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U.C.!Berkeley!–!Haas!School!of!Business,!Independent!Study!!!!!!!

!Kiva!Case!Study!!Sarah!Anderson!Joel!Ramirez!!

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December!6,!2007

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Introduction!!It!was!a!beautiful!morning!in!November!2007!when!Jessica!and!Matt!Flannery,!the!founders!of!Kiva.org,!walked!into!their!San!Francisco!office!to!greet!the!rest!their!ever"growing!team.!!Kiva.org!(Kiva),!the!world’s!first!person"to"person!micro"lending!website!had!seen!incredible!growth!over!the!past!year.!!Media!exposure!such!as!an!appearance!on!the!Oprah!Winfrey!Show!and!a!mention!in!Bill!Clinton’s!book,!Giving,!resulted!in!an!enormous!number!of!lenders!coming!to!the!Kiva!website!in!hopes!of!lending!money!to!entrepreneurs!in!the!developing!world.!!!!In!2005,!Kiva!introduced!microfinance!to!the!internet,!and!since!then,!has!created!a!global!community!of!people!connected!through!lending.!!By!partnering!with!microfinance!institutions!in!over!30!countries,!Kiva!has!given!small!businesses!in!developing!countries!the!opportunity!to!grow!and!thrive.!!The!company’s!microfinance!partners!post!profiles!of!loan!applicants!on!the!website,!where!anyone!with!a!credit!card!and!an!internet!connection!in!United!States,!Canada,!Europe!and!beyond,!can!provide!small!loans!to!the!businesses!of!their!choice!(See!Exhibit!1!for!a!sample!profile).!!As!of!that!November!morning,!Kiva!lenders!have!funded!over!$14.5!million!to!over!22,000!entrepreneurs!through!65!microfinance!partners!in!37!countries.!!The!team!was!meeting!to!discuss!the!upcoming!board!meeting!and!the!strategy!for!Kiva!in!the!coming!year.!!Though!the!meeting!was!filled!with!satisfaction!and!pride!in!what!the!team!had!accomplished!since!their!inception,!major!decision!needed!to!be!made!and!debates!ensued.!!While!their!growth!was!astonishing!and!exciting,!it!was!also!difficult!to!manage.!!Furthermore,!loans!on!Kiva!were!still!not!interest"bearing.!!Matt!had!always!dreamed!of!having!the!Kiva!model!be!a!marketplace!offering!–!one!where!lenders!would!receive!interest!on!their!loans.!!To!get!Kiva!off!the!ground,!they!had!decided!on!no"interest!bearing!loans!for!lenders,!because!legally,!providing!interest!was!too!complicated.!!However,!!things!had!gone!well!with!the!0%!interest!product,!and!now!there!was!dissention!in!the!ranks!about!whether!or!not!to!pursue!offering!interest!in!the!future.!!Jessica,!Matt’s!wife!and!co"founder,!thought!sticking!with!0%!return!to!lenders!was!important!to!their!strategy!and!brand.!!As!Jessica!and!Matt!discussed!the!issue!with!their!group,!they!grappled!with!a!number!of!questions.!!Were!interest"bearing!loans!the!best!route!to!take?!!And!if!so,!was!now!the!best!time!to!do!it?!!

Kiva!History!

In!late!2003,!Jessica!Flannery!was!working!at!Stanford!University!as!a!staff!member!in!the!Public!Management!Program.!!A!passionate!extrovert!with!a!great!interest!in!social!entrepreneurship,!Jessica!gained!access!to!a!wide!array!of!ideas!and!contacts!in!the!social!entrepreneurship!arena!through!her!work!at!Stanford.!!Her!fiancé,!Matt,!was!a!Tivo!programmer!with!aspirations!of!being!a!Silicon!Valley!entrepreneur.!One!night!in!

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the!fall!of!2003,!she!and!Matt!went!to!hear!Mohammed!Yunus,!the!Bangladeshi!banker!and!economist,!speak!of!his!accomplishments!to!the!microfinance!world.!!In!2006,!Muhammad!Yunus,!along!with!the!Grameen!Bank,!was!awarded!the!2006!Nobel!Peace!Prize!for!their!joint!efforts!to!create!economic!and!social!development.!!The!prize!announcement!stated:!

Muhammad!Yunus!has!shown!himself!to!be!a!leader!who!has!managed!to!translate!visions!into!practical!action!for!the!benefit!of!millions!of!people,!not!only!in!Bangladesh,!but!also!in!many!other!countries.!Loans!to!poor!people!without!any!financial!security!had!appeared!to!be!an!impossible!idea.!From!modest!beginnings!three!decades!ago,!Yunus!has,!first!and!foremost!through!Grameen!Bank,!developed!micro"credit!into!an!ever!more!important!instrument!in!the!struggle!against!poverty.1!

