by Anne Field
Twenty-one years ago Jacqueline Novogratz took what she thought would be a three-week business trip to Rwanda. The stay not only ended up lasting two years but inspired her to invent a new form of philanthropy aimed at helping the world’s poor. Like the path traveled by any visionary—or entrepreneur—hers involved unforeseen twists and turns. Yet she maintained her passionate belief in the power of individuals to help the truly poor to help themselves. Along the way she found methods to reinforce that belief and turn it into reality.
Trained first as an international banker, a 25-year-old Novogratz was in Kenya helping launch a microfinance institution that gave small-business loans to poor women when a group of Rwandan women asked for similar help. She agreed and in the process decided to join a group of 20 poor women who were running a church-subsidized, money-losing bakery. By introducing new business processes, she was able to turn the bakery into a profitable enterprise within 6 months, boosting the women’s income and their self-respect.
For Novogratz, the added value was richer insight into economics. With her usual soft-spoken but rapid-fire intensity, she says, “I saw the power that markets can have to help bring people out of poverty, the discipline that running a business provides, and the pride that results from ownership.”
Those insights led this daughter of a former military officer and the oldest of seven siblings to apply to the Stanford Graduate School of Business, where she earned an MBA in 1991 and 10 years later formed her own venture, the Acumen Fund. Living in Manhattan now and working from Google’s Chelsea office building during the infrequent times she is not on the road, Novogratz describes her creation as a “philanthropic venture capital fund.” A ground-breaking hybrid when she started it in 2001, Acumen’s basic mission and approach have not changed, although the details have. It still is a nonprofit using a market-based approach to nurture enterprises that are able to deliver goods and services to the world’s poor on a sustainable basis. That means building businesses that can grow on their own, preferably to have 1 million or more customers among the poor, without receiving handouts on an ongoing basis.
It’s an innovative approach that Novogratz, 46, took most of her life to develop. An idealist from the time she attended Catholic elementary schools, her eyes were opened to the problems of addressing global poverty right out of college, when she worked for the international loan division of Chase. There, she saw millions in loans going to the wealthy with nothing to help the desperately poor. Her search for a better way led her to Africa, Stanford Business School, and the Rockefeller Foundation. Each experience planted another seed until she finally formed the idea for Acumen. Her mix of quiet energy, intelligence, and optimism inspired others to join her cause. “It’s because of her vision and ability to make it happen that we got involved,” says C. Hunter Boll, MBA ’84, COO of Source Audio and an Acumen board member.
The basic premise for Novogratz’s approach to global poverty rests on a few simple ideas: Traditional methods can’t solve the deeper problems facing people living on less than $4 a day because grants and loans to governments from organizations like the World Bank, as well as aid from charities, don’t help the poor build self-sustaining ways to better their lives. Instead, the free money tends to backfire because there’s no real accountability for recipients’ actions, she says. Adds Boll: “Grants don’t contribute to creating financial growth. The only way to keep going is to re-up the grant.”
What’s more, traditional charitable organizations take a top-down approach, imposing their own concept of what poor people need instead of responding to what destitute populations really want. That encourages making the wrong decisions, Novogratz says. She cites an organization that tried to help Rwandan women with the laborious process of milling maize by providing corn mills—without thinking about what to do when the mills ran out of gas. “There’s an arrogance to the attitude that we’re going to come in and fix something for you, and you should appreciate it,” says Novogratz. “The only way to really build trust is by starting from how people really are.”
At the same time, too much emphasis on the power of the market can impair an organization’s social mission. “Once you’re driven just by profit, you’re likely to make different decisions about, say, what income levels you need to serve,” she says.
Novogratz’s solution is to back existing small businesses selling products and services that benefit the very poor. While the fund gives some grants, it also uses equity investments and loans from money raised from foundations, corporations, and individuals. By adopting financial mechanisms employed by venture capitalists, Novogratz says, entrepreneurs are forced to create more efficient organizations.
According to this philosophy, market response tells Acumen whether it has bet on the right companies and the right goods and services. “By affixing prices to the delivery of critical services, we allow people to tell us what they want and what they can pay for it,” Novogratz says. Most important, the poor decide for themselves what works. Says Boll: “We don’t try to make choices for people, and that’s one of the things that really sets Acumen apart.”
This model also differs dramatically from microfinance. That approach gives small loans of $150 or so to individuals to start tiny businesses—a vegetable stand, say. Acumen has its eye on bigger game: investing in already existing firms that specifically sell things aimed at improving the lives of large numbers of people—anything from low-cost housing to eyeglasses or inexpensive irrigation equipment.
With an average investment size of $600,000 to $1 million, Acumen’s investments, of course, are peanuts compared to those of traditional venture capital or of the World Bank and the International Monetary Fund. Still, with $20 million under management, raised from such places as Google, Cisco, and the Rockefeller Foundation, Acumen has invested in 27 for-profit and nonprofit businesses in East Africa, India, and Pakistan. About $667,000 in principal and interest has been returned to Acumen, which has plowed it back into other investments.
Novogratz focuses on four areas: health care, housing, financial products, and water. Take A to Z Textile Mills in Tanzania, to which Acumen gave a $325,000 loan in 2002. At the time, the company was selling polyester-based anti-malarial bed nets to protect against insects that spread the disease. Like most bed nets, theirs had to be re-treated frequently with an insecticide. The loan permitted the company to use new, longer-lasting technology from Japan’s Sumitomo Chemical. In addition, Acumen arranged for the World Health Organization to set standards for the product, UNICEF to buy the nets using public funds, ExxonMobil to provide the resin needed, and Population Services International to help raise awareness. Annual production of bed nets is now nearly 7 million. The company employs 5,000 people in Tanzania, mostly women. Last year, the company paid off its sizeable Acumen loan. Success like this results from a mix of optimism, business savvy, and confidence—characteristics that many of Novogratz’s colleagues say are her hallmarks that inspire everyone from her staff to company CEOs. “She has a unique ability to connect with anyone, a unique curiosity about people,” says Acumen board member Catherine Muther, MBA ’78, a former Cisco executive and founder of the Three Guineas Fund, a San Francisco-based foundation. On a recent trip to India, Muther says, she observed Novogratz repeatedly approaching consumers to ask their opinions of particular products and services.
Novogratz’s interest in social action began early. Amy Novogratz, 14 years her junior, recalls her older sister in high school teaching her folk songs and insisting they visit the local Goodwill. Now director of the TED Prize for the TED conferences, Amy says Jacqueline inspired her own social action. Brother Mike, president of Fortress Investment Group, a New York-based alternative asset manager, is one of three of their four brothers in high-powered finance jobs. He says he and Jacqueline frequently talk about the best way to effect social change.
Novogratz began her career in the for-profit sector, joining Chase’s international loan division after working her way through the University of Virginia. Traveling to 40 countries in three years, she was in Brazil during that country’s debt crisis when she started thinking she needed to do something else. “I saw all these people in the slums with no access to bank credit at all, while we were writing off millions of dollars of loans to the wealthy,” she says. “There was something wrong with this picture.”
Determined to find a better way to “bring the underprivileged into the economy,” she decided to explore microfinance with Women’s World Banking, an organization that sent her to the Ivory Coast and then Kenya. When five Rwandan women invited her to their country to help them build a similar institution, she couldn’t refuse because “that was the first time African women had asked me to do something rather than me being asked by an organization to do something for Africans.”
The invitation to help with “a little charitable project”—making and selling baked goods—came next. Twenty women, subsidized by a church, were spending more to keep the project going than they earned. When they asked for help, Novogratz says, “I thought, as only a 25-year-old could, ‘I can do that.’”
Revamping the operation, she learned that some of the women regularly stole from the bakery, so she instituted new inventory systems. Within six months, they “cornered the market for snacks” by delivering them to the biggest companies in the city of Kigali and were earning three to four times the average national wage.
Wanting to build on her skills, she took a World Bank job briefly in Gambia and applied to Stanford Business School, where she took advantage of the Public Management Program. It would be a few more years before the idea of social entrepreneurship would take hold with large numbers of GSB students, but Novogratz began developing a new set of skills. She worked with the late John Gardner, the founder of Common Cause and a professor revered at Stanford for his ability to inspire community activism. He “changed my life and mentored me for the next 15 years,” Novogratz says. “He helped me understand how you could use these business practices to help poor people make decisions for themselves.”
After graduating, Novogratz started a philanthropy workshop for the Rockefeller Foundation that exposed high-net-worth individuals to underprivileged communities. The resulting discussions led her to create Acumen. Says Muther: “We were all talking about new ways to solve global poverty, but Jacqueline came up with the idea for Acumen and then announced she would actually do it.”
With seed capital of $5 million from Rockefeller, $2 million from the Cisco Foundation, and $1.5 million from three private individuals, Novogratz founded Acumen just before the Sept. 11, 2001, terrorist attacks. She wound up raising another $1 million, half of her original projection.
By 2003, Acumen had put money in 11 companies. They included the malaria net company in Tanzania, a nonprofit making an inexpensive drip irrigation system in India for poor farmers, and a community housing program for low-income squatters in Karachi, Pakistan.
In that same year, with urging by David Kyle, the Fund’s new COO, Novogratz decided to start moving more into equity and loans for the accountability and discipline they would instill in companies. She also refined the characteristics that companies need to receive investments; no matter how interesting the product, Acumen won’t provide backing unless it has the potential to reach a lot of people. Their first grant recipient, a maker of a $42 hearing aid in India, seemed promising, but after the company distributed about 10,000 devices it became clear that wider distribution wasn’t possible. The lesson: “We realized that our sweet spot is in figuring out how to get goods and services to people who need them and looking for business models to support that objective,” says Yasmina Joanne Zaidman, MBA ’03, a portfolio manager at Acumen. “It wasn’t about investing in cool technologies.”
Novogratz, Kyle, and chief investment officer Brian Trelstad, MBA ’99, instituted more stringent financial reporting and planning methods. Loans force recipient organizations to manage their cash flow more tightly not only to show their ability to repay on time but also to take care of day-to-day activities. Because of Acumen’s social mission, the three realized they also had to develop more metrics for measuring success. “Measuring capital return is easy. Quantifying social return is not,” says Novogratz.
Still a work in progress, Acumen’s system involves measuring how many consumers have access to a particular product or service, the financial viability of the enterprise providing it, and whether the company has the ability to serve the poor on an ongoing basis. Novogratz and her team work with each enterprise to determine the most important financial milestones for their business—say, customer retention or total product sold—and then ask for quarterly reports based on those metrics.
Trelstad also developed an innovative way to measure social progress. Called the Best Available Charitable Option it evaluates how much it costs Acumen to support an enterprise and compares that to the expenses that an appropriate charitable organization might incur. So far, of 20 active investments, 10 have come up positive, four undecided, and two negative.
In the past two years Novogratz has turned her attention to striking up partnerships with larger institutions. She also hopes to bring at least $100 million to underserved markets over five years and to be the catalyst for a large movement around market-based approaches to social change.
Big boosts have come from the Google and the Bill and Melinda Gates foundations, which have helped fund Acumen expansion. In 2006, Acumen opened offices in Karachi and Hyderabad and plans one for Nairobi. A new fellows program trains promising young people and sends them into the field as advisors.
Behind much of what Novogratz undertakes are the lessons of her Rwandan experience. A quilt made by her bakery colleagues hangs in the conference room of Acumen’s New York office, a poignant reminder that nearly all of those women died in the genocide in the 1990s. In the microfinance organization Novogratz worked with there, “women played out every role of the genocide: witness, bystander, victim, and perpetrator,” she says. “It underscores for me why systems are so critical not only to economic development but, ultimately, to peace.”
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