The story starts with a blue sweater that Jacqueline Novogratz gave away to Goodwill in 1976. She didn’t think much of it till, eleven years later, she found an African boy wearing that same sweater with her name tag intact. The fact that it made it all the way to Rwanda made her realise how we are all connected and how our actions can touch strangers across the world.
With a background in banking, microfinance and philanthropy, Novogratz has been working on changing the way the world tackles poverty. In 2001, she started Acumen out of New York, which has invested over $88 million in 82 businesses. The warm and outspoken Novogratz speaks to Kripa Mahalingam about the changing face of impact investing and Acumen's investments in India.
What changes have you seen in impact investing since starting Acumen in 2001? How do you see it evolving in the next couple of years?
When we started Acumen, there was nobody [in the field of impact investing], and since then, it has been extraordinary to see the implosion of impact funds. But it is very chaotic. Sometimes, you feel that just by investing in developing countries you create an impact, instead of standing side-by-side with those focused on solving problems. That is where a lot of confusion comes in. In the next 10 years, we are going to learn a lot and see better standards and more categorisation of these different funds.
In our global world, the best opportunity comes from finding the best innovation and then adapting it around the world. For instance, microfinance came out of south Asia and then moved to Kenya, where it was about mobile money. We had just invested in the solar energy company d.light. We got a few insights into what it took to bring solar lighting to low-income families in Kenya.
But more importantly, we had to find a suitable payment system — families were used to paying a few shillings each day for kerosene. So d.light tried to meet that with microfinance, but it still didn’t mirror how families paid earlier. So it entered into a joint venture with M-Pesa called M-Kopa, to enable people to buy household units of solar power and pay on a daily basis or by the end of the week. The technology is connected to Google Earth, so the company can track where your unit is and turn it off if the payment is not made. Within eight years, they went from being just a prototype to providing solar lights to 40 million people with a pay-as-you-go model. And that, for me, is what’s exciting about impact investing. But sadly, more often than not, financial returns take precedence over creating impact.
What are the companies that interest you?
Education, healthcare, alternate energy, agricultural inputs, clean water and housing. Companies that interest me are those with a real focus on low-income people. We look for a scalable business — one that can reach a million people but is also profitable. We assess three things before investing in a company: the quality of the entrepreneur, their ethical fibre and their level of self-awareness. That’s why our due diligence takes over six months. Sometimes, we work with the entrepreneur to develop his or her vision. They come to us with a presentation or just a kernel, and we help them build on that.
Where do investors and entrepreneurs go wrong about impact investing or social enterprises?
You can’t a build a business model for the poor. That’s where the sustainability part fails. Instead, you have to build a business that is accessible to the poor. You have to start with the customer rather than focusing more on solving the problem. Keep in mind what the customer needs and build your service offering, supply chain and costing around that. Take the example of healthcare. Most things offered in a hospital are frills. Low-cost healthcare is not about healthcare for the poor. It is about offering quality healthcare with no hidden costs at reasonable prices. The customers are clear too. They also want the healthcare that everybody wants, just in a way that is affordable. I think LifeSpring has got the model down quite well.
Investors need to remember that this is a 10-year investment sector and one that demands true, patient capital. Here, an entrepreneur is building a model in areas where markets and government have failed and aid has fallen short. Some of our companies that have successfully managed to scale — such as d.light and LifeSpring — are investments made in 2006, and it has taken them 8-9 years to get to where they are.
What makes for good philanthrophy?
It’s not just about the money. Just like the best business people, they listen. When you have the money, it is very easy to think that you also have the answers. But a good philanthropist realises that, just like in business, here, too, you have to start by understanding the problem and look at the best solutions that are already out there. Also, one has to take risks. One of the biggest ironies of philanthropy is that even though it is supposed to be the greatest form of risk capital, we often see people not taking any risks at all. You build a school and a well, and do the same things over and over. They are important, no doubt, but you have to build a model that is sustainable.
The ones that are at the top of their game — and I would put Bill Gates right up there — would look at all the people in different parts of the sector and see who is the doing the best work. They would work on how they can dream big with the others and they have the patience to understand the time frame involved. You can’t do education for two years, then move on to environment for another two. You have to stick to something, allow failures as the model evolves and support the team operationally as much as you can. You must create a relationship that is more open.
