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I was recently referred to an article written by Niti Bhan entitled "Emerging Markets as a Source for Disruptive Innovation: 5 Case Studies." I have my own blog, Disruptive Leadership, in which I frequently advocate the importance of embracing disruptive forces in product innovation and business model development.

I wrote a piece a year ago called "It happened first in emerging markets" in which I made a similar argument as Niti. In this article I used the example of SMS-based banking services, a phenomenon that started first in developing countries like Kenya, predicting that these service swould eventually make it into mature markets. (Mobile money is also one of my predictions for the top ICT4D trends for 2010.) Text-based bank services are still limited in mature markets, and may take a permanent back seat to full-service banking applications on smart phones (I have three banking applications on my iPhone).

This topic, the importance of emerging markets in driving disruptive innovation, isn't new to Next Billion. In 2006, John Paul wrote the article Innovation Blowback, in which he reviewed a Mckinsey report "Innovation Blowback: Disruptive management practices from Asia." He started by summarizing the concept of disruptive innovation as described in the Innovator's Dilemma by Clayton Christensen, and concludes that Western companies who ignore the importance of emerging markets do so "at their own peril."

Coming across this article recently gave me a bit of deja vu. When I started as General Manager of Intel's Emerging Market Platform's group in early 2005, there were three sources I was touting as "bibles" for those that joined my group: 1) Innovator's Dilemma, 2) The Fortune at the Bottom of the Pyramid", and 3) Innovation Blowback: Disruptive management practices from Asia. I even summarized these in a power point presentation that was used in developing the business plan for the group.

In Niti Bahn's article, she also begins her argument by referencing Christensen's Innovator's Dilemma (something I've done many times as well). She correctly uses the netbook market as an example of a disruption that started first in emerging markets. Both Negroponte's "One Laptop Per Child" and Intel's Classmate PC were the first to tout the importance of stripped down, cheap laptops for school children at the BoP. But netbooks didn't truly take off until Asus and Acer embraced the segment and found large demand in the developed world. Niti then goes on to list four other examples, including alternative power sources and "re-imagined" household appliances.

The rationale for why emerging markets are a source for disruptive innovations is simply because in order for a product or service to be successful, it has to be more affordable, easier to use, and offer more value then existing products on the market.

Using the netbook example, does it pass this litmus test? Netbooks are more affordable then notebooks. They typically have a simplified operating system or user interface that is easier to use. And they are providing something clearly of value to under-privileged students: access to a computer, the internet, and mobility.

I have found that many companies seem to focus more on affordability and less on ease-of-use or real value. Companies that embrace all three aspects find success. A source of many other great examples comes from the book "The Fortune at the Bottom of the Pyramid" by CK Pralahad, a piece of work so critical to business theories on the BoP that it was likely instrumental in the creation of Next Billion.

Wouldn't it be great for those of us who are passionate about disruptive innovation and the BoP to have a book co-written by Clayton Christensen and CK Prahalad? If you know of one, let me know.

Until then, fill your appetite with an article on the BoP by Mr. Christensen titled The Great Leap: Driving Innovation from the Base of the Pyramid or a summary of Mr. Prahalad's 12 Principles of Innovation for the Bottom of the Pyramid. 

The year started with the Mother of All Disruptions as the world teetered on economic and financial collapse. The technology industry withered in general due to lack of demand. Intel, for example, reported its first loss in 21 years in the second quarter.  As we head in to 2010, things seem to be on the mend, albeit slowly. 

I thought I'd jump on the new near "top trends" bandwagon and provide some observations of my own for information technology's role in development (ICT4D). 

