United Prosperity Team Blog
Insight on the latest happenings by the United Prosperity team.
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Continued from ‘The First Break-through’.
By February, we had gathered additional momentum. Chiradeep Vittal joined the team and soon after Amar Singh, Ramkumar, Ramya and Vinay started building the system at a fast pace. We would have quick two week development iterations followed by testing done by Suriya Prabha and Supraja.
There was a ton of legal work to be done and we initially had a very hard time getting any law firms to help us. But after a little bit of struggle, things fell into place – Hanson Bridgett, UC Berkeley and O’Melveney and Myers started helping us with the legal work.
Meanwhile Natasha Ramarathnam joined us in India and we started talking to various Microfinance institutions (MFIs) who may need guarantees and also to the large banks who lend to these MFIs.
As we started talking to MFIs and MFI networks, we were soon struck by the enormity of demand and the amount of ground we had to cover. Rajkamal Mukherjee, a microfinance veteran and VP at Accessdev (a Microfinance network working with emerging MFIs in India), wrote to us:
“The AmFA partnership presently has 110 partners aggregating to outreach of 2.4 million clients and gross loan portfolio of over a USD 250 million. These institutions represent a major chunk of the 40-50% annual growth segment in the sector. Our assessment of the immediate demand for additional credit among the AmFA partners is of USD 600 million.”
This bottom up assessment of the demand was quite stunning. One would expect that banks would quickly step in and lend to microfinance institutions adequately at a market determined interest rate. But that clearly does not seem to happen, despite the fact that banks in most developing countries have enough capital to lend. One outcome of this has been that bank lending has been heavily skewed to the larger MFIs while smaller MFIs have struggled to raise adequate bank loans to meet demand.
Prof. Mohammad Yunus summarizes the problem beautifully ‘The biggest problem we face in trying to expand the reach of microcredit is not the lack of capacity. Instead, it is the lack of availability of money to help microcredit programs get through their initial years until they reach break-even level.’ He further adds ‘Local banks cannot lend to MFIs because MFIs cannot provide collateral. However, if an international or domestic organization steps forward to act as a guarantor, local banks are happy to provide the money’ (Nobel laureate Mohammad Yunus with Karl Weber, Public affairs books, Creating a world without poverty : Social business and the future of capitalism, page 70, 2007).
I would take Prof. Yunus’s argument one step further. To make bank loans available to microcredit programs through their initial years, we need to make guarantees easily available. And to make guarantees easily available we need a scalable way to raise funds from socially responsible investors. I believe that our internet-centric model has the potential to raise socially responsible funds in a scalable manner and make it available to MFIs when they need it the most. Implementing it calls for a lot of hard work from a lot of people. I will write more on that topic in another post.
Let me introduce myself and share with you the story of the birth of United Prosperity. My name is Bhalchander Vishwanath, ‘Bala’ to folks who know me. I came to the US from India 8 years back almost to this day. I worked with MphasiS and subsequently Infosys, building large software systems for financial institutions.
On the side, I kept coming up with startup ideas and would spend several months researching them – an innovation and idea management system, a website for comparison shopping of elective medical procedures and many more. I would typically spend 3 to 4 months researching each idea and then evaluate whether I should seriously pursue it further.
In 2006, I was working as a consultant with PMI, a Mortgage Insurance Company. Borrowers who have poor credit scores and cannot put the 20% down payment towards a home cannot get a mortgage. However, if the borrower or the bank buys mortgage insurance from PMI, the bank will make a loan to the borrower and the borrower can enjoy home ownership. Over the years, Mortgage Insurance or Guarantee as it is called has significantly expanded home ownership in the US.
My idea was simple, if guarantees could help people buy homes, why cannot guarantees help poor people get small loans from banks? I had heard a little bit about microfinance and I felt these guarantees could also expand the reach of microfinance. I started reading literature on microfinance and would spend endless hours reading articles and papers I could find on the internet.
Sometime in 2006, it was also announced that Prof. Mohammad Yunus, the pioneer of microfinance, had won the Nobel prize and that increased excitement in the field. But I soon realized that I had hit upon a massive roadblock – An organization which plans to offer guarantees needs to have adequate capital. How do I raise the several million dollars to set up a guarantee fund? I was a little disappointed that I had hit this seemingly un-surmountable road block and decided to move on to finding the next idea.
The next few months I spent time conceptualizing a website which would measure one’s carbon footprint. It would be integrated with a recommendation engine which will then suggest upgrades to household appliances, changes in lifestyle etc. By then http://green.yahoo.com was launched. It had similar features though a little more basic than what I had envisaged. There was also another well-funded project on similar lines being done by UC Berkeley. Given these, I was not sure if my idea could compete against these well funded ventures.
I came back to the earlier microfinance guarantee idea – it simply would not go away. I continued to read more on guarantees and microfinance and figure out how I could raise funds for the guarantee fund. Sometime in April of 2007, I came across Prosper.com and a few days later Zopa and Kiva. Peer to peer lending fascinated me. Instinctively I realized that this held a clue to solving my problem, but I did not know how. By then I also became familiar with the guarantees offered by Grameen foundation and Accion. I also learned that the smaller Microfinance institutions (MFIs) were not having adequate access to capital and no organization was offering guarantees to smaller MFIs. This was a problem waiting to be solved.
But after all this research by June 2007, I was beginning to get a bit impatient. I had no business idea. I responded by setting myself a deadline – I would come up with an idea by July 3, 2007. There was an IIT alumni conference in the valley the following week, and in one of the tracks, VCs would hear and fund idea pitches. I hoped to have an idea by then. The next few weeks I kept thinking on how the peer to peer model could come together with the guarantee model. And finally on July 2nd or 3rd, the whole thing came together: The general public will guarantee loans to entrepreneurs on a website. The guarantee will allow the MFI to borrow from local banks and make loans to the entrepreneurs.
The idea made sense to me, but another reality dawned on me. Just taking an idea to a VC will not secure funding. I decided to first get the idea validated. More on that tomorrow.
Thanks for reading.
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