As!he!shared!about!his!achievements!in!microfinance!and!vision!for!poverty!alleviation,!Jessica!and!Matt!were!inspired!to!become!involved!and!to!make!a!difference!in!the!lives!of!these!people!of!whom!Yunus!spoke.!!The!encounter!would!be!a!call"to"action!and!help!shape!the!beginnings!of!Kiva.!!!! ! !Not!long!after!the!Yunus!talk,!Jessica!received!the!opportunity!to!pursue!her!dream!of!making!a!difference!in!the!microfinance!world.!!In!early!2004,!she!was!offered!a!3"month!consulting!job!with!Village!Enterprise!Fund!(VEF),!a!San!Francisco"based!non"profit,!which!helps!small!businesses!in!East!Africa!grow!through!small!grants!and!a!few!targeted!loans.!!While!she!was!in!Africa,!she!and!Matt!(who!remained!in!San!Francisco)!spoke!regularly!over!the!phone!and!many!of!these!phone!conversations!revolved!around!the!successes!and!challenges!these!small!businesses!faced.!!During!one!of!these!conversations,!they!had!an!epiphany!when!they!reminisced!about!the!“sponsor!a!child”!model!that!they’d!encountered!regularly!as!children.!!Both!of!their!families!had!sponsored!children!over!the!years,!and!that!experience!had!left!a!deep!impact!on!both!of!them.!!Suddenly!the!idea!of!“sponsor!a!business”!was!mentioned!–!setting!off!a!chain!reaction!of!ideas.!!Shortly!after!this!conversation,!Matt!joined!Jessica!in!Africa!for!two!weeks!to!film!some!of!the!work!Jessica!had!been!doing.!!The!two!went!on!a!quest!to!find!entrepreneurs!in!the!rural!villages!of!Tanzania!and!Kenya.!!They!interviewed!the!entrepreneurs!they!met,!documenting!their!trials!of!starting!a!business!and!their!barriers!to!growth.!!Through!their!interviews!and!encounters,!they!came!to!three!realizations:!1)!people!are!connected!to!the!developing!world!more!than!they!think,!2)!the!poor!are!very!entrepreneurial,!and!3)!stories!connect!people!in!a!powerful!way.2!!After!witnessing!the!power!of!microfinance,!they!asked!themselves!how!they!might!facilitate!loans!to!rural!African!entrepreneurs!like!the!ones!they!met!through!their!journeys.!!!!

1 Yunus Nobel Peace Prize Announcement. Norwegian Nobel Committee. 2006. 2 Kiva website. October 2007.

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Business!Plan!Development!!Upon!their!return!to!the!United!States,!Jessica!and!Matt!began!to!put!together!a!business!plan!to!help!the!entrepreneurs!they!met.!!Through!one!of!Jessica’s!friends,!they!were!put!in!touch!with!Geoff!Davis,!President!and!CEO!of!the!Redmond,!Washington"based!microfinance!accelerator,!Unitus,!who!helped!them!to!assess!the!feasibility!plan!for!what!would!eventually!be!known!as!Kiva.org.!!!!During!discussions!with!Unitus,!Kiva!was!pitched!as!an!online!platform!providing!“opportunities!for!people!to!connect!with!and!invest!in!individual!small"to"medium!enterprises!(SMEs)!in!the!developing!world!through!soft!loans.”3!Kiva’s!early!business!plan!explained!how!the!organization!would!aim!“to!alleviate!poverty!and!improve!standards!of!living!in!developing!countries!by!financially!supporting!indigenous!SMEs”!and!to!“utilize!partners!within!existing!MFIs!to!identify!viable!SMEs!and!facilitate!the!administration!of!loans.”!4!!The!loan!capital!was!to!be!raised!through!Kiva’s!website,!by!offering!people!the!opportunity!to!extend!a!loan!to!the!small!business!of!their!choice.!!They!would!then!receive!their!money!back,!with!a!small!amount!of!interest.!During!the!period!of!a!loan!agreement,!investors!would!also!have!the!opportunity!to!receive!frequent,!real"time!updates!on!the!progress!of!the!business!they!contributed!to,!working!to!pay!back!the!loan.!!!!The!plan!also!discussed!the!development!of!a!Limited!Liability!Company!(LLC)!to!raise!investments,!facilitate!the!loan!process!and!manage!the!website,!and!a!Non"Government!Organization!(NGO)!to!provide!training!and!operational!support!as!well!as!cover!Kiva’s!expenses!with!tax"deductible!donated!funds.!!!!Matt!and!Jessica!found!it!useful!to!speak!with!Geoff,!who!listened!patiently!to!their!ideas!and!asked!some!really!challenging,!difficult!questions!of!the!couple.!!He!urged!them!to!think!hard!about!scalability,!and!to!really!“find!their!unique!niche”!in!the!microfinance!space,!among!so!many!other!networks,!funders,!and!operating!microfinance!institutions.!!Years!later,!Geoff!would!join!as!a!Director!on!Kiva’s!board.!!(See!Exhibit!2!for!Product!Philosophy!and!Model!and!Exhibit!3!for!full!Feasibility!Plan)!!!Launching!the!Business!!In!late!2004,!Matt!and!Jessica!found!a!lawyer!who!worked!with!them!to!complete!the!501(C)(3)!paperwork,!helping!Kiva!to!become!an!official!non"profit!entity.!!Meanwhile,!Matt!and!Jessica!were!researching!potential!MFI!partners!and!contacted!the!Security!and!Exchange!Commission!(SEC)!to!research!some!securitization!issues!they!had!discovered.!!Despite!issues!that!arose!around!scale,!legality!and!commercialization,!the!newly!married!team!decided!to!test!their!business!while!waiting!for!their!application!to!

