I was recently asked if I believed why philanthropy was well-suited for investing in social enterprises, and if traditional investors considering getting into impact investing truly had to be “patient.” My answer to both of these questions was: Yes. Here’s why.
In April 2012, Acumen and Monitor published the report, From Blueprint to Scale: the Case for Philanthropy in Impact Investing, in an attempt to paint a clear picture of why, as this individual was right to ask, patience is needed when it comes to investing in inclusive businesses serving the poor. The report outlines much of what we continue to stand by in terms of this need for patience. We believe that entrepreneurs are more readily able to find capital for what we call the Blueprint stage. This type of capital typically is raised from friends and family, business plan competitions, angel investors and grants, and is used to help an entrepreneur establish his or her “proof of concept.” Once a company gets to the Scale stage, at the other end of the spectrum, it’s likely to have not only proven out its business model, but perhaps even repeated it across various geographies and/or demographics. This is the stage where social enterprises have the least trouble attracting funding because, having proven itself, it is the least risky stage of a company’s evolution.
We believe the greatest capital gap exists in the Validate and Prepare stages — the second and third stages of the model where “risk capital” is most scarce. That’s why Acumen’s goal is to invest in companies specifically during these stages. At these stages, the company has started to prove out consumer demand for the model, and is starting to understand unit economics as well as the path to scale. It is also when a company requires more capital than Blueprint investors are willing to provide, but have not yet proven out its business model and profitability potential enough to where more traditional investors or more return-oriented impact investors are willing to invest — this is one of the key challenges Acumen is solving for and why philanthropic capital is best-suited for these entrepreneurs. It is both risk-tolerant and needed.
Think of it like this: the role of patient capital allows a company the time to understand the consumer demand, unit economics and path to scaling. Patience is required because the markets where the companies we invest in are so new, the customers so lacking in trust and accessibility, and the geographies some of the most challenging and corrupt in the world. It’s one thing to argue that patience is less needed in emerging economies, and another to argue that when it comes to, say, building a company delivering affordable solar lanterns to last-mile, off-grid customers who make between $2–4 a day in rural Pakistan. We’ve learned through more than 15 years of investing in these kinds of companies throughout 11 countries that although it takes, on average, between 7–10 years to get to scale. But when they do, these models are truly transformative. As we prove this out across more and more companies, we believe more traditional investors will invest traditional capital. At least that’s the hope.
The good news is, we have started to see this shift take place in sectors like energy. Take East Africa where business models serving the poor are proving to be viable and scalable. As a consequence, we are seeing more return-oriented investors willing to invest. For example, M-Kopa, a solar home systems company in Kenya and one of our first energy investments, has started to scale rapidly. This company is now in its fourth year of existence and has now attracted large sums of commercial capital. This is the result of patient capital enabling them to prove out their business model in the right way and with the right customers, pave a clear path to scale and acquire the confidence of investors by hiring and maintaining a solid management team. As result of M-Kopa, a similar company, Off-Grid Electric, which operates in Tanzania, has been able to attract larger sums of capital to enable scale. But it’s taken them years to get there.
We believe that as unit economics and the path to scale are better understood, as we’re seeing with these solar companies in East Africa, more significant amounts of capital will move into this sector. As result of this shift, Acumen-provided philanthropic-backed capital will no longer be needed specifically for solar home systems companies because traditional capital has started to move in.
But what about the companies of tomorrow, so to speak? Just as one company is scaling, another one around the corner is trying to innovate and look for new solutions that continue to solve for tough and substantive problems for low-income consumers. While investors are coming in to invest in proven models, there continues to be a sizeable need for philanthropic capital in those models that haven’t yet been proven — these are the companies of tomorrow. Capital for these types of companies working in the toughest regions in the world tend to continue to follow de-risked models, leaving behind those entrepreneurs solving for future challenges in the lurch.
Just to give you an example, here are some of Acumen’s newest investments where traditional investors were not willing to take the risk on new models serving low-income customers (all of these been made in the last 24-months):
Nasra Public Schools in Pakistan and Seed Schools in India are aiming to provide high-quality education at an affordable price point in the K-10 grades to children coming from low-income families. They use methods like rent (vs. own) to keep their costs low and are integrating technology into their operations to allow integration and tracking of quality of delivery.
Our Family Clinic in India is integrating mobile technology into its operations to bring high quality medical solutions (typically heavily skewed to urban centres) to lower-income and more-rural consumers.
Devergy in Tanzania is bringing clean electricity to rural communities in Tanzania by running mini-grids in that country. Such power is used for consumption (lighting, mobile phone charging) but can also be used for simple productive uses.