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DVP  invests in software and digital companies poised for rapid growth. A "sister" company in the Gilbert / Quicken Loans family, Bizdom,  is a nonprofit that helps smaller entrepreneurs get off the ground with funding, support, and space. Oh, and connections to other companies in the extended family.

Bizdom and DVP share space in the beautifully restored M@dison Building along with other companies connected to the family in some way. One, WedIt.com,  has a small business doing crowd sourced home videos for weddings. I spoke with its founder, Brett Demeray,  about the kind of  connections he'd benefited from. 

Among others were: 
  • support from Quicken Loans' director of marketing in launching an AdWords campaign
  • introduction to Crowne Plaza Hotels so that WedIt  could be in on all the weddings that took place 11/11/11
  • HR training from the head of Quicken's HR department
  • a mockup of the packaging WedIt could use for the cameras they'd send in the mail, courtesy of Fathead, a company in the family.
 The fee for any of these?   "Nothing. You wouldn't ask your cousin to pay you back, would you?"
    
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I had a check-in meeting with David Merritt this week. David continues towards the launch of his amazing fashion brand -- one that will give 20% of its revenues (yes, revenues) to support poor kids attending college. David's company, Merit,  shows how a for-profit company can have, at its heart, an unmistakable ambition  to make a big difference. MERIT is currently exploring its best options for manufacturing its line of clothing and is raising capital for its product launch.
  
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I also had a check-in with Teresa Fisher who, along with co-founder Gilliam Henker, is leading the efforts of DIIME to develop health technologies for infants and mothers in Ghana. DIIME has developed a life-saving, affordable blood transfusion device which has recently been proven effective by independent lab tests and is awaiting animals trials.  DIIME is hoping to do clinical trials with its partner, the Komfo Anoyke Teaching Hospital in Ghana, by the end of the year. 

DIIME is hard at work preparing for future tests and raising the necessary money to support them.

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Make Education Bigger


The four ideas I stress in teaching social entrepreneurship are these: Big Picture Design (which, itself, encompasses "designing everything," and "stealing shamelessly" the ideas of others); Making It Appropriate; Making It Stick; and Making It Bigger.

Most people have a handle on the last item -- Making It Bigger -- equating this with the important idea of taking a small business or non-profit activity and then "scaling it up." But this definition does not go far enough.

Importantly, another kind of scaling up involves increasing awareness--even if that only indirectly leads to an increase in size of a business or some other social endeavor. A wonderful example of this is the well-known series put on at TED.com, where free talks introduce us to remarkably informative video-bites from people with big ideas. But recently, TED expanded its focus to include educators whose powerful ideas can be enhanced via animation and then shared with the world on YouTube.  

What is taught without animation can be brought to fuller life through animation. And this animation-enhanced great lesson can spill well beyond a single classroom to be viewed by anyone, any time. 

TED-ED's role is soliciting ideas for lessons (and the person who can deliver it) and recruiting animators whose work may help crystalize the idea. The award-winning, fee-based program, Hey Math!, is one demonstration of the power of animation in teaching math. Ted-ED promises to extend the range of topics that become more accessible through animation and deliver them to the world without charge.

The launch of this effort is fast approaching. Take a look at this simple, but powerful, way to Make It Bigger.

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Rural Schools Need Help. Here's How.

Matt Salefski was a student in my graduate level class, Solving Societal Problems through Enterprise and Innovation.  He wrote a term paper, which I have modified slightly, that talks about the "hidden" problem of serving the needs of poor, rural students and presents ideas for addressing this problem in a cost effective manner.

The Art of Social Entrepreneurship

I just closed the book on fall  semester.  For the past few weeks, I've been plowing through an eight-inch stack of papers my students wrote on topics related to microfinance, social entrepreneurship, and the base of the pyramid.  

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I'd be lying if I said I never complained about all the grading, but there's a nice upside, too:  Because the assignments I give are open-ended, asking students to think deeply and write about a topic that really grabs them, I feel like I'm crowdsourcing answers to the question "What stuff do you think a professor of social entrepreneurship and microfinance should know about that he might not?" I get the benefit of receiving both interesting ideas and the current outlook and perspective of those I'm trying to reach.

