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.
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.
In other words, the community that controls access to equity capital for private companies has an imagination disparity. By sticking to seemingly safe bets in socially useless areas such as social gaming and online advertising, venture capitalists may believe they’re fulfilling their fiduciary duty, but mostly they are missing out on what will likely be the biggest market disruption since the industrial age. I haven’t driven a Tata car yet but am sure it would get me where I want to go, albeit without the fancy air bags (yet).
For his part, Polak is walking the talk with his startup Spring Health, which he incubated at IDE. The company constructs 3,000-gallon cement water tanks in poor rural villages in India. The tanks are located next to small shops and provide cheap decontamination solutions for the shopkeepers. The shopkeepers purify the water in their tanks and sell it for prices affordable to the poorest villagers. It’s a low-margin business that means villages spend less on health care to treat waterborne illnesses and therefore can spend more on food and medicine.
LONG INVESTMENT HORIZON
Spring Health’s business model is similar to Wal-Mart’s (WMT) and Amazon’s (AMZN), which endure low margins to make profits on volume. Amazon, if you remember, got a lot of venture capital backing. Should Spring Health really take off, the total addressable market could easily stretch well into the billions of dollars in annual revenue in India alone.
We already know why companies like Spring Health can’t tap money from traditional venture capital and private equity firms: Despite all their talk of disruption, most partners I know manage their funds conservatively and follow the herd like sheep. The idea of an investment horizon of 10 to 15 years on a company like a Spring Health is anathema. Companies serving isolated rural villages with slow-growing or stagnant economies represent more risks than gains in venture capitalists’ eyes.
Then again, with major infrastructure spending unlikely in the near future and a water crisis looming in many parts of the U.S.—Atlanta, Las Vegas, and Orange County, Calif., are among the affected major metro areas—a Spring Hill model for American homeowners to convert their gray water from dishwashers and appliances to tap water holds significant business potential. The backing for this type of innovation is far more likely to come from Colorado, where Spring Hill, IDE, and Paul’s other businesses are based, rather than the venture capital bastions of Boston or the Bay Area. It’s a pity the guys who are supposed to seed the future are punting on killer opportunities both to do good and to do well that the world sorely needs.