1. Netbook-fever and 1:1 computing in education begins to fade into the background. Ever since Nicholas Negroponte launched the One Laptop per Child project and Intel followed with the Classmate PC, the buzz has been about netbooks for classrooms, or 1:1 computing (one computer for each student).  The reality is that the majority of netbooks sold are not sold to schools, but to middle class  consumers who are looking for a smaller notebook form-factor.  In my 2009 travels, Ministries of Education in Latin America seemed to be the most notebook centric.  Peru had purchased 150,000 XO laptops.  Chile wouldn't even consider anything that wasn't mobile.  As governments budgets come out of lockdown, I predict that they will look for more affordable and realistic options, such as PC labs and desktop computing.
2. Alternative computing models "cross the chasm." A desktop PC or notebook computer has typically been the primary way people in the developing world get exposed to computers and the Internet. That is changing rapidly with the introduction of solutions that significantly lower acquisition and maintenance costs, and provide increased energy efficient over a standard PC or notebook.  For example, the company I currently work for, NComputing, sells a product that allows up to 30 users to share one, inexpensive desktop PC by hooking up additional monitors, keyboards and mice to small access devices that costs about 75% lower than a PC and use 90% less energy.  In 2009, NComputing reached 15% of the US market desktop computers in K through 12 education.  Microsoft has also embraced "shared computing" for education, announcing a new product called Windows Multipoint Server that will be available later this year.  Many developing countries, such as India, Brazil, Pakistan and others, now allow these type of solutions to be bid in addition to standard PC's and notebooks.  Just as shared access will prevail over 1:1 computing, virtual desktops will become an increasingly popular option given the tremendous cost savings over traditional desktops.
3. Creative capitalism takes root.  It was just two years ago that Bill Gates presented the concept of creative capitalism at the World Economic Forum at Davos.  For the last two years, venture capitalists, social enterpreneurs and non-profits have gathered in San Francisco for the Social Capital Markets conference to discuss ways of driving social change through profitable means.  In 2009, attendance was twice the previous year, and they lured Sonal Shah, the director of the new office of social innovation in the Obama Administration.  These conferences are going regional as well.  The Social Enterprise conference for Latin America will be held next week in Miami. I argued on Next Billion in December 2008 that the economic crisis could be "the catalyst for social entrepreneurship."  Four months later, BusinessWeek did a special report titled Social Entrepeneurship Takes Off. While it is hard to measure if and when this will start happening, if BusinessWeek does a special report on a topic, that topic is clearly hitting the mainstream.
4. Mobile money comes to mature markets. I have long argued that given the nature of a disruptive innovation (low cost, easy to use, etc.), emerging markets are a perfect breeding ground for new business models. One innovation that started in emerging markets and will likely come to developed markets soon is the use of mobile phones for exchanging money or making payments. In the Economist's special report on mobile phones in emerging markets, the lead story was "The Power of Mobile Money," arguing that "Mobile phones have transformed lives int he poor world.  Mobile money could have just as big an impact."  The report references Safaricom, an early pioneer of mobile money in Kenya (I gave Safaricom's CEO my rare "Disruptive Leader Award" in September 2008 for exactly this type of innovation). In Kenya, there are 7 million users of mobile money of a country population of 38 million.  People can send money to family members, pay for school and even taxis.  It could hit serious hurdles, though, in mature markets, as regulators and banks make it harder for this to happen. But meanwhile, it is creating new opportunities and development for those at the bottom of the pyramid.
5. Mobile health.  Another mobile usage model that could make an impact in the developing world is mobile health.  I personally haven't followed this particular trend closely, but I continue to see more and more evidence of mobile health gaining traction.  Vodafone's CEO gave a keynote at Informa's Mobile Healthcare Summit saying that the question is not whether governments SHOULD use mobile health, but HOW they should use it.  Vodafone has a slew of mobile health pilots going on, from SMS tracking of appointment reminders and medication availabilty and mobile apps that enable data collection and monitor trials.  The Economist report mentioned above also calls out mobile health as one of the new innovative usage models for the mobile phone, mentioning text alerts and speeding up the transfer of information by moving away from paper. Education was the hottest topic in ICT4D in the last decade.  Mobile health could be the new one for the next decade.

The final trend to watch is whether one form factor will win out over the other in ICT4D--the mobile phone or the computer. With smart phones providing most of the capabilities of a computer, some argue this will be the ICT device that prevails. But is it really a zero-sum game?

My opinion is that the computer and the mobile phone will coexist for the forseeable future.  Sometimes you just need a full-size keyboard and monitor for an application.  And sometimes you just have to be truly mobile (and by mobile I mean being able to transact on the move vs. sitting somewhere with a laptop).  At Intel we often talked about "three screens" ... the small screen (handheld), the bigger screen (computer), and the biggest screen (TV). 

