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    Patient Capital: A Third Way to Think About Aid


    International Trade Forum - Issue 4/2009

    © Acumen Fund

    With enterprises ranging from drip-irrigation companies in India and Pakistan to a major manufacturer of malaria-preventing bed nets in Tanzania and women's hospitals and ambulance services in India, Acumen's US$ 40 million portfolio has created more than 22,000 jobs and had a positive impact on more than 30 million people in developing countries.

    At a time when the debate over foreign aid often pits those who mistrust "charity" against those who are wary of relying on the markets, Acumen Fund proposes a middle way termed "patient capital". Through partnering entrepreneurs with corporate, government and non-governmental organizations, it is a fascinating model, which uses small amounts of philanthropic capital and large doses of business acumen that has shaken up philanthropy and investment communities alike. The founder, Jacqueline Novogratz, shares her insights and examples of how Acumen Fund is using entrepreneurial innovation and public-private partnerships to drive social change and economic opportunity in developing countries.  

    Addressing the challenge

    The time for us to begin innovating and looking for new solutions across sectors is now. There is a raging debate as to how we can best lift people out of poverty. On the one hand, we have people who say the aid system is so broken that we need to throw it out. On the other, we have people who say the problem is that we need more aid. Acumen Fund developed a model that seeks to go beyond this debate. It is called patient capital.

    The critics point to the US$ 500 billion spent in Africa since 1970 and ask what do we have as a result but environmental degradation, incredible levels of poverty and rampant corruption. Their policy prescription is to make government more accountable, focus on the capital markets, invest and don't give anything away. On the other side, there are those who say the problem is that we need more money. When it comes to the rich, we'll bail them out and hand out a lot of aid, but when it comes to our poor brethren, we want little to do with it. They point to the successes of aid: the eradication of smallpox and the distribution of tens of millions of malaria bed nets and anti-retrovirals.

    Both sides are right. And the problem is that neither side is listening to the other. Even more problematic, they are not listening to poor people themselves.

    After 25 years of working on issues of poverty and innovation, it is true that there are probably no more market-oriented individuals on the planet than low-income people. They must navigate markets daily and make dozens of micro decisions to move their way through society. And yet if a single catastrophic health problem impacts their family, they could be put back into poverty, sometimes for generations. And so we need the market and we need aid.

    Patient capital: A long-term view of investing in aid

    Acumen Fund's patient capital model addresses both views. Patient capital works between and tries to take the best of both the market and aid. It's money that is invested in entrepreneurs who know their communities and are building solutions to health care, water, housing and alternative energy, and are thinking of low-income people not as passive recipients of charity, but as individual customers, consumers, clients, people who want to make decisions in their own lives.

    Patient capital requires an incredible tolerance for risk, a long-time horizon in terms of allowing those entrepreneurs time to experiment and to use the market as the best listening device that we have, and in the expectation of below-market returns, but outsized social impact. It recognizes that the market has its limitations. So patient capital also works with smart subsidies to extend the benefits of a global economy to include all people.

    Entrepreneurs need patient capital for three reasons. First, they tend to work in markets where people make one, two or three dollars a day and they are making all of their decisions within that income level. Second, the geographies in which they work have terrible infrastructure. No roads to speak of, sporadic electricity and high levels of corruption. Third, they are often creating markets.

    After so many failed promises, actually bringing clean water to rural villages is something new. And so many low-income people have seen so many broken agreements and so many quacks and sporadic medicines, that building trust takes a lot of time and a lot of patience. It also requires being connected to a lot of management assistance. Not only to build the systems, the business models that allow us to reach low-income people in a sustainable way, but to connect those businesses to other markets, to governments, to corporations - real partnerships to get to scale.

    Case study: IDE India

    Indian entrepreneur Amitabha Sadangi had been working for more than 20 years with some of the poorest farmers on the planet. When he met Acumen Fund in 2002 he was frustrated that the aid market had bypassed low-income farmers despite the fact that 200 million farmers in India alone make less than a dollar a day. The aid market was either creating subsidies for large farms or it was giving inputs to the farmers that it thought they should use, rather than what the farmers wanted to use.