3 Kesho.org (original name) Feasibility Plan. Kiva.org and Unitus. 2004 4 Kesho.org (original name) Feasibility Plan. Kiva.org and Unitus. 2004

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clear.!!With!the!goals!of!raising!$5,000!in!capital!for!operational!costs,!$150,000!in!loans!to!the!SME’s,!and!50!friends!to!be!the!first!lenders,!Jessica!and!Matt!were!ready!to!test!their!business!plan.!!They!sent!an!invitation!to!test!out!Kiva!to!the!300!people!from!their!wedding!guest!list.!!Moses!Onyango,!a!Ugandan!pastor!and!friend!of!Jessica,!was!in!close!contact!with!the!couple!throughout!their!idea!generation!and!business!plan!development.!!He!located!seven!entrepreneurs!in!his!community!of!Tororo!and!posted!them!on!the!beta!website.!!Over!the!same!weekend!the!invitations!were!sent!out,!all!seven!businesses!were!funded.!!!!Jessica!and!Matt!were!shocked!at!the!immediate!success!of!Kiva.!!Moses!diligently!blogged!on!the!progress!of!the!borrowers,!and!the!lenders!from!Matt!and!Jessica’s!wedding!list!read!closely!as!he!spoke!of!the!trials!and!successes!of!the!entrepreneurs!they!funded.!!Then!one!day,!a!person!that!was!not!on!Matt!and!Jessica’s!list,!Premal!Shah!from!Paypal,!appeared!in!Kiva’s!database.!!Premal,!also!passionate!about!the!potential!of!funding!entrepreneurs!in!developing!countries!through!microfinance,!became!the!missing!piece!of!the!Kiva!puzzle.!!He!brought!his!passion,!5+!years!of!product!management!experience!and!a!consulting!background!to!Kiva.!!Through!his!own!connections,!he!was!able!to!broker!a!lead!with!Paypal!which!allowed!the!company!to!accept!payments!for!free;!a!critical!step!in!Kiva’s!growth.!!He!would!be!the!missing!puzzle!piece!that!completed!the!Kiva!team.!!!!Jessica!was!passionate!about!microfinance,!Matt!could!design!and!build!the!actual!website,!and!Premal,!through!his!Paypal!connection,!consulting!experience!and!sales!expertise,!was!able!to!get!Kiva!the!support!and!corporate!partnerships.!!Growth!Stage!!With!the!success!of!the!seven!entrepreneurs,!the!Kiva!team!asked!Moses!to!find!fifty!more!entrepreneurs!in!his!community!to!feature!on!the!site,!and!once!they!were!posted,!Kiva!issued!a!press!release.!!A!month!later,!in!November!2005,!DailyKos,!one!of!the!world’s!largest!blogs!at!the!time,!picked!up!Kiva’s!release!and!featured!it!on!their!homepage.!!Within!a!day,!Kiva!had!raised!over!$10,000!from!internet!lenders!and!all!of!the!loans!posted!on!their!site!had!“sold!out”.!!Kiva!had!received!thousands!of!emails!and!an!outpouring!of!support!from!lenders!and!MFIs!in!Bulgaria,!Rwanda,!Nicaragua,!and!Gaza!interested!in!using!the!site!as!a!platform!to!list!their!own!applications.!!!With!Jessica!recently!starting!the!MBA!Program!at!Stanford,!Matt!in!a!full"time!job!at!TiVo,!and!a!budding!business!opportunity!at!their!feet,!the!couple!struggled!with!the!decision!of!who!would!quit!what!to!take!advantage!of!this!quickly!growing!dream.!!Matt!had!told!Jessica!that!he!would!wait!until!Kiva!had!reached!$1!million!in!loans!before!quitting.!!One!night!in!a!teary!conversation!over!Chinese!food,!Jessica!convinced!him!that!the!time!was!now!and!that!Kiva!may!never!realize!that!goal!of!$1M!without!someone’s!full!attention!first.!!After!a!weekend!filled!with!contemplation,!Matt!felt!he!reached!a!point!where!“it!became!too!painful!not!to!be!doing!Kiva!full"time”!and!decided!to!quit!his!job!at!Tivo!to!focus!his!energy!entirely!on!Kiva.org.!!!!

