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

Friday, July 29, 2011

Coca-Cola (KO) sells millions of bottles of its fizzy sugar water in the poorest villages of the world at 15¢ to 25¢ per bottle-prices locals can barely afford. What would happen to the multinational’s business if a well-funded Chinese soft drink startup decided to crash that market with a sweet but relatively nutritious beverage it sold for 5¢ a bottle? Coke would most likely get crushed. The village children, many of which are probably malnourished, would benefit tremendously from the rapid and disruptive shift to a cheaper, healthier soft drink.

That’s the example Paul Polak uses in his April TED talk to underscore the possibilities he sees for disruptive, massively scalable for-profit businesses serving those who have the least. After decades working as a psychiatrist, Polak skipped retirement to start International Development Enterprises, a nonprofit that advises, invests in, and launches ventures aimed at solving problems facing the 2.6 billion people who live on less than $2 per day.

Polak, who has spoken to more than 3,000 poor people during his years traveling the world, believes that innovation serving the bottom of the pyramid will not only improve their lives but also increase competition at the top. That would mean some of the products and services designed to help the poor will end up benefiting wealthier people, too. We’re already seeing extremely compact, lower-priced, portable medical imaging systems made by General Electric (GE) for the developing world that cost orders of magnitude less than traditional imaging systems in the U.S. but could easily be used for many of the same medical imaging tasks. Indian hospitals, likewise, have perfected ways to perform high-quality eye and heart surgeries for a few thousand dollars that would cost tens or hundreds of thousands of dollars in the West. Then there’s Tata’s (TTM) $2,500 car, which the company is getting ready to launch in Europe.

RARE BACKERS

These incursions that initially serve the poor and later end up serving the rich could be hugely disruptive market forces. While multinationals have the cash to make them happen, the entrepreneurs behind them need external capital. Trouble is, private equity and venture capital firms appear to prefer betting on disruptive forces that serve the developed world. I’m singling them out because philanthropy groups in most cases don’t fund for-profit ventures. Private equity and venture capital funds poured a combined $2.52 billion into social media startups during the first quarter of 2011, according to the SMI Social Media Funding Guide. has a $100 million fund for iPhone software startups. Yet not a single major venture capital fund has been launched to invest primarily in companies serving the poor.