I spent 30 hours in NYC last weekend for a wedding and thanks to public transportation I engaged in a discussion about entrepreneurship with an unlikely conversationalist. As indicated by the title of this post, this was a retired crack dealer from Brooklyn who rode the subway with me to Queens on my way to a wedding in Long Island.
Our conversation sparked because we had both just missed the subway from Bushwick to Jamaica. At first, I had certain doubts about his intentions. Normally when people start talking to me on the street in big cities, they end up disappointed that I was not the smart money type they expected. When he found out I was from Louisville, however, his face lit up. He claimed that he just got back from there on a bus. However he was also unable to answer my questions about how long it took him to get there or what part of the city he stayed in…so remained skeptical. I continued to talk to him, but was looking for a way out of the conversation as soon find an exit.
Early in the conversation, he was very vocal about racial tensions he felt in Brooklyn, stating that the police often approached him and made him lift his shirt to check for guns, which made him feel violated. He also complained about Mayor Bloomberg only serving the white people in Manhattan. After 1 month of intense study on theories like resource-based view, game theory, and other economic topics, perhaps this was the conversation I needed.
As we sat on the subway, I succeeded in switching the conversation from politics to business – something that I would be less likely to offend him or any of the other strangers on this train. I wasn’t thrilled that I was talking on a subway in the first place. I’ve never figured out the best way to cut a conversation short. It’s an art that few have mastered, especially during business networking sessions.
The more we talked, the more I believed him. The reason he had taken the bus to Louisville was because his father was in the hospital. His mother and several of cousins live there and all he really wants to do is move closer to his family. It was this point in the conversation that he came clean. The reason he was unable to fly or stay longer in Kentucky was because he was a convicted felon! He had been a crack dealer in the early 90s, arrested and caught up in an ugly situation. He admitted that he had shot people, and been shot in his “hay day.” But he didn’t express any remorse for his actions, besides that he was now stuck in New York and unable to move to where his family went.
I looked around the train, taking notice of our new audience. This was no uplifting Forrest Gump life story, but I had to say something despite the awkwardness of his admission. The first thing I could think about was a chapter in the book Freakonomics about why crack dealers still live with their mothers. It might have been a risky move, but for once in my life, I just couldn’t come up with a non sequitur.
So I asked him outright, “why do crack dealers live with their mothers.”
He laughed, and responded that it was indeed true. I told him about the book, and how an Indian doctoral student made friends with a Chicago gang led by an college educated gangster who kept detailed accounting records that were published into academic research. I asked him what it was lik to deal crack in New York, not thinking until after the conversation such a question might not been a great idea in my very short weekend trip to see my family.
For the most part, he agreed with the a lot of what Levitt talks about. The corporate-like structure of the crack business is similar in Brooklyn than it was in Chicago when the Indian PhD student Sudhir Venkatesh documented it through his field research. Since so many people wanted to work in this industry, the actual wages for the street soldiers were very small, sometimes nothing at all. Only a few people at the top really earned substantial profits, but that tenure could be ended quite abruptly. Or in his words “you could be sitting on a park bench and have three %$#@#’s walk up and put a bullet in your head.”
My new subway friend said that he had no intention of rising up this corporate ladder because it would be too risky. He had dealt drugs and kept a low profile, but he offered some intriguing stories about some of the bosses in the gang at the time. The amount of profits that they made each day according to his story were tempting, but he had mentally calculated the risks of increasing his supply and opted to keep it a “small business.” We talked about territories for dealing being similar to McDonald franchises, and why the guy’s at the bottom of the gang were content with making less than minimum wage. I encourage you to read Sudhir’s book for details.
The retired crackdealer on the subway claimed that that there were few alternative options to dealing drug in his youth. He didn’t have the patience for school but his his mother had told him over and over while growing up that he should study more like the Indian kids. He admired Indians for their successes and emphasis on education, and regrets not trying harder in school. He ended our drug conversation, stating that if he had my brains (assuming I was smart only because I am Indian) and his hustle when he was young, he would have been bigger than Jay-Z. We talked about how kids in his neighborhood should learn how to be entrepreneurs in legitimate businesses, and I told him about NFTE, an organization that teaches inner city youth how to be entrepreneurial. As he walked me to the train I had to take to Long Island, he made sure I found the correct one. He ended by telling me that “New York is a city that destroys people, but if I figure out the right moves, I could do very well out there….Don’t waste any gifts.” This is the last thing I expected to hear from a crack dealer that I couldn’t figure out how to stop talking to. I wished him luck on his desire to move to Louisville, and we went on our separate ways.
Almost two years ago I wrote a post about microfinance – “Microfinance 2.0”. I had just heard about Kiva.org and was fascinated with the power of online communities and social media, and on a personal level, I was looking for ways that my driver, Satyam, could finance his business idea. While living in Hyderabad I became friends with a few people that worked for SKS Microfinance, and was involved in a few discussions about moral concerns people had with the popularity of microfinance in the commercial world. There were rumors that part of the reason that default rates were so low was because ‘collection agencies’ hired by banks practiced mafia-like tactics for obtaining repayment of the loans. I have no idea if this is true or not, but it was part of my early perceptions of this system, and thus I have always had a concern for the social benefits through this form of lending to the poor.