I read about specially commissioned train rides across India to prepare social entrepreneurs; soccer balls that convert kinetic energy into electricity; and a Detroit classroom where students learn about the judicial system by issuing real criminal sentences.  (Sound interesting? Follow this space.)

But one paper stuck out by helping confirm and extend some ideas I was struggling with.  A paper about the video projects that I had assigned my students.

A few years ago, I was at the Skoll World Forum at Oxford. Steve Skoll spoke about his transition from eBay to Participant Media (then Participant Productions), which creates social change through movies.  An Inconvenient Truth, Fast Food Nation, Syriana, Waiting for Superman, The Help -- these and other films attract people wanting a fun night out and, in the process, educate and let people know how they can take action (with respect to the environment, the food industry, global oil, education, and domestic workers in these cases).

I loved the implication that you don't need to join the Peace Corps, start a microfinance institution or work for Ashoka to create social change. And if you could do so as a filmmaker, what about as a a photographer, an artist, a designer, or an engineer?  Indeed, I've thought about this a great deal and have laid out some of my thoughts about looking at the impact you the person or you the corporation can have by exploring the Changemaker's Cube.

Fast forward to last August. I was contemplating how I might gut a course I teach that culminates in students writing business plans for base of the pyramid businesses.  Why would I do that to a highly successful course?  Because, as much as I knew that students were learning from creating those business plans, they were still fictitious businesses.  Students weren't creating genuine impact.

So, I decided my students would create videos for real social enterprises.  Videos with impact.

Early last September, when I told students what their term-end project would be, much was uncertain.  How would they react to the idea of something so, uh, non-academic? How would they learn to film and edit videos? What organizations would the videos support?  Was there any chance this project could even work?

Today, the day ater Christmas, answers have replaced most questions.  Students created videos dealing with health care and microfinance, the revitalization of Detroit and student volunteerism, improving education and creating better food systems.  Sponsoring organizations were located in Liberia, Haiti, and Honduras as well as an hour away in Detroit and a short walk across campus.

Students succeeded in all aspects, from researching their organization, capturing their essence through short videos, and creating calls to action that create awareness for their organization, help with fundraising, recruit volunteers, or provide other forms of support.

But a question remained.  I knew students were engaged by producing their videos, but were they actually engaged in a process that transcended that particular form of expression? 

Jon Hornstein, one of my students, was exploring a similar question and wrote about it in his paper for the course.

The project undoubtedly was a blast for our team.  We each had the opportunity to display a certain talent and use this towards the creation of something that told an important and unique story. We learned a great deal through the process both about the company and social entrepreneurship in general, and we were able to share our creative product with an appreciative audience. So not only was this project a blast, but it was incredibly worthwhile. Yet, for some reason, after its completion, I wondered if we had accomplished what we had set out to do. More poignantly, the question I kept finding myself coming back to was: did we help?
Or, in other words, does art themed around social entrepreneurship truly contribute to the betterment of humanity through business, or is it just purely an art expression for aesthetic purposes. If I am a rapper who writes songs about Social Ventures and different issues going on around the world, am I a social entrepreneur?
Art's role in Social Entrepreneurship is to help a social enterprise gain traction and publicity. But much more than that, art's is to build a bridge ... between the strictly logical and the emotional. By linking hope with memories and inspiring courage, art serves to make tragedies bearable by connecting one's emotions with the cause. 
[And that is also] the essence of social entrepreneurship! It's not just a form of business centered solely on profits, but a form of business that is also about bettering the common good. To better the common good, one needs to have a passion to make change, and this is what art evokes in us. 
The rap song we created for Union Microfinanza doesn't just inform the public about their mission, but it emotionally connects the listener with the problems of Honduras and, hopefully, evokes a sense of compassion among the listener to care about the cause. This, after all, is where creativity and growth stem from in Social Entrepreneurship, through caring about a particular issue and shifting the focus of Entrepreneurship from solely garnering profit, to garnering profit with a greater cause.
So now group beansquad can rest easy, as we truly did help Union Microfinanza in eliciting these emotions surrounding their cause among the video's viewership. We succeeded, after all. That is, if the video goes viral.