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Even!though!they!had!not!received!any!seed!funding,!Matt!now!had!his!full!focus!on!the!enterprise.!!With!additional!(more!or!less!volunteer)!support!from!Premal,!as!well!as!friends!such!as!Chelsa!Bocci,!the!new!Director!of!Partnerships,!and!Fiona!Ramsey!and!Jeremy!Frazao,!who!would!dedicate!themselves!to!Kiva’s!marketing!efforts!and!technology!goals!(respectively),!Kiva!was!well!on!its!way.!!The!team!began!to!reach!out!to!more!MFIs!and!simultaneously,!MFIs!who!had!heard!about!Kiva!began!reaching!out!to!them.!!By!December!2005,!Kiva!made!the!decision!to!be!open!to!working!beyond!Africa!and!began!to!see!themselves!as!“a!technology!platform!for!microfinance!institutions!alleviating!poverty!anywhere.”5!!!!Although!signing!on!MFIs!quickly!enough!to!keep!up!with!lender!demand!became!a!major!challenge,!Kiva!began!to!partner!with!MFIs!from!around!the!world.!!At!the!same!time,!!Matt!and!Jessica!pursued!funding!from!a!number!of!sources,!ranging!from!!foundations!to!venture!capital,!with!the!very!first!funds!coming!from!a!handful!of!supportive!individuals!who!believed!in!the!Kiva!vision!and!were!willing!and!able!to!donate!to!this!very!early"stage!organization.!!In!the!of!Fall!2006,!their!501(c)(3)!was!approved!by!the!IRS.!!Additionally!Kiva!had!received!approximately!$125,000!in!startup!donation!capital,!and!the!MFIs!they!had!partnered!with!were!posting!hundreds!of!new!borrowers!on!the!website!!Despite!early!success,!by!October,!the!team!was!down!to!$15,000!in!cash!reserves!with!a!monthly!burn!rate!of!the!same!amount.!!Worried!they!would!not!be!able!to!make!payroll,!Matt!suggested!to!the!board!that!the!Kiva!become!a!for"profit!entity.!!Shot!down!unanimously,!Matt!instead!continued!to!pursue!donations!instead!of!equity!or!debt!to!fund!the!organization!and!make!ends!meet.!!!!That!October,!Jessica!and!Matt!traveled!back!to!East!Africa!to!shoot!a!television!documentary!for!Frontline,!a!PBS!series.!!The!15"minutes!spot,!which!aired!on!Halloween!night!2006,!was!so!successful!that!Kiva’s!servers!went!down!for!four!days.!!Overnight,!the!loan!volume!on!Kiva!went!from!about!$3,000!to!$30,000!per!day.!!The!lender!base!increased!from!6,000!before!the!piece!to!almost!60,000.!!!!Present!Day!!By!October!2007,!Kiva!has!surpassed!its!2007!goal!of!processing!$12M!in!cumulative!loans,!with!$13.3M.!!The!Frontline!piece!was!a!fundamental!turning!point!that!took!the!non"profit!from!a!point!of!crisis!into!a!healthy!state,!and!mentions!by!Oprah!Winfrey!and!the!backing!of!former!President,!Bill!Clinton,!have!only!furthered!their!success.!!!Currently,!operating!costs!are!funded!by!a!combination!of!optional!lender!fees!and!float.!!!!!

5 Kiva and the Birth of Person-to-Person Finance. Innovations: Technology, Governance, Globalization. Mitpress.mit.edu/innovations. Flannery, Matthew. 2007.

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Scaling,!Microfinance!Institutions!and!Supply!!From!early!on,!it!was!evident!that!demand!from!lenders!could!outstrip!Kiva’s!ability!to!supply!entrepreneurs.!!In!fact!it!had!already!happened!on!a!number!of!occasions.!!The!viral!effect!of!the!publicity!created!by!the!DailyKos!blog,!Frontline!program!and!Oprah!show!demonstrates!the!power!of!Kiva’s!mission!to!resonate!with!people!as!well!as!the!instant!connectivity!and!spikes!in!demand!the!internet!can!create.!!Kiva!now!faces!the!question!of!how!to!scale!their!operations!to!meet!this!ever!increasing!demand.!!!!The!number!of!entrepreneurs!(and!therefore!the!amount!of!supply)!is!directly!linked!to!the!number!of!MFIs!that!Kiva!partners!with.!!Expanding!their!MFI!partner!base!to!countries!outside!of!Africa,!which!as!a!continent!contains!only!10%!of!all!MFI!around!the!world,!was!the!first!step!to!scaling!the!business.!!Of!the!10,000!MFIs!around!the!world,!there!is!great!variation!in!the!financial!and!social!services!provided!and!stage!of!development!which!has!made!the!decision!of!which!MFIs!to!work!with!very!difficult.!!For!example,!some!MFIs!provide!strictly!micro!credit!while!others!provide!education!and!health!services!along!with!micro!credit.!!Additionally,!there!are!wide!variations!among!MFIs!regarding!delivery!method,!efficiencies,!profitability,!governance!and!legal!structures!that!would!need!to!be!considered!when!choosing!partners!to!work!with.!(See!Exhibit!4!for!MFI!Tiers)!!!!At!their!current!stage,!Kiva!employs!five!staff!members!working!exclusively!on!increasing!their!MFI!partner!base.!!Their!duties!include!finding!and!engaging!prospective!MFIs,!performing!due!diligence,!and!setting!up!the!MFIs!on!Kiva’s!platform.!!Although!their!partner!MFI!pipeline!is!not!uniform,!the!average!acquisition!rate!for!Kiva!is!one!MFI!partner!per!staff!per!month.!!While!Kiva!matches!lenders!and!entrepreneurs,!it!also!offers!microfinance!institutions!loan!capital!with!a!unique!value!proposition:!!a)!0%!interest!debt!capital,!b)!increased!exposure!through!Kiva’s!online!platform,!c)!ease!of!pilot,!d)!low!administrative!cost,!and!e)!improved!staff!morale.!!Along!with!these!benefits,!MFI!partners!face!a!0%!interest!rate,!0.2"2%!cost!of!staff!time!to!post!borrowers,!and!foreign!exchange!hedging!cost.!!These!conditions!are!different!from!both!the!traditional!capital!markets!and!donor!capital.!!Currently,!to!become!a!partner!with!Kiva,!the!MFI!has!to!first!be!registered!with!the!government!and!be!in!legal!compliance!in!the!country!in!which!it!is!headquartered,!as!well!as!meet!a!number!of!selection!criteria.!!Furthermore,!MFI!partners!are!responsible!for!posting!a!digital!photograph!and!details!about!the!micro"entrepreneur!seeking!funding!on!the!website,!posting!repayment!amounts!and!submitting!a!journal!entry!to!Kiva!at!the!end!of!the!loan.!!Finally,!they!must!agree!to!in"country!audits!of!the!Kiva!partnership!every!year.!!(See!Exhibit!4!for!Partnership!Selection!Requirements)!!The!option!of!interest"bearing!loans!could!further!Kiva’s!issues!with!scalability.!!It!is!highly!likely!that!new!lenders!would!join!the!community,!as!lenders!interested!in!a!

