Acumen Fund: Going places that other VCs deemed impossible
Jul 16 2012, 19:48 | By CNBC-TV18
Jacqueline Novogratz, CEO - Acumen
It's not very often that you hear about a venture capital fund focused on the poor and the developing world. This episode of CNBC-TV18's Forbes India Show brings you Acumen Fund, which does exactly this.
Jacqueline Novogratz, the CEO of Acumen, started the fund 10 years ago to chance the way the world tackles poverty. In the last year alone, the fund has helped over 90 million across the world, and has helped create 50,000 jobs. "We raise philanthropy, rather than give it away as handouts, and we've invest equity or loans in companies that the government has too often failed to go and the market refuses to go," said Novogratz.
Novogratz, along with Acumen Fund, aims to help entrepreneurs who have to battle corruption, lack on infrastructure and lack of trust by providing them the opportunity of patient capital investing.
Below is an edited transcript of her interview with Siddharth Zarabi.
Q: Clearly this is a part of the world which you were very familiar with, but we are not very familiar with what you do. Tell us about Acumen Fund, how it started and how has the journey been so far?
A: We started Acumen Fund about 10 years ago as a non-profit venture capital fund for the poor. Our mission is to change the way the world tackles poverty altogether by investing in companies, leaders and the spread of ideas. To date, we have raised philanthropy, rather than give it away as handouts, and we've invested equity or loans in companies that the government has too often failed to go and the market refuses to go.
Right now, we have invested over USD 75 million globally in 65 companies who are providing healthcare, clean water, housing, alternative energy and agricultural inputs to low income people in ways that are sustainable overtime, that we can build to reach millions of people. In the last year alone over 90 million people have gained access to these goods and services, we have seen 50,000 jobs created, and any money that comes back to Acumen Fund, we reinvest in other innovations that serve low income people.
Q: There are two approaches that are used in India - one was the traditional approach where a big industry set up social projects which included temples, hospitals etc. We now see a new wave of philanthropy that is emerging in India. From your experience, is this the right way to go because this is small work but it is very significant in the long run?
A: That is right because the opportunity of patient capital investing, which is what we are doing, is to start by finding entrepreneurs who have to battle corruption, lack of infrastructure, often a lack of trust, in going where the world has decided it is impossible to reach to poor.
You take a state like Bihar, 90 million people, put it on the map of Africa and it would be the second poorest country and the second largest country in Africa. 65 million people have no access to electricity, so they are consigned to expensive, polluting, dangerous kerosene. Gyanesh Pande, a native son of Bihar, who refuses the word impossible, decides he is going to experiment. No investor is going to invest when your average person makes less than USD 200 per year.
Q: He goes to the traditional investors and gets rebuffed?
A: Totally rebuffed. So he starts with friends and family money. Uses that very quickly because he tries solar, and then the Shell Foundation comes in as a real hero of this story. They gave him over a million dollars in grant financing, but with milestones as a business would. Overtime, they created a business model.
We then come in with other patient capital investors because we see that it is now time not for grants but for patient capital because we wanted to signal to the entrepreneur that this is a viable business. We are going to signal to the market but it is going to need new kinds of capital to build it. But he still needs a lot of time to experiment and to fail. I am taking 10-12 years so that they can scale to 500 plants.
Today there are 37 plants using rice husk, which he liquefies, burns into gas and provides electricity in villages way outside Bihar. So we are seeing 200,000 people pay Rs 50-100 per month for one-two light bulbs and you see those lives transform.
Q: I am just struck by the need to understand better the difference between patient capital and grant funds. For those who are watching this show and those who could be inspired and want to do this, tell us how this model really works, what are the intricacies involved?
A: It all starts as grants; we go to individuals to give us support. There have been many Indian supporters who have been incredibly generous, like GV Prasad of Dr Reddy's who is on our global board, and Nandan and Rohini Nilekani who have come in with grant money to Acumen because they want to give us the opportunity to then invest in those entrepreneurs. Unlike grants, we actually buy shares of the company or we make them a loan.
