Friday, August 1, 2008
Starting Today, No More Free Water on US Air
Journal reporter Stephanie Chen on changes coming to US Air’s domestic flights today.
Charging for checked luggage and legroom isn’t enough for some carriers — starting today, coach passengers flying aboard US Airways Inc. must pay for a drink of water.
This morning, US Airways began charging fliers $2 for bottled water and sodas and $1 for teas and coffees. First class members, trans-Atlantic passengers and a select group of others are exempt from the extra fees.
“This is another clever way to masquerade airfare increases without increasing airfares,” says Randy Petersen, editor of Inside Flyer Magazine. “Everything has been passed along to the consumer.”
The Tempe, Ariz.-based airline is among many other carriers scrambling to cut costs and boost revenues amid skyrocketing fuel prices. For now, other major airlines including AMR Corp.’s American Airlines, Delta Air Lines Inc., and Northwest Airlines Corp. say they won’t resort to the a la carte beverage system yet but will continue researching all possible ways to save money. Discount carriers AirTran Holdings Inc., JetBlue Airways Corp. and Southwest Airlines Co say they will also continue serving complimentary beverages.
Continental Airlines Inc. — one of the few airlines left that serves free meals on certain domestic flights — says it is unlikely to abandon its free beverage service. Continental says charging for a soda would detract from passenger comfort. “That’s always been our philosophy, and it’s one that works well with us,” says spokeswoman Julie King.
Several other low-cost carriers like Spirit Airlines Inc and Allegiant Air, LLC began charging for beverages a few years ago. These low-budget airlines say their business model offers “unbundled” deals, which strip away extra costs and charge only for the flight. Spirit and Allegiant officials say customers like this plan, which allows flyers to add on extra drinks and snacks only if they desire.
US Airways says it will provide water and drinks for passengers in cases of medical emergency and during extensive delays. If a desperately thirsty passenger does forget a few extra dollars, US Airways spokesman Morgan Durrant says flight attendants will likely “err on the side of the customer” and give him or her water. After all, the airline wouldn’t want its customers drinking tap water from the aircraft bathroom. That water is safe to drink, just not very palatable, according to Durrant.
“Frankly, that’s just not classy,” he says.
Through MicroPlace’s secure platform, everyday people can purchase investments – for as little as $100 – from microfinance security issuers. MicroPlace also enables investors to direct the impact of their investment to a specific country and microfinance institution in the developing world. The microfinance institutions use the funds to make small loans to the working poor, who in turn use the loans to start or expand small businesses and lift themselves out of poverty.
As P2P Lending News explains, [t]he big difference between MicroPlace and Kiva...is that loans will be securitized (and therefore potentially trade-able), and lenders will earn interest. Unlike Kiva, lenders on MicroPlace invest in microfinance by purchasing securities. Funds generated by these sales are then invested in microfinance institutions around the world. MFIs, in turn, solicit clients, make loans and collect payments - they do their normal day-to-day business.
Once client payments are in, the institutional investors receive their loan (plus interest) who can then pay back their investors - people who purchased those original securities. It's not as simple a model as Kiva's, but its differences are very important.
First of all, Kiva is a non-profit. As Matt and Jessica Flannery have explained, it's very difficult to become a SEC-registered broker/dealer - even more difficult when you're running Kiva from your living room on the nights and weekends. (See pages 37-38 of the Innovations article for Matt's take on this decision.) MicroPlace, on the other hand, had the institutional and financial backing of EBay, allowing it to go through the complex regulatory application process and to put up the necessary money for the SEC to sign off. Upshot: Kiva wanted to be for-profit, but had to stay a NGO because it was a regulatory nightmare to register with the SEC. As a result, lenders on Kiva only receive their loans back - without interest. MicroPlace, as a broker/dealer, can pay interest to lenders - thanks to its ability to navigate the aforementioned regulatory maze.
Secondly, MicroPlace adds a level of intermediation that Kiva doesn't have. With Kiva, lenders provide capital to MFIs, who then lend to clients. MicroPlace is a market for microfinance securities, not just requests for loans. Sure, it takes away some of the intimacy, but for the microfinance industry, it's a big step. Securitizing loans helps diversify risk, and allows microfinance investors to reach into the second and third tier MFIs that are having a hard time raising non-donor money.
Are Kiva and MicroPlace competitors? Yes and no. On the one hand, they compete for lenders and have similar models. (Side note - this competition could get bad if the mainstream media screws up the story here. The differences between Kiva and MicroPlace are important, but subtle. Fingers crossed.)
