Acumen Fund – Creating investment portfolios

Jacqueline Novogratz

Why do people tend to give locally rather than across national borders despite increasing acceptance of the interconnectedness of the world, its problems and solutions? In the US, for example, less than 2 per cent of the approximately $215 billion given in charitable donations is given direct to organizations based outside the USA. The Acumen Fund model aims to overcome the main barriers to international giving in a way that will appeal to the increasing number of philanthropists who are entrepreneurial and business-like in their approach.

Three main reasons account for the low levels of international giving. First, people tend to give to organizations related to their personal and professional networks. This stems from a natural desire to give back to people and institutions connected to oneself. Second, the transaction costs of giving internationally tend to be very high. In most cases, individuals do not receive tax deductions when giving to countries other than their own. Identifying strong and credible organizations is difficult and time-consuming, and the cost of transferring funds is an additional burden. Third, follow-up for accountability is difficult and imposes further costs.

Acumen Fund was established in 2001 to address these constraints and to capitalize on three current trends. First, despite the barriers to global philanthropy, the proliferation of wealth combined with the explosive rise of high-tech companies has created a new type of philanthropist with a focus on entrepreneurial mechanisms and greater accountability –many of whom are interested in global issues. Second, the communications revolution has made it possible to connect more frequently and more fully with organizations across the globe. Third, partly in response to dwindling government and other resources and partly owing to growing sophistication in the sector, many non-profits are increasingly adopting more businesslike approaches to the work of social change.

The Acumen approach

To capitalize on these trends, one must find ways to build a sense of connection, reduce transaction costs and decrease risk. Acumen Fund aims to do this by building a network of high-net-worth individuals, foundations and corporations and creating portfolios of investments to which they contribute. Though still very new, early results are promising.

Acumen Fund operates very much like a venture capital fund. It accepts charitable contributions from individuals, corporations and foundations across the world, then ‘invests’ the funds in both non-profit and for-profit enterprises, depending on where maximum impact can be realized. It makes grants, loans and equity investments; any financial return on any investment is reinvested in the portfolio. At the end of the day, Acumen’s partners do not expect financial gain; they expect a social return.

Key to Acumen’s strategy is building portfolios of investments around specific problems or themes. To date, the organization has two active portfolios – Health Technologies Changing Lives and Economic and Civic Enterprise[1] – and one in development. The third portfolio, Water Innovations, is being developed in collaboration with the Sapling Foundation/TED conference.[2]

Advantages of this approach

Acumen’s portfolio approach has three advantages. First, it allows the sharing of otherwise very high transaction costs. Second, it enables risk diversification. Third, and also very important, it enables the building of strategic networks that are critical to success.

Sharing high transaction costs
Identifying strong enterprises with capacity for scale, impact and financial sustainability is difficult and costly. Portfolio managers must work with each enterprise to structure agreements that include developing progress milestones and benchmarks that are also useful to the investee. Most expensive is the work of ‘bringing products and services to market’ – supporting enterprises as they move from the innovation stage to the actual market penetration stage. Developing new and important technologies or delivery systems is difficult and demanding, and an intensive, targeted approach will hopefully yield higher positive results. Given the significant work needed to support each investment, portfolio managers work with no more than six investments simultaneously.

By consolidating the funds of 48 partners, Acumen can significantly increase efficiencies and make a few, bigger bets. The average investment is $300,000. The actual costs of identifying strong investments and doing the more costly and time-consuming work of supporting the organizations are none the less greater than 10 per cent. This is an issue Acumen will continue to address.

Diversifying risk
Organizing investments in portfolios allows Acumen to diversify risk by including both start-up enterprises and more established enterprises where risk is lower (though potential returns may also be less). Ultimately, not all investments will succeed, but by limiting the number undertaken and organizing these into portfolios, being clear about milestones and benchmarks, allowing progress to help dictate ongoing allocation of funding within the portfolio, and sharing lessons among portfolio enterprises, Acumen’s portfolio approach looks like a promising organizing mechanism for venture-oriented philanthropy.

