Profits, With a Conscience

Most of the world's largest and most profitable companies are still trying to figure out how to make money by selling to the poor in fast-growing, low-income markets. David Green, an American social entrepreneur with no business background, wants to show them how it's done.

Mr. Green has spent more than 15 years making expensive medical products affordable to the world's poorest people, and
now he is out to prove he can turn
it into a sustainable, for-profit business.

In 1992, Mr. Green helped create India's Aurolab, a nonprofit organization that is now one of the largest manufacturers in the world of intraocular lenses, a treatment for cataracts, a leading cause of blindness. To launch Aurolab, Mr. Green collaborated with the Seva Foundation, a Berkeley, California-based nonprofit that focuses on blindness prevention, and the Aravind Eye Hospital in Madurai, India. With sales of more than 600,000 units per year to 86 countries, Aurolab has 7.5 percent of the sector's global market share. And even though it sells its lenses for $4—compared to over $100 in the United States—the company has profit margins of 52 percent.

"Profit and production capacity are utilized to fulfill social mission, which is making medical technology affordable and available to all." - David Green, Chief Technology Officer, Catalytic Health

Aurolab cycles its profits back into the business. "Profit and production capacity are utilized to fulfill social mission, which is making medical technology affordable and available to all," says Mr. Green.

With the help of partners, Mr. Green also set up suture manufacturing at Aurolab, and reduced the price of ophthalmic sutures from $200 per box to $30. Next, he tackled digitally programmable hearing aids, which sell for at least $1,500 per ear in the U.S. Aurolab's manufacturing cost is $50, and his cutting-edge hearing aids are sold for anywhere from $0 to $200 as part of a tiered pricing system.

Now, Mr. Green wants to take the same approach with other medical devices, and start making drugs for treatment of diseases like pediatric AIDS. But it's tough for a nonprofit to scale.

Thus, Mr. Green is joining the ranks of a small number of social entrepreneurs who are starting private, for-profit ventures and going to capital markets for funding. He is forming a San Francisco-based for-profit company called Catalytic Health with the help of two partners, Anne Wojcicki, a health sector investor at San Francisco's Passport Capital, a diversified hedge fund, and Bill Maris, a tech entrepreneur with a degree in neuroscience who has managerial experience. Ms. Wojcicki and Mr. Maris will run the company's operations, and Mr. Green will serve as chief technology officer.

Catalytic Health's founders say that some of the most well-known companies in Silicon Valley have offered to invest, although they won't make those names public. The company expects to raise $5 million to $10 million in the coming weeks.

"Reasonable Profits"

Today, established companies typically ignore the enormous market of poor people; although potential sales volumes are huge, profit margins are slim.

Catalytic Health aims to target that untapped space by producing cutting-edge medical devices and medicines at substantially reduced prices. The company also is aiming at developed markets like the U.S., where, for example, 80 percent of people who need hearing aids don't buy them because of high costs, says Mr. Green.

If the plan works, Catalytic Health will shake up the current market structure and do some good in the process. "Let's see if we can fashion a company that is profitable while serving the social mission of helping technologies get into the eyes and ears of those that need them most," says Mr. Green.

Other social entrepreneurs also are starting to raise capital to build private companies.

The key to sustainable capitalism is reasonable profits as opposed to maximizing profits.

Iftekhar Enayetullah and Maqsood Sinha, two entrepreneurs in Bangladesh who built an award-winning waste recycling venture in Dhaka by paying the poor for their food scraps and converting them into compost, have convinced a Dutch company to invest $10 million to turn their project into a nationwide, for-profit bio-gas venture.

And in recent weeks, Nic Frances, an ordained Anglican priest-turned-entrepreneur, has raised money from U.S. investors to help his Melbourne-based venture, easybeinggreen, cash in on Australia's $30-billion market for making homes more environmentally friendly.

Social entrepreneurs turning to capital markets "is definitely a trend," says Ben & Jerry's Ice Cream co-founder Ben Cohen, an informal advisor to Catalytic Health.

"The key to sustainable capitalism is reasonable profits as opposed to maximizing profits," says Mr. Cohen, who also serves on the board of PeaceWorks, a New York City-based profitable company that hopes to promote peace by selling food products made though the collaboration of Arabs, Egyptians, Israelis, Jordanians, Palestinians, and Turks.

"In the current system you have a segment of the society that is trying to maximize profits without a concern for the impact on the welfare of the society as a whole, and a set of non-governmental organizations and social service agencies that deal with the fallout," says Mr. Cohen. "That system doesn't work. What you need to do is to combine the sensibility of the social enterprise with the form of a for-profit business."

Catalytic Conversion

Mr. Green and his partners are convinced that model can work, though converting a nonprofit into a profitable company is a somewhat complicated process. Once incorporated, the majority of the raised money will go toward scaling up Project Impact's existing products. The rest will go toward new products, says Ms. Wojcicki.

Mr. Maris, who previously made investments in tech companies on behalf of Sweden's wealthy Wallenberg family, and then built and sold his own web hosting company called Burlee.com, is making Catalytic Health a full-time project.

If you want to scale and have global reach and don't want to remain on the margins then you need two things: lots of capital and the willingness to take risks.

"Our overriding mission as a corporation is to demonstrate that we can use our core competency to serve first and foremost the bottom of the human pyramid rather than serving them as an afterthought," he says, referring to C.K. Prahalad's term for the mass market of poor consumers.

So what will be the new company's secret sauce? Project Impact's manufacturing costs are the same—if not more—than larger, more established companies, says Mr. Green. And it doesn't cut corners. Mr. Green has made it a practice to hire the former heads of R&D from the best companies to design his products.

Another difference lies in the service delivery models and the fact that the company is looking to make money, but not maximize profits.