But all of these five trends should lead to increased development through access to innovative ICT solutions and services that could be created and driven by social enterprises.  I'd love to see a special report from BusinessWeek and the Economist on the convergence of these trends and its impact, but if not, we can always blog about it. 

When you think about critics of the base of the pyramid (BoP) movement, the most notable name that comes to mind is Professor Aneel Karnani at the University of Michigan.  Aneel has written a number of articles that are highly critical of the BoP idea.  Some of his most prominent articles are "Romanticizing the Poor", "Microfinance Misses its Mark," and "The Mirage of Marketing to the Bottom of the Pyramid."

Now, as many of you know, I have been a very strong supporter of business and its role in addressing societal issues. Over the past two years, I have blogged on this quite extensively. I am even co-teaching a course at the undergrad level here at the University of Michigan on the topic of Social Entrepreneurship this fall. 

Since Aneel and I both work in the same building, I decided to stop by his office to talk with him in depth on his perspective of the BoP concept.  From that conversation (which went really well), we both decided to put our energy into writing a case study on the topic of vision correction in the developing world. In the case study, we looked at two enterprises - Essilor and VisionSpring - that are trying to address global uncorrected refractive error by selling eyeglasses.

In writing the case study we wrestled with three main questions:

1. How effective are Essilor and VisionSpring in addressing vision correction in the developing world?
2. Does either organization have long-term viability and ability to reach significant scale? Why or why not?
3. What other solutions might work better to solve the problem of vision correction?

Since we plan to use this case in the classroom, and hope that other academics will too, I'm not going to divulge our conclusions. If you are a student, perhaps one of your professors will use this case study in your class. If you are an educator, you can review the case study and the associated teaching note on by logging onto www.globalens.com.  (If you need help registering, you can shoot me an email).  If you want to simply read the case study without accessing to the teaching note, you can purchase it here.

Aneel and are I planning to write an article based on this case soon, so be on the lookout! 

These series of posts have been co-authored by Francisco Mejía. Francisco is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogotá, the leading economic think tank and research institution in Colombia, and consulted for various international organizations. The views expressed in this blog contribution do not necessarily reflect those of the IADB.

In our previous two posts we introduced the two basic approaches that are currently being touted in helping incoming firms rapidly gain scale in BoP markets: the sectorial approach (see Al Hammond's post); and the platform approach, which is the one currently being developed by the Opportunities for the Majority Office in the Interamerican Development Bank and which was introduced by Francisco Mejia's guest post. Platforms may be useful to incoming firms to help to gain scale thanks to their accessibility and information. However, depending on the type of platform these characteristics and their contribution to incoming firms may change. Moreover, their products may have different degrees of complementarity and the balance of power between different platform stakeholders may also vary.

In our second post, we went into detail about 3 platform types: conditional cash transfer programs, utilities and mobile phones. In this third and final post we will explain the platforms from mass consumer goods, construction firms and microfinance organizations and conclude these series of posts.

4. Mass consumer goods:

Mass consumer good industries such as cosmetics, garments or perishables create platforms over which they tend to have limited control. This happens because these networks often outsource a big portion of the final distribution or marketing stages to local agents which are usually in charge of offering the product to the final customer and collecting payments. As a result their capillarity strongly increases at the cost of the compromising the full control over their product. In the scaling up and effectiveness of these platforms, women, both as customers and sellers, play an essential role. As customers they represent the entry gate to the household for many products. As sellers (or "consultants" or "promoters" as they are often called) they benefit from extensive informal knowledge about the purchasing power and reliability of the target market. The trust that the community has in "one of their own" also allows these saleswomen to educate potential customers on the appropriate use of the product as well as the benefits derived from its consumption. Furthermore, they may provide useful suggestions in the process of improving the product or offering additional products and services to existing customers. In addition, the women that participate as promoters and sales people, themselves provide a largely untapped market for added value and services.

