Connected Capital: Leveraging the Web to Propel Large-Scale, Micro Impact Investments

Reporting from SoCap 2010:

Convincing one wealthy donor to invest $50M to provide education loans to underserved individuals seems like a daunting task.  But what about convincing 1 million people to invest just $50 each?  Could you convince the millions of people that make charitable donations every year to instead make a loan to a person for whom more education could generate a threefold increase in income?  This is the premise that Kushal Chakrabarti started with when he founded Vittana three years ago.  The company created the first student loan model in developing countries through an online platform where people provide education microcredits to individuals in impoverished areas.

The biggest obstacle, says Chakrabarti, was that without a proven track record, there would be no investment.  But without an initial investment, there could be no proven track record.  By providing individuals who were willing to take a leap of faith with a platform to make the investment, Vittana is creating the track record for the space and demonstrating that the education their lenders provide generates a 282% increase in income for it borrowers who in turn have a 97% repayment rate.

Online microcredit is a recent phenomenon but quickly growing one.  During his keynote at SoCap 2010, Matt Flannery of Kiva described the online microcredit model as “connected capital.”  This is capital that is patient in that lenders don’t seek immediate returns (if they seek returns at all); democratic in that capital is coming from thousands of individuals around the world; catalytic in that it generates immediate and demonstrable results; and accountable due to the information provided back to the lenders.  Kiva started out as a way to give individuals in developed countries an easy way to invest in entrepreneurs in the developing world.  The idea was to build on traditional philanthropic models like mass mailing campaigns and re-create these online to create a mass of micro-investments.  What Kiva found is that its investors are far more willing to invest in riskier opportunities than wealthy donors who might be tapped for the $50 million investment.  In addition, the lenders are surprisingly high maintenance: they want real time updates on their borrowers and transparent reporting on the impact their money has made.  The web has made connected capital a possibility.

With models like Vittana and Kiva demonstrating the impact and scaleability of this kind of model, the question now is what happens next?  Kiva is seeing an increased number of lenders in the developing world lending to individuals in their own countries or even in developed countries.  This phenomenon is changing the traditional lender/borrower and north/south dynamic that has existed for so many years.  In addition, there is a huge amount of virtual money moving on the web and companies, including Kiva, are now trying to figure out how to turn that into real money.  For example, online game developer Zynga has set up various online donations models where Farmville users can contribute to the rebuilding efforts in Haiti.  Flannery wonders if the millions of Farmville players could use the the virtual dollars they pay to plant crops in the online world to instead help a farmer in rural Africa plant crops in the physical world.

Vale is a second year MBA student at Duke University’s Fuqua School of Business and is interested in how for-profit businesses are finding innovative ways to create social and environmental value and how capital is being driven towards those businesses. Prior to enrolling at Fuqua she was the Deputy Director at Empowerment Group, a non-profit microenterprise development organization based in Philadelphia. This summer she interned with B Lab, auditing certified B corporations and working on the organization’s policy and capital markets initiatives. Vale has a BA in Economics and Political Science from Swarthmore College.

Vale is a second year MBA student at Duke University’s Fuqua School of Business and is interested in how for-profit businesses are finding innovative ways to create social and environmental value and how capital is being driven towards those businesses. Prior to enrolling at Fuqua she was the Deputy Director at Empowerment Group, a non-profit microenterprise development organization based in Philadelphia. This summer she interned with B Lab, auditing certified B corporations and working on the organization’s policy and capital markets initiatives. Vale has a BA in Economics and Political Science from Swarthmore College.