Take the case of India's Aravind Eye Hospital. With Mr. Green's help, the hospital has developed a world-class delivery system in eye care that is already spreading to South Africa, Cambodia, and Vietnam. The Indian hospital, founded in 1976 by Dr. Govindappa Venkataswamy, boasts the highest volume of eye surgery in the world. Last year it performed 220,000 eye operations: 80 percent were sight-restoring cataract surgeries.

To achieve that volume, the hospital divides the entire workflow from intake to surgery and patient care into standardized procedures performed by super-specialists. Well-trained doctors perform as many as 50 surgeries each day; on average U.S. hospitals do four per week. And patients pay only $50 for a simple cataract operation; in the U.S., the same procedure costs $2,500. The efficiency allows the hospital to attain 50 percent profit margins, even though 65 percent of the care is provided free of charge or below cost.

The hospital uses the same tiered pricing structure that Aurolab uses to sell medical devices. Mr. Green has duplicated this pricing model successfully for eye care programs in Malawi, Guatemala, El Salvador, Tibet, Tanzania, and Kenya. The challenge for Catalytic Health will lie in figuring out how to do this successfully on a global basis, while at the same time creating technology and offering new types of health care that can compete worldwide.

If other successful companies follow in Catalytic Health's footsteps, prices for medical devices and medicines will drop. And that, says Mr. Green, will be a welcome development.

Turning Trash into Cash

Reaching out to the bottom of the economic pyramid requires a new way of doing business, says the Ashoka Foundation in Arlington, Virginia, which has developed a program called the hybrid value chain, which attempts to create commercial partnerships between the business and social sectors.

It is already happening. Mr. Sinha, an urban planner and architect, and Mr. Enayetullah, an urban planner and civil engineer—both Ashoka Fellows like Mr. Green—set up "Waste Concern" in Bangladesh to tackle a huge environmental problem. Every day nearly 11 million people in Dhaka produce around 3,500 tons of solid waste, 80 percent of which is organic and suitable for composting. Dhaka City Corporation, which is understaffed and cash-strapped, can only collect half of the garbage, and the rest is left to rot in the heat and humidity in different parts of the capital, one of the world's most densely populated cities after Tokyo.

Mr. Sinha and Mr. Enayetullah motivated and trained hundreds of former waste pickers in five areas of the city to "turn trash into cash" by collecting it for composting. The United Nations Development Program provided Waste Concern assistance to help build the first organic waste-processing center in Dhaka. Using small bicycle-driven collection carts, the ex-waste pickers, who now work full-time for Waste Concern, collect organic garbage like kitchen scraps from local households. Using simple technology at their community processing center, they transform the waste into compost over a period of 55 days. The organic compost produced by Waste Concern is being used in rural areas throughout Bangladesh.

The company's founders now want to take the company to the next phase.

"If we can demonstrate that this business model works, we can really transform the lives of a lot of people. . . and perhaps change the world and the way the world does business," says Bill Maris, one of the founders of Catalytic Health.

With the help of a $10-million injection from World Wide Recycling, a for-profit waste treatment company based in the Netherlands, Waste Concern will start capturing methane—a harmful greenhouse gas—from a landfill site in Dhaka and convert it into electricity that can be sold to local power utilities on a for-profit basis. Operations are expected to start in the second half of 2005. Under the United Nations Clean Development Mechanism, composting from city waste could become the first project in the world where carbon credits will be earned through composting activities. "To scale up our activity we are partnering with a foreign investor as a for-profit company to harness the Clean Development Mechanism opportunity," says Mr. Sinha. The joint venture with WWR—the terms of which are still being worked out—will allow the company to expand nationally and use the profit to branch into a new area of business, he says.

Easy Being Green, Tougher to Raise Greenbacks

Scale is also an issue for Mr. Frances, the Australian social entrepreneur who started a for-profit "environmental service provider" business. His company, easybeinggreen, aggregates all the specialists and products necessary to make homes more environmentally friendly.

On April 3, a bank in Melbourne will start offering to add financing for easybeinggreen's fee to all mortgages at no extra charge, giving some 12,000 new customers an incentive to sign up. But the company's goal is much bigger: to see that 70 percent of Australian households reduce their energy and water consumption by 30 percent in the next 10 years. That is a $30-billion market, and Mr. Frances wants to be the market leader. But his ambitions go beyond Australia's borders: Mr. Frances is also interested in setting up business in California.

He just sold 20 percent of his company to Silicon Valley and New York City investors, whom he declines to name, for a half-million Australian dollars ($400,000), and is looking to raise more money. "If you want to scale and have global reach and don't want to remain on the margins then you need two things: lots of capital and the willingness to take risks," says Mr. Frances.

Nonprofit organizations usually lack both, he says.

Mr. Frances says he has found himself feeling frustrated as he listens to discussions at the World Economic Forum each year. "I sit in those forums and I think, 'why is it that the not-for-profits think so small?'" he says. "We have to be willing to put our neck out there and play at the same scale. It is not enough to sit around and talk about multinationals and say, 'they are all bastards and they don't care' if we are not willing to take risks in the same way that they are, and go global but do it differently."

Testing the Not-Only-for-Profit Model

It is too soon to tell if the new not-only-for-profit ventures being formed by social entrepreneurs will be successful, says Catalytic Health's Mr. Maris.

"If we can demonstrate that this business model works, and if we can raise the financing and get the partnerships we need in place, we can really transform the lives of a lot of people. . . and perhaps change the world and the way the world does business," says Mr. Maris. "That is something worth doing," he says. "Certainly something worth trying."




Reprinted with permission from Changemakers.net.

To read another Global Envision article about the ideas behind social entrepreneurship, see Not All for Money.