Entries For: January 2007
2007-01-30
Tax Status Revisited
Filed Under:
A big theme of the journey through Kiva has centered around the decision of organizational type. Jess and I started out right away thinking it would be formed as a nonprofit. One of the first things she did was to look for an attorney to incorporate us as a 501c3. It took over a year from start to finish to get 501c3 status and it was a serious pain.
This summer was kind of rough in this regard. It was taking forever to hear back from the IRS. We sent a letter to them to expedite the process but didn't hear back for months. Kiva was crawling along at $1-$2K in loans and 25 new users a day. We weren't making traction very fast.
There are a lot of debates in social entrepreneurship around the topic of whether to become a 501c3 or become a for-profit. It's my impression that prevailing winds within the field suggest the for-profit model whenever possible. "It's hard to scale a non-profit" , I would hear a lot. Or, "you can access so much more capital" if you convert to a for-profit model.
That was just my experience with people in the social sector. However, It contrasts sharply with what I heard from the financiers of the tech world, Premal and I spent a fair amount of time in the offices of Sand Hill Road...especially last summer. In general, the VCs we talked to wanted to consider ideas that had a decent shot at a 10x return on their investment. When we ran models of trying to eke a 10x return out of Kiva's model, it never felt quite right.
We also briefly looked for "patient capital" investors but turned up very little. There just not a lot of that patient capital out there knocking down doors. This new, but limited, class of investment is arguably harder to access than donations.
I've had the luxury of working closely with three experienced angel investors on the board. This fall I was at a breaking point. At our October board meeting, we were down to $15K in cash reserves with a monthly burn rate of about $15K. Fundraising was getting pretty urgent and wasn't sure if we could hit payroll. I ran the for-profit idea past the investors . Unanimously, the board shot down the for-profit idea. One board member asked us to call him if we were about to hit zero so he could liquidate some of his assets.
Right after that, the Frontline PBS show happened. Combined with a new model around optional lender fees, we became cash-flow positive the next month. We now have much more predictable income and are financially stable. We never had to call for a liquidity event.
I'm not religiously tied to the nonprofit structure. It's working for us now, and has several advantages. Prominent among these is user good will and branding. I consider Kiva to be a public property owned by it's users. This feel would be harder, but not impossible, to pull off if we were a for-profit. There is a level of trust we gain as a nonprofit that would be harder to gain as a for-profit. Equally important are variable cost savings because of donated services. Right now, PayPal has donated free transaction processing to us, which means we aren't charged the usual 3% off of every transaction. Our model would be much more difficult to pull off without PayPal's partnership.
For anyone deciding between the two, my main thought is to be fiercely practical -- not religious -- about the org type you choose. These are tax-structures, not religions, you are choosing between. Each can be maximized in it's own way if you just focus on getting work done.
This summer was kind of rough in this regard. It was taking forever to hear back from the IRS. We sent a letter to them to expedite the process but didn't hear back for months. Kiva was crawling along at $1-$2K in loans and 25 new users a day. We weren't making traction very fast.
There are a lot of debates in social entrepreneurship around the topic of whether to become a 501c3 or become a for-profit. It's my impression that prevailing winds within the field suggest the for-profit model whenever possible. "It's hard to scale a non-profit" , I would hear a lot. Or, "you can access so much more capital" if you convert to a for-profit model.
That was just my experience with people in the social sector. However, It contrasts sharply with what I heard from the financiers of the tech world, Premal and I spent a fair amount of time in the offices of Sand Hill Road...especially last summer. In general, the VCs we talked to wanted to consider ideas that had a decent shot at a 10x return on their investment. When we ran models of trying to eke a 10x return out of Kiva's model, it never felt quite right.
We also briefly looked for "patient capital" investors but turned up very little. There just not a lot of that patient capital out there knocking down doors. This new, but limited, class of investment is arguably harder to access than donations.
I've had the luxury of working closely with three experienced angel investors on the board. This fall I was at a breaking point. At our October board meeting, we were down to $15K in cash reserves with a monthly burn rate of about $15K. Fundraising was getting pretty urgent and wasn't sure if we could hit payroll. I ran the for-profit idea past the investors . Unanimously, the board shot down the for-profit idea. One board member asked us to call him if we were about to hit zero so he could liquidate some of his assets.
