It’s been about two months since I wrote my last real blog entry. I was in Japan. At that point, I was noticing the first winds of the financial hurricane land on the shores of Kiva. There was no better place to ponder these things than while Stormtrooping Akihabara.   I’ve been mostly back in SF since that time. Here’s what’s happened since:

Pretty soon after returning, we started putting together a bunch of different budgets to deal with different scenarios. I was determined we would be ready for whatever hit us. As a young CEO, the last thing I was seem unprepared for a financial crisis and I already felt like I had a little catching up to do. I was not going to be caught dead looking stupid…

Our budget for 2008 arrived at about $4.7M when the year ended. By that, I mean that the total costs of running Kiva in 2008 totaled $4.7M. During this time, our user base released about $37M to the low-income entrepreneurs listed on our site. So, for every dollar spent on operations, our lenders sent about $8 for loans. I’m proud of this, but want to stretch it much farther in the future. I imagine this ratio can expand astronomically within the next decade.

Now, for a quick tangent:

Kiva, today, is a larger operation than you may think. We have about 35 staff members now — almost 20 of which are focused on the microfinance-side of the business. The microfinance team is responsible for a number of activities with regard to our Field Partners. MFI due diligence, selection, training, monitoring, tech support and the Fellows program are among their primary activities. The other 15 of us are focused on making the website, building the community, administration and governance.

In the 90’s, the idea of "percentage overhead" came into vogue as a key measurement of non-profit performance. Essentially, this percentage represents the percent of funds directed towards "overhead" as a percentage of the total funds spent by a non-profit. To calculate the ratio, the non-profit needs to decide what expenses are for "programs" and what expenses are not. Funders and various websites rate non-profits according to their "efficiency". The less you spend on overhead, the more efficient you can become. The logical conclusion of this line of thinking is that the ideal organization is one that barely exists. Thankfully, the percentage overhead concept has since been largely abandoned as an

The percentage overhead metric is especially useless when applied to Kiva. Kiva is a different beast, primarily because we do not take ownership of the funds that our users direct towards entrepreneurs on the site. To be more specific, *none* of our expenses go to the people on our website and *all* of our users loans go to the entrepreneurs. Therefore, our balance sheet reflects only organizational expenses. The $37M, for 2008, is nowhere to be found when we file our taxes to the IRS. This is because it was housed in a separate legal entity (Kiva User Funds, LLC) which is essentially a clearing house for funds which are owned by the lenders and borrowers on the site.

You could argue that our entire $4.7M budget is *overhead*. Or, you might argue that some percentage of our 35 member staff actually carry out programs. For instance, is a staff member who trains MFIs how to use Kiva in Peru overhead, or are they programmatic? What about an engineer in SF that makes software that allows MFIs to upload entrepreneur profiles? Certainly, that staff member is serving the poor. The IRS, it turns out, would consider the engineer to be "overhead", and the trainer to be "programmatic". In fact, I think the IRS would imagine about 1/3 of our expenses ($1.5M) to be "overhead". The result is an org with 33% overhead. That sounds like a lot. But wait, what about that $37M we sent to the poor this year. If we include that in the equation, our "percentage overhead" tumbles to about 4% ($1.5M / $3M + $37M). So what are we, a 4% overhead organization or a 33% overhead organization? Who knows. I don’t devote much to this semantic puzzle.

End of tangent:

Upon returning from Japan, it was our turn to recommend a spending plan that dealt responsibly with the uncertainty in the global economy. I worked closely with Premal and our CFO Jen Hamilton to put together various scenarios. First, we put together a "steady state" budget which prescribed normal growth similar to that we witnessed in 2007. Second, we assembled an "austere" budget, which involved a slight contraction in loan volume, a freeze in hiring and an end to any unnecessary spending. Third, we prepared for total disaster. A "crisis" budget was drawn up…which was characterized by a precipitous cliff in loan volume followed by a sharp rise in user withdrawals….a "run on the bank" if you will. It took a few weeks to put these together. Next, we had to decide which budget to recommend to the board…. 

(To be continued, this is getting too long)