University Times

Supporting enterprises that serve the needs of the poor is producing both social and financial results for one international nonprofit whose founder spoke on campus recently.

The Acumen Fund’s philanthropic philosophy combines business concepts with charitable aims to fight poverty through the concept of “patient capital.”

Patient capital is a strategy of long term, risk-tolerant investment in partnerships and businesses that provide affordable products and services for the poor in developing nations.

The New York-based Acumen Fund, established in 2001, uses money it raises from individuals, foundations and corporations to invest in equity or loans to companies or entrepreneurs who view the poor as customers, rather than passive recipients of charity, said founder Jacqueline Novogratz.

The fund has invested $40 million — about half in India and the rest in Pakistan and Africa in segments that aim not only to make a financial impact but a social one as well.

The nonprofit’s investments in health care, housing, alternative energy, clean water and agriculture have leveraged an additional $170 million from more traditional sources, created more than 22,000 jobs and provided services for tens of millions of people, Novogratz said.

Novogratz, who describes the Acumen Fund as “a nonprofit venture capital fund for the poor,” outlined her vision for a new philanthropic philosophy in a forum sponsored by the Johnson Institute for Responsible Leadership in conjunction with the Swanson School of Engineering, the Center for Global Health and the international executive MBA program at the Katz Graduate School of Business. Philanthropist Sunil Wadhwani, co-chair of Pittsburgh-based IT firm iGate, provided a response.

A broken system

Our financial systems and aid systems are broken, Novogratz said in her Dec. 1 talk, “The Future of Philanthropy: Making Markets Work to Serve the Poor,” at the Pittsburgh Athletic Association. “We have an opportunity to re-imagine, reinvent and think about what it would take to build a real and inclusive economy.”

She argued against the classic economic measures that define poverty in terms of earnings. “Dignity is more important to the human spirit than wealth,” she said, adding that it is essential to move past the concept that poverty equates to earning less than a few dollars a day.

“We have to start thinking beyond that and look at the quality of life. What does it mean for us to be agents of our own lives, decision makers, problem solvers? And if we can think in that term, then we wouldn’t be as focused on income as our metric, because certainly it isn’t the only one,” she said.

Traditional top-down approaches to charity and development typically won’t solve poverty, she said. “What we’ve seen increasingly over the past 50 years is too much dependence and too many failed systems. And at the same time, the markets alone will not solve problems of poverty,” she said, noting that although nearly 100 million people in China and India moved out of poverty over the past two decades, nearly that many have slipped back into poverty as a result of the recent economic downturn.

Equally important, Novogratz said, “We’ve seen the gap between rich and poor widen and it’s clearly not a sustainable world and certainly not an interconnected world.”

Novogratz said, “One of my favorite quotes is from Martin Luther King: He says that love without power is anemic and sentimental. And that power without love is reckless and abusive.

“My dream for our generation who has seen the ‘love alone’ group not work and the ‘power alone’ group not work is to have the courage and, if you will, the moral wisdom to walk holding love and power simultaneously; to think about what it takes not only to build new economic models, new economic systems where we all have opportunity, but at the end of the day, ultimately and fundamentally to extend the precious proposition on which this country was built: That all men were created equal to every human being on the planet,” she said.

Patient capital

“The cornerstone of everything we do is called patient capital,” Novogratz said, offering examples of Acumen’s investments and their results:

• A partnership in India to develop and market affordable water-saving drip irrigation systems designed for small, individual farms. The company has sold systems to 370,000 farmers, who have seen their yields and incomes double or triple.

Patient capital enabled the entrepreneur to build a prototype. “No investors in their right mind would invest in the most risk-averse people on the planet with an unproven technology, knowing that their target market made about $1 a day,” Novogratz said.

Another company has been developed to build distribution systems in India and to export the technology to other countries, and a similar company, half-owned by Acumen, has been launched in Pakistan.

• A solar rechargeable “D-Lamp” developed by the design and business schools at Stanford University. The aim is to replace the hazardous kerosene lanterns used by people in India who lack access to electricity. The $30 lamp can light an entire hut; a smaller, $10 version also is available. Novogratz said 120,000 have been sold in 17 months.

Within two or three months, she said, households that have switched from the expensive and dangerous kerosene lamps report 30-50 percent increases in income.

• A partnership in maternity hospitals in India that offer more dignity to patients than public hospitals at a fraction of the price of private ones. Nine hospitals are in operation, with the business on track to have 15 by the end of next year. The enterprise soon will be the largest such provider in India.

• An ambulance service in India that operates with the underlying aim to build a corruption-free company offering service to all. The company has won several government contracts. “We believe it will be the model for a public-private company to provide services to all people in a way that’s more effective and more efficient than what we’ve seen,” Novogratz said.

• Investment in clean-water plants in India. Acumen’s $600,000 investment has been turned into about $40 million in additional capital raised for the company, which now has plants that serve more than 2 million people through 400,000 paying customers in 285 villages.

