Nonprofit Kingdom

One year ago today (July 2), on the Friday before the 4th of July holiday, Seattle microfinance "accelerator" Unitus, Inc. abruptly announced it would close its local office and lay off most of its staff.

The Unitus board of directors, most of whom had started the organization a decade before, said the charity's mission of helping to facilitate private investments in foreign microlenders was complete. Unitus, they said, would reorganize under a new mission.

Many wondered what the new mission would be, and why Unitus had to close so quickly. Unitus recently unveiled its reorganization plan, and while the charity will use a different approach to reduce poverty, its new business strategy appears very similar to the one that sparked an international controversy last year.

Unitus, Inc.'s board of directors say the charity has reorganized as Unitus Labs, a Seattle-based nonprofit that will serve as source for innovation in fighting global poverty. Unitus has also launched a new, San Francisco-based entity called Unitus Impact (which I recently profiled) that will direct private investments in foreign enterprises that can create jobs and grow incomes for workers. Unitus Labs will "partner" with Unitus Impact in order to help fight poverty.

If this strategy sounds familiar for Unitus, it is.

For years, Unitus used a dual approach to helping grow foreign microlenders, a strategy it called an "accelerator." Unitus would provided microlenders with financial aid, low-cost loans and management expertise, most of it funded by private donors and grants. It also provided access to commercial capital and management advisors.

This approach was highlighted by a single event last year. As Unitus was in the process of closing down, the largest microlender in India, SKS Microfinance, was about to begin selling public shares. It was the first IPO for an Indian microlender, and I reported that Unitus and investors linked to the charity played a key role in helping to make history — and a lot of money.

In a series of stories published by the Puget Sound Business Journal, I reported that Unitus played a key role in helping grow SKS with charitable aid. But at the same time, Unitus had created an equity fund that allowed investors to buy stock in microlenders, including SKS. As Unitus employees were collecting their last paychecks, investors linked to Unitus would be reaping millions from the IPO.

Microfinance experts questioned the conflicting roles that Unitus played as both an investor (the charity invested in SKS as well as people linked to the charity, although a full list has never been disclosed) and as a charitable supporter of SKS.

Now it appears that the reorganization of Unitus will follow a similar path.

Unitus Labs (charity) will "partner" with Unitus Impact (investor) to help grow foreign businesses. As before, there is management overlap between the two organizations. Geoff Wooley, an investment professional who is a former member of the Unitus board of directors and close associate with its founding board, is the executive chairman of Unitus Impact. Wooley also sits on the SKS board.

So once again, the questions are raised: Will Unitus Labs use charitable resources to aid the companies that Unitus Impact invests in? Will Unitus Labs inform donors and even foreign companies of the potential conflicts of interest?

Although the arrangement is a questionable one from the standpoint of ethics and donor intentions, there is no denying it is a beneficial one for companies that work with Unitus.

This graph (source here)  posted to the Unitus Labs web site shows the growth that microloenders experienced after working with Unitus, thanks to the charitable aid and management expertise and investments provided. 

The Unitus "accelerator" strategy also included a capital advisory firm, Unitus Capital (which continues to operate) and the Unitus Equity Fund, both of which were spun out of Unitus. The Unitus Equity Fund was such a success that it was taken over by a professional management firm called Elevar Equity (managed by former Unitus employee Chris Brookfield), which started a second fund. Elevar, with $96 million now under management, was recently named among the top 50 social investment funds in the US for generating financial and social returns.

But growth acceleration has its limits.

After the SKS IPO, borrowers in India stopped repaying their loans at the urging of local politicians who said borrowers were being taken advantage of with high interest rates. Some borrowers committed suicide under the weight of debt. The SKS stock price plummeted as repayments rates fell. The crash highlighted the fragile nature of the industry and how easily a bubble could form — a bubble that was in a large built up by Unitus.

Time will tell whether the Unitus Labs/Unitus Impact reorganization will address some of these past issues of conflict of interest and non-sustainable growth.

The Unitus story is a fascinating tale of innovation (popularizing equity investments in foreign microlenders), drama (the resignation of board members in protest over the decision to close down the charity) controversy (over lucrative investments in an Indian microlender), faith (most of the founders are members of the Church of Jesus Christ of Latter-day Saints) and now even a connection to the 2012 US Presidential race (Unitus co-founder Bob Gay is business partners with Jon Huntsman Sr., father of Jon Huntsman Jr., Republican candidate for US President).

I plan to blog more about Unitus and its work, and hopefully detail more of the achievements that Unitus has made though its history. To date, I have had very little contact with the Unitus board and I hope that will change soon. As other have noted, the Unitus story is an important one for the social business sector to follow.

In some other Unitus news …

• Unitus Labs posted its 2010 audited financial statements that you can download here. I have not had a chance to go through the document yet.

• On the Unitus Labs web site there is a yearbook for past employees to comment about their experiences.

• In May, I received first place in the category of "Social Issues Reporting" for my Unitus coverage in 2010 from the Society of Professional Journalists' Region 10.