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

With a proliferation of small projects and business ideas bubbling up in developing countries, a gap is emerging: the lack of a dedicated donor pool willing to angel fund such projects. Enter the Association for Development of Pakistan, an organization that provides grants in amounts less than USD $10,000 to groups in Pakistan.

As Manuel Bueno recently mentioned in his post, small and medium size businesses have difficulty finding the appropriate financial tools. Similarly, there are many small organizations with a need that can’t find the right donors to fund the project.

From a donor’s point of view, there is such a proliferation of organizations (large and small) in need that it is difficult to choose where to put money. How do I make sure my money has an impact? How do I know the organization is capable of what they promise?

Most donors simply don’t have the time to do this research on their own. Rather than spend hours comparing small organizations & their potential impact, donors are more likely to choose a large foundation or a registered charity to put their money to work for them. As a result, the small guy has trouble receiving direct funding. Even foundations and larger charities don’t necessarily have the resources to spend time poring over who should receive a $10,000 grant. It just isn’t cost effective.

Instead, many foundations (there are exceptions) tend to prefer to select large projects that require lots of funding, such as the Bill & Melinda Gates foundation’s support for the development of a malaria vaccine. When making any sort of grant, there is a “transaction cost” in the sense that the foundation making the grant needs to spend some of its resources deciding to whom to make the grant. It is simply more efficient in terms of a transaction cost to grant size ratio to make grants above a certain threshold.

Enter the Association for Development of Pakistan (ADP). ADP is an organization that provides grants in amounts generally less than $10K to groups and entrepreneurs in Pakistan. What makes ADP interesting is the value proposition that they offer to donors and recipients. ADP has developed an innovative way to identify and screen for projects which are likely to be worthwhile and impactful and connect them with donors. ADP uses volunteers and local expertise to discover projects worth funding, while minimizing their “transaction cost”. Since ADP can identify these projects without tremendous cost, they can efficiently fund much smaller projects.

I had the chance to speak with Mubarik Imam, who is the President of the organization as well as Tarim Wasim, one of the initial founders. Mubarik and Tarim are two of the organization’s three directors as well. Both are charming, funny and interesting people who also happen to be super passionate and extremely intelligent. Tarim is currently a Director at Hellman & Friedman, a well-known private equity firm in San Francisco and he still makes time to work on ADP. Similarly, Mubarik volunteers her time even while she is currently pursuing a joint degree at the Harvard Kennedy School and the Stanford Graduate School of Business.

The secret sauce

ADP’s “secret sauce” lies in their ability to minimize the cost of their screening process, and therefore maintain a low average transaction cost. This efficiency enables them to make small grants or loans to make projects happen that would otherwise be overlooked by large foundations. There is another reason small grants make sense too. Over the phone, Mubarik pointed out to me, “Small grants less than $10K make sense not only because it’s a segment that is currently underserved, but also because the bulk of non-profits in Pakistan have annual revenues of %7E$6K or less. It just doesn’t make sense to give a tiny non-profit more money than it has ever taken in over a whole year.”

Below is a diagram of ADP’s operating model and approach:

Essentially, ADP receives proposals for a grant from non-profits in Pakistan. First, ADP applies a quick screen to decide which proposals are worth due diligencing. ADP uses a team of volunteers (including one on the ground) to evaluate the project along a number of criteria. If the diligence team recommends the project, the Evaluation Committee will make a final decision and ADP makes the grant.

Mubarik explained to me that ADP had two core assets: their due diligence process as well as their talented and dedicated volunteers. ADP’s volunteers are organized in a set team structure: The Evaluation Committee is akin to an investment committee in a private equity firm and consists of three members who must be very comfortable with the local context. The project team, which consists of four people (1 in Pakistan), will make two presentations re: the project to the Evaluation Committee after spending several hours researching the project, estimating its impact and weighing its merit along several criteria.