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return!might!start!using!the!website.!!While!this!would!increase!their!ability!to!fund!entrepreneurs,!Matt!wondered!how!much!it!would!affect!demand.!!!!Even!if!the!number!of!lenders!did!not!increase,!the!demand!for!the!size!of!the!loans!they!make!might.!!For!example,!Prosper.com,!a!US!focused!peer"to"peer!interest!bearing!lending!website!started!after!Kiva,!had!an!average!loan!request!of!$5,000!from!borrowers!and!average!loan!offered!of!$1,000!by!lenders.!!In!contrast,!Kiva’s!average!loan!request!was!around!$600!and!the!average!loan!offered!by!lenders!was!around!$100.!!However,!if!Kiva!was!to!switch!to!the!interest"bearing!model,!it!would!allow!lenders!(and!Kiva)!to!further!differentiate!the!MFI’s!–!not!only!on!the!other!services!they!offer,!such!as!education!and!healthcare!–!but!also!on!their!risk!and!stability.!!This!type!of!transparency!would!allow!the!better!MFI’s!to!get!more!lenders!and!incentivize!the!less!healthy!MFI’s!to!improve!their!operations.!!!!

Interest!Bearing!Loans!!As!Kiva!was!developed,!the!question!of!how!to!deliver!funding!to!entrepreneurs!became!a!critical!strategic!decision.!!They!decided!early!on!to!use!a!soft!loan!model,!or!one!with!below"market!rate!paid!to!the!lender.!!Although!this!model!was!unproven!at!the!time,!it!created!a!business"to"business!partnership!between!the!lender!and!the!entrepreneur!that!Matt!called!“a!dignified,!intellectual!and!equitable!extension!that!appealed!to!us!at!this!point!in!our!lives."!!!!Jessica!and!Matt!ultimately!made!the!decision!to!offer!non"interest!bearing!loans!in!order!to!avoid!some!securitization!issues,!but!Matt!always!pursued!the!vision!of!offer!interest"bearing!loans.!!Paying!variable!interest!to!lenders!could!increase!customer!adoption!amongst!more!typical!investors!interested!in!a!return!and!help!lenders!determine!which!entrepreneurs!would!be!funded!based!on!MFI!status!and!interest!rate.!!Early!analysis!of!which!types!of!entrepreneurs!get!lending!faster!showed!biases!based!on!gender,!geography!and!business!type!–!making!it!more!difficult!for!certain!types!of!entrepreneurs!to!get!funded.!!To!be!more!equitable,!under!the!interest!model,!prospective!lenders!would!be!able!to!make!their!lending!decision!based!on!personal!stories!and!desired!interest.!!Additionally,!providing!lenders!with!interest!struck!at!a!core!belief!that!Matt!and!Jessica!shared!about!the!deeper!integration!between!daily!decisions!and!core!values.!!Socially!conscious!lenders!interested!in!a!return!would!be!able!to!invest!their!money!in!vehicles!that!would!be!in!line!with!their!social!values.!Furthermore,!offering!interest!to!lenders!who!would!simply!like!to!re"loan!once!paid!back!would!have!more!capital!to!work!with!if!they!received!an!interest!return.!!Matt!also!realized!that!microfinance!in!general!has!been!shifting!towards!mainstream!capital!markets.!!The!biggest!signs!of!there!are!a!growing!number!of!investment!funds!investing!in!microfinance!and!that!microfinance!institution!such!as!Compartamos!in!Mexico!launching!their!IPO.6!!In!order!to!be!relevant!in!the!future!of!micro!finance,!interest!

