Are you promoting or financing a cockfight? If so, you should really be aware of a few legal issues you might face along the way. I recently ran into them head on.
A while ago, our Peruvian partner posted this cockfighting loan on our site. Immediately, two things happened. 1) a swathe of lenders rushed to finance the cockfighter and 2) some very angry people wrote in to protest. Later, our sad weekly newspaper wrote about it.



Occasionally, I do customer service. I was doing it much more over the holidays. Things have slowed down a little bit since February so I only take the most controversial issues. I'm also an armchair attorney. The cockfighting loan has raised some interesting legal questions that our real attorneys helped answer.

First of all, is cockfighting legal in California? No sir. In addition to the state law, it's banned at a federal level. The (federal) Animal Welfare Act of 2007 came in part as a response to the Michael Vick case. In layman's terms, it holds that we must not (1) advertise or promote an animal fighting venture in interstate or foreign commerce (2) sponsor or exhibit an animal in a fighting venture in interstate or foreign commerce (3) buy, sell or transport an animal for fighting in interstate or foreign commerce (4) buy, sell or transport a weapon designed to be used by an animal in interstate or foreign commerce. This part of The Act specifically refers to any sharp instrument attached to the leg of a bird.

All of these points are bounded to the realm of "interstate or foreign commerce." Interstate commerce involves transport between two states. Foreign commerce involves transport between the USA and any foreign country. Thus, individual states may permit animal fighting, but federal government specifically prevents any animal fighting activity that crosses a state border.

In addition to Michael Vick, Amazon.com and the US Postal Service have recently been hit with animal fighting-related charges. Who would have thought? Amazon.com is accused of selling magazines that promote cockfighting. The USPS is accused of transporting them between states. The Humane Society leveled the charges and is seeking to forbid any periodicals which promote animal fighting.

So is it legal to send money abroad to further cockfighting in another country? I think so. Foreign commerce must involve the shipment of items to the USA or from the USA. In the Kiva cockfighting case, no such movement occurred. Sure, a Peruvian MFI staff member promoted a cockfighting venture on a website served up in the USA. Sure, funds flowed from PayPal accounts of lenders in the USA. However, no items were shipped. Thus, if we take the Animal Welfare Act as our guide, it seems pretty clear that Kiva did not run afoul of the law.

"Never lead with legal." That's a phrase I've heard a few times lately and I think it's right. Strategy should guide decisions with the law being a critical filter for approving such decisions. The fact that we can get away with cockfighting loans on our site shouldn't be the key driver of our decision whether to allow them in the future.

The real question is whether or not permitting these loans is a good strategic choice. In particular, does this somehow help Kiva achieve its mission of connecting people to alleviate poverty? It's debatable. I think that allowing our partner to decide which loans to post without much interference is a good thing. We can be paternalistic when we start imposing our moral framework upon societies half a world away. Cockfighting in Peru is legal and part of a rich cultural tradition. It may not be humane or palatable from a Western perspective, but that misses the point. Kiva, the organization, should not be making those decisions. Our lenders should be the ones voting with their dollars.

We've had tobacco farms, butchers, and taxi cab loans on the site. For these and more, our lenders have complained. I understand their disgust most of the time. Still, I also understand that Seitan is not such a hot commodity in Uganda and that the Prius is not the most practical option in Bulgaria.

A word of caution: Don't even consider promoting or sponsoring a cockfight in the USA. Especially don't try to transport anything related to the fight from a state to state or out of the country. Also, don't buy cockfighting magazines.  Also, don't spend too much time thinking about cockfighting. To be honest, you are best to stay away from the subject entirely. I know it has wasted a lot of my time!

I'm on my way home from DC to SFO. The window seat right behind the exit row. You know the seat without any seat in front of it? Nice.

This blog entry is about stored value -- yours and ours. Kiva is an example of a "stored value system." By that, I mean that we are storing value on others' behalf. More specifically, we are holding funds for you. Other examples of stored value systems are Western Union, PayPal, Itunes, the New York Subway system and more. There are pluses and minuses involved in running such a system.

Just recently, Kiva formed an LLC subsidiary. A "for-profit", if you will. Let's let that sit in. Ahh.

I'm sure the euphemistically named KivaFriends community loves this idea. (I'm just playing around KF, you are not euphemistically named. You really are friends, right?)

The name of the LLC is "Kiva User Funds, LLC". It's a shell company that we now use to house every penny that belongs to our users. It has no employees and all revenue it generates is donated to the nonprofit "Kiva Microfunds" which owns the LLC. It has one revenue stream, the interest accrued off the funds stored in the savings account used to house the user's money. (some people call this "float")

Why did we form this entity? Not for profit's sake. We will accrue no additional revenue, only additional cost, because of this move. Kiva Microfunds previously housed our users' funds in a savings account of its own. This posed a risk, our accountant advised. By housing user funds in the same entity, their fate was intimately tied to the fate of our nonprofit. If our nonprofit ever encountered financial difficulty, the funds would be less protected. For instance, if an angry ex-employee sued us (victoriously) for millions, the funds could be seized. Creating a separate LLC was a preventative move in case something crazy like this ever happened.

Why do we have user funds to be housed at all? First, there is an up-to-30-day lag between when a user makes a loan and the funds are sent overseas. Second, alhough our users don't get their money back until the end of a loan (usually 10-12 months), Kiva is collecting repayments from our Field Partners quarterly. Third, often users leave money in the still in the system after it is repaid. When this happens, the funds stay stagnant in the US savings account.

The first point is relatively non-controversial, so I'm not going to elaborate. Point two is possibly controversial though, so I'm going to elaborate. The system was designed this way to reduce the number of bank wires between Kiva and Field Partner. Bank wires often cost around $40. So we decided to bill quarterly. However, we wanted our users to hear about entrepreneur repayments in real time. Thus, we we let our Field Partners post repayments at any frequency they chose. However, we bill them quarterly. The lag between recorded entrepreneur repayments and the funds arriving in our USA account means that we can't pay our users back at the moment a repayment is recorded on the site. We could conceivably have designed it so we paid out quarterly, but that seemed overwhelmingly complex for my burdened 2005 brain. I'm feeling a little lighter lately and we have many more brains behind us. Thus, later this year we will release a system that pays out monthly to our users. This will unleash an exciting amount of liquidity to the marketplace.

