Barbara Szewcow spoke with Alberto Gómez-Obregón, portfolio director at Acumen, a non-profit impact investment fund, about its investment approach and its programme to train the next generation of social entrepreneurs.
Jacqueline Novogratz, CEO of Acumen, has said that patient capital “takes the best of the markets as well as philanthropy and aid”. How can these three simultaneously produce optimal results?
The ethos or the philosophy behind the patient capital model within Acumen is that we are using the tools of capitalism as a means to solve a problem rather than as an end to simply focus on a financial return. Our capital and strategy are centred around the consumer at the bottom of a pyramid. Those people have a very small disposable income and it takes a long time to reach them and make them feel comfortable with the new products or services. It is time consuming to achieve a sustainable business model when you cannot increase the amount of sales.
I would like to mention an example of one of our companies called d.Light which has been a very successful investment for Acumen and a very clear illustration of how our patient capital works. We came into d.Light about ten years ago, in its C-round. I think that they were the first company which was testing solar lanterns in an affordable way to bring electricity or at least lightning to the communities with no access to the grid. Nobody, at that point in time, was investing in these types of high-risk products. Historically, solar energy has been extremely expensive but d.Light found a formula to bring solar energy to an affordable product, and so we took a risk early on. Initially, these solar lanterns were a little bit more expensive yet now they are very cheap. We have installed almost 20 million lanterns and reached about 70 million people in the last ten years. Today, d.Light is starting to finally be an attractive investment opportunity for a purely commercial capital. We accompanied them during their whole life cycle, we came in their series A and into the subsequent rounds, and through all of Acumen vehicles we have deployed a significant amount of capital to this company.
Investors are often deterred by the idea of putting ‘patient capital’ into long-term investments. What are you using to convince them that investment for impact in high-risk countries is ultimately desirable?
I think there are different types of capital within the impact world and each type of capital plays a different role. Our patient capital model, because it’s funded by philanthropy, has more of a development lens from the get-go. Our role is to fill gaps and to create markets or to disrupt markets where no other capital is willing to go. The fact that we are financed, or that we are funded by the philanthropy grants and donations allows us to take further risks, invest for longer periods, and, at a portfolio level, to achieve a return which from an impact perspective meets our aims.
We are not looking to convince anybody, we are simply trying to come in where the commercially focused capital that is risk averse does not want to step in. We are trying to build the early stage companies in regions or sectors that are very risky. We come in at that stage, we build these companies, we de-risk them, we are patient in our approach and focus on filling in the gaps for the low-income consumer to improve that person’s livelihood or hopefully, to increase their income. Once we create examples of companies which reach sustainability and are prepared for the scaling level, the more commercial capital funds should come in.
In the company vision you have stated that “neither the markets nor aid alone can solve the problems of poverty”. What is your view on the potential of blended finance to tackle the issue and what are the dangers of using this instrument to distribute risk?
I think the danger could be an irresponsible use of capital without truly having the impact side of the story in mind. There is always a risk associated with immoral behaviours but I do not think that it is something that has truly materialised. I think that most people who use philanthropy to solve problems in the way in which Acumen is doing it are truly committed to that mission and are really trying to focus their strategy on solving [poverty] problems.
How does Acumen position itself in terms the institutions providing state- backed development finance?
We have been seeing that the larger state-backed development funds have been moving further into the impact investing space and now they are finding good value in stepping into an earlier phase of the impact investing sector, in which Acumen participates.
I would say that, as Acumen, we do not see it as a major challenge but we do observe some sort of disruption that has been created, and it comes from both sides. On the side of an investor, like Acumen, what we have seen as a challenge faced by some of the shareholders is that the state-backed development firms have certain sectors or certain agendas that they want to push. In some cases, if a fund is not well structured, it might have a slightly opportunistic take on how it fundraises, or it may be guided simply by the capital or the grants that it is receiving.
That is the side of an investor whose fundraising strategy is more reactive than proactive and thus dependent on the agenda, or the sectors, that the state-backed development agencies are pursuing. On the other side are the state-backed development agencies that, as I was mentioning, have their own agendas or their own sectors. The challenge there is that if they cannot find funds or firms which are willing to deploy capital according to this agenda, they might have trouble mobilising the amount of capital that they need.
The way we position ourselves to avoid these challenges, which can serve as advice to other more nascent investors who might be somewhat more entrepreneurial or less structured, is to be proactive rather than reactive in our fundraising approach. We have a very well-defined sectorial and regional strategy and we procure specifically for our strategy. Hence, if we only invest in four sectors such as education, agriculture, energy and healthcare, we will not fundraise or receive resources from a state-backed agency which wants to focus on water and sanitation because we cannot deploy the capital efficiently. Secondly, what sounds simple but is often hard to manage, is setting realistic expectations and objectives, and having an open level of transparency with your funders or the firms that you are funding.
