Newsmaker. Capital must bring about social change

Jacqueline Novogratz realised that markets alone cannot solve the problems of the world. She also understood that charity and aid are not sufficient to lift people out of poverty. But rather than get impatient with the failure to tackle the challenges faced by over two-thirds of the world’s population, this Stanford graduate and former investment banker bet on patience.

“I was getting tired of writing big cheques to companies and finding there was no accountability,” Novogratz recounted when she was in Chennai in December 2014 for an event on social entrepreneurship organised by TiE Chennai and Villgro.

She quit her investment banking job in the 1980’s at Chase Manhattan in New York and found her way to Rwanda, Africa. As a UNICEF consultant, she helped start the country’s first microfinance institution.

“A lot of money was being given as aid, but there was no change at the ground level,” she observes on why she could not continue in the non-profit world. Novogratz started a small bakery project where she worked with a handful of low-income women to sell baked goods. This little girl scouts-like project led to an “a-ha” moment. Why not bridge the gap between the efficiency and scale of market-based approaches and the social impact of pure philanthropy? This vision of the ‘third way’ led to her founding Acumen in 2001 to provide what she calls ‘patient capital’.

We know about hot money and high frequency trading, but what in the world is patient capital? It is really private equity funding, by way of debt or equity investment, in an early-stage enterprise.

The twist is that these companies cater to low-income consumers and tackle issues such as access to healthcare, water, housing, clean energy or agricultural inputs. Funding is given with a long-term horizon in mind to nurture these companies to scale and build out markets, not just chase high returns. Acumen typically commits $2,50,000 to $2.5 million and exits happen in seven to ten years.

“Capital must be seen as a means to a goal, rather than dictate actions,” she says of her view on the role of funds. In the case of Acumen, the mission is to improve the ability of the poor to live with dignity. The fund is headquartered in New York and has regional offices in India, Pakistan, Kenya, Colombia and Ghana. Acumen counts large global institutions, such as the Bill and Melinda Gates Foundation, Rockefeller Foundation and Google.org, as its investors and advisors. As of July 10, 2014, Acumen has approved $88 million of investments in 11 countries and received $17 million in returns. Since inception, it has invested in 82 enterprises, which have created nearly 60,000 jobs, helped over 125 million people, and leveraged an additional $500 million in follow-on capital.

“I find that in the Silicon Valley, more and more resources are being used to create less and less impact,” she observes. In contrast, companies in emerging economies are trying to make ground-level differences. She cites the example of app development by Esoko in Africa to illustrate her point.

The company has created a technology platform to strengthen the connection between farmers and markets with the use of mobile phones. Farmers get to know pricing information, among others, and the knowledge they gain improves their livelihood. Impact investing has become a more mainstream concept now, with many new funds launched globally to fund social enterprises. “Once you start the process of empowering people by harnessing their ethos for hard work and the spirit to become better, it takes a life of its own,” she notes, based on her journey.

But how does she feel about the microfinance fiasco in India? “Progress is never a straight line growth. There are many setbacks, but overall things are going in the right direction,” she says. She thinks all micro funds serve a purpose. A bit more philanthropic attitude and a bit less of a quick return focus is however required.

Besides being a global fund manager who has set new standards, she is also the author of a New York Times best seller, ‘The Blue Sweater: Bridging the gap between the rich and poor in an interconnected world’ , published in 2009. “The world is extremely interconnected now. The negative forces, such as terrorism are affecting and challenging all the nations. But the opportunities in front of us are larger still,” she states optimistically.