The Entrepreneurs I Met in Uganda and Kenya

(If you haven’t yet read my last post on investing in Africa you can read it here)

The Journey to East Africa

I left my parents’ home in Bradenton, Florida on Sunday afternoon and after a 30 hour journey through Tampa, snowy-D.C. and Istanbul, Turkey I arrived at 2:15am Tuesday at Entebbe International Airport in Uganda. I was so happy to be back in Africa for the third time.

I got through immigration and customs and by 3am came out of the arrivals area at Entebbe to meet Roey Rosenblith and Abu Musuzza, two solar lighting entrepreneurs in Uganda who run VillageEnergy. They very graciously picked me up at such an early hour in the morning.

Roey and Abu have been working for a year and a half now on bringing affordable solar lighting to the 80% of homes without electricity in Uganda. They began their sales back in September 2010 after a year of R&D and production and are now rapidly building out their distribution model for their $60 home solar lighting systems.

I had invested in VillageEnergy back in January 2010 through a personal investment fund the Humanity Fund. There was much to discuss!

We jumped in Abu’s Corolla at the airport carpark and began the hour drive back to their apartment in Kampala. On the way I got an update on Village Energy’s operations. We arrived a little after four back at their place. After a quick demonstration of the VillageEnergy solar lighting system and a heated cinnamon bun (definitely not the first thing I expected to eat in Uganda), I crawled under the malaria net and fell asleep by 5am. We had a busy day ahead!

Tuesday – Kampala, Uganda

I rose at 9am and after a shower and some fresh chapatti and Kenyan tea the three of us went to the Kabira Club for a buffet breakfast.

There at the Kabira Club I met with tech entrepreneurs in a series of meetings Roey had set up.

Here’s are the entrepreneurs I met with  in Uganda.

1. Roey Rosenblith and Abu Musuza from VillageEnergy
2. Charles from Wifi Cloud who is starting a wimax phone routers business in Kampala
3. Saidi Bakenya from One2Net is setting up a digital internet connection service over the TV spectrum
4. Peter Kimuli from Carnelian who is building a micro hydro power plan in west Uganda
5. Peter Benhur Nyeko from Benconolly Pess Ltd, who is in the bus and generator business
6. Charles Kalema, who run a garbage and disposal business with 24 employees
7. Dennis from Dmark Mobile, a mobile apps company with 23 employees
8. Revence Kalibwani, a mobile app developer

Around 4:30pm we went to the Village Energy sales center to meet with their employees Aggie, Alex, Alex, and Charles. We then went to dinner at a local hotel to get feedback from the team on how to improve Village Energy.

At eight we visited Olga, a VillageEnergy customer who lives in area without electricity and has 3 VE units installed.

We capped off the night with drinks at 9:30pm at Cayenne in Kampala with Roey and Abu and their friends Simon, Jennifer, and Dennis. Dennis runs Dmark Mobile, a mobile apps company with 23 employees.

Wedneday & Thursday – Nairobi, Kenya

On Wednesday I woke up at 8am. Roey, Abu, and I drove to Entebbe to have breakfast with Revence Kalibwani, a mobile app developer. Then we went to the airport and I was off to Nairobi on Air Uganda.

Yesterday and today In Nairobi I met with:

1. David Kuria from Iko Toilet, has 50 environmentally friendly pay toilets throughout Kenya. Has raised funds from the Acumen Fund and works with my friend Amon Anderson at Acumen.
2. Elizabeth Myyuiyi from EcoBank Kenya to discuss SME loans and credit. Secured loans are going here for 14% per year and group guaranteed microfinance loans are at 25-30%. (Though the annual inflation here is about 9% so the real interest rates on these loans are lower).
3. Gaita Waimuchii of NetBlue Africa, a web marketing agency, and AfricaPoint.com a 21 employee travel booking company in Nairobi
4. Ben Lyon and Dylan Higgins of KopoKopo, mobile money backend integrator, API connector between MFIs and multiple platform mobile money solutions. Ben is from FrontlineSMS and Dylan is from Savetogether.org. They’re received investment from FirstLight Ventures and Presumed Abundance to date.
5. Jessica Colaco from iHub Nairobi, tech incubator
6. Wiclif Otieno from Kito International, non-profit that employs street-youth in Kenya
7. Morgan Simon, founder of Toniic Impact Investors Network

During these discussions a number of other Kenyan and East African tech firms were mentioned that I’ll have to check out.

• Renewable Energy Ventures, providers of the Solatern and run by Joseph Nganga who is on the advisory board of Carolina for Kibera
• PesaPal.com – mobile money provider, run by Agosto Liko
• Squad Digital, Kenyan ad agency
• Craft Silicon, Kenyan financial software firm with 150 employees
• Kalahari.co.ke, the Kenyan Amazon
• Cellulant Kenya, mobile commerce company
• Virtual City – mobile applications provider
• E-Fulusi, mobile money integrator

I’ll be posting next a report and video from my time this afternoon at the iHub, the tech incubator and innovation hub here in Nairobi.

Asante Sana,
Ryan

Why Invest in Africa?

Jambo from Nairobi Kenya!

I’m so energized. I’ve been in East Africa for the past three days visiting tech entrepreneurs and tech investors.

While I spend about 95% of my working energy focusing on building iContact into a high-growth purpose-driven business, I like to take a couple weeks each year to travel and explore what’s going on with tech companies in other parts of the world.

This week I’m in Uganda and Kenya to find investment opportunities for the Humanity Fund, a personal investment fund I have for investing in African and American tech companies.

Why Invest in Africa?

There is so much economic opportunity in Africa, support for IT investment, and entrepreneurial energy. There’s an opportunity to make a lot of money investing in great companies while creating lots of jobs and doing a lot of good at the same time.

Africa is the least developed continent in the world. There are 1.03 billion people in Africa. Of this 1 billion (source) 65% of Africans live on under $2 per day (source) and 59% of African households do not have electricity (source),  and the number increases to 69% if you only look at Sub-Saharan Africa.

