Interview: Jacqueline Novogratz on the art of investing in business to change the world
Jacqueline Novogratz is the founder of the Acumen Fund, a nonprofit venture capital firm, which makes loans and equity investments in companies that deliver health care, water, housing, and energy to underserved markets in developing countries. The author of The Blue Sweater: Bridging the Gap between Rich and Poor in an Interconnected World, Novogratz recently returned from Pakistan, where she reported on the human toll of the floods, which have left twenty million people homeless, as well as some of the “uncommon heroes” she met along the way. Here, she speaks with us about some of Acumen’s ventures, where she sees her work heading, and what she really means by social investing.
Dowser: Acumen looks to invest in companies that meet critical human needs and have the potential to serve at least a million people. What do you see as one of your most promising investments?
Novogratz: WaterHealth International. They’ve developed a decentralized distribution model that brings affordable water to villagers in India with a simple technology – ultraviolet treatment – and they sell it at an affordable price. The $600,000 we initially invested in 2004 not only helped bring in $45 million in additional investment to that company, but supported its success in reaching 300 villages. The government of Andhra Pradesh has now contracted for them to build another 300 systems over the next year. There are five other copy cat companies bringing water to a thousand villages. What I didn’t understand was that a single company could actually seed and ultimately help build a new industry. That’s a game changer.
Can you give me another example of a business with huge potential to transform people’s lives?
GEWP. Global Easy Water Products. What they have done is to bring drip irrigation to hundreds of thousands of farmers. They’ve miniaturized the systems, and made them incrementally expandable. They’re selling a product to low-income farmers that truly allows them to transform their lives. They use less water and energy while their crop yields increase. Customers see their annual incomes increase by an average of $400 a year. The company has served 30,000 smallholder farmers but they’re just getting started. We initially invested in IDE India – which is a nonprofit — during the prototyping stages. IDE sold more than 125,000 units. Then we created the for-profit company GEWP together. We own 50 percent and they own 50 percent. This year they’ll do $4 million in sales to dollar-a-day farmers. And they believe they’re on track to reach $25 million by 2015.
What’s one of the most common characteristics you see among the entrepreneurs you work with?
They focus on people’s dignity. In Kenya, for example, fifty percent of the population has no access to public sanitation, no toilets. David Kuria, the founder of Ecotact, has created a company that provides clean, safe and beautiful pay-per-use public latrines and showers on public land. Most public latrines are poorly lit, dangerous and dirty. In Ecotact’s facilities, people in uniforms are constantly mopping and cleaning inside and out. They pipe in music. It’s all about making the experience pleasant and treating poor people with respect. Ecotact pays for the upkeep beyond the 5 shilling fee with advertising and marketing. They have shops on site that sell shoe shines and snacks and food, which is pretty interesting. The governments of Uganda and Tanzania are now talking to David about adopting his model.
What do you think Acumen will be best known for five years from now?
I think we’ll be known as one of the key players in the field of alternative energy for the poor. Between our investments in D.Light Design, Husk Power Systems, and SBA Hydro and Renewable Energy systems, we’re probably already helping over a million and a half people have access to light. It’s new, but our energy portfolio may ultimately be our most transformational. These companies are not only showing that there are viable alternatives to kerosene, which is dangerous and unhealthy, but they offer people increased income, better health, better schools, and high levels of decreased carbon emissions.
Why energy more than water?
To have a real game changer in water, you need government – not only to get water priced at a point people can afford and would be willing to pay, but to do it at true scale with regulations. Energy can be a pure private play. Poor people are accustomed to paying 20% or more of their income for energy. They typically buy it in kerosene every single day. But they’ve never paid for water before and they don’t see any reason why they should. So your market creation risk, time horizon and cost are much lower in energy than in water. When people get typhoid or chronic diarrhea, they don’t necessarily correlate that to their lack of investment in water. With light, you pay for it and you see a direct correlation to your productivity and your children’s education. It is seen as a direct investment in your future. So even though Maslow’s hierarchy would say go for clean water first, people will go for energy first.
You told me that you don’t like the phrase ‘Doing well by doing good.’ Yet, that’s what comes to mind for many when they think about social investing. What does it mean to you?
It implies that there are easy solutions. That the perfect way to change the world and end poverty is if we all can make a lot of money doing it. But when you look at poverty and what it takes to break through entrenched systems, high levels of fatalism, unbelievable levels of corruption, incredibly bad distribution, no infrastructure, you are not going to make a lot of money and serve the poor in a way that they can afford. You may make a lot of money and serve the poor in usurious ways that keep them poor forever, like many of the mafia services do, but if you want to provide systems that are fair and affordable, and that they can trust into the long term, building them takes a long time. Over time as you really hit scale, you will make money, but we’ve been in some of our deals for six or seven years and we feel we’re just starting.
You describe Acumen’s capital as “patient capital.” How patient is it?
Our patient capital is really patient. It could be four years, it could be ten years, and if it’s 12, we’re in, and if it’s 15, we’re in. As long as we see significant change that’s moving in the right direction. People often misunderstand what we’re about. I was with some guys from the financial sector and they kept saying, ‘What are your returns?’ And I said, ‘I hope we get our capital back. We still have a philanthropic element to do this work.’ And one guy said, ‘In other words, you have negative returns.’ And I said, ‘If we get 100% of the principal back or even 80% back and millions of people have access to clean water, then I would dare you to find a higher return on investment on the philanthropic dollar anywhere in the world.’
I said, ‘You are very comfortable with charity, seeing a 100% loss, send the money out and you never see it again, and you justify the good it’s doing in the world even if your metrics are fuzzy. Or you’re comfortable seeing 20% returns on your investments with no social impact, and potentially some harm. But you are so uncomfortable in this middle section, where you might get the money back, might not, or you might lose 20%.’ And he said, ‘Yeah, because you’re playing the game of business but you’re not taking it seriously.’ And I said, ‘I never said we were playing the game of business. We’re playing the game of creating change and we are using business as a tool. We are incredibly serious about these businesses succeeding, but we never forget that these businesses are about tackling poverty.’
Jacqueline Novogratz will be speaking at the SOCAP conference, which takes place October 4-6, 2010 in San Francisco, CA. Dowser is a media partner of SOCAP 2010.
Photo credit: JB Reed