In spite of their reach and capillarity, the information collected tends to be relatively weak, because of the difficulties involved in collecting and tabulating it. This is not to say that the existing platform does not receive information about the payment or of the product, but, since these transactions tend to be much less frequent than in utility firms, they provide a far less detailed picture of the customer. On the upside, despite being difficult to collect, the "soft" information owned by the saleswomen can be potentially very valuable since it may include fundamental insights about the needs, reliability and constraints of possible customers.

Some mass consumer firms have included in their offerings the option to buy in installments, thus effectively offering microloans to their customers. Such an option offers the chance for many platforms to develop a payment history for every household and thus develop a better idea of the reliability of the customer. In this second case, the quality and detail of the information is much better, although still patchy compared with that generated in the previous platforms. In general, the best fitting firms in these cases will be able to provide expert financial services to help to overcome the financial constraints of majority markets. Alternatively, incoming firms may offer products that are complementary to the ones that are already being sold or that are geared towards the same group of people. For example, if the platform already sells female beauty products an interesting addition may be products related with basic health care. This platform is also ideal for educational purposes since it is based on face-to-face contact and depends on the mutual trust between seller and buyer.

5. Construction:

It is estimated that majority markets spend approximately US$ 330 billion per year on housing (Source: "The Next 4 Billion"). Such spending, however, is not done on new housing all at once. Instead, housing expenditures are done one a piece-meal basis with houses being in a state of permanent improvement. For example, once enough money has been collected a family may decide to use it in erecting a new bedroom or building permanent roofing. This investment behavior is a consequence of the absence of legal land ownership and the lack financing options available to low-income individuals. Therefore, what is usually called incremental housing is a pervasive phenomenon in majority markets. In this line, cement is the most important material for low-income customers thanks to it being easy to store and to buy in relatively small amounts.

In response to these unmet needs many construction firms have in the last decade developed platforms through which they may be able to access majority markets and finance construction for low-income families (Patrimonio Hoy being an oft-mentioned example). First, they have developed basic microfinance offerings thanks to which these firms attempt to smooth the cash flow of their clients. Second, these platforms try to empower women in their role of household heads. Furthermore, many construction firms have also developed their own educational programs to teach low-income customers how to make the best use of the products they purchase. Safety procedures and basic management and accounting are normally included in the syllabus. These programs may be offered for an additional surcharge or for free and it can be a very important channel to increase customer loyalty.

The economic agents belonging to these platforms are usually comprised of local hardware stores and a local sales network. Both of these agents are relatively free to offer the additional products they see fit in order to remain profitable. As a result, the construction company has less power over the platform to accept or reject certain products. Oftentimes hardware stores even offer an assortment of products from competing companies to the customer - each of which includes their own financing options and benefits.

Such a decentralized platform has its benefits since it enables the platform to have a very big reach and relatively high capillarity as well. On the other hand, the problem with decentralized platforms is that the information it may provide can be quite disorganized and hard to analyze. This weakness can be fixed if construction firms also offer financing options, because information derived from microfinance operations can be quite valuable in deciding whether the client is a good bet for future small loans, additional products or further housing improvement. Moreover, construction platforms may experience strong synergies with furniture offerings and smaller household goods, such as electrical appliances.

6. Microfinance:

The microfinance business model is sustained by three basic tenets: high volume operations, services adapted to the socioeconomic needs of majority markets, and risk management systems customized to the informal nature of the clients. As such, microfinance is often described as a hybrid between small business and retail banking, where loan appraisal techniques must be inferred from a variety of resources. Moreover, to maximize its social impact it mainly targets women as possible borrowers, since, apart from having lower default rates, their investments tend to have stronger impacts on their children. Operationally this requires efficient, decentralized and standardized operations for profitability and well-honed risk management. Microfinance institutions usually have loan officers responsible for the full loan cycle from new business promotion to analysis, monitoring and collection, since their performance bonus depends on a mix of portfolio growth and low default rates. This structure incentivizes loan officers to promote high-quality loans and enforce timely repayments. Loan officers are also normally in charge of conducting on-site visits to develop a strong relationship with the client and get a better understanding of the investment she wants to make.