The third point is growing in importance. Our users are leaving their money in the system too much. Too much for what? Too much for the good of the entrepreneurs we are trying to serve. Last time I checked, approximately 40% of all repaid monies were unused and remained in our bank account -- in the form of "Kiva Credit". 50% has been relent and 10% withdrawn. That means that a sizeable amount of users have money that needs to be used. They could lend it to help someone who needs it, or they could at least withdraw it and buy a meal. Either would be better than the present reality of stagnant funds.

We have no expiration policy for this kind of stagnant Kiva Credit. In the last year, as an amateur lawyer, I've waded into the area of law we know as "escheatment" (pronounced uh-sheet-mint). escheatment has to do with what you do with other people's money when they don't claim it. For instance, what should a landlord do with a renters' deposit if the renter leaves without claiming it? In some cases, the landlord might need to "escheat" it to the government. It all depends and the laws vary state by state. Right now, we escheat your money to nowhere. It just sits there...for all eternity, and we remind you to use it. Once I get our General Counsel hired, we might fix this. We might figure out how to escheat it to someplace much more useful.

And now a final point. Hey you, reader of this blog. You have a lot of value -- stored value. And it doesn't accrue interest. So just do something with it. OK?

I leave in 3 hours to go on another trip.  This time to Brussels via Washington DC and Amsterdam.  It seems the only time I think to write on this blog is when I step away from the daily reality of being in this mad office.

Last time I wrote, I promised from Vegas to elaborate on our company's strategy in the coming weeks.  My Vegas promise fell empty, since it's been six.   I've been falling short in so many ways.

Tomorrow, I'll be at the National Prayer breakfast in DC.  That's where Jess and I met at the turn of the millennium.  I was in my final months as a student in philosophy at Stanford.  Jess was student body president at Bucknell.  She was invited,  I snuck in via my sister Brooke who was running the event.  Tomorrow, things will come full circle as I sit in awe as I watch Jess address the Breakfast as speaker. 

Then, I'm off to Europe...gonna visit Amsterdam and a cluster of foundations associated with the Dutch lottery.  In Holland, the National Postcode Lottery gives half of its profits to charity. Kiva was a lucky beneficiary this spring of the DOEN Foundation, which is the fund of the Dutch Charity Lotteries. The DOEN foundation took a risk on Kiva at a time when we needed it most.  I'll be forever grateful to DOEN for helping us grow into a more mature institution from the fledgling startup we were at the time.   After that, I'm off to visit Laurent in Brussels, who single handedly has put computers and cameras in the hands of our partners in Africa.  Equipment like this has been a big barrier standing between our lenders and borrowers.  I'm excited to put a face behind that legend that has become Laurent. 

My work has taken on a schizophrenic tone in the last few months.  Fundraising requires big dreams and an ability to absorb tons of feedback.  Running an organization is been an exercise in structure, saying no, and avoiding distractions.  Balancing both mentalities within the confines of a single day has been challenging.  I have no cause to complain.  Most of all, life has been a surreal dream for the past few years. 

I was right, in December 2005.  This project has definitely taken on a life of its own.

I am now on a flight from Pittsburgh to Las Vegas and eventually back to SF.  Jess and I spent the last week celebrating Christmas in Pittsburgh -- which was oddly warm this year.

I launched this blog a little over two years ago and did much of my first writing just after I quit my job.  That was also the year I celebrated Kwanzaa for the first time;  I never could find a black candle. 

Oh man, so much has changed since then! 

We had our annual board meeting in November.  One thing we did was present a pretty aggressive budget.  All in all, it adds up to about $4.7M in costs, up from just $1.7M in 2007 and $200K in 2006.  The main drivers of the costs are training, relationship managers and audits.  The staff costs associated with building an international partner base can be staggering.

That is some real growth and it was hard at first to swallow figures like that.  Hey, but it's not us driving the growth.  It's our lenders.  They are demanding it.   As I put it at a meeting with the Skoll Foundation a few weeks ago -- we feel like we are at a "go big, or go home" point in our history.  Going small (or home) could be disastrous in a world as big as this one. 

What did we learn this year?  It boils down to three main lessons:

1) Lender enthusiasm is abundant
This is the biggest shock of the year -- the sheer enormity of enthusiasm and untapped demand in the space of online microfinance.  In 2007, we went from $2M loaned to $18M in loans (cumulative).  We went from 30K users to over 200K.  We were on the Oprah Winfrey show, CNBC, the Today Show, ABC News, blah blah. Come on!  That's crazy talk.  Seriously, those numbers would have broken my brain a year ago.  Scaling this model this year has felt like trying to fit the NBA finals into Stanford's Maples Pavillion -- not easy, but a lot of fun.   

2) Scaling partnerships is difficult
We are reaching out to the long tail of MFIs.  The microfinance world is colorful, scattered, bulging and full of promise.  There are thousands of MFIs out there within our reach.  That said, few of them are ready for truly commercial capital.  Even more, those that are commercially viable are soaking in debt capital.  Kiva is trying to change that game by creating a transparent, Internet based marketplace for MFIs of different shapes and sizes to reach out to the world of online lenders to raise capital for their borrowers.  We are now helping around 80 of such organizations expand their reach...fast.  Doing so can be a bumpy road.  Many MFIs aren't equipped to handle rapid growth.  We have found that out the hard way.  The exuberance of this year has come back to haunt us at times.  We've had a few MFIs flame out completely because of mismanagement and even fraud.  Dealing with it has been heart-wrenching and has introduced a new pressure that sinks in as I sleep and jolts me awake in the morning. 

