Turning capitalism on its head to help the poor

Vinod Khosla, the billionaire venture capitalist and co-founder of Sun Microsystems, was already among the world’s richest men when he invested a few years ago in SKS Microfinance, a lender to poor women in India.

But the roaring success of SKS’s recent initial public stock offering in Mumbai has made him richer by about $117 million — money he says he plans to plow back into other ventures that aim to fight poverty while also trying to turn a profit. And he says he wants to challenge other rich Indians to do more to help their country’s poor.

An Indian transplant to Silicon Valley, Khosla plans to start a venture capital fund to invest in companies that focus on the poor in India, Africa and elsewhere by providing services like health, energy and education.

By backing businesses that provide education loans or distribute solar panels in villages, he says, he wants to show that commercial entities can better help people in poverty than most nonprofit charitable organisations.

“There needs to be more experiments in building sustainable businesses going after the market for the poor,” he said in a telephone interview from his office in Menlo Park, California. “It has to be done in a sustainable way. There is not enough money to be given away in the world to make the poor well off.”

Khosla’s advocacy of the bootstrap powers of capitalism is part of an increasingly popular school of thought: businesses, not governments or nonprofit groups, should lead the effort to eradicate global poverty.

Some nonprofit experts say commercial social enterprises have significant limitations and pose conflicts of interest. But proponents like Khosla draw inspiration from the astounding global growth of microfinance — the business of giving small loans to poor entrepreneurs, of which SKS Microfinance is a notable practitioner.

Advocates also find intellectual support for the idea from the work of business management professors like the late C K Prahalad, who have argued that large corporations can do well and do good by aiming at people at the so-called bottom of the pyramid.

Besides Khosla, entrepreneurs like Pierre Omidyar, a co-founder of eBay, and Stephen M Case, a co-founder of America Online, have started funds with similar aims.

But Khosla, 55, who moved to the United States from India as a graduate student in 1976, has another motive, too. He wants to goad other rich Indians into giving away more of their wealth.

India’s torrid growth over the last decade has helped enrich many here — Forbes estimates that India now has 69 billionaires, up from seven in 2000 — but only a few have set up large charities, endowments or venture capital funds. “It surprises me that in India there is not a tradition of large-scale giving and helping to solve social problems and set a social model,”  Khosla said.

Khosla is not alone in worrying about the state of Indian philanthropy. Bill Gates, the Microsoft co-founder, who was in China last week with the billionaire investor Warren E Buffett, said that he and Buffett might go to India as part of their campaign to get the very rich to give away half their wealth.

Charitable activities and venture capital investing have been a mainstay for some Indian business families like the Tatas and for technology entrepreneurs like Aziz Premji of Wipro, the Bangalore outsourcing firm. But many others have given very little.

Far behind in charity

A recent Bain & Company study estimated that Indians give much less as a percentage of the country’s gross domestic product than Americans. Moreover, individual and corporate donations account for just 10 per cent of the charitable giving in India, compared with 75 per cent in the US and 34 per cent in Britain. The balance comes from the government and foreign organisations.

Rich Indians “are more into temple building and things like that,” said Samit Ghosh, the chief executive of Ujjivan Financial, a microlender based in Bangalore, “rather than putting their money into real programmes, which will have real impact on poverty alleviation.”

Khosla said his experience with microfinance had helped shape his views on the best way to tackle poverty. He has invested in commercial microfinance lenders and has donated to nonprofit ones, and he said that moneymaking versions had grown much faster and reached many more needy borrowers.

He said he wanted to help create a new generation of companies like SKS, which started lending as a commercial company in 2006. It now has 6.8 million customers and a loan portfolio of Rs 43 billion ($940 million).

By contrast, CashPor, a nonprofit Indian lender to which Khosla has also given money, has 4,17,000 borrowers and a portfolio of Rs 2.7 billion ($58 million) even though it started operations in 1996.

Besides growing faster, SKS, India’s largest microfinance company, has become a stock market darling. The company floated its shares on India’s stock exchanges in mid-August, and they have risen 40 per cent since then.

At current prices, Khosla’s 6 per cent stake in SKS is worth about $120 million, about 37 times what he invested in the firm in 2006 and 2007. Khosla said it might take at least a year to set up his new venture fund. He intends to finance it from his SKS profits and then return to the fund any profits from subsequent ventures it backs.
Khosla has already been investing in companies that he says fit his model of profitable poverty alleviation. One is MokshaYug Access, which sets up milk collection and chilling plants in India to help dairy farmers. The company says it helps farmers reduce transportation costs and get higher prices for their milk than they can with local distributors.

Philanthropy experts say commercial companies play an important role in combating poverty by creating jobs. But they say these ‘social enterprises’, as they are sometimes known, cannot be solely relied upon to address the many entrenched causes of poverty.

Moreover, as the fallout from the global financial crisis has made clear, the profit-maximising tendencies of businesses can hurt society, said Phil Buchanan, president for the Centre for Effective Philanthropy, a research organisation based in Cambridge, Massachusetts.

Nonprofits are effective because they can “take issue with the unbridled pursuit of profit at the expense of people’s lives,” Buchanan said. “I think some of that gets lost in all of the hype around social enterprise.”

Khosla says that he is not completely opposed to charities — that his fund may even donate to some nonprofit entities. But he says he is generally sceptical that nongovernmental organisations can accomplish much because they tend to drift away from what their donors wanted them to do.

“I am relatively negative on most NGOs and their effectiveness,” he said. “I am not negative on their intentions.”