Right after that, the Frontline PBS show happened. Combined with a new model around optional lender fees, we became cash-flow positive the next month. We now have much more predictable income and are financially stable. We never had to call for a liquidity event.
I'm not religiously tied to the nonprofit structure. It's working for us now, and has several advantages. Prominent among these is user good will and branding. I consider Kiva to be a public property owned by it's users. This feel would be harder, but not impossible, to pull off if we were a for-profit. There is a level of trust we gain as a nonprofit that would be harder to gain as a for-profit. Equally important are variable cost savings because of donated services. Right now, PayPal has donated free transaction processing to us, which means we aren't charged the usual 3% off of every transaction. Our model would be much more difficult to pull off without PayPal's partnership.
For anyone deciding between the two, my main thought is to be fiercely practical -- not religious -- about the org type you choose. These are tax-structures, not religions, you are choosing between. Each can be maximized in it's own way if you just focus on getting work done.
2007-01-16
Scarcity Mentality
I'm having a slight identity crisis and it involves scarcity.
For the past two years I've operated in an environment where scarcity was the rule. We had a really small budget and stretched it so wide. We used open source methodologies, we had no IT person, no travel budget, no QA testing, no paid accountant, used furniture, little insurance, no computer budget, no server administrator, low budget hosting, a CEO who writes code, etc, etc. Most of all, we had no free time and all became workaholics. I'd venture to say I saw the sunrise 100 times last year.
Scarcity, while we might complain about it, can become a badge of honor as well. In the nonprofit world, I see that all the time. Nonprofits often compete in terms of their overhead ratios. Most every nonprofit out there advertises to it's funders how it likes to keep overhead low so that the majority of funds it raises goes to constituents. Kiva is not all that different. Last year we raised $2M in loans through our website and spent about $200K on our own staff (aka overhead). Thus, we can advertise that our overhead was no more than 10% of the total funds sent to our consituents. That's golden in the fundraising world.
This kind of competition, while it seems logical to the public, can also be destructive. For instance, is it a good thing that Kiva had no QA testing process last year? Sure, we spent less on dreadful *overhead*, but at what cost? A buggier website?
I've definitely thrived on the narrative that Kiva, despite a lack of resources, has overcome enormous challenges and made a positive impact on the lives of thousands. That's a very motivating story. The question is, how will things change once we have more resources? Is there a way to maintain a similar motivation in an adequately- funded organization? Also, can we break the destructive scarcity mentality?
In the last post, I asked everyone how much loan volume they would predict for Kiva in 2007. THANK YOU for all of the comments. Since I spend all my time building an organization, I don't have time to blog a ton right now or respond to all the comments. I read them all and they guide my thinking. I really appreciate the sense of community that is evolving on this blog.
Olana, Premal and I have put together a budget to present to the board. We set the big goal next year at $10M in loans, but have contingincies in place for smaller and larger amounts. This means our overhead budget will go to about $1M for the year. IMHO, this is enough to adequately staff and resource our org for a $10M year. We need to get approval from the board. Pending that, we will be hiring soon....
For the past two years I've operated in an environment where scarcity was the rule. We had a really small budget and stretched it so wide. We used open source methodologies, we had no IT person, no travel budget, no QA testing, no paid accountant, used furniture, little insurance, no computer budget, no server administrator, low budget hosting, a CEO who writes code, etc, etc. Most of all, we had no free time and all became workaholics. I'd venture to say I saw the sunrise 100 times last year.
Scarcity, while we might complain about it, can become a badge of honor as well. In the nonprofit world, I see that all the time. Nonprofits often compete in terms of their overhead ratios. Most every nonprofit out there advertises to it's funders how it likes to keep overhead low so that the majority of funds it raises goes to constituents. Kiva is not all that different. Last year we raised $2M in loans through our website and spent about $200K on our own staff (aka overhead). Thus, we can advertise that our overhead was no more than 10% of the total funds sent to our consituents. That's golden in the fundraising world.
This kind of competition, while it seems logical to the public, can also be destructive. For instance, is it a good thing that Kiva had no QA testing process last year? Sure, we spent less on dreadful *overhead*, but at what cost? A buggier website?