Microfinance institutions have experienced a huge growth in the last years. It is estimated that they reach around 150 million clients, 100 million of which are considered to be poor. However, this growth has arrived more thanks to the number of institutions, rather than a growing reach. Microfinance as a platform is probably not as extensive as those belonging to utilities but it certainly has distinctive advantages. First, it typically reaches poorer areas where utility grids do not exist and so these and the platforms mentioned above may be complementary. Second, the platform is extremely flexible and evolves on the basis of the changing production and distribution of products. Third, it lends the support and legitimacy of a tried and tested business model that serves the poor while being financially sustainable.

The information generated in microfinance platforms is usually of good quality and includes at least payment histories, although it may also present other types of financial information depending on the financial services offered. However, these platforms tend to be quite zealous in their defense of the information they own, since it basically represents its source of competitive advantage. As a result, incoming firms who may want to associate with the platform often find it very difficult to have any control over the platform itself.

Microfinance organizations, due to the nature of their client base, are prone to developing agricultural and business services to help their borrowers invest and manage the assets they buy in the most efficient manner. Moreover, they are excellent partners to stimulate access to basic goods and services such as health and nutrition products that may benefit their customers, which are often women, or their families. Furthermore, some microfinance companies have already associated themselves with household retailers to try to offer also products at preferential prices. Those organizations that are more advanced in offering these additional services have been termed "second generation" microfinance institutions.

To conclude these series of posts, in the coming years we anticipate a growing number of incoming firms to associate themselves with existing platforms. As a result, as platforms allow more products and services to be sold through their networks and they become increasingly legitimate, we expect platforms to offer a growing share of products and services to majority markets. In effect, platforms may well end up being the key-holders for some products types in some specific regions. Finally, we would like to highlight that our platform list is not exhaustive. Although we believe we have chosen the most useful platforms for incoming businesses to gain scale, every firm has its own particular needs. Therefore, incoming firms should not restrict their choice of platforms to the ones we have taken here, but instead seek the platform that better fits their requirements. In conducting this search, management is advised to pay attention to the variables that have been examined here, namely, accessibility and type of information allowed by accessing the platform, the balance of power between platform stakeholders, and synergies between the products sharing the platform itself. By engaging in this exercise incoming firms will maximize their chances of successfully gaining scale, reaping profits and having a positive impact in as many low-income communities as possible.

These series of posts have been co-authored by Francisco Mejía. Francisco is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogotá, the leading economic think tank and research institution in Colombia, and consulted for various international organizations. The views expressed in this blog contribution do not necessarily reflect those of the IADB.

By now there is a reasonably strong consensus about the main ingredients of a successful business model in BoP markets, namely:

• Include low-income community members as productive agents in the firm and try to make use of their local knowledge, either by outsourcing part of the operations to local businesses or by hiring local population.
• Use flexible operational mechanisms to deal with patchy infrastructure.
• Decrease costs as much as possible to be able to offer lower prices, but without impairing quality (within reasonable boundaries).
• Offer products that meet the needs of the customer (versatility here tends to be quite important) and adapt to their payment constraints.
• Associate with local stakeholders such as civil organizations or NGOs to penetrate the target market and educate the population on the most efficient use of the product.

What is still in very much open to debate is how to scale up profitable business model so that their social impact is maximized. Broadly speaking there are two non-exclusive approaches:

Al Hammond in a series of posts proposes a sectorial approach. This in a nutshell involves identifying an outstanding business model for a particular sector and replicating it in different countries and businesses. However, as Al admits, finding such a business model capable of being applied everywhere is a tough nut to crack. In order for the business model to be replicated in different regions it needs to have a certain degree of ambiguity. The details would then have to be fixed depending on the local conditions, even though the success of business models in BoP markets can often depend on such minute details.

On the other hand, Francisco Mejía from the Opportunities for the Majority (OMJ) office in the Inter-American Development Bank suggested in one of our guest posts a platform approach as a means to rapidly gaining scale. In this post we would like to elaborate in more detail the basics of this approach while in the next two posts we will go into more detail about the advantages and disadvantages of specific platforms.