On the other hand, Kiva is filling an unmet need in terms of providing a direct, peer-to-peer portal on which lenders and borrowers can connect. MicroPlace, meanwhile, is more businesslike - it offers a portal where profit-conscious investors can get involved in microfinance without totally compromising on rate of return.K
The only nonprofit that matters
Add one part tech, one part business smarts, hold the do-gooderism. What do you get? A whole new approach to charity.
By Jeffrey M. O'Brien, senior editor
(Fortune Magazine) -- Peter Mukasa needs $250 to buy some hooch. Care to help a guy who's down on his luck if he promises to pay it back? Oops, too late. Mukasa, the owner of a closet-sized liquor store in the Ugandan village of Makindye, posted his funding request on Kiva.org one afternoon in mid-November. Within hours, ten lenders ponied up $25 each to help the man stock his shelves. Case open, case closed.
That's how quickly things happen at the hottest nonprofit on the planet. The toast of Oprah, the Today show, and Bill Clinton's latest tome, Giving, Kiva is a way for First World lenders to link with developing-world entrepreneurs, be they Peruvian farmers, Afghan basket weavers, or even Ugandan liquor store owners. And if someone like Mukasa seems unlike the typical charity case, well, this is not the typical charity.
Kiva is a nonprofit, but it has the heart of a Silicon Valley startup. Executives call it a "company." Rather than tax-deductible donations, users pledge interest-free loans. Standard-issue charities take as much as 40 cents on the dollar for administrative costs, but Kiva directs 100% to borrowers, thanks in part to free payment processing from PayPal. (Kiva keeps the servers running and the 16 employees paid by tacking on an optional donation of 10% of every loan.)
And whereas charitable giving often resembles investing in a mutual fund i.e., write a check and let the experts do the work Kiva treats lenders the way a full-service broker services a big-money client, providing risk assessment upfront and a steady stream of post-investment information. Every borrower has an associated risk rating. The number of defaults sits out in the open (currently 0.14% of all loans), a few clicks from photos of deadbeat borrowers. The organization discloses scams immediately, not to mention good news from the entrepreneurs themselves. "We think the users want information more than they want their money back," says Matt Flannery, the 30-year-old CEO who founded the site with his wife, Jessica, in the fall of 2005. Jessica (Kiva's chief marketing officer, also 30) saw Nobel Prize winner Muhammad Yunus speak at Stanford about eradicating poverty through micro-finance, which inspired her to take a three-month trip to East Africa. Matt joined Jessica, and when they came back they spent a year exploring the idea behind Kiva. Once the site went live in the fall of 2005, Matt quit his engineering job at TiVo to devote himself full-time.
So far Kiva has attracted nearly 250,000 lenders and disbursed $22 million across 40 countries. Lenders may withdraw loans upon repayment, but 90% recirculate the funds, so the kitty keeps growing. Kiva expects to have doled out $100 million by 2010 and $1 billion within a decade, $25 at a time. "To get everyone a piece of the action, we had to set a limit on the size of the loans," says 32-year-old president Premal Shah, who came to Kiva from his product manager position at PayPal in March 2006. We're sitting in Kiva's conference room at 6 P.M. on a Friday, surrounded by a gritty section of San Francisco's Mission District. "When's the last time someone put a cap on your philanthropy?"
The Flannerys and Shah resemble your average do-gooders in one way: They're out to end poverty and injustice. But Shah has to be the least pious charity executive ever. He has the megawatt smile and looks that got him a starring role in a BlackBerry ad campaign, the stage presence to merit a speaking gig at the Clinton Global Initiative, and the good sense not to tell people where to put their money. Matt Flannery majored in computer science and philosophy at Stanford and has a wide range of interests and duties as CEO. Shah, on the other hand, has a Stanford BS in economics; he's all business, constantly exploring ways to expand. While old-school philanthropy is the province of the rich and superannuated, Kiva is wooing everyone from the penny-pinching grandmother to the 22-year-old fantasy-football addict who doesn't know Uganda from Utah. A February 2006 survey showed that Kiva donors were evenly distributed between 25 and 60. Slightly over half were males, and 65% made more than $50,000 a year. But a $25 cap on individual donations is causing the demographics to spread; more older, younger, and less-well-off people are signing up. "This is a low-friction gateway for people to give a damn," says Shah. "We have about 15,000 to 20,000 visitors a day coming to the site now. It's becoming a movement."
