NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

It’s all about scale. Inevitably, any dialogue about operationalizing ’development through enterprise’ strategies will confront this issue. Why? Because a fundamental axiom of ’economics for the greater good’ is that one should strive to maximize social benefit whenever possible—help more people more efficiently and effectively at a lower cost. Unfortunately, that nut has yet to be cracked in a meaningful way. Fortunately for us, there are a few intrepid souls who are confronting this challenge.

Enter Melissa Richer, founder of a new social enterprise called Ayllu (pronounced eye-yoo). Melissa’s journey began with two simple questions. First, what would happen if several social enterprises were located in the same community? Secondly, how can they be brought to scale? As you’ll soon discover, Ayllu is tackling this problem head on. With no further ado, Ayllu!

Tayo Akinyemi, NextBillion.net: What inspired you to launch Ayllu and how did it get started?

Melissa Richer, Ayllu: It came from traveling in high school and college. Through my travels to places like Ecuador and Costa Rica I noticed that my peers were unable to find jobs and that they had a strong passion for solving problems in their communities. This made me think: what if they could get jobs that solved some of these problems? At the time I didn’t know what social enterprise was, but I thought that two issues could be resolved at once—unemployment and making a difference.

I found out about Ashoka during my senior year of college and started there as an intern. I was working with Youth Venture, which provides social change grants to youth. I noticed that a group of low-income Mexican youth had created income generating strategies for their projects and began buying and selling from each other. For example, one group was training people to grow vegetables on a rooftop garden and was selling the produce to another group working with street vendors. I got really excited about the social capital that was being created, especially since youth unemployment is such a critical problem. I started asking Ashoka Fellows if they could tell me more about creating jobs that solve tough social problems, but they encouraged me to explore the idea myself.

Ultimately, I was hired by Ashoka to be a liaison for Latin America. In February I quit my job with Ashoka to focus on Ayllu exclusively because it was really hard to have two full-time jobs.

Tayo Akinyemi, NextBillion.net: What problem is your organization trying to solve? How will it do so?

Melissa Richer, Ayllu: The problem all comes down to isolation. Social enterprises are rare and dispersed, with few, if any, existing in the same ecosystem. Usually they do not interact. As a result, the social enterprises do most things themselves along the whole value chain. Since poverty has multiple causes, even if one social enterprise solves a few problems well it cannot solve them all. Additionally, being small, it is hard for them to achieve economies of scale, which is something they need to do to be sustainable. MFIs also face scaling difficulties – it is hard for them to meet their bottom line, let alone make a surplus that can be plowed back into the business. In terms of economic growth, while microentrepreneurs who receive microcredit may climb out of poverty, they rarely hire employees or expand their businesses. Most profit is invested in the family, not the business. This means that microenterprises are not creating new jobs. FINCA, for example, found that after the children of microentrepreneurs completed school and had more skills than their parents, they were unemployed because no jobs existed.

We found that most social enterprises have some form of microfranchising model when it comes to growth strategy. This means they systemize their model and package it for replication. It can be ’mass produced’, yet customized to new markets. We also noticed that MFIs were not systematically lending to social enterprises or microfranchises. This is because they did not know how, and because so few, if any, of these models existed in the market. With such a low concentration of social enterprise franchises, it is too risky and costly for MFIs to create a strong product offering for just one business model. Microfranchises usually employ at least three people and generate higher returns. The franchisor (headquarters) provides systems that make it easier for franchisees to compete and to reach larger markets. They are also a safer investment for MFIs than an individual entrepreneur.

We wondered what the impact on poverty would be if we could bring many social enterprise microfranchises to one place, and how being clustered might help them overcome isolation. For example, if they’re both producing a good for export, maybe they could share a distribution channel. If we grouped them together it would be easier to develop systems around them. For example, MFIs could develop product offerings; investors could lower risk by investing in a group; microfranchisees would have a stronger support network, etc. So in partnership with local organizations already working on economic development/creating economies of scale, we will introduce microfranchise clusters to communities. In doing so, Ayllu will create a simple model that can be copied. Our goal is that it becomes self-evident to social enterprises and MFIs that they should work together to scale. Microfranchising becomes a powerful tool for both of them.

