Ditching the tin cup model

When Alicia Polak, a former Wall Street investment banker, decided to start baking cookies in the squalid township of Khayelitsha outside Cape Town, friends told her she had “officially lost it”. That didn’t stop her.

Using her savings, Polak founded the Khayelitsha Cookie Company with one Xhosa worker and a recipe for chocolate-chip cookies jotted down on a piece of paper. The goal was to create a viable business and at the same time help lift underprivileged women out of poverty by offering them skills and income.

Last year, she sold KCC, by then a purveyor of brownies and four types of cookiea, and put her energy into replicating the South African business model in the US.

For help, Polak turned to an unusual place: the Wharton Societal Wealth Program, an initiative that is little publicised outside the business school.

Over the past six years, the WSWP team has worked quietly behind the scenes to find innovative business solutions to tough issues.

Its projects in sub-Saharan Africa include animal nutrition; healthcare, with a focus on HIV/Aids; small-scale agricultural production; and acquaculture. Skills training – specifically baking – is a relatively recent addition to the portfolio.

For social entrepreneurs such as Polak, success often hinges on finding flexible, non-institutional sources of funding and intellectual capital. The WSWP does not take an equity stake in start-ups but donates “seed funding” in the form of research and development and travel expenses. It also draws on the academic resources of the Wharton School and the University of Pennsylvania.

“We look for big, messy problems that are seemingly intractable,” says James Thompson, director of the WSWP. “We have a deep and broad intellectual base we can utilise and it’s best to put it to work on the tough stuff.”

Thompson co-founded the WSWP in 2001 with Ian MacMillan, director of the Sol C Snider Entrepreneurial Research Center. Its aim was to help build for-profit businesses that alleviate societal ills. The concept is simple: launch businesses that will do good and make money.

It is an approach that has powerful advocates, including the Skoll Foundation, the Schwab Foundation for Social Entrepreneurship, and Ashoka.

One of the best-known proponents of the movement is Muhammad Yunus, who won the Nobel peace prize last year for his work in microfinance. As he has said of his Grameen Bank: “This is not charity. This is business: business with a social objective.”

MacMillan says the goal of the Wharton programme is to move philanthropy away from dependence on charitable donations to projects that sustain themselves financially in the long term. In other words, to get away from what he refers to as the “tin cup” model of philanthropy.

Three years ago, Polak was wrestling with a similar conundrum. She was living in South Africa and consulting for the Freeplay Foundation, a non-profit organisation that distributes wind-up radios. But she was perplexed as to why there wasn’t a job-training component to instruct people on how to repair the radios. She also questioned the merits of simply handing out aid.

Setting up KCC – whose tagline is “Creating opportunity one bite at a time” – represented a way for Polak to improve the lives of a few people living in desperate circumstances. Khayelitsha, which is among the largest and most dangerous of the townships near Cape Town, is home to an estimated 500,000 people, who live in a vast sprawl of small homes and shanties. Poverty and unemployment are rife.

“If you can attack a social problem using a business and make money solving the problem, you set in motion a virtuous cycle,” MacMillan says. “The more money you make, the more people are helped. The more people who are helped, the more money the entrepreneur makes.”

To that end, he and Thompson are developing societal entrepreneurship projects in several countries on the African continent as a springboard to the rest of the world.

They view the businesses as entrepreneurial experiments, but the WSWP is no ivory tower. Thompson travels frequently to Africa to meet the entrepreneurs and considers getting attacked by tsetse flies part of the job.

Wharton’s relationship with KCC began informally when the company was founded in early 2004. Because it was a one-woman show, Polak needed advice on how to ramp up the business, so Thompson helped draft some marketing materials.

Only once Polak had built the business and demonstrated that it was “beyond proof of concept” did Wharton formalise the relationship. The key was a belief that the business was replicable and scalable.

But there was another box that needed to be ticked – adequate skills training. The women who worked at KCC, all of whom had previously been unemployed, were trained in baking, packing, labelling and customer service.

Last year, Polak founded the US-based Khaya Cookie Company in collaboration with the WSWP. The aim is to set up US distribution (it is currently selling brownies through a website, www.khayacookies.com ) and replicate the business model in disadvantaged areas in the US, such as New Orleans, Camden in New Jersey and the south side of Syracuse, New York. “Baking is a skill that is transferable across cultures and languages,” Polak says.

A team of Wharton MBA students is working with the Wharton real estate department to identify potential manufacturing sites.

Thompson says the WSWP differs from philanthropic venture funds in that it does not have a pool of capital to draw from to invest in projects. And it is not a foundation.

That said, the programme is funded with philanthropic dollars and, in the future, may find ways to use charitable donations as seed money for projects. As those projects eventually become self-financing, the donors will move on to fund worthy new ventures.

“There are two kinds of philanthropy in our programme,” Thompson says. “First, in order to do some of the work we do, it takes funding. And it’s very hard to argue, even with a socially oriented investor, that they should put money into such an early-stage project. That’s where philanthropists can play a major role.

“Second, if the project has legs, where do we go for growth capital? Local financing or philanthropy.”

In order for the WSWP to take a social entrepreneur under its wings, the company must offer more than employment, Thompson says. It also has to have a demonstrable societal benefit. “We want to do things with potential for large-scale impact and see whether we can take a small philanthropic contribution and put it to work and learn,” he says.

The business model also has to have potential for regional, if not national or global, replication.

Most importantly, the Wharton team has to feel that it can make a contribution. “If we can’t, it’s pointless us getting involved,” he says.

The programme’s most successful project is an animal feed plant in central Africa. (For competitive reasons, it has asked not to be identified.) The company was founded in 2000 and produces high-quality feed mixes for poultry, cattle and pigs in a region populated mainly by small-scale farmers. A local entrepreneur had spotted an opportunity to enter the market with a lower-cost feed for small poultry farmers, but needed helped getting the business off the ground.

Thompson and MacMillan started working with the company in 2001 and two years later approached the University of Pennsylvania’s school of veterinary medicine to help build a simple computer programme that would lower costs without compromising the quality of the feed.

Within a year of implementing the software, the entrepreneur had cut prices 20 per cent and the competition had followed suit on both price and quality.

“We’ve embedded a pacemaker in the system,” Thompson said. “The incumbents have a choice to leave the market or stay and compete. Now the country has a more efficient feed industry and others are moving into the sector. So it’s not just a business we’ve helped create but also there is a societal impact in the region.”

The company started with six workers mixing feed with shovels and is now producing 26 types of feed. It employs 60 full-time and up to 20 part-time workers and supplies more than 600 small farmers who generate the equivalent of 2.3m daily protein servings per month in a market previously considered destitute.

One of its biggest achievements, Thompson says, is that it has enabled the creation of hundreds of micro-businesses that, in turn, have generated jobs and an average family income of eight times the average daily wage. About a third of its customers had never produced poultry, eggs or other livestock products.

And in the past few years, a significant percentage of its clients have become small commercial producers, increasing production from fewer than 100 broilers (chickens raised primarily for meat) to between 1,000 and 4,000 a month.

Thompson says that, since installing mechanical equipment and using Wharton’s planning programmes, the company has seen its revenues and profits more than double. The next phase is to see if the business can be replicated elsewhere in Africa.

If so, a “virtuous cycle” will have been set in motion.