Micro-finance and micro-lending are changing the world as we know it. It’s not just a new way to help the poor. It’s a new way to invest. It’s more stable than the market. It’s almost as lucrative. And it’s not just a good way to live, it’s a smart way too. I’m going “all in.”

The personal problem (for both you and me) with money and time

So, everyone who knows me knows I’m one of those “idea guys.” If you know another “idea guy” you know what this term really translates into. We start projects and never finish them. I really hate that about myself, as most of us do. So, I’ve been on a mission these past few years to hone in on the ways I can be most productive, efficient, and get the most out of my time. Most of us “idea guys” are terribly lousy at managing our time where it counts the most. We have a distorted view of what’s important, especially in the minutia of day to day tasks.

There are a few ideas and passions I’ve held on to over the years, though. One of those is microfinance, specifically starting my own micro-lending company. However, creating what essentially constitutes the equivalent of a bank is pretty difficult to do these days without prior finance and monetary policy knowledge. I knew that even when I interviewed Chris Larsen from Prosper.com back in 2006. I may have ideas, but I’m also a realist.

So, what’s the next best thing? If I can’t do something today, what can I do today that gets me closer to that goal? Well, of course participating in microfinance is definitely an option. With Kiva.org I can (and have for years) lend my money to the organization and in turn the entrepreneurs. In return I get that nice warm fuzzy feeling and maybe a little whuffie. But, I’m also an entrepreneur, so that can’t be all I can do…. can it?

Other options are lending to others where it’s not really microfinance, but more peer to peer lending in the US and the UK. There’s places like Prosper.com (US) and Zopa (UK). I could also simply give money to people anonymously if I’d rather not lend. And I do. I have done each of these at one time or another, and continue to do so.

Why now?

Now, before I share my new plan, I want to mention why I’ve decided this today. Why now?

There’s a few sources of inspiration, but much of it comes from reading The Snowball, a book about Warren Buffett – his life and his business(es). From that book, I’ve been spurred on to think more about the power of compounding interest and what and where to invest. The end of the book also brings to attention the need for doing more than just making money (albeit, this is coming from a guy who has more than he’d ever care to spend). Tangentially, I’ve been considering heavily the Rule of 70 (or 72 if you prefer).

Now, to get past all the financial mumbo jumbo, I’ll get to the point. I’ve tried everything I can think of that’s still honorable (and sometimes even in the gray areas) to make money without going into debt. I’ve not wanted to get into debt because I (personally) usually have a hard time getting out of it. But, that’s usually because I choose risky operations for the money which I borrow. I wouldn’t worry about it so much if I invested my money and time in more stable income-producing operations. But, now I’ve gotten off track again. So, the point is… exponential gain and affiliate marketing.

*poof* and now you’re gone, I’m sure.

For those of you who are still here… here’s the plan.

The plan

First, let me just say that affiliate marketing has some huge advantages to it. You can start small, risk a little, and when you find a winner of a campaign, scale to where you’re making $1000 per day (profit). Yes, it’s possible. No, I’m not going to sell you a product or anything else. But, just trust me, it can be done both ethically and without much risk.

It also has some very big disadvantages too. There are millionaires who play this game and it’s not for the weak minded or emotional. You will get beat and lose your shirt if that’s you. Don’t go into that game without a lot of study (not buying e-books), consultation, and very small tests at first with money you are perfectly happy to lose. For newbies, you’re speculators. You’re gamblers. Realize that fact until you find the patterns and you’ll not be in the poor house. And last, this kind of work is not the most powerful use of your money. It is not able to be used directly in compounding anything exponentially. So, we need a two-part system.

Now, what I’m going to do is actually take all the proceeds of my affiliate income (since we don’t live on this source of income) and funnel every penny of profit (after taxes) into micro-finance.

But why would you do that if the micro-finance organizations aren’t giving you a return on your investment? (you might ask)

Ah hah! But wait… there is ONE micro-finance organization that actually does pay you interest (right now, and I’m sure there will be more in the future). That one place is MicroPlace.com.

MicroPlace.com was started by the same guy who founded eBay – Pierre Omidyar. The man is not only wealthy and innovative, he’s got a heart the size of … well, it’s really big. The organization is funded primarily by the Omidyar Network and has the right idea.

