19 May 2003  Lessons from the Classroom

Business Plan Winner Targets India Dropouts

Gyaana means "knowledge" in Sanskrit—a fitting name for a business that aims to fight the 50 percent dropout rate in India by offering microfinance loans to families.


Editor's Note— Harvard Business School MBA '03 students Raj De Datta, Arvind Krishnamurthy, and Meghna Modi recently won the Social Enterprise track of the annual HBS Business Plan contest with their plan for brokering microfinance loans to families in the service of keeping schoolchildren in the classroom. In an e-mail interview, HBS Working Knowledge talked with team member Raj De Datta to hear more about the plan and next steps for Gyaana.

Tishler: What inspired you to develop Gyaana?

De Datta: The genesis of Gyaana came from two observations: the critical importance of education as the building block of any initiative to empower the poor and the equally critical importance of available credit to allow poorer families to invest in their future. Despite the plethora of education-related activities and the rapidly growing success stories in the area of microfinance, we had not seen the concepts of microfinance applied to the problems of education. Specifically, we came to believe that an innovative microfinance-based solution could have a meaningful impact on the reduction of the high dropout rates in primary schools that cause functional illiteracy to abound in India and in a number of other developing countries.

Raj De Datta
Raj De Datta

The three of us come from very different backgrounds (entrepreneurship, private equity, and general management) but share a common passion for the problems of economic development; we wanted to identify an innovative way to approach those problems. Gyaana was our answer.

Q: What is the basic business model for Gyaana? Why will this model work when government-led or other plans to improve education in India have not been successful?

A: The basic business model for Gyaana is to offer two remedies to address the problems of high primary school dropouts: loans to meet the cash flow crunch that prevents children from staying in school past Class V, and vocational education to ensure that the formal education they receive is complemented with more immediately income-generating skills. Our program is divided into three basic phases: a first phase of formal education from Classes VI - VIII, a second phase of two years of vocational training, and a third phase of asking the children to pay back any loans with accrued interest.

We intend to offer the product through a series of partnerships with microfinance institutions. The other plans in this sector (including government) predominantly target the problems of lack of adequate schools, teacher training, and curriculum development. There has been a paucity of efforts that target the inability of children to stay in school because of the significant needs of their family to contribute monetarily—in any small way they can. In addition, the existing microfinance institutions tend to focus on short-term loans targeted at income-generating activities.

Q: Are there any similar programs in other developing countries?

An innovative microfinance-based solution could have a meaningful impact on the reduction of the high dropout rates.
—Raj De Datta, Gyaana

A: There are a range of microfinance programs around the world: Grameen, SEWA, Accion, and many others. There are also a range of successful education-focused NGOs. However, we have not seen very many large-scale applications of microfinance concepts to the problem of education. Our hope is to pioneer this strategy and, if it is successful, to foster a replication of this model throughout the developing world.

Q: What was the most surprising thing you learned when creating this plan?

Meghna Modi
Meghna Modi

A: I would say that the most surprising thing we learned is the nature of the problem. We, perhaps like many others, had the misconception that cultural factors were the primary inhibitor to literacy development in India. However, it turns out that 85 percent of school-age children enroll in Class I. The problems, it turns out, are much more about the rising opportunity cost of staying in school and the perceived lack of economic relevance of staying in school—that fosters as much as a 50 percent dropout rate by Class V.

Q: How did your prior business experience prepare you for creating this plan? Were there any particular classes or experiences or opportunities at HBS that influenced your work on the plan?

Arvind Krishnamurhty
Arvind Krishnamurhty

A: Both our prior business experience and our HBS experiences have been instrumental in creating the plan and executing it. The founders bring complementary skills to the venture: Meghna has deep experience running a large industrial organization in India; Arvind adds financial acumen and investing skills from his private equity experience; and Raj has been through the start-up life in the for-profit world. At HBS, perhaps the most critical experience was the field study that we used to write the plan for Gyaana. Professor Allen Grossman, our advisor for the field study and the business plan, has been instrumental in shaping our ideas and structuring our thoughts.

Q: What are the next steps for Gyaana?