3) Our users desire transparency above all
The Kiva community of lenders continues to amaze me.  In effect, they are trading risk, and the hope of profits, for stories of impact and total transparency.   The more transparent and site we can make this marketplace, the more our lenders respond.  The site has gone through repeated, chronic and extended periods of inventory shortage.  Instead of trying to artificially rush the marketplace and grow at an abnormal pace, we have learned to simply be OK with the fact that we can't grow the partner base as fast as the lender community demands.  In doing so, we have built a level of trust and understanding with our users.

In addition, the site has seen MFIs with high delinquency rates and others that have collapsed all together.  We currently have a 99% repayment rate, a 3% delinquency rate, and a refund rate of nearly 3%.  The last statistic covers a number of loans that we refunded to users this summer because we learned that not all of the funds reached the intended recipients.  We sent out a message to lenders indicating this fact and issuing the refund.  The response was incredible and it turned out to be a teachable moment for both Kiva and it's lenders.  Refunding loans is not something we intend to continue as a long term policy!

So those are the main lessons we learned this year.  So what are we going to do?  We reduced our high level strategic goals to four:

1.  Double absorption capacity
2.  Diminish fraud
3.  Deepen lender engagement
4.  Increase transparency

This blog is too long, and we are boarding now.  I'll dive into these points in the weeks to come.  Happy new year. 

Kiva is once again taking on an Eastern European/Central Asian flavor.  As you check the website from now until the end of the year, you should see a high concentration of Bulgarians, Azerbaijanis, Moldovans, Tajikistanis and the like.  

There are two factors strongly at play here.  1) The presence of many highly-dependable and scaleable micro-finance institutions in that part of the world and 2) The fact that loans from these regions are the least desired on the site.  Recently, it's been taking 1 day on average for a loan to become fully funded.  The Azerbaijani loans take 3.7 days to be funded on average and are only 30% larger in dollar amount.  Why is that?  Who knows...

Premal is in Kenya.  Among other things, he is consulting with an ailing WEEC and helping kickstart our partnership with BRAC in East Africa.  WEEC, as many here know, suffered a huge loss with the passage of Jedidah Waigwa last Spring.  Ever since then, they have had trouble moving forward and are experiencing over 30% delinquency across their Kiva portfolio.  This has raised an important question inside our organization:  How much should we get involved in building the capacity of our partner base?  How much should we intervene when a partner is in turmoil?  In this case, we've pretty much made up our minds -- we are doing *alot*.  More on that in the months to come...

BRAC -- the world's largest NGO(?) -- is a slightly sunnier development.  BRAC is a modern marvel and has recently taken its recipe for microfinance into the eastern shores of Africa.  As a Bangledeshi organization moving continents, one might perceive potential difficulties in setting up operations.  None-so-far from everything we've heard.  Interest rates: relatively low.  Repayment rates: relatively high.  Portfolio growth: extremely fast. 

Premal had significant cargo to carry.  The Kenyan and Ugandan border crossings can be intimidating.  How would they react to a party with 25 cameras?  Often, governments want to get into your goods.  We haven't heard back, but I assume he arrived safe -- cameras and all.  Often, cameras are a surprising last mile barrier between borrowers and thousands of dollars in low cost debt pouring through the Kiva website. 

We have a donor -- Laurent Drion of Brussels -- who makes sure that lack of cameras are no excuse.  Laurent, a venture capitalist, started one of the biggest Macintosh distribution businesses in Belgium.  The man moves consumer electronics  -- now to Africa.    Thank you Laurent.  Soon, cameras will be flashing for BRAC in Tanzania, Uganda and Southern Sudan.  Sudan?  You can do microfinance there?  If anyone can, BRAC can.

When I was an undergrad at Stanford, I had trouble articulating what I wanted to do after school.  The best I could say was that I wanted to be an "entrepreneur."   That, however, is not very specific -- more of an adjective than an occupation.  I racked my brain in my free time to try and figure out how everything would eventually materialize. 

Graduation was a looming worry.  School ended in June.  By April, I had secured my first job....summer intern at a startup called "Pinacus."  We were 11 guys and 1 girl, working out of an apartment in Menlo Park.  I worked in the bedroom, programming in Java and doing random tasks around the apartment.  We were trying to create the world's first "content marketplace."  That might have been a good idea, except for what happened in the Spring of 2000. 

I had no concept of how a stock market crash could effect our small angel-backed startup, but it didn't matter.  By July, I was unemployed.  We folded up shop, broke our lease, and returned half of the angel investment.  Our model needed a significant round of Venture Capital.  I watched the founders come home disappointed day after day from their meetings on Sand Hill road.  It wasn't their fault -- most VCs were completely clamped shut. 

Freedom was good.  A week after the layoffs, I boarded the back of a U-haul truck on the way to New York.  Garth was moving to Manhattan and I tagged along.  He didn't let me drive because he didn't trust me behind the wheel.  I spent the entire voyage in the cargo area in the back.  We arrived in NYC in 3 days and only stopped once for any period of time.  Omaha baby. 

Blue Energy and Mathias Craig are in a last minute battle for the top spot in the CNN Heroes poll. At stake is a $25K grant. A grant like this would be a huge boost for Blue Energy at this young stage in the org's history. BlueEnergy builds wind turbines in the most remote and marginilized communities along the Nicaraguan Coast. As far as Kiva goes, we are bowing out of this race and conceding to the emerging favorite. It would mean a ton for me if the readers of this blog wouldn't mind simply voting here...for MATHIAS CRAIG (not Kiva!!)

http://www.cnn.com/SPECIALS/2007/cnn.heroes

What is blueEnergy?

blueEnergy is a nonprofit organization that provides a low-cost, sustainable solution to the energy needs of marginalized communities through the construction, installation, and maintenance of hybrid wind and solar electric systems. blueEnergy manufactures wind turbines and other key components locally to keep energy costs low, improve equipment serviceability, and create employment where it is desperately needed.

