My interview with Ayllu founder Melissa Richer covered wide ground.  Our discussion included her inspiration for starting Ayllu, the specific structure of Ayllu’s business model, the broad capability of microfranchising to provide sustainable economic opportunity to the poor, and the receptiveness of the Brazilian community to her efforts.  For the purposes of relative brevity, I have divided the interview into 2 parts.  Part I focuses in the social enterprise itself while Part II focuses on the personal rationale and history behind Ayllu’s founding.

Ayllu fights poverty by scaling the world’s best business solutions. These businesses use microfranchising to create jobs for the poor that tackle unmet needs like healthcare, education, deforestation, and malnutrition. Ayllu is launching in Brazil, where they work with local partners, especially microfinance banks, to match community needs with business solutions from around the world. The organization is a tax exempt US-based nonprofit. Learn more about them at AylluInitiative.org.

And now for the interview:

Welcome Melissa.  What was the problem that sparked your desire to create Ayllu?

For most of the problems a poor community faces, there are social enterprises somewhere on earth that offer a solution. But right now are not enough solutions in any single community to break the poverty cycle. The root cause: low-income markets have such undeveloped infrastructure that stable, scalable businesses are extraordinarily difficult to build and rare to find. Scaling is the biggest sector challenge for social enterprise and currently this is a young and inefficient field. The poor barely have access to it. We do not yet have the tools to build dynamic social enterprise markets within low-income economies.

What do you mean by infrastructure in this context?

Infrastructure is access to necessary channels such as supply chains, transportation, warehousing, and distribution chains. It’s expensive to access the poor.  Businesses have to develop end-to-end solutions – marketing, sales, distribution – with no one to help them.  A business in our economy can outsource work to people who specialize in certain areas.  But in poor communities we don’t see that.  Take Honey Care Africa, which provides second incomes for rural farmers through beekeeping.  They provide training, microcredit, collect the honey, process it, sell it – they take care of all the distribution. In the past they tried to work with distributors but the relationship didn’t work out because Honey Care’s model was too different from the distributor’s other clients.  There is a lack of indigenous infrastructure to help a business that’s bigger than a mom-and-pop shop.  And so these businesses have found that the best way to grow is to do it themselves.  But it really constrains their ability to scale themselves, and they end up being isolated.  In any given community, their efforts are not enough to end poverty.

What’s the solution?

You place infrastructure on top of the existing situation. The microfinance model is strong, and it works, but it’s limited.  From an overall perspective, entrepreneurs are constrained by isolation and the market infrastructure that surrounds them, which they have limited control over.  In short, they can’t transform the economy on their own.

The solution exists in aggregating social enterprises and creating access to shared channels.  When social enterprises can, they will collaborate to access local channels.  For example, VisionSpring is partnering with Grameen Village Phone in Indonesia to distribute their products through microfinance channels and deliver 2 products to the same community.

Our idea is this:  if we can aggregate social enterprises and introduce them to new markets as a group, then we will create infrastructure in 3 ways: 1) communities will be able to access a basket of solutions – education, healthcare, energy, technology, etc.  2) it builds up local channels, like distributors, suppliers, and microcredit.  3) in acting as a hub, we attract specialized intermediaries like market research firms, investors, and favorable regulation (think Silicon Valley as a hub for IT).

How does your model work?

Ayllu is a facilitator, a link between local communities and business solutions that would work in those communities. First, we get to know a local market really well, and we form local partnerships.  At the same time, we have relationships with social enterprises around the world that are ready to expand.  We identify a community’s needs and demands (what the poor would buy). Then we ‘matchmake’: we work with local partners to introduce social enterprises from outside markets to the communities.

So Ayllu examines local demand, establishes local partnerships, and then facilitates connections for social enterprises to come in and meet that demand.

Yes.  We group microfranchises together and introduce them to local networks, mainly through local partners.  Our expertise is in facilitation. With distribution channels, for example, we are not a distributor ourselves, but we know who the distributors are.  We connect the social enterprises with more local channels, more cheaply than they could do on their own. Not only do we introduce them to a new market, but once introduced, we help them go deeper in that market.

When I say market I am referring to a new country or region.  So in Brazil, we could introduce a social enterprise from the northeast to the south.  And of course there’s a level of adaptation.  Look at McDonalds: every country has a different menu, but although the delivery may differ, the core value proposition is the same: affordable fast food.

Who exactly are your customers?

The social enterprise is our primary client.  We focus on how to make them sustainable and able to reach more of the poor. The key to succeeding in a low-income economy is ‘wholesale distribution’– selling low-priced products but making money by selling a high-volume of those products. The catch 22 is that market infrastructure is so weak it is hard to reach a high-volume of customers, so a social enterprise is not making money off its low-priced products.  In helping them reach more customers, we’re helping them become stronger businesses.

Our secondary customer is the local partners – microfinance banks, distributors, suppliers, etc.  The ultimate beneficiary is the poor.  We measure success based on how a social enterprise is affecting poverty in a community.  So while a social enterprise might be doing really well in a new market, if they’re not helping the poor then they’re not meeting our criteria for the business relationship.

How do you measure the impact of these social enterprises on a community?

Success means breaking the poverty cycle. Short-term indicators measure job growth, economic growth, and social impact.  On top of our indicators, since all social enterprises have measurement systems, we will rely on these to assess their impact.

