One fund stretches charity dollar

Jacqueline Novogratz, chief executive of Acumen Fund, a non-profit venture fund, can thank peanut butter for her vision of philanthropy.

It was 1986, and Novogratz was scouring Kigali, Rwanda, for plastic containers. She had started a microfinance organisation and helped 20 unwed mothers set up a bakery to sell snack foods. One of their projects was making home-made peanut butter but they did not have enough jars in which to store the popular sandwich spread. Eventually she found some at a honey factory.

“I was standing at this honey factory and I was thinking: ‘Wait a minute, we’re doing these tiny businesses, and even micro-finance, when we should be building big companies and factories that employ people as most people aren’t entrepreneurs,” she says. “Instead, all the development money is either going to women’s empowerment or to really, really micro projects. Why aren’t we using those resources to try and get more honey factories and more manufacturing facilities that would give people jobs, skills and opportunity?’ ”

She realised there was something wrong with a picture in which people were “too afraid to use the philanthropic dollar to build businesses”. Fast forward to the summer of 2001. After graduating from Stanford business school and working as a manager of special projects at the Rockefeller Foundation, Novogratz founded Acumen. The fund takes a business-like approach to improving the lives of the poor and typically works with people who are making between $1 and $3 a day.

Think of it as venture capital for the poor: philanthropic capital meets entrepreneurial approaches.

Novogratz (whose brother is Michael Novogratz, a principal at Fortress Investment Group) believes the only way to end poverty is to build businesses that deliver critical and affordable goods and services to the poor in ways that are financially sustainable and scalable. It is this philosophy that encouraged her to start Acumen.

Raised from charitable donations, the fund was set up to have the flexibility of grants, loans and equity investments in for-profit and non-profit enterprises. While there are times when grants are appropriate, Novogratz says the focus is more on loans and equity investments.

“What we have learned is that when building the kinds of companies we are trying to build, with the goal of stepping them into the mainstream financial markets, grants make it more difficult to establish all of the different parameters of the relationship,” she says.

At the end of 2006, Acumen had $12m under management with $667,000 in principal and interest returned to the fund to be recycled through other investments.

Over the past five years, Acumen has funded 27 projects, of which 20 are still active. In 2005, for example, it pulled out of a fluoride filtration company in India when the entrepreneur changed strategy and started pursuing subsidised government contracts.

Acumen’s investments span Africa to south Asia and include healthcare, housing, financial products and clean water. Its projects range from malaria nets in Africa to drip-irrigation kits in India.

Much like a mainstream private equity fund, Acumen takes a rigorous approach to its investments, from due diligence at the outset to an ongoing “forced ranking” of its portfolio to evaluate what is working best, what really needs help and what needs to be dropped.

Acumen’s most successful company to date is A to Z Textile Mills in Tanzania, a maker of long-lasting anti-malaria bed nets. In 2002, Acumen made an initial $325,000 loan to help facilitate a transfer of the technology from Japan to Africa. The loan has been repaid and the company will soon employ 5,000 people and produce 7m bed nets a year. Five years ago it had about 1,000 employees and made only traditional polyester-based bed nets.

“It is now the third-largest company in Tanzania and from a social perspective it is ostensibly protecting 14m people per year from malaria, providing 4,000 jobs and a couple of million dollars in new wages into the Arusha economy, which has a huge ripple effect,” says Novogratz.

Another notable project is Drishtee Dot Com, an e-kiosk company that gives the poor in rural India access to internet services. Acumen took a $1m equity stake in the business to help Drishtee expand the kiosk base and add new services, including healthcare. It also loaned Drishtee $600,000.

Acumen’s goal is that for every philanthropic dollar the fund raises, three to 10 times that amount will go to under-served sectors.

“There is always the risk that when you are creating a financial model for change all you do is bring in a little more capital into markets that need it. And while that is a sufficient and good reason for existing, it is not enough for us,” Novogratz says. One of the insights she gleaned over the past five years is that increasing people’s income is not enough when they still face high costs for basic services.

“If you find ways to give them jobs to help them increase their income from $1-$2 a day and they are still paying 30 times more for clean water than their middle-class counterparts, and 30 per cent of their income is going to health, and 30-50 per cent to housing, they are never going to get out of the poverty trap,” she says. “It’s got to be both opening markets and making goods and services more accessible to them, as well as finding ways to help them increase their own income. All with a focus on giving them the opportunity to solve their own problems. It’s that pushing away of the different obstacles that are in front of people that is at the core of our value set.”

Acumen’s mission and efforts to reinvent philanthropy have resonated with some of the biggest names in the charitable world.

The Rockefeller and Cisco foundations helped provide seed capital to start the fund and in 2005 Google.org, the internet search company’s philanthropic arm, provided Acumen with a $5m operational grant. In December, Acumen moved into Google’s corporate offices in Manhattan.

“There is a common value set and a common set of aspirations around proving the market-oriented approach to change that Google shares with us,” says Novogratz.

Two of Acumen’s staff are working with Google on a portfolio data management system that will help the fund track investments.

The fund also received a $3.9m grant from the Bill & Melinda Gates Foundation to aid its work in providing clean water and sanitation services. And last year the Skoll Foundation announced a $1.5m, three-year partnership with Acumen, saying it wanted to “support Acumen’s work with social entrepreneurs and its efforts to develop metrics that will advance the field’s understanding of the financial and social impact of social enterprise”.

While Acumen receives kudos from many philanthropists, some say for-profit does not jibe with philanthropy. The big question: are you making money on the backs of the poor? (As a non-profit, Acumen does not operate to generate income, but it does invest in for-profit ventures.)

“There is a critic who believes the poor are so poor, why would you make them pay for things?” Novogratz says. “Our experience is that dignity is more important than anything else and that the poor already pay for things so let’s find a way to provide them things they can afford and want.”

That ethos underpins Acumen’s work. The mantra, Novogratz says, is: “Tell us what the poor want, don’t tell us what you think is good for them.”