The high school football season is just kicking off.  Young ballers are getting the chance to prove themselves on the fields and under the lights of stadiums around the country.   Me, I'm hoping to finish the CY 07 season strong --  proving myself in the cubes and under the fluorescent lights of the office.  Last night, our team was put to the test.

We spent the night redesigning the repayments part of Kiva's website.  It's about the 5th time Premal, Ben and I have taken a crack at this.  This is one of several ways we are hoping to make life easier for our Field Partners by the end of the year.

A Field Partner is typically a small to medium size microfinance institution (MFI) who uses our site to raise money for their borrowers.  Our Field Partners are located in over 35 countries now.  Kiva can add a significant amount of overhead to the operations of a Field Partner.  Uploading loan applications isn't necessarily easy.  Everyday, loan officers and MFI administrators are uploading loan applications to the website.  They are often doing so from places where a page-load takes 20 seconds.  It takes about 10 page loads to upload a business, including an image upload, when things work out.  We are often talking about 4-5 minutes per business upload.  We have Field Partners that have over a thousand businesses funded.   

As a user, when you loan to a business on the site, you usually receive payment notices every month for every business you loan to.  The repayments are collected and registered on the site by our Field Partners.  For each of the thousand businesses that this Field Partner administers, the partner needs to register repayments once monthly. 

About a year ago, we realized that many of our Field Partners were having trouble doing so.  The sheer number of page loads was making it prohibitively difficult for a Field Partner to register repayments on time, even when the actual borrower collections in the field were happening like clockwork.  Thus, we introduced "exception-based" repayments.  The idea, used widely in MFI accounting systems already, is to have regularly scheduled payment registered automatically in a system unless the loan officer marks an exception -- an event signaling that something went wrong and the borrower did not pay the full amount.  Since borrowers typically repay 95% (or so) of the time, loan officers only need to register something 5% of the time. 

Kiva's first whack at exception based payments was very crude.  The feature was written by me in late '06 in between blog entries and trying to keep the site up.  Many of our Field Partners adopted the feature out of necessity and it saved them a lot of time.  However, it was very difficult to mark an exception, so most of them never did.  Thus, many of our Field Partners never mark exceptions and just repay all of their loans on time, even in the 5% case where the borrower defaults.  This creates misleadingly high repayment stats on the site and we are working to correct that. 

In addition to that, we are rolling out a number of features to further reduce the work required by our Field Partners and increase transparency.   Group Loans will go live on the site this week.  This will allow Field Partners to post up groups of up to 50 on the site as an individual loan application on the site.  Group-lending is common practice in microfinance, but was not well supported by Kiva until now.  In addition, we will be introducing local currency support for all of our Field Partners.  This will allow the disbursement and repayment amounts on the site more closely mirror the actual accounting books of each MFI.  This creates more transparency around financial flows.  It also paves the way for a future reality where our partners will not need to bear currency risk.   Hard currency lending has fallen out of favor in the microfinance world and we hope to soon be on the cutting edge of local currency lending. 

This blog became rather dense.  It started out talking about football and ended in currency risk.  Sorry about that.  I'm going out to shoot pool in the Mission with my friend Mathias Craig.  Have a great night.

What is this?  Another blog entry where I tell you how famous Kiva has become?  Well, sort of.

This week is the Clinton Global Initiative, a mecca of sorts for philanthropy in the US.  Premal, a co-conspirator and Intl micro-financier at large, was given the honor of speaking for the second year in a row.  I couldn't think of a better person to do it.  Nobody can convey the message of Internet micro-lending with the passion, sincerity and intelligence that Premal carries on his person (in addition to his blackberry)

Thanks, in part, to Premal, we are being hit with a new deluge of lenders, loans and enthusiasm.  A big thanks goes to President Clinton himself, who has unexpectedly become a spokesman for Kiva as well.

Mr. Clinton, do you read blogs?  If you do read this..."Thanks".  It's not just me thanking you;  there are thousands of entrepreneurs in the developing world for years to come who will have you to thank.  You have taken this cause to a new level.  Of all things you could have devoted your post-presidency to, you chose philanthropy.  And you are not just posturing either, you are serious and we can see that.  Kiva will widen its sails to catch the wind you have created. 

Read on.  This, from a recent interview with the President on MSN. 

http://www.msnbc.msn.com/id/21020060/page/2/

CLINTON:  Well, I can just give you an example of that — we can all be micro-bankers now thanks to a little Web site called kiva.org, which made its introduction here last year.

They came here for the first time.  And one of the people who followed us on the Internet, of the 48,000 people, several hundred of them made their own commitment.  One of them said, I’m going to loan $25 to somebody in Africa to start a business or expand a business.

When I featured them in my book and then went on “The Oprah Winfrey Show” and she brought them there, within three days, all of the people in Africa, Asia, Latin America, Afghanistan, every one of their businesspeople was fully funded within three days by people giving between $25 and $200.

It was amazing.  So now they all will get reports and when their loans are paid back, they can keep them or turn around and lend them again.  These are the kind of ideas that are circulating in the world.  And we can increase the visibility of the good idea.

And people, even with a very modest amount of money can have a huge impact.  Just think about it.  You and I could become bankers to people and we could monitor their progress and people in their neighborhoods will see and they will look for micro-loans, they have their own ideas, so we can give them a chance to raise their kids with dignity, send their kids to school, and in troubled places like Afghanistan, we marginally increase the chance that peace can prevail because people will see there is a positive alternative to conflict.

Jess is in Swaziland.   My Dad, Mike Flannery, is in town.   Last night, Dad and I went out to the Liberties on Guerrero  -- a couple of Irish lads at the local Irish pub. 

After a few Guinness , we were back home.  My laptop lives on my nightstand.  I checked in for one last glance at Kiva stats.   We were out of businesses and there was no way to make a loan.  This is the first time this has happened since January '06. 

Ms. Winfrey, you sold us out.  For you, I thought I would summarize the stats below. 