But Africa is no longer about famine, poverty, and war. That was the Africa of the 20th century. The 21st century Africa is about opportunity, technology, and entrepreneurship.

You may read about Sudan, Somalia, Zimbabwe, Eastern Congo, and the Ivory Coast in the New York Times and hear about these countries on the nightly news. But these are only five of the 54 countries in Africa.

The real, untold, narrative of Africa is what’s happening in the other 49 countries. Tremendous economic growth, investment, and rapidly rising living standards. What happened in South East Asia from 1950-2000 (rapid growth and poverty reduction) is now happening in Africa from 2000-2050. Most of the world just hasn’t realized it yet.

Why Invest in East Africa?

Here in East Africa (Kenya, Rwanda, Ethiopia, Uganda, and Tanzania) the GDP has grown at an average annual rate of 7.6% the last four years compared to just 0.5% for the USA. Africa will be the economic lion of the 21st century as McKinsey proclaimed in their July Report, “Lions on the Move: The Progress and Potential of African Economies.”

Take a look at these average annual GDP growth rates for 2006-2009 from the World Bank Development Indicators GDP database.

• Uganda: 8.75%
• Rwanda: 7.925%
• Kenya: 4.375%
• Ethiopia: 10.45%
• Tanzania: 6.675%
• USA: 0.5%

Uganda was the first country I came to in Africa back in 2008 and so I decided to start investing here in East Africa and expand later. I hope someday to run a fund making investments in high-growth socially responsible companies all over the developing world.

Investing As a Way of Making a Positive Impact

This is my third time in East Africa. When I came for the first time in 2008, I held the view that the way to best make positive change was to give money away to NGOs and non-profits.

I come now with the perspective that it takes all three sectors of society (government, non-profits, and for-profits) working effectively to create sustainable economic growth and that the private sector has a huge power to make positive change in the world.

The best way I believe I can contribute to positive change is to help high-growth companies that are creating jobs expand and create more jobs. At the end of the day, the cause of poverty is a lack of jobs and productive capital. Low education, low health care, and low nutrition are the symptoms of poverty, not the causes. If you increase someone’s income they can afford better education, health care, and food for their family.

So now, I believe the best way I can use my experience and resources to make an impact in reducing extreme poverty is to invest in high-growth companies that are creating jobs in developing world.

What I’m best at is figuring out how to grow technology and internet companies. Over the next two years I hope to invest in about ten more privately owned high growth African tech companies as part of dipping my feet into the water and beginning to create a model for eventually building a private equity fund some years down the road.

I hope to be able to eventually show that it is very possible to build a microequity investment firm that gets above market returns investing in high growth socially responsible companies in the developing world.

The field of impact investing is developing rapidly and I’m glad to slowly be learning about it. To learn more check out this Impact Investing Primer from the Rockefeller Foundation and this one from the Federal Reserve Bank of San Francisco.

Existing VC Funds in Africa

In my time here and in talking to people at the Skoll World Forum in April I’ve come across the following funds that are actively making venture capital investments in tech companies in Africa.

1. InReturn Capital
2. BusinessPartners Kenya
3. TBL Mirror Fund
4. eVA Fund
5. Flow Equity
6. FirstLight Ventures
7. Humanity Fund
8. Fanisi
9. Grassroots Business Fund (non-profit fund)
10. Acumen Fund (non-profit fund)
11. RootCapital (non-profit fund)

A more extensive list can be found on the African Venture Capital Association (AVCA) web site. Other resources include the VC4Africa and BiD Network

How You Can Invest in Africa

If you want to invest in private African companies, then you could contact the above VC funds and express interest in investing as a limited partner in their next fund. They will likely require you to be an accredited investor and be able to invest $100,000 and up. You can also find private companies yourself and invest in them directly or join an angel network that invests in African start-ups like Toniic.

If you want to dip your toes into the water of investing in African companies without putting tens or hundreds of thousands of dollars at risk, you can invest directly into publicly traded African companies. There are even Exchange Traded Funds (ETFs) that allow you to get index-fund like exposure to African markets. You can invest as little as $75 in these funds through your broker or your TD Ameritrade, E*Trade, or Scottrade account and participate in the growth of the African economy.

You may want to check out:

• AFK – The Market Vectors Africa Index ETF seeks to replicate the performance of the Dow Jones Africa Titans 50 Index. The fund represents a broad range of sectors and African countries, including exposure to some less traditional, frontier markets. Up 23% in 2010.
• GAF – SPDR S&P Emerging Middle East & Africa ETF. Seeks to closely match the returns and characteristics of the total return performance of the S&P/Citigroup BMI Middle East & Africa Index. Up 22% in 2010.
• EZA – South African ETF, up 29% in 2010.

You can also call your broker and ask them to invest directly in publicly listed firms on the Ugandan Securities Exchange or the Nairobi Stock Exchange.

For proper disclosure, as of this writing I do not own any of these ETFs but might in the future. I am definitely not a qualified securities advisor in any way and past performance is not necessarily indicative of future performance.

Thanks for reading. I hope you enjoyed this post! Please share and comment.

Next, I’ll be posting about the entrepreneurs I’ve met in my first three days here in Africa…

- Ryan, Nairobi, 30.12.10

Maximizing Social Return from The Giving Pledge

I originally wrote this post for the Social Entrepreneurship Section of Change.org. You can find the original Change.org post here or read below.

A Vision in a Time of Peril

It’s hard to see the big picture in times of turmoil. Let’s go back to Wednesday, March 4, 2009. That day, Bill Gates and Warren Buffet, the richest individuals in America, wrote a letter to David Rockefeller, President of the Rockefeller Foundation. The letter suggested a gathering of their billionaire friends to discuss giving.

The letter was mailed in the backdrop of a tumultuous week. By that Friday March 6th, the Dow Jones Industrial Average reached its lowest point in twelve years, free falling 52.9% from two years before in the good ‘ole days of 2007 prosperity.