Long-term success means system change.  Our desired 2025 outcomes are to impact 10 million people.  10 million is achievable because potential clients are already affecting thousands if not hundreds of thousands of people.  By 2025, we’re looking to have 30% of microfranchise operators exiting poverty.  We’d like 70% of microfinance institutions to be introducing microfranchise portfolios, which will extend their reach to people who are less entrepreneurial.  Lastly, within 7 years after entering a new country, we’d like to positively affect public policy.  Brazil is our pilot market, but we aim to go global and enter 10 countries within 10 years.  We’re already looking to expand to India, Paraguay, and Colombia.

Can you talk a bit about some of your organization’s accomplishments thus far?

Once I started Ayllu, I knew I had to ge ton the ground to determine if there was demand.  Without formal funding, I moved to Brazil and rooted Ayllu in the social entrepreneurship community.  I joined key networks such as the Sao Paolo Hub, conducted a feasibility study, and formed 3 partnerships to develop Ayllu’s pilot.  All this was achieved with a cross-sector team of dedicated volunteers and advisers.  The team conducted market research and built a database of social businesses worldwide.  Within one year, we had backing from industry experts; for example, Ayllu was invited to launch a Microfranchise Working Group with VisionSpring, Grameen, and Brigha Young University.  We also created global awareness of the problem through recognition through sources like Acumen Fund’s blog, Next Billion, and Beyond Profit Magazine.

Tell me about your team?  Who is on it, and how do they help your organization?

That’s a good question.  Ayllu has always been a team effort.  Evan joined when Ayllu officially launched in February 2009. He built and maintains our social enterprise database. Mike found us on Twitter and came on board as a volunteer strategy consultant for the pilot. Monica was connected via the Acumen Fund and is using 15 years in finance to select 3 social enterprises for our pilot. We are collaborating with Brigham Young, the leading university for microfranchising. Through a variety of channels we selected 4 BYU students to develop Ayllu’s business plan. The Advisory Board represents our global network. Finally, we work with our 3 Brazilian partners to bring a local voice. Finally, a group of Yale graduate students will join us this spring for a consulting project to assist Monica with client selection.

Melissa, something I’ve been wondering is that your organization comes into an area, and says that it provides a solution to the community’s problems.  And I think that representatives of traditional aid have been making this argument for decades, but rather than solving the problem their policies have arguably increased a sense of dependence between the givers and recipients of aid.  So how do you avoid this paradigm?  How do you convince your partners that you’re for real?

Brazilians are open to new ideas and to innovation. When I arrived in Brazil I wasn’t sure what to expect, but Ayllu was received very positively.  To clarify, we don’t work directly with the poor.  Instead, we work with organizations that are already working with them.  The poor have an interaction with Ayllu, but we work alongside local partners that the community already knows and trusts; as a result, the trust in our partners is extended to us.

In terms of how our clients (social enterprises and local nonprofits) earn trust, our criteria for partnership is that the model is designed to be a hand up, not a hand out: it listens to the poor, meets their demands, and is ultimately driven by the community. Ultimately, our success depends on demand, so if the community does not want us there and does not buy the products we introduce, that would speak for itself and we would have to cease operations.

You are currently in the process of selecting 3 social enterprises to introduce to Brazil.  Has it been difficult for Ayllu to build trust with your potential clients?

No, at first I expected it to be very difficult but it’s been the opposite. Ayllu was founded because leaders of nonprofits and social enterprises that could be potential clients encouraged me to pursue the idea. We were actually invited by Ashoka Fellows to launch in Brazil and our first official funding is coming from Brazilian institutions.

A strategic focus of your organization includes creating a global map of social enterprise.  Can you elaborate on the rationale for this project, as well as any findings you’ve had?

Ayllu’s core value proposition is our global network: for local partners it’s access to business solutions that have worked elsewhere, and for social enterprises its access to local markets where Ayllu has identified demand and established relationships. We had to build this network, and a key piece of it is understanding the global social enterprise landscape.  It started as an Excel file created by Ayllu team member Evan Chen, and we found that somewhere on earth there are business solutions to almost every problem the poor face. When you enter new markets, you must know what solutions are relevant for that market, so we need a robust global database.

What are the next steps for your organization?

We have already started launching out 2010 pilot.  The first 6 months are being spent selecting 3 social enterprises to introduce to Brazil. We are currently narrowing down from a list of 40, through interviews and conversations with potential clients.

What is your biggest challenge right now?

Getting the right funding for our 2010 pilot. The first six months of the pilot are much trickier than the second six months – the first half will be spent selecting 3 social enterprises and determining our relationship with each of them. The second half will be spent introducing them to Brazil. Since these social enterprises are mature, proven models, potential funders are more interested in funding the second half of our pilot. However, the bulk of our costs are in the first half – conducting interviews, due diligence (international site visits) and feasibility studies in Brazil. If we don’t get the first half right, we can’t deliver on the second half. We really need support to conduct the necessary R&D (due diligence) to select 3 clients. Once they’re selected in the second half of 2010, our costs will be much lower. This is especially because the social enterprises will pay Ayllu for market introduction, driving down our costs.

Fundraising is a challenge for many social ventures, but for your organization it seems like the front end is where you need the funding – making these next few months especially important.

Yes, our funding situation should only get easier from here. It’s always toughest to get the first funders committed.

If you are interested in supporting Ayllu’s efforts to combat poverty through microfranchising and local capacity building, you can contact Melissa Richer at melissa [at] aylluinitiative [dot] org.  For more information, please visit their website at AylluInitiative.org.  You can follow Ayllu on Twitter or their blog by following the links in this post, and you can follow Melissa on Twitter as well.