A platform is the public or private distribution and/or sales network that has been built to cater to low-income markets and, as a by-product of its operations, generates potentially useful information for additional market-based offerings. As such, it offers two very useful characteristics for incoming firms with a pre-defined business model wishing to gain scale rapidly: accessibility and information about BoP customers.

Accessibility is a variable that may be measured using two different parameters: capillarity and reach. Capillarity (from capillaries) refers to the density of the network in a particular area. For example, a mobile phone company may control either one or many points of contact in one neighborhood. Depending on the number of points of contact it owns, we may argue that it has more or less capillarity in that region. Reach, on the other hand, is related with the number of different regions the platform may have a presence in. As a result, a platform may have strong capillarity in one region but barely any reach beyond that particular area, or vice versa.

Information is also a crucial variable in gaining scale, because, if properly utilized, it can be leveraged by incoming firms to differentiate those clients that are trustworthy from those that are not. By having information about customer quality, incoming firms can then choose to serve only the reliable customers and often even lower the final retail price, since they do not have to cover any losses arising from the unreliable ones (for our economics-minded readers, this is the adverse selection problem).

Furthermore, since BoP customers know that information is collected about them, their quality as a customer will tend to not deteriorate after the product is sold. For example, a reliable customer may (consciously or unconsciously) take less care of her house after buying insurance, because now the losses will be borne by the firm, rather than the customer (for our economics-minded readers this is the moral hazard problem). This is because it is in the best interest of buyers to be perceived as "safe bets" also after the purchase because their transaction history (payment timeliness, credit, insurance, etc.) is being built through this behavior and thus will have a decisive impact in future transactions they may want to conduct.

However, accessibility and information quality and type will vary depending on the platform itself. Some platforms may generate high quality information, but at the cost of lower accessibility. Additionally, incoming firms should also consider whether their products are complementary to those already being sold in the platform and whether they will have any power in deciding the spreading and growth of the platform activities. In the next post we will talk about different platform types and explain in more detail what are their respective characteristics and how they can be leveraged.

I'm always asked by students here at the University of Michigan how they can get more involved in the base of the pyramid movement. "I'm really interested in these BoP ideas.  What can I do to explore this more? How do I get more engaged in the community?"

Unfortunately, on most campuses around the world, there are not many opportunities for students. Some universities offer a single course on the subject (and it's generally open only to business school students). A select few schools provide field-based consulting projects. Most offer nothing. Indeed, there is a tremendous unmet need. 

In response to this need, the William Davidson Institute (WDI) has partnered with Acumen Fund and the World Resources Institute (WRI) to launch The Next: 2010 Case Writing Competition on NextBillion.net. The purpose of this competition is to engage students in writing high-impact case studies with their professors to help further the overall base of the pyramid movement. 

To make the competition meaningful and relevant to the field, the case competition will center on key questions that the three sponsoring organizations are currently wrestling with:

• Where can markets work best to address issues of poverty?
• What business models and business innovations are effective in developing scalable businesses serving low-income markets in the developing world?
• What are the consumer behaviors - in terms of spending and decision-making - that define market opportunities?
• How can market-based approaches to poverty alleviation achieve their goals while also protecting natural resources and preventing environmental degradation?
• How can the public and/or private sector best support the development of businesses serving the poor?

Bob Kennedy (Executive Director, WDI), Brian Trelstad (Chief Investment Officer, Acumen Fund) and Virginia Barreiro (New Ventures Global Director, WRI) have each agreed to be a judge for the competition. The hope is that these cases will be used to better inform their organizations, help academics teach this material to future leaders, and ultimately, make a tremendous social impact on the ground.  

And an added reason to participate in this competition? Prize money!  Prizes will be awarded as follows:

• First: $1000
• Second: $500
• Third: $250
• Fourth and Fifth: $100

In addition, winners will be interviewed and profiled on NextBillion.net and will receive an autographed copy of Jacqueline Novogratz's new book, The Blue Sweater. 

Cases are due April 30^th, 2010.  For more information on the competition, please click here or email me.

Note: To help drum up interest in the competition at your school, please pass this flyer around.