Novogratz said the company won a state contract to expand to 600 branches in the next 18 months.

• A partnership in a manufacturer of long-lasting bed nets to fight malaria in Tanzania. The company employs 7,000 and makes 20 million bed nets a year.

• Investments in a microfinance bank and low-cost housing initiatives in Pakistan. An Acumen Fund fellow is establishing a for-profit affordable housing company for the poor in that country.

• A partnership with an entrepreneur in Kenya who established pay toilet buildings as an alternative to dirty and unsafe public toilets that often are havens for drug deals and prostitution. The firm emphasizes safety and cleanliness, with the toilets featuring uniformed attendants and piped-in music. Some offer showers and additional amenities such as shoeshines or adjacent sundry shops.

The profitable enterprise serves 22,000 customers a day at 11 locations, with plans to expand to 37 locations by the end of 2010, Novogratz said.

“In each of these cases, we’re really starting to see patient capital taking a longer time to get started and then really moving up the J-curve of showing what’s possible, allowing the imagination, not just for us around what’s possible, but for the poor themselves to think about what they deserve and what they can access.”

Novogratz said she pondered the question of poverty as she observed a successful businesswoman in Africa. A former prostitute, the woman received a loan to buy a sewing machine and became a tailor, making a business of converting discarded formal dresses into special-occasion outfits for girls.

“Is she poor or isn’t she poor?” Novogratz considered as she watched the woman sell her dresses.

She concluded, “What poverty really is about for me is choice: The lack of choice; the lack of freedom — and that really is about the lack of dignity.”

Response

“I’m a huge believer in this approach,” said Sunil Wadhwani, who has been involved in philanthropic efforts ranging from large global nonprofits to tiny charities and non-governmental organizations in India.

He agreed with Novogratz’s assessment: “The development world and the aid world is broken,” he said. “There has been no innovation in this field for centuries.”

Traditional large aid organizations, which tend to be bureaucratic and inefficient with high overhead costs, represent a model that is not working, he said.

Solutions too often are top-down, susceptible to corruption and sometimes are outright scams, he said, adding that it’s hard to know whether donations are getting to the people who need them.

He cited his IT company’s own experience in donating outdated computers to charities in India. Often the equipment is held up at customs and released only after the customs officer receives a bribe. “It’s tough to deal with,” Wadhwani said.

Added challenges to successful charitable work in developing nations include some organizations’ reluctance to be held accountable or to keep accurate books, making it hard to know if the donations are being well spent, Wadhwani said. Technological illiteracy may also hinder record-keeping and accountability.

Small charities may say they want to grow, but often don’t know how to expand their organizations. Moreover, sometimes they don’t want to grow, fearing that they will lose control of their operation, he said.

“What I love about Acumen Fund and about Jacqueline’s work is it deals with very many of these issues in a very practical, down-to-earth way,” he said, praising it as “pragmatic idealism.”

He especially admires that solutions aren’t imposed from the outside but are developed locally by people within the community who have insight into what works and what doesn’t.

In addition, the Acumen Fund’s approach, using loans and equity investments rather than outright grants, requires that the recipients be accountable and over the long term provide a way for the fund to be sustainable, Wadhwani said. And Acumen’s policy of not only providing funding, but training as well, helps recipients learn how to expand their businesses.

“I love the fact that they look for impact. Acumen selects ideas, selects NGOs to work with, selects small companies to work with that have major impact,” he said. Although it may take longer to achieve results, that’s true of any new startup funded by venture capital, Wadhwani pointed out.

Such non-traditional approaches are beginning to be noticed by larger aid organizations, he said, although he cautioned that there may be some challenges ahead for Acumen and its peers.

Wadhwani said he found it surprising that few of the social venture funds that were started over the past six or seven years have scaled up. “Given the innovation involved in this approach you would expect it would be easy to raise money, you give out more funds, have more money come back from these ventures in which you’re investing and I haven’t seen that scaling up yet.”

Wadhwani admitted he didn’t know why that appeared to be the case, but posited that part of the reason could be that no studies have been done to demonstrate that this approach to venture philanthropy or social venture investing is significantly more effective than the traditional approach.

The next challenge to smaller groups such as Acumen will come after bigger, traditional charitable agencies adopt similar strategies, he said. “How do you get people to give you money  … when all the bigger guys are doing it too?”

The other threat comes from the private sector, which also is active in low-cost “bottom of the pyramid” markets.

In spite of the challenges, Wadhwani said he remains supportive of the Acumen Fund’s approach.

“It’s not just about a better way of philanthropy, it’s really about daring to dream.”

The entire lecture is available online as “Patient Capital for an Impatient World” at http://mediasite.cidde.pitt.edu/mediasite/Viewer/?peid=76d226cd-6022-486e-bae4-9379cb3b10d5.

—Kimberly K. Barlow