Business Skills in the Social Sector

The Road to Microfinance: A Serendipitous Journey
by Renee Hartmann, Fuqua MBA 2005

As Michael Chu looks back on his career, he sees it not as a planned progression, but more as a series of serendipitous events. As a child, born in China and brought up in Uruguay, his early impressions were shaped by the vibrant communities that he experienced. The tumultuous years of his childhood – the Dirty Wars in Latin America, the assassination of Martin Luther King Jr., students protesting in the streets of Paris and Russian tanks invading Prague – made him keenly aware of social issues. He viewed himself as a radical youth, and although he didn’t know what he wanted to do with his life, he was certain that he didn’t want to be involved in business.

As if to mock his youthful vision, Chu became what he refers to as a “surprised business person” after graduating from Dartmouth in 1968, returning to Uruguay and a job with Unilever. He excelled in business, and decided to pursue an MBA at Harvard, from which he graduated to join an emerging start-up called the Boston Consulting Group. After working his way through “stars” and “cows,” he left BCG to join a New York Stock Exchange-listed conglomerate, Pace Industries, and then found himself at KKR, where he developed a deep expertise in Leveraged Buyouts.

While working for KKR, he was drawn to the nonprofit microfinance provider ACCION because he felt that the group offered one of the few effective responses to alleviating poverty. He began serving on ACCION’s Board of Directors while he was still at KKR. During his tenure on the Board, ACCION began a search for a new CEO. They were looking for someone with deep business and financial expertise, with knowledge of capital markets and Latin America. As ACCION began the search for this person, it became clear that Michael Chu was the perfect person to lead ACCION into its next phase of development. Chu did not go looking for ACCION; as he says “chance met the prepared mind.”

Microfinance and ACCION
When asked why he left Wall Street to join a nonprofit, Chu says that the idea of working with a nonprofit had nothing to do with his move to ACCION – he simply wanted to effect social change and was taken with the idea of microfinance. His interest stemmed from personal experience with the issue of poverty. Chu calls poverty the “natural state of the world,” with over 50% of the global population living on less than $2 a day. Since World War II, the world has spent more than $1 trillion to alleviate the problem of poverty, and Chu says that the effort is still losing market share, as the problem gets even worse. “I believed that there had to be a better way of addressing the problem,” Chu says.

Microfinance services the poor in a way that they have not typically been serviced: equitably. ACCION provides very small loans (frequently less than $100) to people living below the poverty level at a fair rate, which allows them to engage in entrepreneurial businesses. These loans lead to dramatic increases in productivity. Chu compares the effect to that of introducing a power saw to a carpenter who is accustomed to working with a handsaw. Without this access to credit, ACCION’s clients would likely be forced to borrow money from loan sharks at astronomical rates, as much as 5% interest per day. Without access to reasonable credit, the weakest players in the economy bear the greatest costs. Chu believes in microfinance because it treats the problem of poverty from the street up, not from the theory down, and directly addresses the critical failure in the system. Microfinance treats the poor as clients.

ACCION proved that servicing the poor was not only successful for social improvement, but that is was also profitable. In 2003, ACCION’s individual banking branches generated Return on Equity (ROE) ranging from 4% - 54.2%. Not only has ACCION’s success led to the expansion of its own microfinance organization, but it has also drawn competition to the sector, a sign that Chu believes proves the profit potential in servicing the poor.

Working in the social sector
Chu has found that the skill set necessary to work in the social sector is exactly the same skill set he once used in the conventional business sector. Social enterprises need employees who excel at analysis, are able to determine the key drivers behind business issues and can creatively solve problems. While these skills are similar to those needed in conventional businesses, Chu sees the way in which managers apply these skills to get things done as the primary difference between social enterprises and traditional enterprises. Social enterprises lack the usual levers to motivate people, namely compensation, career progression and bonuses.

Servicing the poor
Chu sees microfinance as just the beginning. Microfinance puts disposable income in the hands of the poor and allows them to choose how they spend it. Chu says, “Once businesses view the world’s poor as a market to be served, there will be enormous potential, and figuring out how to serve this market will provide the opportunity for outstanding returns for first movers. The two key issues to be solved for the poor are distribution and cost reduction. Businesses need to determine how best to reach these consumers, and how to reduce their cost of goods. Businesses must develop new models to serve the world’s poor, which will require disruptive thinking.”

Advice to MBA Students
In the end, Michael Chu advises MBA students that, “there are many roads that lead to Rome, and the path leading there is less linear than most would assume. Some MBAs will go into the social sector directly after school, while others will enter the sector at some point in the future. The key determinant of the correct time for you will be the opportunity that arises.” He advises students to find positions that prepare them for future opportunities by developing and stretching themselves in whichever field they choose – whether for-profit or nonprofit. He also touches on the personal aspect of the decision to join a social enterprise, adding that “there is never a perfect time to make a switch from traditional to social enterprise, but the right opportunity makes the moment good.” Chu advises MBA students to become involved in social issues, so that when chance meets the prepared mind, they will recognize the opportunity and can begin their journey to effect social change.

Michael Chu is currently the Managing Director and Founder of Pegasus Venture Capital and a Senior Lecturer with the Harvard Business School's Initiative on Social Enterprise.

CASE thanks Fuqua’s Latin American Student Association (LASA) and the Center for Leadership and Ethics (COLE ) for co-sponsoring Michael Chu’s visit.