Sponsored By:

Last October 2008 Stuart Hart visited Erasmus University in Rotterdam as a committee member of the PhD defense of Martin Klein from the Erasmus School of Economics at Erasmus University.

Martin has now founded ‘Business for Development’, a BoP business development company focused on stimulating founding new BoP businesses in partnership with other organizations. Unfortunately his webpage does not have much information yet, but parts of his doctoral thesis can be freely downloaded. It is indeed an important document to take into account; while summarizing what we know about starting and developing businesses at the BoP, it also develops this body of knowledge from the perspective of both BoP practitioners and academics.

Martin's thesis examines the most common postulates of what it means to work at the BoP level thanks to an extensive survey of 143 BoP firms working in 105 countries, and prods into what exactly are the challenges and opportunities that these firms encounter. In this line and among other findings, he shows that there are several issues which are constant along the lifetime of a BoP business, such as external corporate governance and challenges related to developing a strong market position. Other issues were perceived to be relevant at some points in the growth cycle of the business, but not in others. For example, the struggle to remain profitable or finding ways to keep on growing only became important concerns after some other operational milestones had been passed.

Martin also develops a management support model for developing profitable pro-poor business models by incorporating additional variables to the business model. These variables provide criteria for the development of profitable pro-poor business models and may be a factor in explaining why some firms succeed at the BoP while others fail.

Furthermore and not surprisingly, many of the challenges and opportunities found by these firms are very much context-specific. Thus a firm has to be willing to adapt as much as possible to the local conditions in order to thrive. Here, Martin makes clear that often BoP businesses are often asked to be contrasting things. For example, on the one hand, BoP businesses have to become highly specialized and embedded within the local markets, while also having to remain flexible to gain scale and exploit other local markets.

Martin here finds that robustness has a larger effect on financial performance than does flexibility. He also finds that social value creation improves financial performance whereas adopting environmentally friendly practices does not seem to have such a positive effect. As a result, he suggests that maybe additional incentives and monitoring mechanisms are needed at for BoP ventures until it pays off financially to be environmentally friendly.

In my opinion, Martin also sheds light into some interesting tensions that underlie surviving in these markets. For example, if a firm is highly specialized to the local market, then what learning is most relevant and applicable to other BoP businesses? Martin argues that this is a false dychotomy. BoP businesses have indeed much to learn from each other, not less thanks to the soft skills acquired in their management. He vouches in favor of finding ways to stimulate more connections among businesses to avoid “reinventing the wheel” and to share insights and lessons learned.

Another important tension is the clash between formal and informal economies. BoP businesses belong to the formal economy, but the local markets in which they are embedded are most often highly informal. To build the reciprocity and trust required to succeed in these markets, BoP businesses should tap into the entrepreneurship and customer knowledge that underlies informal economies. At the same time, working in the formal market facilitates cooperation and enables growth by reducing market imperfection and transaction costs. Still, finding the ideal middle ground is not an easy task.

Martin finishes off by pointing out areas of future analysis. Previous research has shown that NGOs may be particularly valuable partners for BoP businesses, but it remains unclear how exactly or in which cases they may be particularly relevant. Moreover, a full assessment on the long-term contribution of BoP initiatives to poverty alleviation is yet to be done.

A few months ago I sat on a Net Impact panel discussing the topic of social ventures.  During the Q&A time, the topic of funding came up. 

A student asked a question along the lines of, "Is there a way for social ventures to attract the type funding that has traditionally been available only to for-profit businesses?"

My response: "If I asked you to consider investing in a company that offered below market rate returns and had a high probability of failure, would you make an investment?"

The room was silent. After a minute, the student said, "No."  And so did most everyone else.

The response shed light on the issue at hand.  Most people will not invest in a social venture because at the end of the day, people, even those who are socially conscious (I mean, these were students at a Net Impact conference!) want to maximize returns on their own financial investments.

Even as I think about my own investing behavior, it's hard sell for me to put money into a business that promises minimal to no return with a high-risk of business failure.  I'd much rather give to charity. Perhaps I've been just too conditioned with my background in finance.