I’ve just invested in 3 people like Jessica Maria Corea Gutierrez who is a Candy Maker with only $745.00. With this investment, I’ll make %6 annual return (as long they stick to the repayment plan) and help them on their way to becoming self-sufficient.

Jessica Maria Corea Gutierrez

Jessica Maria Corea Gutierrez is a candy maker in the small community of San Martin located a few miles outside of Tipitapa. She is a member of a “solidarity group” comprised of two other women. Together they have recently taken out their first loan with NICA Fund partner agency FODEM. Jessica explains that before she took out a loan her situation was “critical”. She lacked the income to be able to afford to pay for all of her children’s shoes and school supplies, which ultimately forced one of her children to have to drop out of school.

Jessica says that with her loan she has been able to purchase larger quantities of the ingredients needed to make her candy such as milk, cinnamon, and vanilla. With increased output she has been able to multiply her candy sales. Now her son is able to return to his studies.

Many members of the community of San Martin have few other work options than to travel to Managua and work in the free trade zones. Jessica is thankful that her microcredit loan has provided her the opportunity to remain working in her community and has dreams that her children will one day be able to pursue their educations beyond secondary school.

Here’s how I envision it:

• The non-exponential work (optionally, just saving some money and skipping to #2)
  1. I pay Google (or whoever) for traffic
  2. Google delivers the consumer to my website
  3. I deliver the consumer to the producer
  4. Consumer delivers money to producer
  5. Producer delivers product to consumer
  6. Producer delivers commission money to me
• The exponential work
  1. I invest profits into microplace (or other micro-lending organizations)
  2. Entrepreneur gets funds and creates or enhances their own business and profit
  3. Entrepreneur pays back interest and principal on the loan to the organization
  4. Organization takes their share of the interest for operating costs and expansion
  5. Organization gives the rest (interest and principal) back to me
  6. I reinvest once again in the organization and more entrepreneurs

Ok, so that was a bit more in depth than you probably needed to see, but it maps out my plan nicely. First, with affiliate marketing, I have the ability to expand a good business rapidly and capitalize on trends in marketplaces where people have money to spend. Next, I reinvest that money into areas that have less money to spend but earning an interest.

There are two criterion which I am simply hoping exist that make this a good transaction for everyone. The first I can control. The second I cannot.

1. The products or services which I get paid a commission on, and the companies I promote should be honorable and ethical. Without this criteria, I’m just helping move the poverty from one person to another. That’s not helpful.
2. The entrepreneur should be profitable, over and above the cost of the loan. If they aren’t the purpose of the loan was not fulfilled (to help them get self-sufficient).

A word on making money vs doing good

There seems to be this notion, or itch, that if we were truly doing right in the world to these entrepreneurs, we’d just give them the money or loan it to them with no interest due. Although that seems wonderful and idealistic, there are problems with that notion.

First, it’s very well known that giving money to people, on average, creates social and economic problems – especially if it’s given to people who don’t have a plan already in place on how they will be managing it. There’s the entitlement theory that creeps in and a relaxed (if any) sense of ownership and pride. If you’ve been in a startup before you know how that hunger for success needs to be there. Without it, you’re dead. With it, you’ll grow fast, innovate, own your ideas, and squeeze every bit of value from every penny you have in the bank. Then when you succeed, you feel huge. But the pressure to perform is so much less when we’re just given a million bucks with no necessity to repay. We feel like it’s ours. We can do whatever we want with it, including squander it.

Second, the idea that we shouldn’t make money while we do good things has no foundation. It seems to itch us the wrong way for some reason. However, most of the reasons I’ve heard so far usually have to do with the problem of incentive and motivation. The problem with this thought process is this; If I were only focused on the money, I wouldn’t put it into the micro-finance world. There are much better places to put your money than into micro-lending in terms of ROI. So, if it’s sacrifice you want, consider that those who choose to receive a gain from their assets have other options. Usually they (we) have chosen this route because it’s helpful. The ROI is equal to sustainability and growth.

The crux of the matter always seems to come down to this one question. If I could help one person with $10, wouldn’t it be better to help 99 more people with $1000? If the answer is yes, but you don’t have $1000, how do you get there?

Thus, the plan. Make money you can invest. Invest it letting compound interest work it’s magic.

Now, because of micro-lenders paying back interest, I think we have a better plan. Or perhaps just a different meaning, for “compound interest.”