    At the same time Mr Sadangi had come across drip-irrigation technology that had been invented in Israel. It was a way of bringing small amounts of water directly to the stalk of the plant and it could transform desert land into fields. But the market had also bypassed low-income farmers because these systems were too expensive and were constructed for fields that were too large for the average small village farmer who works on two acres (or not quite one hectare) or less.

    Mr Sadangi decided that he would take that innovation and redesign it from the perspective of the poor farmers themselves, because he had spent so many years listening to what they needed, not what he thought they should have. He used three fundamental principles. The first was miniaturization. The drip-irrigation system had to be small enough that a farmer only had to risk a quarter acre, even if he had two, because it was too frightening given all that he had at stake. Secondly, it had to be extremely affordable. In other words, that risk on the quarter acre needed to be repaid in a single harvest or else they wouldn't take the risk. And thirdly, it had to be what Mr Sadangi calls "infinitely expandable". That is, with the profits from the first quarter acre, the farmers could buy a second, and a third, and a fourth.

    Today, IDE India, Mr Sadangi's organization, has sold these systems to over 300,000 farmers who have seen their yields and incomes double or triple, on average. But this didn't happen overnight. In fact, when you go back to the beginning, there were no private investors who were willing to take a risk on building a new technology for a market class that made under a dollar a day, that were known to be some of the most risk-averse people on the planet and that were working in one of the riskiest sectors, agriculture. Mr Sadangi used significant grants to research, to experiment, to fail, to innovate and to try again. When he had a prototype and a better understanding of how to market to farmers, patient capital could come in. Acumen Fund helped him build a profitable company that would build on IDE's knowledge, and start looking at sales and exports, and be able to tap into other kinds of capital.

    Acumen Fund also wanted to see if this drip-irrigation system could be exported to other countries and we have been able to start a similar company with a large community development organization in the Thar Desert of Pakistan. Although that company has just started, Acumen Fund is confident the project will have a positive impact on millions of people who live in the poorest parts of the country.

    Case studies: Public-private partnerships

    Acumen Fund has also developed successful public-private partnerships between entrepreneurs, governmental and non-governmental organizations, and corporate investors in developing countries.

    In Arusha, Tanzania, A to Z Textile Manufacturing has worked in partnership with Acumen Fund, the United Nations Children's Fund and the Global Fund to Fight AIDS, Tuberculosis and Malaria to create a factory that now employs 7,000 people, mostly women. They produce 20 million life-saving anti-malarial bed nets per year for Africans.

    Lifespring Hospital is a joint venture between Acumen Fund and the Government of India to bring quality, affordable maternal health care to low-income women. It's been so successful that it is currently building a new hospital every 35 days. Also in India, 1298 Ambulances decided to build an ambulance service in Mumbai that would use the technology of Google Earth, and a sliding scale pricing system so that all people could have access, and took a firm public decision not to engage in any form of corruption. In finding a solution to the pre-existing broken ambulance service, they subsequently won four government contracts to build a fleet of 100 ambulances. They are now one of the largest and most effective ambulance companies in India.

    Scale is critical and the time to act is now

    The idea of scale is critical. Acumen Fund is starting to see these enterprises reach hundreds of thousands of people. But that's obviously not enough and it's where the idea of partnership becomes so important. Whether it is by finding those innovations that can access the capital markets and government itself or partnerships with major corporations, there is unbelievable opportunity for innovation. It is time to consider a global innovation fund that would support the entrepreneurs around the world who really have innovations, not only for their country, but ones that we can use in the developed world as well. 

    This article is adapted from Ms Novogratz's presentation, "A Third Way to Think About Aid", at the TED Conference in June 2009. To see the full presentation visitwww.ted.com

    © Reproduced with permission of Jacqueline Novogratz, Acumen Fund and TED, 2009.