A: We have three critical priorities in the next stage: launching pilots, fundraising, and recruiting. Meghna will serve as interim executive director of Gyaana. During the coming months, our objective is to get at least two pilot programs off the ground, to test the concept in the field, and to begin to learn from having a product in the market. We also plan to raise up to $400,000, which is intended to fund our first few years of operations. Finally, we intend to recruit a permanent executive director and members of our board. We will have our hands full over the next couple of months!

Gyaana Business Plan Executive Summary

Gyaana's vision is to eliminate functional illiteracy in India. We believe that by providing funds and by making education economically relevant, families will further invest in their children's education, thereby fostering a virtuous cycle of empowerment, opportunity, and poverty alleviation.

An essential problem confronting the Indian education system today is astronomical dropout rates prior to completing primary/secondary education. Even though enrollment rates are as high as 85 percent in Class I, more than 50 percent of children drop out by Class V. Gyaana believes that children who dropout by Class V will struggle to retain any literacy they have gained in their early years. Thus, high dropout rates have led to extremely low functional literacy rates and a very low return on education. While the central and state governments and NGOs have invested significantly in education, Gyaana believes the current offerings are not geared to solve the challenges of retaining children through higher primary/secondary education and are instead focused on making primary education universally accessible.

Challenges to primary education include social and cultural taboos, lack of quality schools and direct costs such as fees and uniforms. Gyaana believes that the main barriers to higher primary/secondary education, however, are fundamentally different in nature: High opportunity costs in the form of lost value from child labor and the perceived lack of any economic return on education. These barriers become significant as children reach the age of ten (Class V onwards), and thus failure to appreciate these challenges causes general illiteracy to remain at 33 percent and women's illiteracy to stand still higher. This crisis in education points to the need to identify an innovative model of funding and promoting higher primary/secondary education.

Our solution is to provide loans to families to alleviate the opportunity cost of sending children to school and to facilitate a vocational education to make families' investment economically relevant. These loans will finance Classes VI-VIII (Phase I) and a two-year vocational program (Phase II). After children complete their education and secure employment, families will be asked to pay back their loans within five years (Phase III). The children that would benefit from such a program would be those who are economically disadvantaged, show an eagerness to learn, and whose families have demonstrated a commitment to supporting their child's education. Gyaana's education product would consist of screening criteria, funding, a monitoring methodology and process, a repayment schedule, interest charges, and placement in vocational institutes.

Gyaana would distribute its education product to self-help groups (SHGs) through a series of partnerships with local microfinance institutions (MFIs), which would make the product available to the children of the thousands of microfinance clients in India. Each SHG, a solidarity group of eighteen to twenty individuals, would be asked to guarantee the loans made to families within the group. Day-to-day monitoring can be done by the MFI partners and by leaders of the SHGs, for which they would be compensated. Overall governance would continue to be the responsibility of Gyaana. Gyaana will also form a set of relationships with local technical schools to provide vocational training to students who complete Class VIII. It is not envisioned that a single, uniform education product would be supplied to all geographies. Rather, Gyaana would work with various MFI partners to design locally appropriate offerings.

Team, Execution and Funding
The team is currently staffed with Harvard Business school students who are passionate about this field. Raj De Datta has the entrepreneurial experience of building a start-up venture, Arvind Krishnamurthy brings private equity experience, and Meghna Modi (who will serve as Interim CEO) has the experience of running a large, industrial corporation in India. Importantly, the team has an important network of academic and industry experts, NGOs, microfinance institutions, government entities and industrial groups in India. Gyaana has successfully secured two microfinance pilot partners, Sanghamitra and Mann Vikas Samajik Sanstha; these pilots will refine Gyaana's model and value proposition. Our plan calls for raising $400,000 to fund the first five years of operation, to be released on a staged basis as we meet proposed performance milestones.

Reasons for dropping out before completing primary school in the six to fourteen age group among the rural poor

Customs and Social TaboosHealth problemsSupply FactorsDemand FactorsLack of Incentives
Self-Employed Farm22.9%0.0%0.0%23.7%78.3%
Self-Employed Non-Farm0.0%0.0%0.0%0.0%100.0%
Agricultural Wage0.0%2.6%0.0%46.1%86.6%
Non-Agricultural Wage36.3%25.8%9.7%20.6%69.7%
All Occupations11.9%4.2%1.1%32.3%81.9%

Source: National Council of Economic Research, 2000

About the author

Carla Tishler is the director of the Baker Library Information Products group.