A New Approach to Tackling Poverty
The markets alone cannot solve the problems of poverty; nor are charity and aid enough to tackle the challenges faced by over two-thirds of the world’s population living in poverty. Patient capital is a third way that seeks to bridge the gap between the efficiency and scale of market-based approaches and the social impact of pure philanthropy.
Business models capable of bringing affordable, life-changing products and services to parts of the world where markets have failed are now emerging. Many of these businesses create jobs and lead directly to economic growth. Starting a new business is always tough and starting a business in the developing world can be much tougher. Launching a business that focuses on the needs of the world’s poorest often seems impossible. Patient Capital can make the difference in helping innovative business models that address poverty see the light of day.
For Acumen Fund, patient capital is understood as a debt or equity investment in an early-stage enterprise providing low-income consumers with access to healthcare, water, housing, alternative energy, or agricultural inputs. Our typical commitments of patient capital for an enterprise range from $300,000 to $2,500,000 in equity or debt with payback or exit in roughly five to seven years. The patient capital Acumen provides is accompanied by a wide range of management support services nurturing the company to scale. Our aim in investing patient capital is not to seek high returns, but rather to jump-start the creation of enterprises that improve the ability of the poor to live with dignity.
We define patient capital as having the following characteristics:
- Long time horizons for the investment
- Risk-tolerance
- A goal of maximizing social, rather than financial, returns
- Providing management support to help new business models thrive
- The flexibility to seek partnerships with governments and corporations through subsidy and co-investment when doing so may be beneficial to low-income customers.
As an example, in 2004 Acumen Fund invested $600,000 in WaterHealth International, a company that set out to bring safe drinking water to rural Indians, something long thought nearly impossible. One year after our first investment, they had broken ground on two new water systems. Working with Acumen to modify the design of the water facility, a year later WHI had ten systems in operation, and had started to attract the interest of additional investors. Three years after Acumen’s initial investment, WHI had raised $11 million in private capital and were speaking with banks about financing an additional 20 systems.
Today, WHI has developed over 275 systems that impact the lives of over 350,000 people, and they are still growing. With over $30 million now raised, this is a company that leveraged a powerful business model, dedicated leadership, and the support of patient capital, to create an innovative new approach to tackling India’s water challenges.
Flexible, long-term investments of patient capital for businesses like WHI are changing the way the world fights poverty. To see how patient capital has impacted millions of other people, please take a look at our individual investment pages.
References:
Thomas Friedman, "Patient Capital for an Africa that Can't Wait," The New York Times. 20 April 2007.
Jacqueline Novogratz, "Meeting Urgent Needs with Patient Capital," Innovations, Winter/Spring 2007, Vol. 2, No. 1-2, pp.19-30. An article written byJacqueline Novogratz describing Acumen Fund’s use of patient capital and four examples of our work.