Da beansquad's video helps support coffee growers in Honduras who receive support from a microfinance institution specially designed to provide them financial, technical, and marketing support.  Help it go viral by watching it on YouTube.  Or watch it below.
 
Jon Hornstein is the lead rapper in the video.






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Education correlates with income.  Using Ted Rosling's wonderful Gapminder program I've created a graph showing showing how adult literacy correlates with income around the world.

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If you want to see these trends change over time (my chart only shows the situation for 2007), try this interactive animation of the data.

The Bureau of Labor Statistics data for 2010, which I've charted below, show how income varies with education in the United States.

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There is a reinforcing (and unfortunate) symmetry to these data.  Lack of education leads to economic hardship, which leads to a lack of educational opportunity.  ProPublica, the non-partisan, investigative news organization, recently completed a nation-wide study that showed that "poverty [is] the predominant factor in determining the proportion of students in a school or district who were enrolled in higher-level education [such as Advanced Placement courses]."


Can this circle by unbroken?  By and by, let me list two reasons to be hopeful.

College Summit, a Washington, D.C., based nonprofit, works with high schools by providing tools and helping shape their culture to increase the rate at which bright, college-ready students understand that college is even an opportunity for them, and then take advantage of their opportunities.  As the organization reports, "students from the low-income quartile who get get A's on standardized tests go to college at the same rate as their higher income peers who get D's on the same tests."  But with support from College Summit, things are turning around:  Participants enroll in college 22% more than non-participants.  Seven hundred teachers and staff members are trained every year, providing opportunities to 25,000 students.


The Preuss School UCSD, a combination middle school and high school, provides a rigorous, college-prep experience.  It strives to produce students who are accepted at selective four-year colleges.  To achieve its aims, it uses a combination of pedagogy (including tutor-assisted teaching), high tech, and high expectations.  Teacher salaries are about 10 percent below the district and state averages.  The school enrolls 6th through 9th graders who must be motivated and have the potential to succeed academically.  

Most unusually, they must come from poor families (with incomes of no more than 185% of the poverty level; for instance, under $40,793 for a family of four), and their parents or guardians can not be college graduates.  

By 10th grade, approximately nine students in ten is "proficient" or "advanced" in both math and English/language arts, in contrast to half that many at the district and state levels.  By graduation, 100 percent of students meet all state and local graduation requirements, including California's state exit exams in math and English/language arts.  Nine-five percent are accepted to college.  

For  its accomplishments, Newsweek rated Preuss School the country's thirty-fourth best high school, and the number one "Miracle," or "Transformative," high school.

Want other examples of transformation and hope?  Then watch the 80's movie Stand and Deliver about an East L.A. math teacher who took "can't make it" students and taught them calculus.  Or read about the extraordinary teacher, Marva Collins.

Or bookmark this blog and keep checking back.  I'll be presenting other examples, just as persuasive as these, to indicate other ways to change the educational lives of young people, and thus their futures.


Funding poor students could be the next big thing in microcredit and other innovative forms of microfinance that are so new that they don’t even have names.

Microcredit is put to many productive uses: as a cushion against the financial ups and downs of poor people whose lives are so uncertain and so fragile, as support for helping them launch or expand small micro-businesses, and to pay for unexpected “life events” such as funerals or weddings.  None of these is a proven way out of poverty, whereas offering someone the opportunity to receive a college education or training as a skilled tradesman is a much surer path to a brighter financial future.

More than 850 million people worldwide lack basic education.[i] Of these, approximately 40 percent are out-of-school children and youth while the rest are illiterate adults.  Many factors account for this including direct costs from school fees, tuition, books and uniforms, etc; opportunity costs from families forgoing the income their children would earn if they were working instead of being in school; and gender discrimination and other cultural norms.