Historically, the majority of ADP grants have been in the areas of education and healthcare. Partially this was driven by ADP familiarity with the space, but it has also been skewed by the high influx of proposals from those sectors. Mubarik described to me that, “ADP is currently trying to proactively expand its portfolio to include other industries such as Energy (Biogas), Water and Vocational training,” and she hinted that we should follow ADP to see the results in the next 6-12 months.

ADP’s birth and subsequent growth

Over a chilly lunch outside Tlaloc in the financial district of San Francisco, Tarim told me the story of one of ADP’s first grants back in 2004; a computer lab for a school about 30km outside of Islamabad, Pakistan. I scrambled to squeeze in enough time to take a bite of my burrito between each flurry of notes as Tarim kept on painting a picture of a poor rural village primary school.

He recalled his first visit to the school when they were screening the project. He asked the school teacher, “why do you need a computer lab?” She described the software they were going to use to teach math and word processing. She admitted that the purpose of the computer lab was much more than just to improve education (though that was important) the lab was helpful in another way as well. The school was losing students to a near-by madrassa and the teacher knew the computer lab could help win the students back. Madrassas usually offer free education and have been accused of including extremist training for the Taliban in their curriculum, though many schools are believed to be safe from that influence. With the madrassa up the road, families that were willing to pay a small nominal fee for their children to attend school took advantage of the free education to save money. The teacher boldly stated, “The computer lab is the hook. That’s what gets parents in the door.”

20 projects later, today ADP has transformed by learning, evolving and innovating on their model. At first, ADP was based out of Boston but had a spread out set of volunteers and a few chapters. Unfortunately, the chapter model resulted in ineffective decision making, so the organization learned and in ’05-’06, they introduced more systematic ways of evaluating potential projects, especially given that their volunteers were still remotely based. They produced a standardized set of training materials for new volunteers and they formalized a set of criteria used for deciding whether or not to fund a grant. The bulk of ADP’s growth in activity has been experienced since this transformation. Today, ADP has 50+ active volunteers at any given time and 6-7 projects currently in the diligence pipeline (though to maintain quality, usually only 10-15% of projects are funded). The group plans to make $100K of grants in 2010 and $200K in 2011.

I asked Tarim, “How do you expect to be able to grow so quickly?” He laughed and smiled and admitted, “Yes it is an ambitious target but I believe we have the right tools in place to accommodate the growth and we will just have to overcome the challenges that come our way.” Tarim then told me that in his perspective, there are growth bottlenecks and to avoid them you need to ask yourself three questions:

1. Is there enough need on the ground to accommodate the increase in grant making?
2. Can we raise enough funds to distribute?
3. Each due diligence takes time, do we have the capacity in volunteer time to distribute enough grants?

“Number 1 is almost not worth asking; theres always a need,” said Tarim, “and you would be surprised how easy it is to raise enough funds. The CEO of my firm is constantly asking if he can give more.” Capacity would be the biggest challenge of all, but Tarim told me they were working on their primary capacity limitations; volunteering on the ground and managers to handle a larger number of remotely located volunteers (if you’re interested you should check them out: www.developpakistan.org). Tarim believed that once capacity barriers were removed the organization could grow its impact rapidly.

I asked Tarim if he tracked any metrics after making a grant or loan and he told me what he thinks about when choosing metrics:

• Simple is best
• Don’t trust that the project is needed: If you’re funding a well, check that there is a need for water and that a much better alternative isn’t available
• Measure the benefit by the number of beneficiaries
• Measure the cost by comparing the cost to alternatives

Tarim said that after making a grant, they require the recipient to make monthly reports on the status of the project. In addition, they will follow up with their recipients a few times in person over a couple years.

Having met the founders and spent a good amount of time getting to know the organization, I can certainly recommend you start following ADP. The Association for Development of Pakistan is a spectacular organization that has an innovative approach to fulfilling the long tail distribution of small grants and funding needed for all the little fish out there.