What excites you about the Indian market?
India is the most developed and sophisticated competitive sector in the world, which means it also has the most opportunity to show what is possible and do it in scale. Because to really succeed in India, you have to do things in a big way and once you are able to convince people to take decisions and succeed in India, you can move it anywhere in the world. Other societies allow more leeway in creating your model, but India is one of the competitive markets and here, you have to be on top of your game. I see India as the laboratory of the world. The diversity in the country is a model for the world and we want to create an ecosystem that starts with a sound investment portfolio and surround these companies with leaders and ideas to make things happen.
We have invested about $30 million in India. Some of our portfolio companies are doing really well and this allows us to continue pioneering early-stage investments. One of the companies that has caught our attention is an education company that brings English training through community schools and teaches kids critical thinking (which is more of a life skill) and creating greater awareness about gender issues and the environment. We have one in housing too. Often, slum dwellers see their houses being demolished if they can’t get the right allotment. This company is a for-profit housing finance company that provides housing loans to low-income women to repair and build their homes.
You hear about how a lot of mainstream companies are now trying to collaborate with social enterprises to build solutions for a larger market. How do you think these collaborations would work?
Corporates have the opportunity to be at the forefront of the sector because they have taken risks in building companies and they know the realities of the low-income market. We have been partnering with Unilever and they are working on making their supply chain more sustainable.
Locally and internationally, a lot of corporates offer technical assistance to our portfolio companies. More than giving money, a lot of leaders willingly give their time to work with our companies and share their expertise. GV Prasad, CEO of Dr Reddy’s Laboratories, has supported many Acumen fellows in India. We need to build an ecosystem of companies, leaders and ideas, and expand that by building trust and working on collaborative models.
Where do you think private and public partnership work well?
In sectors such as education, healthcare and water — which are purely for public good and have an element of human rights attached to them — you are not going to scale to a level that also brings quality without a partnership with the government. One should be open to understanding the efficiencies and limitations of the market. One should not confuse the means with the end. The end must be a society that allows everyone to bring their best to the table.
Traditional tools of government and aid create dependency, which leads to a colossal failure. For instance, look at the very well-intended programmes to build toilets. They may even have a payment system, but the truth is that there is no accountability because nobody follows that. So people end up getting very sub-standard services. It has worked well in areas such as vaccines and public infrastructure, which are top-down.
For one of our portfolio companies in India, Ziqitza, which provides emergency medical services, the public-private partnership has worked really well. Ziqitza began with just nine ambulances at the time of our investment in 2008, and it now operates more than 1,250 ambulances across India and has served more than 3.2 million people. It operates in partnership with state governments that allow emergency medical transportation to be offered free of charge or at subsidised rates, and they have awarded them $80 million in contracts so far. While it would have done well even if the company remained with private investors, it would have never scaled to the level that it has without government participation.
How do you measure the impact created by your companies?
We are developing a suite of tools through our Lean Data Initiative. We are testing a range of collection and survey methods (call centres, SMS and automated voice responses) to look at the depth of the impact created through our portfolio companies. For instance, when you provide housing, you are creating a huge impact on lifestyle. We are using the mobile platform to collect data to lower the time and costs attached to traditional data-collection methods. The portfolio companies will use the information from Lean Data to understand what works best and how to make their services more effective.
What are the challenges you face when investing in India?
The regulatory environment, not only on the investing side but also on the fund raising side, is very challenging. It is impossible to invest money raised through philanthropy in for-profit organisations. So, while everyone agrees that this is a viable model and there are many success stories, we still can’t raise money. In the education sector, regulations make it hard for entrepreneurs to come and work. But at Acumen, we sign up for what is right, not what is easy.
How does one make impact investing more mainstream?
We have to make sure this is something the young people see as a valuable way to spend their lives. I sometimes see a small group of people working on smaller problems for smaller groups. Some of them are working on the next great app to find the best latte in town. It is great and even important, but we still need people to figure out sanitation and ensure more people have access to electricity. We are starting to reach a tipping point. The next generation (or the millennials) doesn’t see it as for-profit or not-for-profit ventures. They see it more from the sustainability point of view, and they look for opportunities where they can solve real problems. I am really looking forward to the next generation taking on these problems.