I've definitely thrived on the narrative that Kiva, despite a lack of resources, has overcome enormous challenges and made a positive impact on the lives of thousands. That's a very motivating story. The question is, how will things change once we have more resources? Is there a way to maintain a similar motivation in an adequately- funded organization? Also, can we break the destructive scarcity mentality?
In the last post, I asked everyone how much loan volume they would predict for Kiva in 2007. THANK YOU for all of the comments. Since I spend all my time building an organization, I don't have time to blog a ton right now or respond to all the comments. I read them all and they guide my thinking. I really appreciate the sense of community that is evolving on this blog.
Olana, Premal and I have put together a budget to present to the board. We set the big goal next year at $10M in loans, but have contingincies in place for smaller and larger amounts. This means our overhead budget will go to about $1M for the year. IMHO, this is enough to adequately staff and resource our org for a $10M year. We need to get approval from the board. Pending that, we will be hiring soon....
2007-01-02
Seasonal?
Filed Under:
Our site has been branded around small loans, with a primarily African focus. We started in Uganda with $300 - $500 loans which seemed large at the time. In that part of the world, a $500 loan is a usually a second stage loan given to somebody that has already proven some ability to repay a micro-loan in the past. When the first round of Ugandan loans was posted up, we wondered how users would react.
If you look at our site at this very moment, for the most part, you will see a pretty different story. Most of the loans currently listed are $1000 and up....with a heavy focus on Eastern Europe. Why is this? You ask. It's not because our partners in Africa, South America and elsewhere aren't posting up smaller loans.
Instead, what is happening is that our partners in these parts of the world are posting quite a few smaller loans every day. It's just that these loans are the first to be funded and moved to the "raised" section of the site. Thus, what you see on the site usually are the loans that take the longest to be funded.
This points to an interesting phenomenon: users prefer small loans. Also, users seem to prefer African loans above all. Thus, when a partner posts up a an African, female, agricultural entrepreneur, this entrepreneur gets funded sometimes in minutes. On the contrary, an Eastern European retail store or taxi driver will sometimes take weeks to be funded. Every loan is getting funded, just a drastically different rates.
Another, more important phenomenon, has happened to us: a pretty drastic surge in business. I wrote that, while in Toronto, I watched our user base and our loan volume double. We crossed the $1 million mark in November. The trend has only accelerated: we crossed $2 million last week. We have amazing lenders. This has caused growing pains for those of us writing software, for our partners posting loan opportunities, and for the rest of our staff which has been tirelessly working to sign up more partners and conduct due diligence. It's a cliche around here: these are all good problems to have.
Check out this chart of our traffic and loan volume. If you have a sec, let me know what you think. How much of this growth is seasonal? If you were me, how much loan volume would you predict for '07?
If you look at our site at this very moment, for the most part, you will see a pretty different story. Most of the loans currently listed are $1000 and up....with a heavy focus on Eastern Europe. Why is this? You ask. It's not because our partners in Africa, South America and elsewhere aren't posting up smaller loans.
Instead, what is happening is that our partners in these parts of the world are posting quite a few smaller loans every day. It's just that these loans are the first to be funded and moved to the "raised" section of the site. Thus, what you see on the site usually are the loans that take the longest to be funded.
This points to an interesting phenomenon: users prefer small loans. Also, users seem to prefer African loans above all. Thus, when a partner posts up a an African, female, agricultural entrepreneur, this entrepreneur gets funded sometimes in minutes. On the contrary, an Eastern European retail store or taxi driver will sometimes take weeks to be funded. Every loan is getting funded, just a drastically different rates.
Another, more important phenomenon, has happened to us: a pretty drastic surge in business. I wrote that, while in Toronto, I watched our user base and our loan volume double. We crossed the $1 million mark in November. The trend has only accelerated: we crossed $2 million last week. We have amazing lenders. This has caused growing pains for those of us writing software, for our partners posting loan opportunities, and for the rest of our staff which has been tirelessly working to sign up more partners and conduct due diligence. It's a cliche around here: these are all good problems to have.
Check out this chart of our traffic and loan volume. If you have a sec, let me know what you think. How much of this growth is seasonal? If you were me, how much loan volume would you predict for '07?