We can change this world, we can build models with entrepreneurs who refuse to accept the mediocre, who know that low income people want to make their own choices, and if we can find ways to deliver services in ways of their value and can afford and believe is fair, then you can scale it to a point where either capital markets can come in or government.
Q: I was struck by the opening remarks that you made, where you spoke about USD 75 million. Does that indicate lack of money or is this enough money? Is there a lack of money in the system for this kind of investing?
A: There is a lack of smart money in the system. What's happened with impact investing is that there is so much excitement that you can invest in entrepreneurs that are serving the poor, where government or markets had previously failed. That long, hard story of patient capital is that this is not an easy invest, make your money and you have solved all the problems of the world. This is a 10 year journey, that uses a mix of grants and patient capital to allow for this kind of experimentation. There is less tolerance for money like that, and so a lot of the impact investors are coming in and looking for already commercially viable entities. Those either have to reach a higher income group or are longer in the trajectory of business development.
In fact, we have worked with the Monitor Group in Mumbai to look at what other organizations are doing as well as the hard work of helping Gyanesh to build husk, as well as another entrepreneur Amitabha Sadangi, who works with International Development Enterprises - India (IDE India), has been doing drip irrigation and that's been another long trajectory to the place where now over 350,000 of the poorest farmers have access to a technology that will change their lives. But it wasn't done without patient capital and grant money side by side, and that's a more complicated but critically important place, particularly for those who have business skills and who are excited about the opportunity to bring those businesses to places that have been forgotten for too long.
Q: What are the larger challenges that this kind of effort by you faces in a country like India? Is it an uphill journey or are you satisfied with the progress that is being made?
A: I would say absolutely, because after 11 years of doing this with Acumen Fund I can say with clarity that patient capital works. We have seen so many of these companies move to sustainability. It's interesting that you mentioned microfinance, because I think our main differentiator is that we measure success not in terms of whatever financial returns to Acumen Fund. What matters is that we building sustainable companies that serve very low income people in ways that their value.
Look at a company like D-Light, which makes a solar torch. When we first started investing in this company to be a substitute for Kerosene, the price was quite high. Over time they got it down to about Rs 400 per solar torch. They are now selling 100,000 units per month. So we are seeing several million people now have access to light that they can afford on their terms. Acumen Fund will get returns from it, but again because it gets reinvested in innovation for the poor, there is a values alignment with what it is that we are trying to and how we define success.
I think that becomes really important for the way we build new sectors that recognise the importance of government as well as business as well as civil society that need to do a better job at working together for more inclusive economy where people really have dignity, people really have choice and they can see each other as more viable participants.
Q: As per your definition of success, of all that you have invested, both in terms of money as well as the number of projects, what's been your success rate so far?
A: Success rate - that's an interesting question. It is probably easier to answer by looking at our failure rate, which is actually lower than a normal venture fund. I think in large part that is because we are in such an experimentation moment, but we have only had to write off two investments. We have exited one investment where we found a misalignment of values if you will, but for the most part we are seeing real successes.
For example, in Tanzania we have a company now that has 8,000 employees making 30 million malaria bed nets every year; we have D-Light which seven million; Zachita has 4500 employees and a million people served.
Yesterday I was in Andhra Pradesh with Krishi, a company that was started by Vijay Mahajan of Basix who knows microfinance very well. He understands that microfinance isn't enough, and what some of the short comings as well as the importance of it is. He is looking at building an alternative extension services for low income farmers, recognising that the Indian government has an incredibly extensive network of extension workers and products available, but we need to find a way to get it at that last mile to low income farmers.
Q: Which is where the problem really lies.
A: That's the problem. It was so exciting for me to sit in rural villages in Andhra yesterday to talk to farmers who have seen real change. They have because the guy with the artificial insemination shows that when the cow is in heat, they are getting protein that is increasing the milk productivity, so some of them are seeing doubling in their income within six months of working with this affective extension service. You can again imagine a business model that is selling both to the farmers as well as being outsourced by government so that you are building viable, sustainable models where we can solve these problems.