While microfinance lending was envisioned to help the poor gain access to capital to start their own enterprises, it has become evident that it is far more complex in today’s world. With several strong examples of social ventures that give micro-finance loans, it is easy to generalize this practice as being social entrepreneurship. However, loans can be given out in several ways through socially responsible investment funds, non-profits, and commercial institutions that operate strictly for profit. Just like I had doubts two years ago, today I am even more concerned about the future of this model with non-profits becoming more commercial. I support social ventures that make a profit because using innovation and business strategies help the ventures stay self-sufficient. However with micro-finance, I am concerned that the entire system might be damaged if the industry becomes too capitalistic. Profit incentives may consequently punish the people microfinance was originally designed to help: the poor.
There are two ‘pure’ microfinance lenders that have made public offerings to raise capital, Compartamos and SKS Microfinance. Several Indian companies involved with microfinance are expected to follow soon based on the success of SKS’s IPO last month (generating $358 million) In a study done on Compartamos’ IPO in Mexico in 2007, no significant negative consequences to the poor were found from the IPO:
The grants supporting Compartamos operations went to not-for-profit non-government organizations (NGOs) and not into private pockets.
Compartamos “overcharged” existing clients for the sake of outreach to potential future clients.
Profits made by the NGO remained at the service of poor Mexicans.
The tension between commercial and social objectives did not begin with the IPO, but with commercialization in 2000.
However I’m still skeptical. With new incentives that are introduced for the business to maximize profits, how long can they afford to keep serving the poor as a priority? The founders of Compartamos became instant millionaires and were accused of profiting off the poor. This surely has given existing and future competitors a window of opportunity to follow and try to claim their piece of the pie. When the microfinance lender suddenly becomes an attractive stock to put in your investment portfolio, regardless of your desire to help the poor, where do the profits of that that transaction go? Essentially, people will be making a profit of the poor even if Compartamos keeps their profits within the poor communities. Competition in this industry will make lending even more competitive, changing the incentives for the firms. It is yet to be determined if this level of competition will raise or lower interest rates for the poor. More lenders might lead to lower interest rates, however lenders with new objectives tied to stock performance may actually raise interest rates.
It appears that in India, banks are regulated to give 40% of their funds to priority sectors. This allows micro-finance lenders to borrow at around 10% interest, while they charge 30% interest to the poor. This is still about 10% cheaper than other forms of lending available to people in these areas. SKS has given loans of $3.2 billion to to almost 7 million people (as of March 2010). They have less than a 1% default rate. Some analysts suspect that this will go up, and may create a “subprime crisis”. While SKS started as a non-profit organization, it became a for-profit venture when founder Vikram Akula came back to run it in 2003 raised $75 million in private equity before the $358 million IPO this summer. The non-profit organization (Unitus) that helped start SKS has recently shut down, which one writer suggests is an live example of ‘seeing what the endgame for social entrepreneurship can look like.’
Today the nobel-prize winning Muhammad Yunus is criticizing SKS Micro-finance from profiting off the poor. He initially trained Vikram Akula at the Grameen Bank, but Vikram wanted to tweak the model, introducing strategies borrowed from Mcdonald’s and Starbucks to drive growth. Vikram’s vision to have the venture free from government grants and charitable donations is a shared goal of at least 20 social entrepreneurs that I have spoken with at length. Social entrepreneurship walks a fine line sometimes between capitalism and altruism, and the debate whether they can coexist is ongoing. With early indications that we might soon be seeing micro-finance lending becoming popular at home in the US, I think this is an area worth thinking about more. NPR did a great story on the Latin Economic Development Corporation giving micro-loans to a small business owner unable to get financing after the economic crisis.
While there are several forms of microfinance loans, and very successful organizations that operate from commercial capital, social networking, or generous grants, this field is about to change significantly in the next few years. My hope is that with change come progress, and the people within the industry can find ways to self regulate the forms of corruption that may emerge.
Next year you might have a chance to buy the first commercial flying car. Developed by MIT grads, the Transition by Terrafugia is planning on launching a vehicle that can fit in your garage, is street legal, yet can fold out wings in 30 seconds and take off for flight for up to 500 miles. Take-off and landings must take place at airports, and pilots must have 20 hours flying experience from earning a Sports Pilot license. 2 people can ride in one, and they boast that their is storage room ideal for golf clubs. It runs on premium unleaded fuel, and will likely start at around $200k.
There are several other projects designed to help us become more like the Jetsons. Will police to monitor this new form of traffic, and if so where do you go if they pull you over? What will insurance premiums be? Will Nascar evolve? Will there be smog tests? How much more will mechanics charge? Will the big auto companies get into this? So many questions, So many questions…