Seth Godin makes an appealing case for “social enterprise investment” along the lines of The Acumen Fund:
When two people trade, both win. No one buys a bar a soap unless the money they’re spending for the soap is worth less to them than the soap itself.
When someone in poverty buys a device that improves productivity, the device pays for itself (if it didn’t, they wouldn’t buy it.) So a drip irrigation system, for example, may pay off by creating two or three harvests a year instead of one.
How does Acumen Fund create these markets? The answer is patient capital. The companies that are selling solar lamps to replace kerosene or water purification systems in tiny villages, or housing projects for peasants in Pakistan or even ambulance services in Mumbai fully intend to make a profit, but the venture capitalists on Sand Hill Road aren’t in a hurry to invest in them. The investments are a little too risky, take a little too long or a little too unproven to take a chance on.
So Acumen finds these entrepreneurs on site in the developing world, funds them, teaches them and pushes them to build really big organizations. A to Z has literally thousands of people in their modern factory creating malaria bed nets in Tanzania. And so it grows.
There are reasonable arguments that this sort of larger-scale financing is far more promising than microfinance, which typically focuses on tiny microenterprises that are unlikely to achieve large scale and create jobs. If we could find a strong charity in this area, we’d be excited to recommend it. But as with other areas, we try to go beyond the story and ask critical questions, and so far we have found no organization – including the Acumen Fund – that appears to answer them.
Our main question in this area pertains to an investor’s track record. We’d expect large-scale investing to have a success rate well under 50%, but we’d want to see at least an example or two of real success in the past, consisting of any of the following:
- An investment that has been shown to improve the lives of customers (for example, tracking bednet use in areas served by A to Z).
- An investment that has been shown to create jobs, i.e., employ people with previously low incomes.
- A financial return. (Note that it isn’t enough to point to a “portfolio” member and observe that it’s a successful, self-sustaining business. Anyone can make a loan or grant to an already-successful business; this doesn’t mean they’re having an impact.)
Given Acumen Fund’s reputation for (a) general excellence and (b) focus on evaluation (see the Acumen Fund discussing these issues here and here), we would have expected them to produce such examples. But after evaluating them for our economic empowerment grant, we have concluded that:
- They do not directly track social impact of the organizations they invest in.
- They do not have information on the effects of their investments on jobs.
- They have declined to share information on the performance of their loans, and have not yet exited any equity investments.
A couple of other concerns:
- At least one of their investments, VisionSpring, has a major charitable solicitation component (for example, they have applied for funding from us). Acumen’s loan could end up getting repaid by donations, which wouldn’t go well with the idea of “patient capital to create self-sustaining institutions.”
- Their documents are largely at too general and vague a level to give a concrete sense of how their investments are going.
Given this situation, it’s hard to see the organization as more than an experiment at this point. No matter what its team’s credentials, there is the enormous question of how developed-world business experience translates to the goal of making good and socially impactful investments in the developing world.
As with other unproven charities, it seems to us that Acumen should be primarily funded by those who are very close to the relevant people and issues, until it is able to demonstrate not just a good story but some real results. Other similar organizations seem to be similar cases.