Building strategic networks
The portfolio approach also enables the building of strategic networks to facilitate the overall work of investment. Each portfolio is supported by an advisory panel of external experts who know the international players in the field and have extensive experience in the work of social change, business development or both. The advisers are an essential asset, ensuring that investment selection is rigorous and that there is high potential for results.

The Acumen Fund community

To date, 48 investors have made ongoing commitments of between $17,000 and $800,000 per year to Acumen Fund for three main reasons. First, they are seeking high-impact philanthropy and recognize the prohibitive costs of doing this individually at a global level. Second, they want to support new models for identifying, supporting and measuring the results of organizations focused on solving global problems, where there is a clear commitment to transparency and accountability. Third, in some cases they are seeking a network of individuals on the financing and innovation sides where they can be more involved with their grantmaking. The trade-off of higher transaction costs is warranted to lower their own risk in finding, supporting and reporting on ‘best of breed’ social change enterprises.

These reasons relate to the Acumen approach rather than the specific areas in which the organization invests. Acumen investors want to maximize the impact of their contributions above all else. They are increasingly choosing not to invest in any specific portfolio but in Acumen itself, so that their funds can be invested wherever they can be best used. They are increasingly interested in why some things work and why some things get in the way of change. Acumen is currently experimenting with an entrepreneur match, whereby an investor pledges pro bono time to work closely with an investee to help the organization move toward its vision.

One of the biggest challenges is to provide appropriate support in a cost-effective way to ‘bring goods and services to market’ for the poor. In the venture capital world, bringing investments to scale is frequently the most difficult, and often the most important, part of the work. It is also the most costly, though returns can be enormous. If Acumen can build a track record with demonstrated results, a consistent feedback system and transparent financial structures, we believe it will have a good chance of strengthening and expanding its base of investors, given the growing number of individuals investigating new ways of solving tough global problems.

1 See http://www.acumenfund.org for information about these portfolios and the investments they currently contain.

2 TED stands for Technology, Entertainment and Design. The conference is for 800 individuals from those industries and meets yearly in California. See http://www.ted.com. The portfolio will focus on improved testing of water quality (especially of household or village wells) and enhanced, scalable technologies for purifying drinking water.

Jacqueline Novogratz is CEO of Acumen Fund. She can be contacted at jnovogratz@acumenfund.org

For more information, see http://www.acumenfund.org
Why Cisco is an Acumen Fund founding partner

Maideh Radpour

In 2001, the Cisco Foundation, in partnership with the Rockefeller Foundation, was among the Founding Partners of the newly formed Acumen Fund. Cisco’s philosophy is to support innovative philanthropic programmes where they can reap the greatest impact. Acumen Fund fits well with this philosophy, uniquely melding their portfolio staff, global experts, entrepreneurs and investors into an integrated team to achieve long-term impact. More recently, Cisco has supported the launch of Acumen’s Economic & Civic Enterprise portfolio.

In addition, Acumen’s strategy of providing near total transparency relating to their portfolio investments enables active communication and gives them the opportunity to leverage the intellectual capital as well as the financial resources of their investors. Due diligence, measurements of each investment’s potential public dividend, risk factors, and the schedules for each deliverable they offer – all are clearly articulated. In Cisco’s case, Acumen Fund has leveraged our support in various ways. We have provided technology for their offices, and supported the production of marketing materials and a video of their work to inform investors. One of their goals is to expand their investor network into a global network of individuals, foundations and corporations. Drawing on its own global networks, Cisco has introduced Acumen to prospective partners. This is made easier by the fact that Acumen is working in countries in which Cisco is actively involved on a business level – India, Egypt, Pakistan.

Cisco is committed to investing in programmes and partnerships to help build strong, productive communities. In addition, Cisco firmly believes that true sustainable change is achieved through partnerships between non-profits, corporations, governments and individual philanthropists. Supporting Acumen is a key example of this philosophy.

Maideh Radpour is Director of Corporate Philanthropy at Cisco Systems. She can be contacted at mradpour@cisco.com


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