Among those with a high school education, only 24 percent worldwide go on to receive a college degree or specialized technical training.  This statistic drastically exaggerates the picture in the developing world where, for example, the figure is as low as 10.5 percent in India and just 7.5 percent in China. Lack of funding is often the underlying reason. For instance, if India is to achieve the worldwide average, more than 35 million Indian students will require funds.  

Poor families understand that their children’s education can result in increasing their lifetime earnings and help their entire families escape poverty.  Often as little as $100 to $500 can fund a year of education in a developing country,[ii] an expense most families still cannot afford. Loans for education are typically nonexistent, and when they do exist families fear being crippled by indebtedness from high interest rates. Yet there is compelling evidence from conditional cash transfer programs (where financial benefits are tied to school attendance) to indicate that properly structured incentives can dramatically improve school enrollment, attendance, and achievement[iii].

New models for funding education for poor children are being tried throughout the world.  Below are two examples which together suggest the range of variations being explored.  One is a nonprofit, the other a for-profit; one raises small amounts of money from desktop lenders, the other seeks institutional funds; one makes loans, the other equity investments.  

Vittana

Vittana, a Seattle-based nonprofit organization founded in 2008, raises loans for students in Mongolia, Nicaragua, Paraguay, Peru, and Vietnam[iv] through online, peer-to-peer lending. Peer-to-peer (person-to-person) lending allows individuals, mostly from wealthy countries, to identify college students to whom they would like to make a loan and then effortlessly arrange a transfer of funds.

Lenders give Vitttana $25 or more to fund a particular student.  Once the total from all donations for that student are sufficient to cover his or her educational expenses (average: $655), the funds are released.  Vittana sends money to microfinance institutions in the countries it funds which give the money to funded students.

Though Vittana is just a few years old, it has received more than a half million dollars from lenders in 30 countries, and it is growing at over 30% a month.[v]  What accounts for its success to date?       

  • Vittana targets high-achieving students.  Vittana’s microfinance partners screen loan applicants on the basis of students’ academic records.       

  • The screening makes sure the student loan is for enrollment in a program where the prospects for employment after gradation are good.       

  • Vittana reduces the risk of making loans to students who never complete their education by only funding those in a twelve month or shorter vocational program or who are in their last twelve months of college. Students with more than twelve months of school remaining are less likely to complete their education.       

  • Vittana highlights “high-achieving, deserving” students on its website in the hope that visitors might be inspired to help out.[vi]  Its search engine allows a lender in Lima, Ohio, to find someone and easily invest in someone they want to support in Lima, Peru. This peer-to-peer model might reach millions (billions?) of potential small- scale lenders interested in supporting students in the developing world.       

  • Vittana seeks to mitigate risk from students not repaying their loans in several ways:  by making loans to the children of microloan borrowers with good credit backgrounds; by having students’ mothers or other close relatives co-sign for the loan; and by instituting a year long interest-only “grace” period after the student graduates from his or her program.

By funding only the “last mile” of students’ education and identifying candidates whose employment prospects are bright, Vittana achieves a 95% loan repayment rate.  Its graduates make, on average, two to three times their previous incomes.

Finding successful and efficient MFIs is crucial for Vittana to gain scale and fine-tune the loan product to specific regional circumstances. MFIs are fully responsible for marketing the loan, finding suitable borrowers and managing the customer relationship. Moreover, Vittana  conducts random audits of their partners to ensure that individual lenders’ money is well spent.[vii]

To cover the costs of developing and administering their student loan programs, Vittana’s microfinance partners charge students minimal interest, typically 10-15 percent per year. They receive no funding from Vittana, and every dollar that Vittana sends from lenders goes towards students’ education.  Neither Vittana nor the initial peer lender charges interest, and peer lenders are repaid when students repay their loans.