Kiva may be at the front end of that movement, but it's not alone. Several upstart charities are gaining traction on the web, including Global Giving and Progreso Financiero. But if Kiva has a peer, it's DonorsChoose.org, an education-oriented site founded by former Bronx high school teacher Charles Best. DonorsChoose.org differs from Kiva in that it's U.S.-only, and users make donations rather than loans. But as with Kiva, DonorsChoose.org connects donors and recipients over the web. It also aims to tackle a big problem - underfunded public schools - by breaking it into small chunks, letting donors effect change in very specific ways.
For example, a biology teacher in Oregon submits a funding proposal for $703 to buy 20 chest-waders for high schoolers who operate a salmon hatchery on the Coquille River. A prospective donor concerned about both science education and salmon depletion (like me) can search on "salmon" and fund the whole project or whatever he can afford. DonorsChoose.org then buys the materials and ships them to the teacher. The teacher and students, in turn, provide regular progress reports. "You could type in 'hiking in the Sierras' and get projects specific to that area of interest," says Best, holding forth at the crowded and bustling DonorsChoose.org headquarters. "Right now there are 10,000 live projects that range from therapeutic horseback riding for disabled students to teaching Catcher in the Rye."
Also like Kiva, DonorsChoose.org has ties to Silicon Valley. The organization recently went live in all 50 states, thanks to a $14 million donation that included money from eBay founder Pierre Omidyar and Yahoo co-founder David Filo. Super-VC Vinod Khosla also contributed and helped structure the funding to be less restrictive than a typical grant. He ranks DonorsChoose.org alongside the most innovative tech companies. "It's like eBay. It's leveraging the connectivity that the Internet brings," says Khosla. With DonorsChoose.org, a donor can allocate 100% of a donation to a particular project or peel off 15% to cover overhead; 90% choose the second option. "It's hard to imagine how you can be a self-sustaining startup focused on education," adds Khosla, "but Charles has figured out a way."
The $45 million or so that Kiva and DonorsChoose.org have doled out is, of course, a tiny sliver of the $300 billion charity pie. But the organizations are having an outsized influence on the rest of the sector. "There's accountability. You know when you go there that you can make an impact for as little as $25, and that's bringing in people who didn't have the means to give," says one William Jefferson Clinton, who, in addition to being the 42nd President, knows a thing or two about philanthropies. Should United Way be working on a Kiva clone? "If they did, they would raise more money," he says. "I think the capacity to expand is infinite."
As it turns out, United Way, the nation's largest charity ($4 billion in aid per year), has been paying attention to Kiva. It's obvious that lenders feel an incredible connection to Kiva as an organization, and that's something United Way could use more of. Everyone's heard of that organization, but most probably have no idea what it does. With Kiva and DonorsChoose.org, says Michael Schreiber, United Way's chief technology officer, "instead of just helping end homelessness, I'm helping a single guy named Bob. This is very compelling. Our role is to help take these successful concepts like Kiva and try to scale to a broader set of constituents and issues."
It was mid-December, and Shah was on his way back from Uganda by way of Rome, where he stopped to speak at a Free Markets and Christianity conference outside the Vatican. Unfortunately, his bags didn't make it to Italy. "So I was there in my Kiva hoodie and track pants, talking about the blogosphere and the Internet's effect on the public good," he says now with a laugh. "And the guy sitting right next to me is named Lord something."
It was the only snafu on a two-week journey. His mission was to touch base with the microlending intermediaries that help make the Kiva model possible and to sign more NGOs onto the platform. Kiva's presence in the developing world consists mainly of volunteers (recent MBAs and college students, usually) running around in jeans and college T-shirts. But nothing says commitment like having the president of the organization take a 30-hour plane ride.
Shah dropped in on Peter Mukasa, the liquor store owner. His shop is surrounded by a grocery, a bar, a beauty salon, and a butcher, all funded by Kiva lenders. The experience reinforced for Shah the idea that loans put lenders and borrowers on equal footing. "I was asking, 'How's business? How's your profit margin?' We weren't focused on poverty, but on their skills as businesspeople. It's such a dignified relationship, rather than, Here comes the rich business guy with the camera."