March 6th, 2009 brings back vivid memories. I was visiting the White House with a group of young entrepreneurs with The Summit Series. The White House Office of Public Engagement had put together the session to discuss their plans for the Economic Recovery Act. As Jason Furman, the Deputy Director of the National Economic Council, spoke to our group, the market was in freefall.

While the media was anointing The Great Recession and debating whether it would become a depression, Gates and Buffet had the fortune and foresight, to bring together their friends for dinner in New York to discuss how to give back.

The Launch of The Giving Pledge

Out of this meeting in New York came an initiative called The Giving Pledge, “an effort to invite the wealthiest individuals and families in America to commit to giving the majority of their wealth to philanthropy.”

So through The Giving Pledge Mr. Gates and Mr. Buffet are encouraging other billionaires to give at least 50% of their net worth away.

In fact, instead of the recommended 50%, Warren Buffett has pledged to contribute 99% of his net worth to charity within 10 years after his death, all to be used for immediate need and none for endowments. Laudable indeed. Buffet writes in his usual matter-of-fact style,

“The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. That reality sets an obvious course for me and my family: Keep all we can conceivably need and distribute the rest to society, for its needs.”

How Much Money Are We Talking About?

Mr. Buffet will perhaps give around $50 billion to philanthropy by the time of his death. Through The Giving Pledge, he and Gates have the opportunity to leverage their influence and connections to multiply their giving many times over and set the example for other billionaires, who can no longer give away just 10% of what they have and feel good about themselves.

The total net worth of the Forbes 400 in 2009 was $1.27 Trillion. If Gates and Buffet convince 20% of these billionaires to give half of their net worth away, they’d be able to drive another $120B into philanthropy, doubling the amount of they themselves can personally give away.

So let’s say The Giving Pledge is successful and it generates another $120B in giving over the next twenty years, or about $6B per year for the next twenty years.

While an additional $6 billion per year can certainly make an impact, this amount pales in comparison to the $3.8 trillion proposed spending in the U.S. Federal Budget for 2011. It also pales in comparison to the $303B in total annual private giving by U.S. citizens.

The Goal: Sustainable Economic Prosperity

The two issues in our world today that are causing the greatest threat to a secure and stable human society with access to opportunity for all are extreme poverty and environmental sustainability. Most people don’t know that 39% of the human beings on this planet live on under $2 per day. If our goal is global stability, not to mention justice, this cannot be allowed in our world. And most of us by now get the global economic and natural disaster that will be caused if we keep increasing our annual consumption of goods without decreasing our carbon emissions.

As an entrepreneur and social entrepreneur, I believe that our mission, challenge, and opportunity as a generation is to create sustainable economic prosperity for all. We will never have a truly secure or stable world until we do. So how can this extra $6 billion per year be used to get the maximum return toward this goal of sustainable economic prosperity?

While humanitarian aid is absolutely necessary and moral, providing funds with this extra private capital for short-term gap filling needs caused by the symptoms of these issues won’t solve the issues themselves.

How Can This Money Make The Biggest Positive Impact?

So how can these funds best be used to generate the highest Social Return on Investment (SROI) and work toward sustainable economic prosperity for all?

The funds of these Giving Billionaires can either be given to address immediate need or invested to change much bigger systemic issues that are at the root cause of so much human suffering. While I do not know which will generate the highest return, I believe that by investing in changing global public policy (in a few select areas mentioned below) to reduce the incentive structures that are at the root cause of much suffering, lack of access to opportunity, and environmental damage these new Billionaire Givers will generate the highest SROI.

In order for this relatively small amount of additional capital to have the biggest positive impact, it must be leveraged. Philanthropic money can be leveraged by investing it in changing how other, larger, capital flows occur within our global system.

To effect real long term global change this $120B should be directed to:

1) Change U.S. domestic policy so we stop spending on the very expenditures that block access of the poorest countries to the market and creates need for more humanitarian aid and philanthropic giving in the first place (e.g. farm subsidies, trade tariffs, some military spending);

2) Influence a change in International Financial Reporting Standards and laws of nation-states so that companies can no longer off-balance sheet their negative environmental externalities;

3) As Nathaniel Whittemore has recommended, invest in social entrepreneurs who can leverage these dollars and markets (the largest capital flow of them all) to create sustainable change with dignity; and

4) Launch a campaign to encourage not just billionaires, but millionaires, to make a giving pledge and generate many trillions of additional dollars to invest in one through three.

Leverage Point 1: Invest in Domestic Policy Changes to Gain Social Return

Imagine the social good that could come from a concerted effort focused on lobbying to reduce the gargantuan $721B per year U.S. military budget (which as of 2008 was 48% of the world total military spending and larger than the next 45 countries combined) by 25% so that we could increase the salaries of every teacher in America by more than 50%.

There are 6.2 million elementary and secondary school teachers in the U.S. according to the U.S. Census Bureau’s 2000 Census. The average U.S. teacher salary was $51,009 according to American Federation of Teachers Survey and Analysis of Teacher Salary Trends 2007. So in total, the U.S. spends around $316 billion per year on teacher salaries. Hence a $180 billion re-allocation from defense to education would enable us to pay teachers 57% more.

Having this type of dollars and cents carrot might just enable Chancellors to negotiate out the single requirement of Teacher Unions that is the most damaging to our children’s education–the inability to fire a teacher who is not performing due to the tenure system, allowing the best teachers to be paid well above $80,000 per year.

Take a look at the below graph showing the allocation of 2009 U.S. Federal Taxes and you’ll see where our priorities seem to lie as a nation (of course noting that most funds for education come from State Taxes). A few billion dollars per year spent on influencing our Government to re-allocate this pie a bit more toward butter and a little less toward guns might just provide a huge return.