Last Week's Averages
-- 100K page views
-- 10K visits
-- $40K in loans raised
-- 250 users per day


Monday, September 3rd
-- The Today Show
-- The site stayed up
-- 24K visits
-- 331K page views
-- $97K in loans raised
-- Transaction cap was on limiting users to $25 per loan
-- 2089 new users


Tuesday, September 4th
-- The Oprah Winfrey Show
-- The site crashed 3 times for 20 minutes each during peak traffic
-- 94K visits
-- 992K page views
-- 4388 new registered users
-- $145K in loans raised
-- Transaction cap was on limiting users to $25 per loan
-- Thousands of email addresses collected during the crashes


Wednesday, September 5th
-- The day after The Oprah Winfrey Show
-- The site stayed up
-- 60K visits
-- 865K page views
-- 4067 new registered users
-- $153K in loans raised
-- Transaction cap was on limiting users to $25 per loan
-- We sold out around 10 PM PST  (we are still mostly out)

I don't have time to explain the strategy that went into creating this chain of events.  Rather, I'll just explain how I feel about it.  I'm ecstatic.  I don't think we made many mistakes this time around. 

At a high level, the strategy was guided by the following beliefs 1)  We  are no longer terrified of running out of businesses and will not sacrifice our best thinking around risk in order to avoid a shortage and 2) We are not going to overspend on infrastructure to handle temporary press events.   These lines of thinking contributed to the situation we are in now -- sold out of businesses with a website that went down a few times for short periods of time, but generally held up.  This is remarkably different than a year ago when we were on Frontline and down for 4 days.

I'm proud of the team.  Mike is proud of me.    Sam, Zvi and John:  You guys are heroes.  Same goes for you Ms. Winfrey.

For the past 10 months,  we have been operating in a state of suspended reality.  For the past 2 days, it has felt more like delusion.  We just got back from Chicago last night.  We spent yesterday morning at Harpo productions for an Oprah show taping.

The place is a fortress and Harpo definitely runs a tight ship.  We showed up at 7 AM and spent an hour and a half in the green room.  For the first time in my life, I got airbrushed.  By the time Jess and I proceeded into the studio, our faces were speckle free and mostly monochrome....ready for the bright lights and the intimidating gaze of Ms. Winfrey. 

A team of highly professional and kind producers and assistants made sure we were prepared.  We practiced our responses all morning.  However, you never know what Ms. Winfrey might come up with.  In the end, you better be able to throw your preparation out the door.  She will look at you when it's time to begin.

We were in the audience.  The show was focused on President Clinton's new book -- Giving.  We assumed our seats in the front row.  The President and Ms. Winfrey entered to great applause.  There we were, in the front row, about arm's length away as the interview began.

We were in the 5th segment.  I think that's right.  The President and Oprah ushered us through 4 segments of emotional conversation and specials.  I could almost touch them.  Even so, it felt like I was watching a movie -- however more frightening because the characters could call on you at any time.  You better be ready.

I couldn't pay perfect attention.  About 45 minutes into the show, the Kiva segment began.  A tape rolled highlighting Anne Brown, an artisan in Seattle who lent money to a seamstress in Ecuador.  I didn't watch too closely because I didn't want to be too emotional as the biggest interview in my life would begin.

Then she called on us.  Our most likely scenario was that Oprah would focus on Jessica, given that is a women-centric show.  We were wrong -- she focused on me.  How much has Kiva loaned so far?  How does it  make you feel?  How long does it take for an entrepreneur to get funded?  I could answer these questions in my sleep.  However, they came out in slow motion.  I didn't make any big mistakes.  I was serviceable, not incredible.  Since that time, I've replayed the answers in my head, second guessing every word.  I'll probably never get the chance to address that many people again in my life.  Thinking about it too much can drive you crazy. 

She turned to Jess and asked about her inspiration.  Jess got emotional.  It was an emotional moment. She delivered a heart felt account of how we began Kiva.   It was one of the more moving parts of the show. 

The President and Ms. Winfrey spent the next few minutes talking about the power of the Internet and "the Kiva model."  Watching this was truly surreal.  If you had told me a year ago that I would watch these two people discussing Kiva in front of millions on TV, I would have laughed.  I cannot tell you how ridiculous it would have seemed.  It still seems imaginary.

The show ended.  The President approached us to talk about Kiva and how he could help.  He noted that Jess used to work for World Vision and had apparently read our bios.  Are you kidding me?  Is this really happening?  President Clinton is an immensely personable person.  He would have stayed all day and talked to every single person in the studio if reality accommodated that.    The Harpo people had to remind him to move to the next venue. 

Tactically speaking, this will be a big week for Kiva.  Watch for the show on Tuesday, September 4th.   It's bound to be another order of magnitude shift for our young organization.  We will do everything we can to react.

We just released a new risk rating system.  Like I said last time, we've been working on this for about six months.  You can check out the ratings here:

http://www.kiva.org/about/partners/

My guess is that most of our lenders barely noticed the addition.  It made it's way onto the live site with little fanfare or immediate effect.  About 10 people have written in about it and a few people have commented on Kivafriends.org.  Our daily loan volume continues at a steady pace.  Was it worth it?

From my perspective, it's been worth every month.  We did it because we feel it's important to educate our lenders about the true risks of lending on Kiva.org.  Compared to traditional investment products, lending on Kiva.org is relatively risky.  In doing so, our lenders are sending dollars to the most undeveloped places on Earth that are being handled by MFIs of all shapes and sizes.  Lenders are assuming 1) country risk 2) institutional risk and 4) the risk that a borrower defaults.  Kiva, as a young organization, is doing everything it can to minimize all risks, but cannot completely eliminate them. 