The lenders feel similarly. Elisabeth Idnurm, a 30-year-old Australian investment banker living in New York, does volunteer work and donates money to breast-cancer research. She has an obvious charitable streak, but nothing to compare to her addiction to Kiva. She signed on as a lender in the fall, and she already has a portfolio of 300 loans that she checks daily. "You know what their business plan is, you see their picture, you get regular updates," she says. "The thing that brings me back is that one-on-one you get with entrepreneurs. For me, the satisfaction comes simply from that fact that I'm helping people do what they have chosen to do."
Such stories, along with the suggestion that the United Way is watching, thrill Shah. "Dude, seriously, this thing is executionally so ridiculously hard - until it's actually working, and then it's a flywheel effect," he says, referring to Jim Collins's metaphor in Good to Great. "The first crank is really hard, but by the 100th turn, it's just moving by itself. And before you know it, people will quit their jobs and go out and work in Uganda for four months."
A Tale of Two Lenders
Two startups with similar goals travel very different paths
By Sonal Rupani, Anne Tergesen, and Bremen Leak
In 2004, while backpacking through Northern California's Desolation Wilderness, Chris Larsen told his buddy John Witchel about the concept of a hoi. Larsen, whose wife is Vietnamese, described how entrepreneurs in that country join cooperatives called hoi, then pool their resources to give one another informal loans. Not long after, the topic came up again as Larsen and Witchel hashed out business ideas at Larsen's dining room table in San Francisco's tony Russian Hill. At the time Larsen, 45, was the founder and chairman of online lender E-Loan, but he was ready for a new challenge. The competitive Witchel, 39, was hungry for another go at the dream: He had watched the software company he had founded, Red Gorilla, disappear when it ran out of money in 2000.
What if, they wondered, they started a company that let people bypass banks and get small loans from one another?
Around the same time, across the city in a modest Noe Valley flat, Matthew Flannery, a 27-year-old product developer at TiVo, was receiving long e-mails from his new wife, Jessica. She was a consultant in Kenya and Uganda with Village Enterprise Fund, a San Carlos (Calif.) microfinance organization. The 26-year-old described how she drove from village to village, evaluating the living conditions of business owners who had received $100 loans from the fund. "A little bit of money does so much,'' she wrote. What if, Matthew thought, he started a company that would let Americans lend money to struggling entrepreneurs in Uganda, enabling those entrepeneurs to bypass banks and loan sharks?
In March, 2005, Flannery mocked up a Web site, Kiva.org, which, loosely translated from Swahili, means "agreement.'' A month earlier, Larsen and Witchel had launched Prosper.com, a site that helps individuals loan each other small amounts. Both businesses are pioneers in microlending, a field born in the 1970s that is gaining prominence. Muhammad Yunus, who founded microlender Grameen Bank in 1976, won the 2006 Nobel peace prize for developing the idea of making small loans to entrepreneurs who otherwise might not be able to raise money. Entrepreneurs and philanthropists including Bill Gates and eBay founder Pierre Omidyar increasingly consider microlending an important strategy for lifting people out of poverty.
Kiva and Prosper share more than the goal of increasing access to capital. Both strive to keep operations lean, and both wrestle with a complicated regulatory environment. But Prosper is a dot-com, and Kiva is a dot-org. Prosper is a classic Silicon Valley baby, nourished by $20 million in venture capital and heavy-hitting backers including Accel Partners, Benchmark Capital, Fidelity Ventures, and the Omidyar Network. As a nonprofit, Kiva relies on donations and grants, which so far total $250,000.
The different models affect not only the superficial -- guess which company has slicker offices -- but also the fundamental. One key question: How will the benefits and challenges of each model affect its results? The issue is increasingly relevant for entrepreneurs whose businesses have an explicit social mission, be it protecting the environment or helping the disadvantaged. "Choosing between for-profit and nonprofit is becoming more of a common dilemma for entrepreneurs,'' says Alan Abramson, director of the nonprofit sector and philanthropy program at the Aspen Institute. "This is becoming an uncomfortable choice to make because they're trying to do both.''
Soon after their dining table epiphany, Prosper's Larsen and Witchel each kicked in $10,000 and hired a lawyer to see if their idea would fly with the U.S. Securities & Exchange Commission. In early 2005, they started offering programmers contract work and the promise of equity, and soon they had six employees. "They weren't doing it for charity,'' says the sandy-haired, soft-spoken Larsen. "There was no question we were going to get funded because of our track record.'' In April, Prosper raised $7.5 million from Benchmark and Accel. Prosper moved into a 2,500-square-foot office with furniture left over from a dot-com that went bust. Larsen brought his computer and office chair from home.