Source: Friends Committee on National Legislation Budget Chart for FY 2009

Leverage Point 2: Invest in Global Policy Changes to Gain Social Return

If these giving billionaires that join The Giving Pledge really wanted to get a large social return they would allocate dollars to change the public policies that drive the economic incentive structures that are the source causes of many of the issues.

One of the biggest problems in the world today is of course environmental sustainability. Six billion dollars per year, if the funds were focused, might just be enough to lobby the largest world governments to make a change to their accounting principles.

If companies across the world were required by law (that was enforced) to pay for the replacement of any environmental resource that they utilize such that each company had a net neutral impact on the environment, we’d remove much of the incentive structure that causes investors to seek out companies with the highest returns, which often are companies that unethically but legally have off-balance sheet environmental externalities that are simply passed on to all human beings.

Any philanthropist who can begin to create a tipping point for governments to stop accepting off-balance sheet negative environmental externalities that are not reported in GAAP or IFRS statements would enable the return on their investment to be leveraged many times over.

Change the economic incentive structure and you’ve changed the flow of trillions of dollars of private capital that billions of dollars of philanthropic capital simply cannot compete with.

Leverage Point 3: Create an Investment Fund for Triple-Bottom Line Entrepreneurs

As Nathaniel Whittemore suggested two weeks ago, some of the funds from The Giving Pledge should be directed to a Social Private Equity Fund. Nathaniel writes,

“What I can imagine is an institutional actor whose specialty is helping great social businesses with good revenues get even bigger while retaining their social and environmental missions. These types of firms would bring companies into their portfolio by acquiring some of the stock that had previously been held by investors and founders, in that way providing that liquidity that is missing from the current social finance system without compromising the social mission. This would create more incentives for early stage social investors, and provide social entrepreneurs more plausible returns that could increase the variety of the people thinking about social businesses.”

I agree with Nathaniel that late-stage capital for socially responsible businesses would be a help to provide liquidity, and thus returns, to the early stage investment funds already investing in triple-bottom line entrepreneurial companies.

I would add however, that any company that gets to $30M or $40M in EBITDA positive revenues, regardless of whether it has a core social mission or not, will be able to raise private equity and provide liquidity to shareholders. I don’t think the gap in the market is lack of funding for profitable at-scale social ventures.

The gap in the market is lack of funding and assistance for small-scale socially-responsible businesses that have the desire and dream to grow their impact and their revenues but don’t know how–both in the developed world and the developing world.

The biggest market gap I see is investment dollars in for-profit businesses in the developing world, where “microequity” investments of $5,000 to $50,000 along with some guidance and incubation can generate huge returns for a local entrepreneur who requires capital greater than a microfinance organization can provide but isn’t able to take on the $50,000 to $300,000 that organizations like Acumen Fund are able to invest.

And so, to maximize both financial return and social return for the Billionaire Givers, I would recommend not just a late-stage PE firm for social ventures, but also expanding capital investments in existing or new growth stage funds for socially responsible companies, particularly those in the developing world.

The second area of leverage I see within the world of private capital markets, is to invest in putting pressure on publicly-traded companies to implement strong CSR programs and actually live up to them. A few billion dollars spent buying mass media advertising to publicly encourage (read:shame) large MNCs so they live up to global CSR standards would be dollars well spent for social return.

Leverage Point 4: Invest in The Giving Pledge for Millionaires

While I applaud Gates and Buffet’s effort on The Giving Pledge, in order to enable this pledge to truly make a substantial impact, part of the funds should be directed to extend the effort beyond billionaires and create a new social norm where it is simply expected that anyone who makes way more than they need will contribute half of their net worth by the time they die to making the world a better place.

For the millionaires out there, it will just screw up your kids if you leave too much money to them. So why not ensure your legacy by committing now, publicly, to giving at least 50% away?

There are 10 million millionaires in the world, with a total net worth of $39 trillion according to the 2010 Merrill Lynch and Cap Gemini World Wealth Report. The average millionaire has $3.9 million.

Excluding the $1.3 trillion of the Forbes 400 from this $39 trillion, there is $37.7 trillion in assets among millionaires globally. What if there were a Millionaire Pledge?

If through a directed effort we can get 20% of global millionaires to commit to give half of their wealth, instead of an extra $120B for philanthropy, we’d have an extra $3.8 trillion. If we invest much of this $3.8 trillion in the three key leverage areas to fundamentally change our global economic and public policy system and use the rest to invest in filling short-term societal needs we can make a truly meaningful impact in the world.

Every multi-millionaire should commit to giving at least 90% of their wealth away by the time of their death. I made a commitment to do this in 2008 (in my book Zero to One Million) and will uphold this commitment. You can’t take money with you.

So who will take up this charge? And what do you think about these four areas of recommended investment?

Microequity at Skoll World Forum on Social Entrepreneurship

What Comes After Microloans?

As a technology entrepreneur and angel investor in both North Carolina and East Africa, I’ve been thinking about what comes next in microfinance? To me, it’s microequity.

I had a fascinating breakfast this morning here in Oxford on the topic of microequity. The field of microequity is nascent, but rapidly growing. To me microequity is investing small amounts in for-profit socially responsible companies, particularly those in the developing world. I’d consider the core of microequity investment ranges are between $5k and $100k in for-profit socially responsible companies in the developing world.

Microequity investing can fill a tremendous need for capital for SMEs that can help a small business grow when microloan maximums have been reached but an entrepreneur is not yet able to access banks and larger scale institutional investors.

Effectively, microequity can be seen as seed funding and angel funding for companies in the developing world–with the exception that investing $25,000 in an existing company in the developing world really is growth capital rather than seed capital as this amount of capital can go much further and in some cases get a company past cash flow positive.

A Model for Microequity

From my vantage there seems to be a profitable (and hence scalable for greatest social impact) model that is now being developed investing in these microequity capital ranges in many parts of the world and filling the gap that sometimes exists between microloans, banks, non-profit investing funds, and institutional capital while creating tremendous social impact through sustainable job creation and economic development.