In many cases investors who want to access the funds might promise objectives or timelines that are not attainable. We [at Acumen] always clearly outline the scope, the expectations, the deliverables, and the timelines. At the end of the day it is a relationship that you are forming. Within Acumen, we care about creating strong relationships that
are based on trust and transparency.
Could you explain to our readers what the advantage is of the ‘Lean Data’ approach to impact measurement as opposed to other methods?
Every firm has its own methodology and it might be working for them. In Acumen, we focus on the bottom of the pyramid consumer and changing the way in which the world is dealing with poverty by creating these examples of sustainable enterprises. Other investors might be focused on climate change or gender equality. Consequently, it is hard to put a standard in impact measurement when you are not even focusing on the same objective.
Rather than comparing our lean data approach to others, I prefer to help you understand the philosophy behind it. I think the word ‘lean’ really gives away one of the main principles of lean data. Previously, obtaining figures from remote consumers who, in some cases, did not have access to technology was quite cumbersome, expensive and time-consuming. Acumen saw that as an opportunity to create something that would be nimble, faster and cost-effective and thus the lean methodology is a procedure which allows for that. That is the first pillar of lean data. The second one is focused on a bottoms-up approach. We use this system across our whole investment strategy. We use it to really understand whether the product or the service that is being offered to the consumer is the right one, affordable and satisfactory. Ultimately, you are giving the user a voice, a choice and dignity. We have also found that you can use that data to improve as a company.
As a form of introduction and a context for our readers the lean data approach is focused on three indicators: the breadth which shows how many people the product or the services are reaching, the poverty focus which expresses the percentage of the users who are below poverty line, and the depth which is more dynamic and harder to measure but really yields the most interesting results. The last indicator measures in what percentage are the livelihoods of these people or their incomes improving by using the product or service. These three objective values give us a number to measure our impact.
Measuring social change can give a strong indicator of how successful an investment has been, but how does the fund go about measuring this?
I think our patient capital model, as I was outlining in the beginning, has a role. It is deployed as capital and it does look for a financial return. Yet, the other bottom line for our patient capital is the impact. When we think about success, we see companies which hit those two lines. They reach a certain number of consumers and improve their livelihood and, at the same time, become sustainable, scalable, and yield a return for us.
Having two bottom lines is tricky therefore we set the expectations for our companies from an impact perspective. At the diligence stage, we know from our lean data analysis how many people a company is reaching, what percentage of those people are below the poverty line, and what effect is the product or service having on their lives. Based on that we outline a theory of change that we want to achieve, and we define an impact thesis and the mile stones that we want to achieve.
Every year, during our annual review we map how the companies behave and move within the chart of financial and impact performance during a certain period of years. If we see that a company is financially successful but moves away from the impact story, and the reason might be that it is reaching consumers who are not at the base of the pyramid, there is an action that needs to be taken. On the other side might be a company which creates an impact but does not perform well financially. For us success are the companies which are at the top right of a chart. They create an impact alongside having a strong financial performance and becoming financially sustainable.
The fund offers a fellowship programme based on the Adaptive Leadership framework. It would be useful finally to know a bit more about this framework, and about what graduates of the programme can hope to gain from its content.
When Acumen started investing in the social entrepreneurs 16 years ago, there were few of them out there. The sector was not that developed and there were no companies or start-ups focusing on improving the livelihoods of people at the base of the pyramid within their business model. Consequently, the initial focus of the fellowship programme was to foster more social entrepreneurs in the world. As the sector has developed, our fellowship curriculum has evolved to a programme which looks to promote individuals from diverse backgrounds who are committed to something bigger than themselves, and driven by a stronger sense of purpose. The programme basically gives these people the tools to become change makers and moral leaders.
This is where the adaptive leadership part of the course comes in. The framework helps individuals and organisations to adapt and thrive in challenging environments. Besides the adaptive leadership framework, we also teach the authentic voice through which we help our fellows to learn how to use storytelling for change. Also, the programme offers a pillar around managing polarities, and this has become very critical in our interconnected world full of ambiguity and opposing visions. This framework helps people to understand the systemic problems that the world is facing today and allows them to appreciate both sides, and try to reach a common ground. Finally, the fifth aspect of the programme is what we call the good society readings which are lectures curated from strong figures that have made a change. It is focused on helping our fellows to understand how a just society should look like, what is the moral and the historical foundation of social change, what is the role of an individual within society and how can society cater to an individual.
The programme is much more complex than simply offering a framework around the adaptive leadership. It offers five tools to help these fellows to become the change makers that they want to be, and to become moral leaders.