The risk rating system helps to educate lenders about the institutional risk.  We do this by assigning a 1-5 star rating to each MFI in our network.  1 star MFIs are generally seen as more risky and less likely to handle large volumes of loan capital effectively.  5 star partners are generally seen as less risky and very likely to be capable of easily handling debt capital and returning it dutifully to Kiva lenders.  Some of our MFI partners are large and established -- with sophisticated systems -- and some are very small with a less developed processes.  Several factors go into our ratings.  Key factors include the presence of audited financial statements, participation in a microfinance network, portfolio size, existence of credible outside funders, organizational age and financial sustainability.  In the future, we will make the scores more transparent so lenders can see exactly why a particular partner was assigned a particular score. 

There are conceivably 10K MFIs in this world. We currently have about 60 that have posted to our platform.  Of these, 16 have 5 stars, 18 have 4 stars, 12 have 3 stars, 6 have 2 stars and 10 have 1 star.   Low star ratings shouldn't be confused with low quality or low social impact.  Instead, low star ratings indicate that Kiva has less evidence that a partner will be able to repay loans as they scale. 

This portfolio breakdown is a pretty decent start, but we desire a portfolio more heavily weighted to less risky MFIs in the future because these are the MFIs that can most likely handle the growing amounts of debt capital being spent on our site by social lenders.  In the early days, Kiva has been too highly weighted towards riskier MFIs and that has limited the debt absorption capacity of our network.  This is changing rapidly for the better, however, as I write. 

Why did it take so long to get the rating system on the site?  It seemed like a pretty preposterous idea 6 months ago to think that we could rate MFIs in terms of credit risk.  After all, Kiva was started by a small team with experience weighted towards product vision and web technology.  Thus, we involved a whole host of amazing people and organizations.  Special credit goes to a few folks at Microrate, Unitus, Planet Rating, MixMarket who contributed their wisdom.  Advisors from these MF orgs and others helped educate our thinking as we evolved our model.  Erick Hong from Mercer Consulting was an amazing author of the model that, in the end, was used to generate the ratings.  The rating system, as it stands, is a work in progress that will definitely improve over time as our platform learns what truly determines the riskiness of a particular MFI. 

Kiva's repayment rates are high today.  The vast majority of MFIs in our network have performed and scaled well with Kiva.  A few have had problems and I expect there to be more difficulties as the loan amounts increase.  Certainly, there will be tough times ahead as our nascent marketplace matures.  We are far from a point of stability or predictable equilibrium and I still consider Kiva to be in the experimental stage. The kiva story will be a long one and we are just reading the preface today -- 3 years after the idea was born.  The idea has turned out to be bigger than we ever imagined.

In the meantime, we are doing everything we can to educate users about the potential risks. 

Life is busy as ever. The primary task -- building an organization to last. Some news:

-- We've added some amazing people to the team. In the last month we've added an illustrious engineer Jon Kart, a VP of microfinance Isabelle Barres from the MixMarket, a microfinance expert John Berry and a Finance Director Jen Hamilton. Hiring in a period of growth is a significant time commitment, but the commitment pays off many-fold when you hire the right people. These new friends are going to start paying huge dividends soon for Kiva.

-- Our focus these days is managing the mounting risk on our site as we start sending larger and large sums to the microfinance field partners in our network. Our solution is to be transparent to lenders about the risks of lending on our platform. To that end, we've created a risk rating system to be displayed to our user base which will go live later this week. This is one of the most significant accomplishments in our short history and is the culmination of nearly 6 months of work.

-- We are making a significant move to do more work in the field. Finally, we are at a point where we can afford this it makes incredible sense. We've sent over 40 Kiva fellows to the field, are conducting audits all around the world, and are signing up new MFIs by actually visiting them and training them. In our first year we had very few partners in South and Central America. We are just rectifying that by signing up high quality partners there, for instance Pro Mujer Bolivia and FINCA Peru.

-- I've been trailed by a Japanese film crew for the last week. NHK Japan is doing a series on social entrepreneurship and I've learned a lot about the evolving attitudes towards social issues in Japan thanks to a week hanging out with the crew. It's been a learning experience and so much fun to spend time with the crew. Hopefully, we will be able to handle the outpouring of Japanese interest later this year when the show goes live!

-- Kiva continues to face chronic shortages in businesses to fund as we try to accomodate the growing lender interest while managing risk on our platform. We've limited user transactions to $25 per user for the rest of the month to deal with the shortage. We live in crazy times!

-- I'm off to Aspen Colorado tomorrow to spend the rest of the week at the Brookings Institute conference on Poverty. I'm excited about the event but it will be hard to be away from home.

-- Jess and I just completed a move back to the Mission District/Noe Valley area where Kiva began. Her graduation from the Stanford GSB prompted the move and it is incredible to realize the dream of walking to work.

-- Jess just took off for a trip to West Africa to visit MFI partners there and she is working again for Kiva dealing with some of our relationships with MFIs in the field. It is amazing to be working together but hard to be apart.

-- We moved to a new office to accomodate the growth. Our team is in the process of moving from 10 to 20 people and needed a better space to handle the new activity. The new place is intimidatingly professional.

-- Kiva will be on the Today show this week or next. This is another humbling episode in a series of media events about Kiva and social entrepreneurship.

More to come.

The Internet is a big place. Pretty much everyday we get letters like this from all over the globe:

TO KIVA.ORG,

MY WIFE AND I STARTING ALREADY A PALM OIL FARM IN EAST-MALAYSIA (BORNEO), WE PLANT ALREADY 440 PALM TREES, BUT TO RUN A PROFITABLE BUSINESS HER WE NEED TO PLANT MORE TREES, WE HAVE OUR OWN LAND HERE, BUT IT IS A VERY RURAL AREA, SO WE HAVE TO CUT SOME SMALL FRUITTREES AND MAKE A ROAD ALSO TO OUR LAND, SO MY QUESTION NOW IS CAN WE ASK KIVA.ORG TO SUPPORT TO GET/MAKE A LOAN FOR US?

THANKS FOR YOUR TIME,

DIRK

MALAYSIA

Usually these emails come in ALL CAPS (for emphasis?). Some of them probably legitimate requests. Most of them are probably scams of the 419 variety. A palm oil farm? Sounds fascinating. I wish I could get involved. But I can't right now.