6 www.microcapital.org as of 12/5/2007 has listed 89 commercial and non-commercial funds investing in microfinance

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bearing!loans!had!to!be!addresses.!!Finally,!he!recognized!interest"bearing!loans!as!being!an!important!tool!to!remain!relevant!in!this!space!going!forward.!!!!On!the!other!hand,!Jessica!argued!that!offering!interest"bearing!loans!could!have!a!negative!effect!on!their!brand.!!Would!potential!lenders!be!turned!off!by!the!idea!of!“making!money!off!of!poor!people”?!!Would!it!affect!Kiva’s!culture!and!values?!!She!argued!that!it!would!affect!their!brand!and!that!current!lenders!may!feel!angry!or!alienated.!!Furthermore,!according!to!a!recent!survey,!almost!half!of!Kiva’s!current!lenders!were!not!interested!in!a!return!–!they!were!interested!in!stories,!and!including!significant!amounts!of!information!about!MFI’s!and!interest!rates!might!confuse!their!users.!!!!

Capital!Requirement,!Revenue!Model!and!Funding!!Kiva’s!initial!funding,!like!for!most!start"ups,!came!from!sweat!equity,!friends!and!family.!!Money!was!so!tight!in!the!early!days!that!they!were!required!to!find!creative!ways!to!make!ends!meet.!!For!example,!Matt!gave!his!friend!a!guitar!to!design!the!logo.!!By!the!time!the!DailyKos!article!was!released!and!its!first!flow!of!lenders!came!in,!it!was!clear!that!the!venture!needed!full!time!attention!from!the!founders!and!a!team!of!dedicated!resources.!!Fortunately,!Matt!and!Jessica!were!able!to!find!a!passionate!and!dedicated!team!to!work!unpaid!for!the!first!6!months!after!launch.!!However,!they!would!need!to!find!a!sustainable!business!model!that!allowed!them!to!fund!their!operations.!!While!they!tried!business!plan!competitions!and!grant!funding,!they!found!that!it!usually!did!not!pan!out.!!Lack!of!resources!meant!that!Matt,!Jessica!and!Premal!did!most!of!the!grant!writing,!and!the!team!was!unable!to!focus!heavily!on!the!business.!!They!continued!to!work!for!“free”!until!they!were!able!to!create!a!working!prototype.!!Once!operational,!they!derived!revenue!from!a!combination!of!optional!lender!fees,!float!and!foundation!funding.!!Oddly!enough,!it!wasn’t!until!they!were!temporarily!cash!flow!positive!that!they!were!able!to!successfully!raise!donation!growth!capital.!!!!

! Optional!Lender!Fees:!!!When!a!user!is!finalizing!her!loan!on!the!website,!she!is!given!the!opportunity!to!donate!to!help!fund!Kiva’s!operations.!!Typically,!seven!out!of!ten!users!choose!to!donate!and!their!average!donations!average!seven!percent!on!top!of!their!loan!to!a!Kiva!entrepreneur.!!!

!! Interest!Paid!on!Float:!!Each!day,!Kiva!users!loan!money!to!entrepreneurs.!!Each!

month,!Kiva!takes!that!money!and!distributes!it!to!its!MFIs,!as!well!as!bills!its!MFIs!quarterly!for!the!funds!they!owe!users.!!Furthermore,!Kiva!pays!back!its!users!after!the!loan!cycle,!generally!about!a!year!after!the!initial!loan.!!During!the!period!in!which!the!money!sits!in!the!bank!before!being!distributed,!it!accumulates!interest.!!While!the!money!sits!in!the!bank,!it!accumulates!interest!at!a!rate!of!4.5%.!!Currently!float!is!a!small!revenue!source!that,!in!2007,!will!account!for!1"2%!of!loan!volume.!!!

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!! Other!Funding:!!Kiva!has!raised!about!$3M!in!disbursed!and!promised!grants!

from!offline!sources!–!mainly!family!foundations!and!individual!investors.!!Given!their!rapid!growth,!they!are!also!considering!taking!a!loan!from!a!foundation!to!add!more!capital!to!the!mix.!!!