Overhead costs, deal selection, accounting transparency, and methods of obtaining the return are perhaps the most challenging obstacles to achieving a market rate of return to the investment. We talked about how all of these challenges can be overcome. There is such a huge gap here that traditional finance has not yet solved and there so many high quality opportunities to invest in while making a tremendous impact.

One suggestion centered around taking a pre-agreed upon percentage of free cash flow (FCF, or effectively net profits) that is pre-agreed upon in advance. Another suggested revolved around tying returns to a revenue multiple since EBITDAs are easier to manipulate by non-audited smaller companies.

Personally, my interest is in helping small, high potential companies based in the developing world owned primarily by local entrepreneurs access the mentorship and financial resources they need to grow into the future leading companies in their respective countries and eventually take their firms public on regional stock exchanges when run. It will likely take a couple decades to bring together the educational (human capital), governmental, and infrastructural resources needed to help small companies run by smart ambitious local entrepreneurs thrive–but the trend toward local entrepreneurial-led (often ICT-related) economic growth is already happening in Kampala, Kigali, Dar es Salaam, and Nairobi and so many other emerging markets globally from what I’ve seen.

To me, small business growth is the key to sustainably growing an economy and effectively increasing per capita incomes (otherwise known as reducing the number of people in urban and rural areas in poverty) and I believe through the right local trust networks for deal flow and local entrepreneurial support and mentorship models it is quite possible to achieve very strong returns investing today in high-potential for-profit socially responsible companies in the developing world.

Not Replacing NGOs, Non-Profits, and Public Sector

Investing in for-profit socially responsible companies in the developing world does not replace the need for a strong effective transparent public sector and does not replace the need for investments from non-profit organizations and NGOs.

Rather, it is additive to creating sustainable bottom-up economic development that creates local constituent-based growth in a way that reduces inequality of opportunity–and it happens to be where I think I can add value with my background as a venture-backed technology entrepreneur at some point.

Creating a venture capital fund that puts social return equal to financial return is something I hope to focus on someday down the road and create a scalable model that provides market-rate returns (15-20% per annum) investing in high-growth entrepreneurial ventures in the developing world run by local entrepreneurs (likely in the energy, solar, water, agricultural, low-cost medical device, software, and Internet fields).

Microequity Breakfast This Morning at Skoll

The microequity breakfast attendees this morning were:

Forrest Metz, Dev Equity, based in Oxford
Ryan Allis, iContact, based in North Carolina USA
Allan Barkat, Dualis, based in Israel
Naoko Felder-Kuzu, Socential, based in Zurich
Ron Boehm, Boehm Gladen Foundation, based in California, USA
Rob Pettit, Sumaria, based in Dar es Salaam, Tanzania

We chatted about a number of social venture funds investing in equity in the developing world such as GrowFin, BusinessPartners, TBL Mirror Fund, InReturn, ManoCap, and Jicana.

We had a great discussion around the technical structure around how to achieve market-based returns investing in for-profit socially responsible companies in the developing world.

We also talked about networks of socially responsible investors including Social Venture Network, Aspen Network for Development Entrepreneurs, and the Global Impact Investing Network and marketplaces for entrepreneurs in the developing world raising capital like BidNetwork and NeXii.

Questions & Comments?

What questions are there on this topic of microequity and investing in companies that create social good while achieving market returns or above market returns? I’d love to discuss this more!

Endeavor – Promoting Entrepreneurship in Middle-Income Nations

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A Non-Profit Profile By Humanity Campaign Writer Ebs Sutton–

Recently, a non-profit organization by the name of Endeavor was profiled in the July issue of The Economist, in an article which gave rave reviews of the group’s commitment to providing not just access to opportunity, but access to the mentoring and investment which turns opportunity into actuality.

When it comes to promoting entrepreneurialism in developing nations, Endeavor believes that a significant part of the problem is not just a lack of access to entrepreneurial possibilities, but a lack of access to the modeling and mentorship which are available in places like the United States. Endeavor seeks to address this need by using successful high-impact entrepreneurs in developing nations to select and mentor budding entrepreneurs in developing nations.

The Purpose of Endeavor

Endeavor is a non-profit organization whose vision is to change communities and countries by promoting entrepreneurship where it is needed most. Using their internal Search and Selection teams as well as panels of successful entrepreneurs from across the globe, candidates for the Endeavor program undergo a rigorous selection process which can take up to 18 months. Endeavor uses six main criteria to evaluate candidates:

• Entrepreneurial Initiative
• Business innovation
• Value and Ethics
• Role Model Potential
• Development Impact
• Fit with Endeavor

Additionally, through the course of this process, each entrepreneur is given valuable feedback and advice, whether or not they are selected. Once entrepreneurs are selected according to the criteria, they are set up with mentors and access to support and advice. Endeavor matches the entrepreneur with selected mentors who can help him or her with specific challenges faced. Some Endeavor Entrepreneurs can have over a dozen mentors.

Interview with Elmira Bayrasli

I had a chance to interview Elmira Bayrasli of Endeavor’s Outreach Team via email. She described the Endeavor process this way:

“Generally Endeavor looks for high-impact entrepreneurs who are leading companies that are generating between 500K to 20 million in revenues; and entrepreneurs who have role model potential – who will give back to their emerging market communities and not only inspire, but lead, mentor and support aspiring entrepreneurs. Endeavor Entrepreneurs generally are those who have a business that has great high-impact potential to go to scale – to create jobs, generate revenues and investment opportunities.”

The Process

Here is an image showing their selection process from their 2007 annual report:

Many selected entrepreneurs go on to become mentors themselves. Some serve as panelists or as members of local boards of directors.

Before this process even begins, Bayrasli says, Endeavor does its homework:

“Before Endeavor starts to identify and support high-impact entrepreneurs, we spend quite a bit of time building local operations. Endeavor will only launch its ‘mentor capitalist’ model for high-impact entrepreneurship in countries where there is actively backing and engagement from leading business talent and recognized leaders. These individuals form the basis for Endeavor’s local board of directors.”