International, disintermediated Internet lending of the Prosper.com variety right now remains a pipe dream for the Kiva team. At first glance, it's definitely what we are all about. The mission of Kiva is 'to connect people through lending to alleviate poverty." The Internet is an incredible tool for removing layers of intermediation and connecting people who might not ever meet in the physical world. Lending is a binding tool to create lasting financial and emotional connections. We are seeing that every day on the site.

Microfinance is largely about banking the unbankable and providing low cost financial services to those left out of the formal financial system. The first seven borrowers on the site were unbankable. Jess and I couldn't send them funds via PayPal to an isolated village outside of Tororo Uganda. Still, we found a way to bank them. How? We went through a pastor who served as the critical connector between the bank and the first Internet lenders. "That's nice" any expert we talked to said. "But how is that going to scale?" Certainly we couldn't hire pastors in thousands of villages across Africa and beyond....

Prosper.com relies upon a few systems in the US that are not largely available in most of the developing world. First, they rely on electronic transfer to deliver funds. Lenders and Borrowers on Prosper transact through bank transfers connected to the web. This allows a lender to send money directly to a borrower with little intermediation. Second, they rely on a well developed credit rating system. FICO scores help lenders on Prosper differentiate between credit worthy borrowers and other less reputable investment opportunities. Last, they make use of a robust network of collections agencies which come calling on borrowers who fail to repay. None of these three exist in most of the places where we work.

So we looked to microfinance institutions (MFIs) as a more scaleable solution. MFIs serve all three needs nicely. First, they provide a hub for funds distribution. We can send MFIs cash through wire transfers who then distribute cash to isolated persons. Second, MFIs create a de-facto credit rating system through local reputational collateral. MFIs are deeply ingrained in communities and make use of an often informal sense of credit worthiness. Lastly, MFIs serve as collection agencies. There is nothing more motivating for collection than one's local reputation, relationship to a group and the prospect of future access to larger loans. MFIs are Kiva's answer to the more developed systems available in the USA.

So, will Kiva ever be able to provide truly disintermediated lending opportunities? Might we ever be able to get our funds right to someone like the Palm Oil Farm in Malaysia? The answer is , hmm, maybe.

Jess graduated two weeks ago. I had a lot of time to sit around with my family and read. I picked up Forbes Magazine. A cover story on African business reads:

With few banks around the continent, mobile networks pick up the slack. A South African company called Wizzit allows rural farms and other employers to pay their workers in credits that are good on a credit card or via cell phone. People can send one another money over the network or withdraw sums from a cash machine. With 160,000 users, stores are already using Wizzit to accept cell phone payments.

I heard about Wizzit this January and my mind raced. A few days later I heard of similar services across East Africa. In Kenya, Safaricom is following suit and so is K-Net in Uganda. Cell phones are life in East Africa. Sometimes it can feel like nothing works in East Africa -- except mobile. Even the poorest, most remote towns in Uganda are colored red and yellow with the Celltel brand. It seems like everything the govt touches goes to hell. Celltel, a banner to privatization, is thriving.

My imagination fades into the future. Can Kiva one day enable a loan directly to a Ugandan phone? It might not be so far off. Hold on Dirk.

Do you really want *me* managing finances anymore at Kiva?  Come on now!  Help me by finding someone to apply for this job.

Description

Position: Finance Director/CFO
Location: San Francisco, CA – Downtown/Mission District
Job Type: Full time with competitive salary plus benefits.
Contact: jobs@kiva.org

Do you have a strong financial background and the ability to assess new revenue opportunities? Kiva.org is a nonprofit organization that lets people connect with and loan money to unique small businesses in the developing world. To date, our lenders have sent over $8M to entrepreneurs in the developing world at the rate of over $1M per month.

Called by many news publications as "revolutionizing how donors and lenders in the US are connecting with small entrepreneurs in developing countries" and "Kiva simply democratizes access to a worldwide microfinance movement that has been empowering the working poor for two decades", Kiva.org is changing the microfinance landscape.

Finance Director/CFO

* Role title will be determined by candidate's background and skill set

Job Responsibilities:

* Prepare revenue forecasts, monthly management reports, budget, and board reports
* Strategize and forecast future earned revenue streams for the organization
* Create and keep updated Kiva's internal control documents
* Author and implement next generation billing policies with microfinance institution partners
* Perform daily reconciliations of our database and payment systems
* Manage Kiva's accounts receivable and accounts payable through Quickbooks
* Perform partner payments and manage our partner aging reports
* Liaison with Kiva's external accountant teams to facilitate audits and tax reports
* Work with our product and engineering team to develop future accounting features

Experience Required/Preferred:

* Background in microfinance
* Thorough knowledge of Quickbooks
* 3-5 years direct finance experienc
* Background in management consulting or banking preferred
* BA/BS degree required, CPA/CFA preferred

Throughout the year, Kiva has been making a push to sign up more established, pre-vetted microfinance institutions (MFI) partners to the site. This is in an effort to more safely place the growing amount of funds that our lenders are making available to the entrepreneurs that get posted to the site by these field partners. The amounts being loaned on the site are staggering and we feel a growing responsibility at Kiva to manage and reduce the risk exposure to our lenders. There is a paradox, however, in doing so. Usually, the organizations that are the most transparent and credit worthy are least in need of the funding. Kiva hopes to address this paradox by using the Internet as a reputation building mechanism.

I recently wrote a paper that will come out this week in the academic journal Innovations. Below, I'm pasting in a snippet from the paper which really describes what we are seeing and how we are using the Internet to access a new class of MFIs.

In the past few years, we have seen the formation and growth of a new group of funds that seeks to link the microfinance industry to the capital markets.These funds feed a substantial and growing desire among institutional and individual high-net-worth lenders to invest in microfinance in developing countries. These funds also value both social and financial return and are usually rather risk averse. This is a fantastic trend that will no doubt contribute to the rapid increase of borowers served.