Larsen and his colleagues developed a site where those in need of cash can set up an account and list the amount they want to borrow and the maximum interest they will pay. Prosper's analytic tools assign each borrower a rating based on his or her credit record. Other Prosper users then offer a portion of the capital and bid on the interest rate. Those with the lowest bids become lenders. Last February, Fidelity and Omidyar Network invested $12.5 million in Prosper. "We didn't need the money,'' says Larsen, "but we wanted the brainpower.''
At Kiva, Flannery also worked his connections, albeit far less moneyed ones. He asked Moses Onyango, a pastor Jessica had met in Uganda, to gather $3,100 in loan requests from seven businesses, including a vegetable stand and a fishmonger. "The idea was that we would divide the loans into shares and sell them to the friends and family from our wedding invitation list,'' says Flannery. The loans wouldn't collect interest, but the shares sold in three days. Flannery collected the money through PayPal and wired it to Onyango, who then distributed the money to the entrepreneurs. Each succeeded in repaying the loan within the year.
Encouraged, the Flannerys organized a second round; this time, they invited the public to make loans. "I had this idea about sponsoring a business,'' he remembers. "That word was running through my head because I grew up sponsoring children.'' (His family donated to World Vision in the 1980s.) Jessica worked with Onyango to collect loan requests from 50 Ugandan entrepreneurs.
Matt built a tool to create MySpace.com-like profiles for each one and sent out a press release. In November, 2005, two high-traffic blogs, Daily Kos and Boing Boing, featured the site. Within three days, 50 loans had been made for a total of $25,000. After talking with his mentor, Bob King at Peninsula Capital, and his brother-in-law, venture capitalist Peter Cochran, with Vulcan Capital, Flannery decided to take the nonprofit route. "What we were doing was highly experimental,'' he says. "I thought that as a nonprofit I could get early support I probably couldn't get from a VC.''
Unlike Prosper, Kiva works only with entrepreneurs, which it finds with the help of microfinance institutions in developing countries. Those partners bring their clients to Kiva instead of to a local bank. Kiva posts pictures of the borrowers on its site and shows how each would use a loan. When a loan is made, Kiva transfers the funds to its partners. Lenders, who are usually repaid within a year, can read blog updates from entrepreneurs they've sponsored.
Last July, Kiva's six employees moved into an airy, 1,300-square-foot office in a Mission District warehouse with exposed brick and an assortment of secondhand furniture. Kiva also inherited its best talent from other places. Chief Operating Officer Olana Hirsch Khan came to Kiva in May after six years in sales at Google, and Premal Shah, who made his fortune as one of eBay's first employees, became Kiva's president last year. Shah and Flannery now earn about $3,300 a month, and Jessica volunteers while she finishes at Stanford Graduate School of Business. Says Flannery: "In the future, we'd like to scale this to the point where people are paid the salaries that will give them incentive to do the work.''
Since July, Prosper's 25 employees have inhabited 111 Sutter, a 9,000-square-foot space with a majestic wood-paneled conference room and a showstopping view of San Francisco Bay. The rent is more than seven times Kiva's. Prosper's employees could do quite a bit better as well: As part of competitive pay packages, they receive options that vest in four years.
In all but four states, Prosper has secured a lending license by meeting the terms of the Fair Credit Reporting Act. So far, Larsen says, default rates roughly mirror those at major lending institutions. Prosper receives 1% of the loan amount; lenders pay an annual servicing fee of 0.5% of the amount they lend. That money leaves Larsen, who is CEO, and Witchel, who is chief technology officer, free to concentrate on building the business and to add new features to the site.
That's freedom Flannery would like to have. He spends three-quarters of his time raising funds.
He can't replicate Prosper's model in the U.S. because the legal expenses would be too much. Instead, Kiva plans to expand by introducing low interest rates to attract more lenders.
It is not surprising that Prosper's reach is so much broader than Kiva's. In its first seven months, Prosper's 100,000 registered users have made $22 million in loans, averaging about $5,000.
Kiva's 15,000 lenders have made $1.2 million in loans, with an average loan size of $500. That translates into success for both companies, whose founders agree that there is room in the wide-open field for both models. Says Kiva's Shah: "Right now there are so few people doing this and it's so experimental, we need to help each other. If either model has a significant flaw, it could destroy the credibility for everyone."