Tayo Akinyemi, NextBillion.net: How will your model work?

Melissa Richer, Ayllu: Although we’re still building the model, Ayllu will work in the following way: We will act as a facilitator between social enterprises from around the world, and low-income communities (mainly urban). We will collaborate with local partners to conduct a feasibility study in the community in order to understand what problems exist and what people want to address. Based on this, we can determine demand for different social products and services.

Ayllu will then select examples of social enterprises that could address the problems the community has identified. The community would then choose multiple microfranchises that Ayllu would introduce in partnership with an MFI. Ayllu will work with the MFI to create a product offering for microfranchise, and with the social enterprise headquarters to enter the new market. Our goal is to make the connection between the social enterprise and local partners (organizations and MFIs). Once they are working well together, we will exit the community and move to another market. We hope to exit within 3-5 years. Of course we want to ensure that the voices and choices of communities are respected, so ideally every community would invite Ayllu to enter and do its work.

Tayo Akinyemi, NextBillion.net: Can you explain who will benefit from Ayllu’s services and how they will do so?

Melissa Richer, Ayllu: Through Ayllu’s work, several parties will benefit. First, communities will benefit from the creation of new jobs that tackle poverty. MFIs will have access to new business opportunities and a new market, which will help them scale. The clusters will encourage shared channels that the franchises can take advantage of, instead of having to do everything themselves along the value chain. Impact investors will be able to make less risky investments because they can invest in clusters of proven social enterprise franchises that spread out and lower the risk because they are grouped together. Social enterprises will be able to scale and reach more people. Finally, auxiliary support structures such as investment firms, research institutions, advocacy groups and consultancies will be able to more easily reach social enterprise through the clusters.

Ayllu can also act as a facilitator for multinationals that want to franchise BoP initiatives, given that the viability of such ventures is so contingent upon volume. We’ve already been approached about creating mobile phone franchises in Brazil.

Tayo Akinyemi, NextBillion.net: What has Ayllu been up to in Brazil?

Melissa Richer, Ayllu: Well, I spent the first two months in Sao Paulo presenting the ’Ayllu concept’ to people and asking for feedback. Because the social enterprise community in Brazil is very interconnected, it wasn’t difficult to get a sense of who the major players were. I was also looking at the market-based solutions being used by Ashoka Fellows and trying to understand the context in which Ayllu would be operating. I met with fellows in areas that seemed completely disconnected from Ayllu. Having these conversations gave me a much better understanding of how Brazil’s economic system works.

Additionally, I started doing site visits and forming partnerships. We now know that Ayllu is not designed to enter communities on its own, but rather as an ’add on’ for existing economic development efforts. The next step will be to build out the business model. Over the next 12 months we aim to launch a pilot with three microfranchises in three communities. We will continue to build Ayllu’s network and test ideas.

Tayo Akinyemi, NextBillion.net: What issues keep you up at night?

Melissa Richer, Ayllu: Funding absolutely takes the cake. We’re at the point where we need seed funding but don’t yet have it. It keeps me up, but I know this insomnia is short term. A more nagging concern is my desire to create an enabling environment for Ayllu’s team. I want to make sure that we really take care of our people with strong internal management and feedback systems, and that they want to come to work every day.

Well, that’s all folks! A special thank you to Melissa Richer for taking the time to chat and providing significant editing assistance. Gratitude is also extended to Michael Shoemaker of Ayllu for providing much needed preliminary context. If you want to learn more about Ayllu, be sure to check out the blog, read Melissa’s interview with Social Earth , and look out for an article in an upcoming issue of Beyond Profit.