Here is a graphic that shows the Endeavor “idea to impact” process:

Examples of Success

This year Wences Casares became the first Endeavor Entrepreneur to join Endeavor’s Global Board of Directors. An Argentinean entrepreneur, Casares founded Patagon, an Argentinean online brokerage; Wanako Games, a developer of video games fueled by Latin American creativity; and Lemon Bank, a Brazillian bank designed to help the poor.

Of the roughly ten Endeavor Entrepreneurs profiled on the Entrepreneur website, one in particular stood out to me. Natallie Killasy began a company called Stitch Wise which sews mine safety gear in the Gauteng Province of South Africa. After realizing how many miners were seriously and permanently injured in mining accidents, she customized sewing machines to provide work for disabled miners. The products started as protective rainwear and eventually moved into safety equipment to prevent underground collapses. According to the Endeavor website, “these products are now industry standard and are critical to the industry.”

Some Reader Criticisms

Five out of the eight responses to the article posted on The Economist expressed concern. One concern is that Endeavor is addressing the wrong issues when it comes to entrepreneurialism in developing nations. It is stated main challenges faced are not a lack of well thought out ideas or good business strategy but rather the bureaucracy, corruption, unreliable infrastructure and poor access to loans which plague most emerging economies. Another concern is the Endeavor selection process and its rigorous search for entrepreneurs already brimming with potential. The term “picking winners” appeared twice in reader feedback, seeming to imply that Endeavor has an ulterior selfish motive. If Endeavor strives to “picks winners”, one wonders, are they truly developing an entrepreneurial spirit or just helping an elite few gain their feet?

From my perspective, Endeavor appears to be effectively carrying out its mission and creating lasting positive change in developing nations. Certainly the concerns Economist readers raise regarding the “real” challenges facing entrepreneurs in developing nations are undeniable. I spent 13 years in one of the poorest, most corrupt countries in the world and witnessed the bureaucracy, unreliable infrastructure, and corruption firsthand. However, it takes one look at the Endeavor site to see the statistics supporting their success in countries such as Brazil, South Africa, Argentina, Chile, Uruguay and Mexico. Endeavor currently works in 11 countries and hopes to expand its reach to include even more.

Picking Winners

Although it may seem that Endeavor only helps an elite few, “picking winners” could be a necessary part of smart strategy. With all the possible Endeavor Entrepreneurs and limited Endeavor resources, Endeavor has to pick entrepreneurs showing the most likelihood of success. It’s about investing precious time and resources wisely it seems.

At a relatively young 11 years old, Endeavor is a welcome addition to the scene of international sustainable development.This noted, it has so far focused its work in middle-income countries like Argentina, Brazil, and Turkey and not in the most impoverished “developing countries” where arguably they could create more social value. Though certainly not the only organization addressing entrepreneurial needs in developing countries (Technoserve, for example, has a very similar purpose) Endeavor is energetic and effective in fulfilling its purpose.

Financial Markets: 3 Predictions | Dare Mighty Things

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I may be wrong, BUT…

(Update 4/1/2009 – Wow, was I wrong or what! I’ve learned a lot.)

1. This is the End of the Financial Crisis–

This is the end, not the beginning, not the middle. AIG will likely get a $85B-$90B bridge loan from the Fed backed by company assets in exchange for a majority stake in the company. The Dow will continue its rise in the morning with the news of AIGs stabilization. Based on March market capitalization, AIG It is five times bigger than Lehman. AIG is the 13th largest company in the world according to the Fortune 500 versus 37 for Lehman. It is an insurance and annuities company mainly and not a broker. It affects Main St. Americans much more than Lehman did. It can’t, and won’t be liquidated.

2. Oil Is At a Bottom–

Oil is at its bottom. Remember $88.90 per barrel, the bottom today before it started rising at 2:30pm. It is the lowest we will see a barrel of oil sell for in the next fifteen years until sustainable energy technology (“ET” as Friedman calls it, “ST” as Sachs calls it) creates green power at a price/KWH that is lower than fossil fuels can and transportation fully converts to electric ( reducing global demand for oil significantly and possibly reducing the price under today’s price). Oil will trend upwards, more slowly, toward $150/barrel by the end of the decade.

3. The Dow and S&P Have Reached Their Bottom–

The DJIA has reached it’s bottom. Remember 10,742.70, the bottom today at market open. It’s the lowest you’ll see the DJIA go in your lifetime. The underlying profits and productivity of American businesses are simply too strong to justify the S&P 500 the same level it was at in December 1998, nearly ten years ago when the U.S. GDP was 58% lower than it is today (8.7T vs. 13.8T).

This graph shows the S&P 500 at the same place it was in December 1998. Today’s bottom was 1174.

I may be wrong here, BUT… I sure hope I’m not.

The Influence of Hank Greenberg on the Fed

As an aside, Hank Greenberg, a WWII hero and the former CEO of AIG for 37 years, has had quite a bit of influence on the Fed policy vis-a-vis AIG it seems. I heard him on Bloomberg radio today sounding like Mikheil Saakashvili on CNN five weeks ago when Russia was “invading” Tskhinvali. Greenberg wrote earlier today in the Financial Times:

“AIG is not an ordinary company. It has opened markets all over the world and, for more than three decades, stood at the vanguard of the liberalisation of the global trade in services. Its stock is owned directly or indirectly by millions of Americans. And it has contributed significantly to US gross domestic product directly and indirectly over the four decades of its existence. But all that is not why it should be saved. AIG has a trillion dollars in assets. It can (and always has) serviced its debt. With the right leadership, it will continue to do so. Action is needed now: AIG needs immediate help, because the threat to our financial system is real. For that reason, if private capital cannot rescue AIG, a temporary federal bridge loan – not a federal bail-out – is in order.”