Discuss.

Normally, I don’t post videos or comment on the news.  But, something just hits me as smelling like a dead fish behind the couch when we have to subject our kids to new advertisement methods.  Can’t we figure out another way to make money for our schools?

The first part of this video is what I’m talking about.  I just didn’t have the time to edit it to make it shorter and cut out the rest of the broadcast.

Teachers Sell Ads on Tests, Money for Supplies from nate ritter on Vimeo.

I do have to give credit to the teacher who thought of the idea… at least it works. It’s just sad that this is what we’ve resorted to to be able to fund the teaching process.

TOC

1. My dream for microfinance
2. The microfinance podcast
3. The problem of microfinance
4. A solution to the microfinance problem: franchising
5. Resources: Microfinance franchise

My dream for microfinance

From the day I heard about a strange little thing called micro-finance (or micro-credit) I’ve had a dream to create an organization which would participate. It usually takes me a few years to make a dream this big turn into a reality. There’s the day-dreaming, the peripheral research, the active research, the “holy crap, this could actually work” phase, the planning, and then the doing. It’s a long process, but I’ve done it before, and I will do it again, over and over and over again.

The problem (there’s always a problem, isn’t there?) is I don’t know squat about the intricacies or processes of a lending organization. I’ve never worked at a bank. I’ve never been an accountant or bookkeeper, and honestly, I hate doing my own finances.

But, what I do love is the amazingly massive amount of good will and huge PEVZ created by microfinance. As an entrepreneur, I’m always looking for new ways to create wealth; not just for myself, and certainly not only the economic kind. The holy grail of my passions have to do with combining life enhancement (via psychological, identity, or just “life” coaching), economic viability, entrepreneurship, and teaching. For me, that is what microfinance is all about.

Have you ever watched the faces of students who understand geometry for the first time?

Have you ever given money anonymously to you someone who’s been financially troubled? Then, they see you one day and they talk about some anonymous donor who changed their lives for the better.

Have you ever given a soccer ball to a kid who’s never seen one before?

In every circumstance, you’ve changed their world. You’ve created “wealth”. It didn’t exist before, but you just created it out of thin air. It’s amazing to watch their worlds change for the better, and being a part of life-changing endeavors has always my goal.

The microfinance podcast

What sparked my interest in microfinance lately was listening to a podcast (attached to this article) series put on by the Stanford Technology Ventures Program. It’s a podcast stream titled Entrepreneurial Thought Leaders and this particular one was “The Microfinance of Entrepreneurship, with Geoff Davis (Unitus)”.

Here it is:

[display_podcast]

The problem of microfinance

The problem Mr. Davis mentions in this podcast is the trouble with the microcredit organizations in their attempts to reach those who need microfinance. The statistic he gave was that microcredit organizations, both non-profit and for-profit, are only reaching 20% of the people who need it.

Let’s just stop there. If you don’t already know this, microfinance is a 30 year old industry. This is not a new industry, folks. And in 30 years the industry as a whole only has a worldwide 20% market penetration. Amazing.

It sounds like an industry failure to me. I mean, when you’re not reaching 80% of the people who would gladly take you up on your services, regardless of whether it’s for or non-profit, you’ve got some issues to solve.

A solution to the microfinance problem: franchising

Now, these problems aren’t insurmountable. One of the reasons why there’s only been 20% market penetration in microlending is that up until recently it has been attempted by non-profits only. The biggest reason why this is an issue is that non-profits generally rely on either government grants or big financial backers who essentially have disposable income they are willing to donate instead of invest or purchase stuff with. Unfortunately, that severely limits how much money can get into these organizations which, in turn, limits their possible expansion and growth rates.

Blech, that was a lot of college-word terminology all to say they don’t have the clink to grow fast enough.

So, what’s the solution? Microfinance franchises could most certainly be one.

It solves two issues:

• Decentralization of “retail” outlets. Each new “retail” outlet is its own business and therefore has little reliance on centralized overhead and structure.
• Turning into a for-profit enterprise means you get access to the big money through capital markets like the stock market, etc.

So, the biggest response that immediately comes up is “But you’re taking a socially-good idea and now making money off of it? Isn’t that seriously wrong somehow?”

I answer a hearty “Absolutely not!”

