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No Phone? No Worries. Innovation in the Cloud Transcends IT

3/8/2012 --

No-phone mobile-phone service illuminates how ventures targeting the poor can deliver maximum social and financial impact.

ANN ARBOR, Mich. — Sharing mobile phones is a common practice among poor consumers at the base of the economic pyramid. Many customers use their own SIM card and switch it in and out when borrowing a mobile device. But privacy can be compromised and SIM cards are easy to lose.

Entrepreneur Nigel Waller saw an ideal opportunity to transform mobile communications and improve service to the poor. He founded Movirtu Ltd., a cloud phone service that allows people to manage their own mobile network accounts — phone number, voice mail, texting, etc. — without owning a phone or SIM card. It's a win-win: The service is priced for base-of-the-pyramid (BoP) customers and the mobile network carriers get a piece of the action. But founding a technology startup focused on serving the poor comes with myriad challenges. Professor Ted London's new teaching case on the company, Movirtu's Cloud Phone Service: Funding a Base-of-the-Pyramid Venture, explores how the entrepreneur balanced relationships with both impact investors and traditional venture capitalists to meet his goals. The case was featured recently in the Financial Times.

In the following Q&A, London, a senior research fellow at the William Davidson Institute, explains how innovation can spur ventures that sell services aimed at the poor in a way that creates value at the base of the pyramid and among the company’s investors.

London's case study, along with other cases by Michigan Ross faculty, is available at GlobaLens.com.

How big a role does technology, especially cloud computing, play in base-of-the-pyramid ventures?

London: In Movirtu's case, the company’s cloud phone services bring the ease of email accounts to phone numbers. We can access our email from any device. We don't need to own a computer. Movirtu's technology now makes this possible with a phone number. The customer at the base of the pyramid doesn't need to own a device or even a SIM card, which many people carry and plug in when they borrow someone else's phone. Cloud phone services offer the potential of a less expensive, more effective way for people with less income to access the benefits of a phone network.

In terms of impact, this can have huge benefits, including access to more information, connectivity to more people, and the saving of time and money. From the perspective of the poor and poverty alleviation, it's an intriguing way of thinking about how we can offer the functionality consumers desire with more and better convenience for less money.

This model demonstrates that kind of innovation is possible and can make a real difference in the lives of the poor. This particular case also can help instructors dispel the notion that buying from the poor is better than selling to the poor. Of course, as this case shows, a deep understanding of the business model and its potential impacts is required to make an assessment of whether a venture is good or bad for the poor. This is a model where you are providing services at a cost, but it can create a lot of value for the poor. Thus, instructors can use this case to prod students to develop a more nuanced understanding of impact assessment.

The founder of Movirtu sought impact investors, also known as social investors, for seed capital. How big a role do these types of investors play in base-of-the- pyramid ventures?

London: It’s substantial. Recent studies estimate the future impact investing market could be $400 billion to $1 trillion globally. And that's the other half of the case. The first part is about the technology and how you can innovate to serve this market. The other half is getting students to think about entrepreneurship in BoP markets. In particular, they need to think about how to raise the funds, as any start-up venture would. As this is the BoP domain, the case introduces the reader to impact investing, a growing pool of funds that explicitly seeks to generate both financial and social performance returns. This case helps students understand the pros and cons of going with impact investors compared with other types of funding, like traditional venture capital. And if you do end up securing impact investors and then want to look elsewhere later, what are the pros and cons of that? It gives you a real sense of how you go about funding a base-of-the-pyramid venture.

And that's what happened here. Movirtu received seed funding from social investors and sought an additional round from a more traditional venture capital firm, TLcom Capital. How do those two mix together?

London: The case shows that once you go down one route you're not necessarily stuck with it. There are challenges, however, that must be recognized and addressed. Impact investing often comes with some sort of subsidy. Often the rates of return are more friendly and the time frame for a return is a little longer. There's been a question as to whether, once you accept impact investors, you'll be of interest to more traditional funding. Movirtu shows that it is possible to attract investors with different financial and social performance expectations. Traditional investors still can be interested in companies that have received funding from impact investors. TLcom Capital didn't change its expectations for a base-of-the-pyramid venture versus a traditional one. They're looking for a traditional return.

But this does create challenges for the venture. How do you balance the needs of investors who may not necessarily agree with each other? They both want economic returns and they're both delighted to see social returns. The challenge for Movirtu is to achieve on both levels with returns that are sufficient to both investors. They need to be transparent about both their economic and social responsibilities. The needs of the investors are not mutually exclusive but they might not be perfectly aligned. That'll be a challenge for the company, but that's the kind of mutual value creation at the heart of the base-of-the-pyramid model. You can alleviate poverty while generating sufficient profits for investors, even when the investors come with different expectations.

Though the case ends with Movirtu contemplating the traditional venture capital deal, TLcom indeed invested $5.5 million. How has it worked?

London: Whenever you're talking about deals, there's information the parties can talk about and information they don't wish to share publicly. From what I can say, everything is going really well and the venture has recently gone from pilot to scale in Madagascar. They are also active in a number of other countries in Africa and Asia. All the investors seem happy. The case shows what you need to think about to raise funding. All options are on the table. One just needs to understand and balance the implications and expectations that come with each decision.

Funding and structure seem to be the key questions early on in base-of-the-pyramid ventures, including whether to be profit or nonprofit.

London: The case explores the risk and return from the for-profit or nonprofit decision. If you go nonprofit, you may have access to some grant funding. So the early-stage risk may be lower. But once you've chosen to be a nonprofit, it's difficult to get the kind of funding you need to really scale. It may preclude you from getting equity investment and you may need to develop some kind of hybrid approach. If an entrepreneur has visions of scale, some sort of for-profit structure may well make the most sense. It does limit your ability to get grant funding, though it doesn’t eliminate it. There's so much in this case to think about and talk about. There are all sorts of policy, legal, technology and environmental implications. Indeed, it goes beyond a business school case.

-Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu