Dowser 2011 Year in Review interview

[This interview first appeared on Dowser.org]

This is the 1st part of our Year in Review Series, in which we reconnect with our group of experts about the trends they forecasted for social entrepreneurship in 2011 and look forward to the year ahead. As the Chief Innovation Officer at Acumen Fund, Sasha Dichter is constantly keeping abreast of significant developments in the social enterprise sector. Acumen Fund, which recently marked its 10th anniversary, has a decade of experience investing in solutions to poverty, and as a result, Dichter has first-hand knowledge of the strength of the investing market. Here he discusses the progress made this year in building a funding pipeline, and what it will take to get more capital flowing to the sector. #

Dowser: In our interview earlier this year, you said there’s been a gap between the people talking about impact investing  and the amount of investing actually happening.  What is your assessment now?

Dichter: What’s clear is that more funds are being raised. However, the general theory about what’s going on is that there’s still a lag cycle from talking about it and actually doing it. Anecdotally, we know that more funds have been raised, both in this country and globally, and as expected, people are starting to follow through on this excitement. I would be confident in saying that there have been changes in the investing environment in several countries. There’s a lot of enthusiasm for sure, but it’s still hard to get a benchmark on the volume of investing that’s happening on the ground. #

In general, would you say that investing in social enterprises has become more commonplace in the past year?
I think the level of interest is high, but how that’s translating into what people are doing still remains to be seen. The mainstream investors are increasingly aware that the sector exists and are expressing interest and curiosity about it. Ideally what they want is a story that involves little to no tradeoff on the financial returns. The story that people are hoping to be told is that you can invest in this space and do quite well financially, but there is a gap between that hope and the underlying reality of doing this investing. The opportunity and challenge for the sector is to understand and communicate what the real economics of solving social problems are; there is a way to deploy investment funds to solve social problems, but there is no reason to assume that the rewards and risks would be good because these are really tough problems that we’re solving.

So, how can the sector seize that opportunity?
I hope we can develop a more nuanced vocabulary around the problems we are trying to fund, for example, communicating to investors what would it really look like to get water to this village in Africa? And, asking them, ‘How would you feel if you could make that happen, and then, What if you got your money back?’ More and more we can tell the story of the success of solving very big problems and sharing the complexities of actually doing this. We are able to say, ‘Here is what we’ve accomplished in the world in terms of changing people’s lives, and by the way, we got you your money back.’ Approaching it from an impact perspective rather than focusing on what types of returns you are getting, will increase action among traditional investors.

How do you think the funding pipeline for social enterprises has evolved over this year?
I think the world is still digesting the JP Morgan report [about impact investing as a new asset class], and that has been quite influential for what the sector can look like. At Acumen Fund, we are doing some research with the Montitor Group to try to better understand our portfolio and the different stages of organizational development in funding. The goal is to really understand the types and stages of capital that are needed to create social enterprises, all the way from grant makers, and the public sector players providing smart subsidies, to patient capital and the more mainstream investors. Some of that research has already shown us that there are four stages of funding development for social enterprises. Typically they start with some seed capital and there is a good amount in grant money, and then there is growth capital, and finally the business is at the stage where they can take on a big investment. However, there’s a gap when it comes to Stage 2 and Stage 3 funding for social enterprises.

One of the questions we need to be asking ourselves is how do we as a sector build a pipeline of Stage 4-ready companies and think about the availability of funding along those stages. There aren’t as many players in the market that have the flexibility and risk appetite to really step in there. When you look at the microfinance sector, $20 billion of philanthropy went into it before it entered the phase where the majority of capital going into the market was investment capital.  So, for social enterprises, where is that philanthropic capital going to come to play? It could be deployed as low return investment capital for example, or there’s a lot of ways to handle it. But what seems to be the case when we talk about the maturity of investment capital out there, that it’s not the stage that investors want to play because it doesn’t align with returns they are looking to get. I think we are still trying to figure out who is going to fill that gap and how.

Acumen Fund just celebrated its 10-year anniversary, and in our last interview you mentioned this was going to be the year to assess how much impact the organization has had. What have you learned about your progress?
It’s been a humbling process to reflect on the past 10 years for Acumen Fund. We have $73 million in cumulative investments, and we are seeing capital get returned to us. Ten years ago, this was just an idea to invest in solutions to poverty and now we have this robust sector where we’re talking about the specifics of those investments. We are in a drastically different place in the world now. We still have a long way to go and a lot to do, but we know that patient capital is working and it’s changing people’s lives. The practice of philanthropy looks radically different than it did 10 years ago, not just in the investing sector, but also more widely. The idea that we can use capital in this productive way and we can control it without having it control us to create the outcomes we want is really exciting. The sector offers a certain sense of hope that we can make massive progress in a short time and solve massive problems in very creative ways. It still feels like we are just getting started.

Fast Company Interview

I was excited to be profiled by Lydia Dishman in her Innovation Agents column in Fast Company. Here’s the full copy of the piece.

Innovation Agents – Sasha Dichter, Director of Business Development, Acumen Fund

BY Lydia Dishman  Fri Aug 26, 2011

Sasha Dichter wants you to know that social impact investing is anything but a crock. He talks to Fast Company about making a difference for global social good.

The economy may be slumping and the markets fluctuating wildly, but Giving USA recently reported that over $290 billion in charitable funds was raised in the U.S. last year, an increase of nearly 4 percent. What’s more remarkable is that the majority of those dollars came from individuals, accounting for a whopping 73 percent of overall giving.

Talking with Fast Company, Sasha Dichter asserts that we aren’t running out of money for worthy causes, we just need “a different mechanism that will outlast an individual philanthropic funding system.” As the director of business development at the nonprofit Acumen Fund, Dichter understands there are huge, public problems such as clean water, sanitation, and affordable, preventative health care that can be solved by social impact investing.

“At Acumen Fund we’ve been asking ourselves this question since 2001: How can we combine the best investing and philanthropy for the 3 billion people living on less than $2 per day?”

Dichter rattles off statistics and outcomes such as how Acumen Fund’s already invested $60 million in more than 44 enterprises and touched 40 million lives, that illustrate how well-versed he is in the decade-old world of impact investing. Or, as he explains it, that space “somewhere between pure philanthropy and pure investing where there’s a class of capital that’s willing to get a lower expected economic return for a higher expected social return.”

As a graduate of both Harvard’s business school and its Kennedy school as well as doing stints as global manager of Corporate Citizenship at GE Money and as a senior program manager at IBM, Dichter has spent longer than that raising both philanthropic and sub-market return capital. He’ll be the first to tell you that social impact investing is far from “a crock.

Challenge – Talent

It’s also why, when he talks about how maximizing every philanthropic dollar should be a profit seeking, not necessarily profit maximizing, endeavor, he doesn’t try to sidestep the challenges. For instance, he points out how funding is not the biggest issue in giving people safe drinking water. “When the model starts to work the money will find its way there. The challenge is finding people willing to slog it out. The scarce resource is talent on the ground, not just in leadership but teams,” he explains.

This was in evidence when Acumen Fund invested in A to Z Textile Mills in Tanzania, a manufacturer of low-cost bednets treated with long-lasting insecticide (LLINs) which are effective for up to five years to prevent malaria, a disease that kills nearly one million people in Africa every year.

Acumen Fund’s initial investment in 2002 catalyzed a public-private partnership between A to Z, Sumitomo Chemical, ExxonMobil, the World Health Organization (WHO), and the United Nations Children’s Fund (UNICEF)–all heavy hitters. So no one expected to have difficulty getting the nets sold.

But they did–at least through traditional sales methods such as “Tupperware” parties, church and hospital sales, and door to door. Even corporations invested in having healthy workers refused to purchase nets for their employees.

By listening to the community and experimenting with different retail venues, A to Z became an Acumen Fund success story. The company is now the largest manufacturer of LLINs in Africa, producing 29 million bednets each year, protecting millions of people from malaria, and providing jobs for more than 7,000 people, primarily women.

Challenge – Storytelling

Even with those numbers, it’s likely that you haven’t ever heard of A to Z or any of the other businesses focused on social good that Acumen Fund investments are supporting in Africa, India, and Pakistan. Which brings up another challenge: communicating the cause and “making the ask” for funding.

Even as the guy who wrote a manifesto for CEOs of nonprofits, an impassioned diatribe for them to grow a pair and not be ashamed to ask for money. Dichter acknowledges that paving the path for people to understand impact investing is key to the future of the sector.

In his blog, Dichter describes the potential philanthropist/investor as having two pockets for two types of capital. One is for investing for financial return, the other is for philanthropy. He writes, “Asking someone to make an impact investment isn’t a move along a rational economic scale, with each step proving marginally more attractive. It’s asking someone to do two things instead of one: create a new pocket and invest out of that pocket with us.”

He puts most of the onus on impact investors, though. “We as a sector have a responsibility to not be apologetic about what the [investment] story is. There is no tradeoff,” he explains, the way there was a generation ago with the screened investment funds of the 1990s that peddled various “vice-free” stocks. “A certain amount of results have to be proven,” he adds.

Challenge – Analysis

But not quite in the way most MBAs would think. Dichter’s not opposed to applying metrics and analysis to the warm fuzziness of investing funds for social good. In fact, the Acumen Fund uses something called the Best Available Charitable Option (BACO) model as an analytical tool created to help evaluate investments against other charitable options delivering comparable products and services. Donors always know where their dollars would be most effectively placed.

Instead, Dichter believes that when impact investing does what it should, ie: tackle poverty, metrics will be beside the point. And this is where impact investing takes a sharp turn away from traditional philanthropy. He writes, “What if we get to the point when it becomes pointless to ask if an intervention works because, like the cellphone, it will be ubiquitous, so the question will feel purely academic?”

Dichter maintains there is no skipping hard work and the way to affect change on global social issues is to get close to the problem. One impact investment at a time.

If investing = sexy…

If investing = sexy, and if sexy = better = innovative = how we’re going to solve all the world’s problems…well then, Houston, we have a problem.

There’s huge momentum around using investing capital to solve social problems.  The question isn’t whether this is a good thing (it is!); the question is, how do we do this in a way that doesn’t devalue grant funding, that doesn’t inexorably end up at the conclusion that if you’re getting your money back (and then some), you win, and if you’re the grantmaker, you’re doing something that’s not as important/innovative/worthwhile.

What a shame that would be.

What happens when we build large-scale enterprises that serve tens of millions of people, but the service still remains out of reach for many?  Is the grant funder who provides capital to makes the service more affordable doing anything less noble, less valuable, less impactful than the equity investor?  What about the person who put up the first $500,000 with no expectation of ANY return so that the whole thing could get off the ground?

The thing that’s in scarce supply isn’t investing capital – heck, there are trillions of dollars fleeing the European fixed income market and looking for a place to alight.  What’s scarce is risk capital that will take a bet on a person or an idea and help it scale; and high-impact capital, which will take a powerful, existing infrastructure and make it accessible to those who can’t afford it…all in a way that doesn’t distort the market.

In the US, there’s no notion that the person who puts up $15M to fund cancer care for the poor is somehow doing something less important or less impactful than the bondholders who financed the initial construction of the hospital itself.  If anything, the donor is MORE celebrated.  Different tranches of capital are all playing their roles in an attempt (not completely successful nor a complete failure) to provide high-quality heathcare.

We’re obsessed with “building the market” for investing in enterprises that solve large-scale social problems.  That’s good.  But let’s not confuse that with making the world safe for investors to get their money back.

We’ll know the market is functioning not by measuring how much money is swirling around, how many funds there are, and their total capital under management.  We’ll know it’s functioning by measuring how many new blueprints for social change we’ve created; how many people’s incomes have increased; how many people no longer need a permanent handout.

 

The future of impact investing

I’ve now spent four years in the impact investing space, and nearly three years as a blogger on philanthropy, generosity and social change.  The landscape looks radically different than it did just a few years ago.

On the upside, JP Morgan is now saying that impact investing might be a $1 trillion market; “impact investing” and “social entrepreneurs” are two of the top 10 philanthropy buzzwords of the decade; and we’ve seen a flourishing of philanthropy, especially by mega-donors, both in terms of total philanthropic dollars committed and in more visible and more public talk of results-oriented approaches.

At the same time we’ve seen the limits of markets: the global economy nearly collapsed in late 2008; microfinance, wunderkind of new philanthropy, was shaken to its core by a wave of suicides in southern India late last year.  No wonder that some are calling 2011 the year of reckoning for social enterprise.

Here’s my take on what this all means, from my talk at the 2010 NextGen:Charity conference.

(You also don’t want to miss these other great talks from the conference: Scott Case, Scott Harrison, Scott Belsky, and Nancy Lublin.)

Enjoy, and please share you reactions.

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