Making money is the primary goal of for-profit organizations, for sure. But, I’ll take a set of for-profit companies changing the world over non-profit companies missing the opportunity any day of the week. The risks of inactivity completely outweigh the potential risks of gouging. Gouging and predatory lending already happens (at a 3000% monthly interest rate!). The competition by other microfinance companies, as well as government oversight on lending companies and banks, will keep the interest rates low enough to still be helpful.

And that’s the point — changing the world for good.

If that can be done through for-profit franchising of microfinance, I’m all in.

Now for the good stuff: Resources

As you might know by now, I’m apparently a knowledge broker (also known as an infomediary). That just means I like putting information together for people (and futzing).

So, below you’ll see the podcast (again) which you should listen to along with a PDF I found along the way which describe some of the issues related to starting a microlending organization in the wake of regional conflicts. Then, when you’re completely convinced that you want to start a microfinance company too, join Intellecash as a franchise and you’re on your way to becoming a microlender, changing the world in extremely significant ways.

I guarantee within a few years I will be running my own microfinance company, and it could very well be by starting a microcredit franchise through Intellecash.

[display_podcast]

Financing of Income Generation Activities in the Wake of Conflict (pdf)

If you’re interested in financially backing or otherwise collaborating on creating a microlending franchise/organization, please feel free to contact me.

Yay! *the crowds rejoice*

I wondered if there was any market for something like this, tested it out, found out people didn’t want to pay for it, so instead we’ll give it away for free.

Now, full disclosure here. There are affiliate links inside this e-Book. They link to a website called Mvelopes (no affiliate link here). Now, their service is amazing (we’ve used it for years). However, I thought you should know about those links just because I hate tricking people. It’s not nice. Not that I don’t want you to use them. I hope that if you find the book and the service useful that you do use them. But, you should know that I’ll get a small finders fee if you do.

Anyway, back to the offer. Here’s the e-Book, complete with a free budget spreadsheet and instructions.

The contingency I asked for before releasing this book for free was that I wanted feedback. So, if you download it, please be sure to come here and give me feedback on it.

Is it too light? Not enough info? Too much info? Need better instructions? Did we leave something out?

Please, do the world some good and help us make this a better budgeting product for those millions, no thousands, no “over one Americans every year” who will download this book.

Cheers!

(Download link, or click the green arrow)

[tags]ebook, how to make a budget, free budget spreadsheet, spreadsheet, budget, budgeting, budgets, free[/tags]

Now, I’ve founded companies in the past and sold them successfully. However, I’ve always used my own money to build them, which works out pretty well because you get to sell it however, whenever, and for whatever you think it’s worth.

When you start looking at pulling in outside investment, though, things change a bit. So, here’s the formula we worked with, for better or worse.

Side note: if you know anything about this arena and find fault in how we did things, feel free to say so. I’d love to learn more, and I know my readers would respect the info as well. Although I talked to some smart folks to come up with this, I don’t have it all figured out.

Here’s a few known variables regarding expected ROI:
1. VCs expect 5-10x their money within 3 years.
2. Angels expect 5x their money within 5 years.

We changed ours a bit because we’re bashful. We wanted our angel investor to get 5x in 3 years. So…

3. Our growth rate for revenue at year 3 is about 130% annually.
4. Let’s assume our angel wants 5% of our company.

• Start with an exit year (we took year 3).
• Take the expected revenue that year ($20M) and multiply it by what percentage ownership our angel wants (5%). $20m x 5% = $1m
• Our angel expects a 5x return within these 3 years, so let’s back that out to today by: $1m / 5 = $200k.
• That $200k is what we would expect they would invest today to get 5x their money in 3 years. So, the rest is pretty easy if they want to own 5% of the company. $200k / 5% = $4m.
• So, today our company would be valued at $4 million.

Now, these numbers are pretty fictional. So, let’s just say we we didn’t want to estimate quite so high. We thought that was a bit presumptuous, just as a hunch. So, we recalculated the numbers based on profit instead of revenue. For our model, let’s just say that got us closer to a $1.2m valuation, which seems a bit closer to expectations.

Anyway, that’s how we did our pre-money valuation. If you’re doing anything else, then forget everything I just said and go listen to these guys chat about cap tables. They know what they’re talking about.

[tags]finance, money, corporate, valuation, company, pre-money, estimate, angel, vc, venture capital[/tags]