Vittana recently made a 2010 Clinton Global Initiative commitment, Vittana/Africa: Bringing Student Loans to Africa.  Vittana, in partnership with leading microfinance institutions, will fund African students’ post-secondary education, aiming  to fund the last of mile of the education of 10,000 students by 2015. Students will gain employable skills in fields including nursing, law enforcement, and IT.[viii]  

Lumni

Lumni is an international company that helps finance the college education of poor students.  Operating in Chile, Columbia, Mexico, and the United States, Lumni creates and manages social- investment funds that allow low-income students to pay for college and its funders to receive financial (and societal) returns.

Lumni attracts capital from foundations, funding agencies including the Inter-American Development Bank, and wealthy individuals. It uses this money to fund a portion of a student’s college tuition and fees, but not all.  In exchange, each student commits to pay a fixed percentage of his or her income for 120 months after graduation. The percentage varies from student to student based upon a number of factors including the student’s grades, job, the amount of funding received from Lumni, and the amount of funding from other sources.

The Lumni model shifts risks from students to investors.  Students earning more money after they graduate repay more every month (remember: repayment is based on a fixed percentage applied to a student’s income), and loan repayment amounts will rise, too, as a student earns more over time.  A typical situation is a student who receives $16,000 over four years from Lumni and repays at 4-8 percent of his or her income after graduation.  This is approximately equal to repayment of the principal at an 8.5 percent annual interest rate.  The student’s obligation is complete at the end of 120 months, even if his or her total repayment is less than the amount s/he received.  Lumni also allows students to work in activities like the Peace Corps without worrying about repayment. Under this design, students face little risk of overly burdensome debt payments, providing peace of mind for debt-averse populations that are most in need of funding.

Investors are repaid, with interest, which essentially makes their financing of students’ education an equity investment: The more students earn after graduation, the greater the investors’ financial return.

For its part, Lumni offers career coaching, networking, and technical support to students after graduation.  Lumni receives a fee for raising and managing the fund.

Lumni has raised and obtained commitments of more than $15 million from more than 100 investors. Lumni has financed nearly 2,000 students to date, nearly all from low or very low-income backgrounds where funding recipients are the first family members to attend college.[ix] In addition to the dual financial and social return from their investment, contributors are helping prove an efficient, sustainable new system for giving students access to college without the burden of a traditional student loan.[x]  

Parvati Patil, a Masters in Public Policy graduate from the University of Michigan, brought these ideas to my attention and did the initial research for this paper.  She and I both contributed to this post.  Her blog is available at http://tenmarks.wordpress.com/

REFERENCES
[i] UNESCO, Education For All Global Monitoring Report, 2009 http://www.unesco.org/new/en/education/themes/leading-the- international-agenda/efareport/reports/2009-governance/ (accessed on December 11, 2010)
[ii] John Hatch, Expanding Microcredit Services to Young Adults: Research Findings, Rationale, Blind Spots, and Recommendations, 2004
[iii] Alain de Janvry and Elisabeth Sadoulet, Conditional Cash Transfer Programs: Are They Really Magic Bullets?, 2004 http://are.berkeley.edu/~sadoulet/papers/ARE- CCTPrograms.pdf (accessed on December 11, 2010)
[iv] FAQ Vittana, http://www.vittana.org/faq (accessed on December 8, 2010)
[v] Making the Grade, Economist, http://www.economist.com/node/16996791 (accessed on December 8, 2010)
[vi] Huffington Post http://www.huffingtonpost.com/2009/10/29/huffpost-game- changers- whn337128.html?slidenumber=G6ny07MYCRM%3D&slideshow#s lide_image (accessed on December 8, 2010)
[vii] Next Billion, http://www.nextbillion.net/blog/2009/11/20/vittana- student-loans-and-a-new-generation-of-microfinance (accessed on December 12, 2010)
[viii] Organizational Partners http://www.vittana.org/partners (accessed on December 11, 2010)
[ix] About Us, Lumni http://lumni.net/forpotentialinvestors/ (accessed on December 8, 2010)
[x] Lumni, http://lumni.net/forpotentialinvestors/ (accessed on December 8, 2010)

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