Because these funds need to provide commercial returns,they are typically targeted towards the best of the “Tier 1”MFIs. Tier 1 MFIs, the largest and most established, account for just 200 of the approximately 10,000 MFIs in existence. Lists of these MFIs and their terms for accepting debt are widely available. They attract international debt because they have reached a substantial size, are well run, and can prove it through transparent financial statements.

While the number of Tier 1 MFIs is growing rather slowly, the number of investment funds is growing incredibly fast. Thus,we are beginning to see a fairly crowded situation where a growing set offunds is targeting a relatively small group of institutions. I would argue that the amount of capital available to the MFIs in this group, even if they increase beyond the current 200,will out- pace their capacity and numbers,leading to a significant bottleneck in supply. It’s natural to ask, then, why don’t we invest in the other 9,800 MFIs? The short, over- simplified answer is a lack of tranparency and commercial viability. Many of the 9,800 MFIs are extremely small, opaque, unsustainable,and often impossible to contact internationally. We call this the “long tail”of MFIs.

Since these MFIs are off the commercial radar screen, they often have trouble accessing favorable debt and building up a level of creditworthiness. But Kiva’s partnership strategy includes openness to connecting with the long tail of MFIs. We view our ideal portfolio to be a combination of very established and more commercial MFIs and less established MFIs. Our ability to take risks and dip into the long tail is what differentiates us from the microfinance investment funds.We are able to do so for two reasons:

1) We have a risk-tolerant source of funds.
Individual Internet users lending small amounts at a time have a greater appetite for risk than commercial institutions or wealthy individuals using microfinance as part of their retirement account. I would argue that this group represents a huge, sustainable, and grow- ing constituency that is not artificially subsidizing our partner MFIs in unsustain- able ways.

2) We use the Internet as a reputation-building mechanism.
Through Kiva, MFIs build a track record for borrowing and paying back in real time.Users can moni- tor the performance of each MFI and the borrowers associated with it. Thus, we are giving organizations the ability to prove themselves through performance in a similar fashion to how Ebay allowed lesser known individuals and businesses to become major e-commerce players through credibility scores.
 
Since its inception as a movement in the 1970s, microfinance has been largely about providing financial services to those outside the banking system. MFIs often provide loans to people who have no collateral, and no previous credit history or formal, traceable identity. They are able to do this because they use reputational collateral and a hope for future access to funds in order to enforce repayment. MFIs have achieved very promising results through this approach. Kiva, in many ways, is conducting a similar experiment in our relationships with MFIs. We are reaching down into the long tail of MFIs, giving them the ability to prove themselves as good borrowers on the Internet,put their reputation on the line,and gain the ability to access future debt.

In our first year, we started reaching out to Tier 2-4 MFIs, and they started reaching out to us.Building a partner base was slow at first.It took three months after the DailyKos event to get our first set ofMFI partners on the site.  By the fall, we had around twenty. As of April 2007, we have nearly forty. A handful of our partners are commercially viable and able to attract true investment capital. The majority,however,are not top tier. Thus,the Kiva website is providing them with a platform to demonstrate a track record of borrowing that may one day lead to their inclusion in the capital markets.

The scarcity mentality has been steadily run out of this organization -- for the better.  We are 11 strong now and are moving to an office 3 times the size of our current facility. In a month we will be 4 blocks down the road.  We are still in the mission for sure; however, we are dangerously far from Blowfish Sushi.  This could potentially put the 70% off Sushi deal at risk..

My life has definitely taken on a different rhythm.  I haven't pulled an all-nighter in months and I go to bed at 11 or so every night.  All the mad energy of our years in business I have been channeling back into my relationship.   Jessica is just about to graduate from the Stanford GSB so we have been spending most of our times together relishing our last days living in a cottage in the woods near Stanford.  It's been amazing.  In June, we'll be moving back to the city a short walk from where we work.

We were on CNN last week.  A short 2 minute segment keeps rotating during Anderson Cooper airings.  It's playing over and over today and causing quite a stir on our website.  As of 11 AM we've already done about $20K in business.  This won't be a record day, but close. 

CNN called us 'heroes'.  This is awkward, to say the least.  I've had to deal with a series of wise cracks from old friends who by chance saw the segment.  I look emotional in the piece.  I was emotional.  Those CNN interviewers really know how to get you in a sensitive mood. 

This we had the first Iraqi Businesses on the site. Our partner in Iraq is Iraqi Al-Aman center / Kirkuk . They are a USAID-funded MFI that is currently being protected, in part, by the US military.

Check it out. This man is using his loan to rebuild his electronics store after it was ruined by terrorists. His face has been masked in Photoshop in order to protect his identity.



This entrepreneur is a young man who owns a small computer and CD shop in Kirkuk. Two months ago, terrorists attacked his shop, and it was totally burned to the ground.

He wants to get back to work with the help of a loan from Al-Aman. He has two adorable children and he wants to send them to school. His son is 7 years old and his daughter is 5 years old. Al-Aman is very focused on helping this business, and wants to get the entrepreneur back to work. The Al-Amam staff is excited to see him get back to work and make money while paying back the loan.

Note: This entrepreneur is from a volatile region where the security situation remains unsettled. Personally identifiable attributes of this entrepreneur have been altered to protect him or her (i.e. blacking out portions of the entrepreneur in his/her picture, altering his/her first or last name, etc.).



Microfinance has a reputation as being relatively immune to political crises. Micro-borrowers operate in the informal sector and often buy and sell goods that fulfill the most basic needs of a population. In times of crisis, needs traditionally met through more formal channels often are largely shifted to more informal means. Kiva will be a good place to turn in the next few months to see if this dynamic plays itself out in Iraq.

The Iraqi loans went live on the site last week and were funded in an average of 13 hours. In about a half a day, our user base funded about $9000 in Iraqi loans. These days, the average loan takes about 1.5 days to fund on Kiva.org, so the Iraq factor turned out to be quite an accelerator. I guess political instability can be a positive within Kiva's inverted economy...