Review of The Winning Investment Habits of Warren Buffet and George Soros & Three Questions

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I only had 38 emails going into today compared to the usual 450 (mainly because of having a 4 day week and actually not having such a crazy schedule that I couldn’t answer them during the week) so I’ve been able to spend the past ten hours reading The Winning Investment Habits of Warren Buffet and George Soros, a book I picked up yesterday. The author Mark Tier has come up with 23 investment habits of the ‘Master Investor’ that both Soros and Buffett have shown. Tier also talks about the background, styles, trades, and philosophies of Benjamin Graham, Carl Icahn, John Templeton, Peter Lynch, Philip Fisher, Jimmy Rogers, and Jesse Livermore. I’d say the book was good and would recommend it to anyone fairly new to investing or someone looking to understand how to control the psychological and emotional side of investing and be presented with a view of different systems that have been effective. I would probably not recommend it to an advanced investor with many years of experience, unless they feel like they are in need of focusing on improving their emotional control and are looking for a new systems.

I wanted something that could present a fairly simple and straightforward strategy while helping me develop the mental guidelines to not let emotions control investment decisions. My only suggestion for improving the book would be for it to provide more information on the specific how’s of getting started with a strategy.

The depth of the history behind Buffett and Soros’ trading philosophies that Tier shared was very interesting and inspiring. I find it quite amazing how Buffett and Soros have been able to obtain 24.4% and 28.2% average annual investment returns since 1956 and 1969 respectively. While I have read books about and by Buffett before, after reading this book I know even more that I am much more attuned to the Buffett style of fundamental investing compared to the Soros style of technical investing–though some of his investing based on economic and geopolitical events I could see myself someday modeling. At the end of the day I prefer looking at P/E, ROE, the competitive landscape, and management quality and investing in companies and people rather than candlesticks or directional momentum arrows.

Personally, I have about 5% of my liquid assets in an account I manage and the rest in an account managed by professional money managers. I will probably keep it that way for a few years as for now I feel my time can best be spent working to build the value of iContact. I do want to keep learning and start to spend an hour or week or so making investment decisions for the TD Ameritrade account, so I figured I would start again by reading a book that can help me simplify and add to my personal equity investing beliefs. I have followed the philosophy of Buffett (value investor based on fundamentals) in public equity investing so far (as well as some safer index fund strategies) and wanted to learn more about his strategies.

Until I have much more time to devote to the effort, I will likely never come close to reaching the percentage return levels from public company investing that I can achieve in investing in my own private company (being an ultimate inside investor as Kiyosaki calls it), but someday I would enjoy managing a fund that invests in both public and private companies–so I figure I should keep learning a little bit here and there as I can. Some of the topics in the book like competitive advantage, control-over-emotion, and stock evaluation will be helpful in the continued day-to-day building of iContact.

Now wanting to learn more about the specific Buffet strategy of value-based fundamental investing, I will probably try to find a book that details how to develop a system based on this philosophy and how specifically to find great companies with great teams at periods during which their stock is undervalued by the market. I do have three questions after reading the book that I would welcome any advice on in the comments:

1. How does one know when a company is trading at a stock price that is sufficiently low to buy shares. What quantitative measures other than ROE, P/E are good to look at and what are the targets for these figures? What qualitative measures other than competitive landscape and management quality are good to look at? Obviously Buffett wants to buy companies that are valued at less than the present value of their future cash flow–but what are the main determinants in predicting cash flow 10 and 20 years out?
2. Tier spoke a lot in his book about Buffet and others going to talk to management teams before making buying decisions. I am a bit unclear regarding the rules for what constitutes illegal insider trading in the U.S.? How is it that you can speak to the management teams to get insight on their business and their competitors’ businesses without it being classified as illegal insider information that you cannot trade based on?
3. Tier talks about taking losses quickly, beating a hasty retreat and admitting mistakes, but what is Buffet’s guidelines for getting out and admitting a mistake? Per page 85 he says When the business no longer meets his criteria. When it’s broken and we can’t fit it. To me, this means a fundamental shift in the company’s management, earnings results, or product prospects–and nothing to do with the price. Is there a metric-based guideline that is good to have (10% earnings drop, 15% price drop). How do you know when to admit your mistake and move on in a public equity investment?

Below are my notes from the book. Off to write up my Directors’ Report for last week and compile survey results. I truly do love Sundays.

Notes from The Winning Investment Habits of Warren Buffet and George Soros by Mark Tier