I recently talked to Kevin Jones, a Founding Principal of Good Capital and Co-Founder of the SoCap conference, about the state of the social capital markets and he confirmed what I see in myself and others.  In his own experience, a lot of investors can give charitably, but cannot fathom making an investment in a social venture that does not have an appropriate risk-reward tradeoff.

So, what does this mean for social ventures? Will they never be able to attract the appropriate funding necessary to achieve significant scale?   

Currently, there are a few options for social ventures seeking to raise sizable funds, none of which are particularly appealing.

Option 1: Hope that the growing class of social investors will reach a critical mass

Today, there is a small, but growing subset of investors known as social or impact investors.  Brian Trelstad of Acumen Fund defines this group as the following: 

We define a social or impact investor as someone who takes a double (or in some cases triple) bottom line approach to their capital, and attributes real value to the social or environmental return in their investment decision-making. They will often, but not always, be willing to exchange a lower economic return for potential social or environmental impact

There is no doubt that social investors are a real class of investors.  As Trelstad puts it, social investors "are part of an emerging asset class that can generate serious deal flow, test new ideas, or expand into new market and in the process contribute to solving some of the most intractable environmental and social problems of our time; certainly a reasonable return on investment by most measures."

However, the challenge that I see is that that these types of investors hold only a fraction of the total available investment capital. Currently, even large social investments funds are only able to invest capital in the range of $1 to $2 million in social ventures. This class of investors is indeed growing, but it is questionable if this class will reach that critical mass that is needed to help bring social ventures to scale - especially considering the business environment that we are in today. Social ventures may have to wait a long time for this to happen.  

Option 2: Seek out and rely on donor funding

If social ventures cannot attract enough funding from investors, where else can they turn?  Donor funding? This approach may seem counterproductive to the base of the pyramid movement, but the reality is that many social ventures are relying on donor funds for capital today.

The problem with this approach is that many social ventures take on a for-profit legal form, which makes it hard to attract donor funds. Contributions to for-profits are not tax-deductible; contributions to non-profits are.

 Also, by seeking out donor funds, a social venture has to compete with traditional non-profits.  And it is a highly competitive landscape in the non-profit world. Personally, I don't think this is the solution to the funding problem.

Option 3: Compromise on social outcomes in order to improve profitability

This is not ideal, but unfortunately, a lot of social ventures are forced down this route in their efforts to raise funds to scale.  In many cases, a social venture starts moving up the pyramid - to the middle-to-upper class population - to improve profitability.  And in the course of doing so, they reduce or even exit entirely communities that need their products or services the most.  This is not a good outcome.

Bleak picture, right?

These three options are not the only paths forward. There are a lot of people out there that are trying hard to create alternative options. I am optimistic about a new type of corporate entity has recently formed called L3C, which stands for low profit limited liability company. It's not perfect, but it is a promising corporate form that may open up more doors for social investing.  I'm also hopeful about the role of governments and their agencies in financing social ventures.

More of L3Cs and governments in follow-up posts.

Greetings from Delhi, where tomorrow I will attend the Emerging Markets, Emerging Models conference convened by the Monitor Group.  If you have not yet heard of Monitor's eponymous report, I urge you to take the time to read it.  Staff writer Allen Hammond agrees, calling it "a must read!"

Why is it a must read - and why is there a whole conference about it?  First and foremost, credit goes to Monitor and its Inclusive Markets group.  Led by Ashish Karamchandani, they've done a thorough job investigating more than 300 market-based approaches to poverty alleviation around the world, most of them based here in India.  With such a large sample size at their disposal, the Inclusive Markets team then turned its attention to pattern recognition and actionable next steps - just the approach you would expect from a top-flight consulting firm.

The result is a thorough but easy to read report breaking down "bottom of the pyramid" myths and confirming some key truths about working with low-income consumers and producers. 

Tomorrow's conference - which continues on Tuesday - will convene the report's authors and subject matter to discuss the latest trends in market-based approaches to poverty here in India.  It should be less academic and less political than most conferences, which I'm looking forward to.  Monitor didn't publish much information about the event on it's web site; I'll do my best to capture the spirit and proceedings tomorrow and Tuesday and report back here.

Finally, if you'll be at tomorrow's event, be sure to seek me out!