!Kiva!continues!to!face!accelerated!growth!in!demand!for!loans!and!has!needed!to!review!the!capital!requirements!of!expected!operations!to!help!meet!this!growth.!!With!increased!publicity!driving!demand!by!prospective!lenders!faster!than!Kiva’s!ability!to!add!partners!and!upload!entrepreneurs,!Kiva!has!often!have!to!limit!users!to!a!$25!loan,!and!the!need!to!invest!in!scaling!operations!has!become!more!important!than!ever.!!Furthermore,!along!with!this!increased!demand,!only!10%!of!lenders!decide!not!to!re"loan.!!This!ensures!that!Kiva’s!loan!base!will!likely!grow!at!well!over!a!factor!of!two!in!coming!years.!!The!current!revenue!model!has!been!able!to!sustain!operations"to"date,!but!given!this!dynamic,!the!team!is!losing!potential!lenders!and!opportunities!to!lend!to!deserving!entrepreneurs.!!Switching!to!interest"bearing!loans!could!also!have!an!effect!on!the!type!of!funding!Kiva!would!have!going!forward.!!For!example,!would!the!complexity!of!having!an!interest!rate!tied!to!the!loan!create!a!barrier!for!people!to!donate!through!optional!lender!fees?!!!!

Preparing!for!the!Annual!Board!Meeting!!During!that!November!meeting,!Matt,!Jessica!and!the!team!debated!for!hours!and!tackled!a!number!of!questions!that!they!would!need!to!answer!before!the!upcoming!board!meeting.!!How!would!they!continue!to!manage!their!incredible!growth?!!Should!they!pursue!Matt’s!dream!of!an!open!market!place!and!offer!interest"bearing!loans!to!lenders?!!And!was!now!the!right!time!to!make!that!dream!a!reality?!!They!all!had!strong!opinions,!but!they!would!need!to!come!to!an!agreement.!!What!should!they!focus!on!in!the!upcoming!year?!!!

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!Exhibit!1:!!Example!Entrepreneur!Profile!

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!!Exhibit!2:!!Kiva!Product!Philosophy!!People!are!central.!The!first!things!you!notice!are!faces.!!Money!and!organizations!are!!!Lending!is!connecting.!At!Kiva.org,!lending!money!is!all!about!information!exchange.!In!a!sense,!money!is!a!type!of!information.!Lending!to!someone!else!creates!an!ongoing!communication!between!two!individuals!that!is!more!binding!than!a!donation.!!Things!are!always!changing.!Every!time!you!load!our!website,!it!should!be!different.!Every!minute,!loans!are!being!purchased!and!repaid,!and!stories!are!being!told!about!the!borrowers.!This!can!lead!to!a!dynamic!where!philanthropy!can!actually!become!addictive.!!Emphasize!Progress!over!Poverty.!Business!is!a!universal!language!that!can!appeal!to!people!of!almost!every!background.!This!can!lead!to!partnerships!rather!than!benefactor!relationships.!We!appeal!to!people's!interests,!not!their!compassion.!!Create!a!Data"Rich!Experience.!Whenever!it!is!possible!to!collect!data!from!the!field,!we!collect!it.!Over!time,!we!will!display!as!much!information!about!our!partners,!lenders,!and!borrowers!as!possible!and!let!the!users!decide!where!money!flows.!!Exhibit!3:!!MFI!Tiers!!

1

3

2

4

1

3

2

4

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Exhibit!4:!!Partner!Selection!Requirements!!

!Exhibit!5:!!Consultative!Group!to!Assist!the!Poor!(CGAP)!Principles!of!Microfinance!

CGAP!is!a!consortium!of!31!public!and!private!development!agencies!working!together!to!expand!access!to!financial!services!for!the!poor,!referred!to!as!microfinance.!These!principles!were!developed!and!endorsed!by!CGAP!and!its!33!member!donors,!and!further!endorsed!by!the!Group!of!Eight!leaders!at!the!G8!Summit!on!10!June!2004.!!

1. Poor!people!need!a!variety!of!financial!services,!not!just!loans.!Like!everyone!else,!the!poor!need!a!range!of!financial!services!that!are!convenient,!flexible,!and!affordable.!Depending!on!circumstances,!they!want!not!only!loans,!but!also!savings,!insurance,!and!cash!transfer!services.!

2. Microfinance!is!a!powerful!tool!to!fight!poverty.!When!poor!people!have!access!to!financial!services,!they!can!earn!more,!build!their!assets,!and!cushion!themselves!against!external!shocks.!Poor!households!use!microfinance!to!move!from!everyday!survival!to!planning!for!the!future:!they!invest!in!better!nutrition,!housing,!health,!and!education.!

3. Microfinance!means!building!financial!systems!that!serve!the!poor.!In!most!developing!countries,!poor!people!are!the!majority!of!the!population,!yet!they!are!the!least!likely!to!be!

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served!by!banks.!Microfinance!is!often!seen!as!a!marginal!sector—a!“development”!activity!that!donors,!governments,!or!social!investors!might!care!about,!but!not!as!part!of!the!country’s!mainstream!financial!system.!However,!microfinance!will!reach!the!maximum!number!of!poor!clients!only!when!it!is!integrated!into!the!financial!sector.!