Q: You speak about the human capital that is involved and the fact that this is very intricate last mile work so every last dot has to be connected. Are there any issues with this? Does it take a lot of the fund's time, your own time to go over the details? You are not a typical fund that writes a cheque and then comes back visits it three quarters later,; you need to be involved almost on a 24x7 basis?
A: That's such a perceptive question and it's really why we need these patient capital funds and we need philanthropists to give grant capital to allow them. It's too hard to do this on your own. In fact, at the end of the day what this comes down to what we call moral leadership. I have a friend who is a civil rights leader and he says that the opposite of poverty is not wealth, that the opposite of poverty is justice.
I have learned in building Acumen Fund that justice is much more difficult than generosity. People want to write a cheque, but if you are going to build systems for low income people, where they haven't had a lot of advocates working on their behalf, they are ready to pay for things that they value. But we need to build systems that work, and that is not going to happen overnight and that's where the challenges lay and it's why we are investing in companies, but we are also investing in leaders.
We have a global program, called the Acumen followers program, and we see the hunger in young people and how this generation is changing. We just got 1200 applications from young people from 113 countries for just 10 spots. We are starting a regional program in India that we hope to rollout in the next 18 months, where we will bring in 20 extraordinary young leaders to start to get them involved in the space. It's a space that holds so much promise, and it's a space that really demands a kind of leadership that is building a hard edged hope; not one that just insists that the market should work, but one that can work between the markets and charity.
Q: Given the size of a market like India with its massive demographics, with its massive complexities, regional diversity and all that really constitutes India, are there enough funds of your kind out there or is much more needed to be done?
A: Much more is needed to be done and much more can be done. I want to see Acumen India grow and I would love to see other funds like Acumen grow with it. We need to build a whole eco-system. I believe there is an entire generation of young people who want to build a world that starts with the assumption that all of us are equal and that all of us deserve the opportunity to make changes in our lives.
We need to build better career tracks for them where they can stretch themselves, not just to do good, but to use the tools of business and combine them with all of the other tools of leadership to essentially stretch them to work on the most important and difficult issues of our time. I think that that's what this generation, wherever they are in the world, but I certainly meet them across India, are ready to stand and to lead and to move the world ahead.
Q: When I talk to a lot of global visitors like you, one of the standard questions asked is what the regulatory difficulties are that you face in India. So my question to you is that within the space that you operate, are there any hurdles, government rules, regulations that really come in the way of the kind of work that you are doing?
A: The good news is that some of those regulations are easing. Because we work in a new area, it's been complicated to navigate some of the regulatory requirements, particularly on receiving donations. Since we receive donations and we invest in for-profit companies as well as non-profit it can be very confusing for regulations. But recently, some of the regulations have eased to allow us to raise philanthropy for not all of our activities but some of our activities.
I would like to see a whole new asset class whereby the Indian government recognizes the power of these kinds of venture funds and allows charity to be used for investing, provided that the charity that comes back is not given for private distribution, but is actually reinvested in more innovation. India is a laboratory for the world in terms of social innovation, in terms of low income people and I think that there is a whole new generation that would jump to that opportunity if we could release the pools of capital, but it has to come from the philanthropic sector.
Q: Not only are you a patient investor, but you are also the author of 'The Blue Sweater' - New York Times best seller?
A: I wrote 'The Blue Sweater' really as a memoir of this long 25 year journey that started from my own recognition as a young banker that we had to do more if we were going to reach low income people. That led me in the 80's to Rwanda, where I started the first micro-finance bank there, and that led me to see that markets and development were not in themselves going to solve problems of poverty.
That is why we started Acumen Fund. We are launching in India, which is really exciting. I have such incredible admiration for Rohini Nilekani, she has written the foreword to the book, and it's been real gift to me because it's allowed me to meet young people around the world and who've read it.
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