1. Don’t buy a stock when you expect the price to go up. Buy it when it meets your investment criteria.
2. Intriguingly, often when the market is collapsing, investment professionals suddenly discover the importance of preserving capital and adopt a wait and see attitude, while investors who follow the first rule of investing, never lose money, are doing the exact opposite and jumping in with both feet.
3. When you can’t find an investment that meets your criteria, don’t invest at all. Put it in T-bonds.
4. Only invest when you can buy at a price significantly below your estimate of the business’ value. (the margin of safety)
5. Buffett’s only concern is whether his investments continue to meet his criteria. If they do, he is happy–regardeless of how the market might be valuing them. He simply doesn’t care what the market is doing. He wouldn’t mind if the stock market closed down for 10 years.
6. Graham’s ideal investment was a company that could be bought at a price significantly below its liquidation or book value
7. Anecdote about Mr. Market and his whims and changing emotions. The more manic-depressive his behavior, the better for you. At times he falls euphoric, at other times he is depressed.
8. Mr. Market is there to serve you, not to guide you. It will be disastrous if you fall under his influence. Use your own, independently derived standard of value for determining when a business is cheap or expensive.
9. One way or another, the market is always wrong.
10. Buffet started with Graham’s model but became influenced by the Fisher model starting in 1963 with his purchase of American Express (after his partner Charlie Munger’s influence, who he met in 1959).
11. Fisher – Reading the printed financial records about a company is never enough to justify an investment. One of the major steps in prudent investment must be to find out about a company’s affairs from those who have some direct familiarity with them.
12. Fisher – If the job has been correctly done when a common stock is purchased, the time to sell it is–almost never. His average hold was 20 years.
13. There are only 3 times to sell a stock–when you’ve found you made a mistake, when the stock no longer meets your criteria, or when you find a fantastic opportunity and the only way to buy it is to sell some stock.
14. If there is one factor that sets the Master Investor apart, it is the amount of thinking they have done.
15. To Buffett, a company’s worth is the present value of it’s future earnings.
16. Companies that focus on making their moats (of competitive advantage) wider and deeper, and fill them with piranhas, crocodiles, and fire-breathing dragons, are what Buffett is after.
17. Diversification is for commoners.
18. The right amount of a good investment to buy is as much as possible
19. Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing. — Warren Buffett
20. The opposite of diversification, concentration in a small number of investments–is central to both Buffett’s and Soros’ success.
21. To Soros, investment success comes from preservation of capital and home runs.
22. Soros incorporated the Quantum Fund in a tax haven, the Netherland Antilles, so it can compound its profits tax-free.
23. How did Soros and Rogers find stocks? They read. Intensely. Trade publications like Fertilizer Solutions and Textile Week were common.
24. Read annual reports of the companies you plan to buy–as well as those of their competitors.
25. You make your money when you buy
26. Monitoring your investment after you make it is just as important as buying
27. Story of Harold saying, How would you like to be the target of a class-action lawsuit on behalf of the minority shareholders for failing to maximize this company’s value?
28. The Master Investor has the patience when he can’t find an investment that meets his criteria to wait indefinitely until he finds one that does.
29. Soros insists on formulating a written thesis before taking a position.
30. Soros – To be successful, you need leisure
31. The Master Investor acts instantly when he has made a decision.
32. The Master Investor never makes an investment without first knowing when he is going to sell (based on pre-set criteria)
33. The Master Investor almost never talks to anyone about what he’s doing. He is not interested or concerned with what others think about his investment decisions.
34. In evaluating people, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. – Buffett
35. Warren gets people to work their butts off after he buys the business. Now that’s a good skill to have.
36. Buffett’s two roles are 1) capital allocation and 2) to motivate people to work who simply have no need to
37. One of Buffett’s conditions when he purchases control of a company is that the existing owners stay on to manage it. Part of his success is choosing to only do business with people who simply love their work the way he does.
38. Munger – I had a considerable passion to get rich. Not because I wanted Ferraris–I wanted the independence.
39. If you are inspired by what you do, then any money you make while pursuing your goals is merely a side effect.
40. Buffett – Money is a byproduct of doing something I like doing extremely well.
41. When Soros burned out in 1981, he was already worth $25 million, but he had no accomplished what he set out for in life.
42. Soros wants to write a book that will be read for as long as civilization lasts.
43. For Buffett and Soros, making money is a means to an end, not an end in itself.
44. The artist has a vision of his painting–of his ultimate goal. When he paints, his focus is on his craft, on the way he applied his brush to the canvas. He is absorbed by the process of paining. When he is totally involved in what he is doing, the master painter enters a mental state called flow. Flow is a state where absorption is so complete that one’s entire mental focus is on the task being performed.
45. Buffett- The first question I always ask myself about a business owner is: Do they love the money or do they love the business, because the day after I buy a company, if they love the money, they’re gone.
46. Neither Buffett nor Soros have passed the Series 7 exam. Soros took it and failed. Buffett was the CEO of Salomon Brothers and never took it.
47. The Master Investor puts his net worth on the line and has most of his net worth in his company.
48. Carl Icahn’s strategy is took take large positions in ‘undervalued’ stocks and then attempt to control the destinies of the companies in question by a) trying to convince the management to liquidate or sell the company to a white knight b) waging a proxy contest, or c) make a tender offer or and/or d) selling back our position to the company.
49. They buy companies trading at or below book or liquidation value where no one including incumbent management had a significant stake in the company.
50. He would create confusion in the market place by talking and talking and talking to keep the management off guard–he would sow confusion.
51. Alfred Kingsley joined Icahn as his associate in 1968
52. They then seek a seat on the board. Icahn is actively involved in creating his own exit path by finding the highest bidder.
53. Icahn’s biggest mistake was buying TWA in 1985
54. Templeton – Buy in bear markets. The best time to buy is when the markets are down and most investors, including the professionals are too scared too invest.
55. Templeton got a Rhodes Scholarship after finishing an economics degree at Yale
56. Templeton moved to the Bahamas so he could live there tax-free. Templeton views his money as a sacred trust that he can use to help other people.
57. Templeton shorted individual dot com stocks in January 2000 systematically 11 days before the 6 month lockup period was set to expire and made $86 million.
58. Buffett and Soros believe that they deserve to succeed and make money and that they are in control of their own destiny.
59. The strategies were: Buffett-Buy a good business that can be purchased for less than the discounted value of its future earnings. Soros: Buy (or sell) an investment that can be purchased or sold prior to a reflexive shift in market psychology/fundamentals that will change its perceived value substantially. Icahn – buy a company with no controlling shareholder trading below its breakup value that’s a potentially appealing candidate for a takeover. Graham – buy a company that can be purchased for substantially less than its intrinsic value.
60. One investment approach is to find good investments by reading and then talking to managers, competitors, retailers, suppliers, and others in the business.
61. A complete investment system has detailed rules covering what to buy, when to buy it, what price to pay, how to buy it, how much to buy as a percentage of your portfolio, monitoring the progress of your investments, when to sell, portfolio structure and the use of leverage, search strategy, protection against systemic shocks such as market crashes, handling mistakes, what to do when the system doesn’t work

NC IDEA Funding

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Broadwick closed on $500,000 in an initial round of funding today with local investment firm NC IDEA. We’re quite excited about the financing. Additional coverage can be found at the LocalTechWire, Triangle Business Journal, Carolina News Wire, and Tech Journal South.