4. Microfinance!can!pay!for!itself,!and!must!do!so!if!it!is!to!reach!very!large!numbers!of!poor!people.!Most!poor!people!cannot!get!good!financial!services!that!meet!their!needs!because!there!are!not!enough!strong!institutions!that!provide!such!services.!Strong!institutions!need!to!charge!enough!to!cover!their!costs.!Cost!recovery!is!not!an!end!in!itself.!Rather,!it!is!the!only!way!to!reach!scale!and!impact!beyond!the!limited!levels!that!donors!can!fund.!A!financially!sustainable!institution!can!continue!and!expand!its!services!over!the!long!term.!Achieving!sustainability!means!lowering!transaction!costs,!offering!services!that!are!more!useful!to!the!clients,!and!finding!new!ways!to!reach!more!of!the!unbanked!poor.!

5. Microfinance!is!about!building!permanent!local!financial!institutions.!Finance!for!the!poor!requires!sound!domestic!financial!institutions!that!provide!services!on!a!permanent!basis.!These!institutions!need!to!attract!domestic!savings,!recycle!those!savings!into!loans,!and!provide!other!services.!As!local!institutions!and!capital!markets!mature,!there!will!be!less!dependence!on!funding!from!donors!and!governments,!including!government!development!banks.!

6. Microcredit!is!not!always!the!answer.!Microcredit!is!not!the!best!tool!for!everyone!or!every!situation.!Destitute!and!hungry!people!with!no!income!or!means!of!repayment!need!other!kinds!of!support!before!they!can!make!good!use!of!loans.!In!many!cases,!other!tools!will!alleviate!poverty!better—for!instance,!small!grants,!employment!and!training!programs,!or!infrastructure!improvements.!Where!possible,!such!services!should!be!coupled!with!building!savings.!

7. Interest!rate!ceilings!hurt!poor!people!by!making!it!harder!for!them!to!get!credit.!It!costs!much!more!to!make!many!small!loans!than!a!few!large!loans.!Unless!microlenders!can!charge!interest!rates!that!are!well!above!average!bank!loan!rates,!they!cannot!cover!their!costs.!Their!growth!will!be!limited!by!the!scarce!and!uncertain!supply!soft!money!from!donors!or!governments.!When!governments!regulate!interest!rates,!they!usually!set!them!at!levels!so!low!that!microcredit!cannot!cover!its!costs,!so!such!regulation!should!be!avoided.!At!the!same!time,!a!microlender!should!not!use!high!interest!rates!to!make!borrowers!cover!the!cost!of!its!own!inefficiency.!

8. The!role!of!government!is!to!enable!financial!services,!not!to!provide!them!directly.!National!governments!should!set!policies!that!stimulate!financial!services!for!poor!people!at!the!same!time!as!protecting!deposits.!Governments!need!to!maintain!macroeconomic!stability,!avoid!interest!rate!caps,!and!refrain!from!distorting!markets!with!subsidized,!high"default!loan!programs!that!cannot!be!sustained.!They!should!also!clamp!down!on!corruption!and!improve!the!environment!for!micro"businesses,!including!access!to!markets!and!infrastructure.!In!special!cases!where!other!funds!are!unavailable,!government!funding!may!be!warranted!for!sound!and!independent!microfinance!institutions.!

9. Donor!funds!should!complement!private!capital,!not!compete!with!it.!Donors!provide!grants,!loans,!and!equity!for!microfinance.!Such!support!should!be!temporary.!It!should!be!

15

used!to!build!the!capacity!of!microfinance!providers;!to!develop!supporting!infrastructure!like!rating!agencies,!credit!bureaus,!and!audit!capacity;!and!to!support!experimentation.!In!some!cases,!serving!sparse!or!difficult"to"reach!populations!can!require!longer"term!donor!support.!Donors!should!try!to!integrate!microfinance!with!the!rest!of!the!financial!system.!They!should!use!experts!with!a!track!record!of!success!when!designing!and!implementing!projects.!They!should!set!clear!performance!targets!that!must!be!met!before!funding!is!continued.!Every!project!should!have!a!realistic!plan!for!reaching!a!point!where!the!donor’s!support!is!no!longer!needed.!

10. The!key!bottleneck!is!the!shortage!of!strong!institutions!and!managers.!Microfinance!is!a!specialized!field!that!combines!banking!with!social!goals.!Skills!and!systems!need!to!be!built!at!all!levels:!managers!and!information!systems!of!microfinance!institutions,!central!banks!that!regulate!microfinance,!other!government!agencies,!and!donors.!Public!and!private!investments!in!microfinance!should!focus!on!building!this!capacity,!not!just!moving!money.!

11. Microfinance!works!best!when!it!measures—and!discloses—its!performance.!Accurate,!standardized!performance!information!is!imperative,!both!financial!information!(e.g.,!interest!rates,!loan!repayment,!and!cost!recovery)!and!social!information!(e.g.,!number!of!clients!reached!and!their!poverty!level).!Donors,!investors,!banking!supervisors,!and!customers!need!this!information!to!judge!their!cost,!risk,!and!return.!!

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!Exhibit!6:!!Kiva.org!Loan!Volume!and!Lender!Data!!

!!

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Exhibit!7:!!Prosper.com!Loan!Volume!and!Lender!Data!!

!!!Exhibit!8:!!Kiva.org!miscellaneous!statistics!(06"18"08)!!

!