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Making a Case for Patient Capital


In 2002, after nearly 10 years of running a nonprofit to help poor farmers in India get the most out of their land, Amitabha Sadangi was frustrated. Government aid to alleviate poverty had largely bypassed individuals earning less than $1 a day. Instead, those funds subsidized large farms and were invested in technology Sadangi says the farmers didn’t want. Rather than battle bureaucracy to redirect the money more appropriately, Sadangi had a novel solution. Convinced the farmers would benefit more as informed buyers than as passive recipients of charity, he adapted a water-saving drip irrigation system to their needs and sold it at an affordable price.

Acumen Fund, the nonprofit venture capital fund I lead, gave Sadangi’s International Development Enterprises India a $100,000 grant to experiment with his product. Then in 2008 we invested $1 million in Global Easy Water Products (GEWP), a for-profit spinoff Sadangi created in western India to further increase the technology’s reach and to sell other products to the poor.

GEWP and its parent nonprofit so far have sold irrigation systems to some 350,000 farmers. That means roughly 2 million people (including the farmers’ families) are now benefiting from higher incomes—for some, $5 to $6 a day instead of $1 to $2. With 101 employees and sales that have tripled since 2008, GEWP is one of Acumen’s most profitable enterprises and has even begun to pay dividends to its shareholders. By all measures, that is the kind of return on investment we need to see in a world with more than 2 billion people living in poverty.

This is an example of what I call “patient capital.” Acumen will make debt or equity investments for up to 15 years in entrepreneurs who see the poor as customers who can make choices for themselves rather than as recipients of aid. Such entrepreneurs have difficulty getting money from traditional venture capital firms, which don’t want to wait decades before they see a return on their money. And people such as Sadangi rarely get support from charities, which typically are reluctant to fund for-profit businesses.

The poor are willing to pay for services they value and can afford. One of our investments, WaterHealth International in Irvine, Calif., builds and operates water purification systems in rural areas across India. Since 2004, WaterHealth has installed 600 systems that now provide safe drinking water to 500,000 customers. The success of the 600-employee company is sparking a new sector of enterprises that deliver water in India. In 2008, Acumen became one of the first investors in d.light Design, which manufactures solar-powered lamps sold in 34 developing countries, illuminating the homes of about 3.5 million people who previously relied on kerosene for light. Two years ago we invested in Kenyan hybrid seed developer Western Seed, which distributes inexpensive seeds to hundreds of thousands of farmers in Kenya and plans to expand across East Africa.

We have invested $68.5 million in 63 enterprises in Africa and Asia, helping to create more than 35,000 jobs. These businesses last year served 40 million people, and six of our companies have more than 1 million customers each. Our investment has also helped these entrepreneurs attract more funding from other sources. Since we founded Acumen a decade ago, our companies have attracted an additional $200 million in follow-on capital.

Despite the benefits, it’s not easy persuading investors to place long-term bets in troubled parts of the world. I remember speaking to a hedge fund manager during the subprime lending bubble in the U.S. He told me he would make money on his investments even if 90 percent of mortgage holders defaulted on their loans. The lack of accountability in the system, for both lenders and borrowers, was striking. When I described how we’re investing to bring low-income housing to slum dwellers in Pakistan, he was uninterested, though we’ve now been fully repaid, and 2,000 people are living in their own homes near the city of Lahore. He thought the financial returns were too low and that the project would have taken too long to pay off.

In our interconnected world, using the tools of capitalism to drive the potential of all human beings is imperative. But instead of focusing solely on profits, let’s create sustainable entities that extend opportunity to people who for too long have been excluded. As events such as last year’s floods in Pakistan and this year’s uprisings across the Arab world demonstrate, new approaches to helping the world’s poor are crucial.

Jacqueline_novogratz
Novogratz is founder and chief executive officer of Acumen Fund, a nonprofit venture capital fund that invests in enterprises serving poor people in developing countries.

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