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Monday, May 12, 2008

Guest Post: Brian Trelstad Responds to Al Hammond

By Derek Newberry

Brain TrelstadGuest blogger Brian Trelstad is the Chief Investment Officer of Acumen Fund. Before joining Acumen Fund, Brian spent four years at McKinsey as a consultant in the healthcare and non-profit practices and as an editor of the McKinsey Quarterly. Prior to McKinsey, he worked as a case writer at Stanford University's Center for Entrepreneurial Studies and was the lead environmental staffer for President Clinton's AmeriCorps program.

In this post, Trelstad responds to Allen Hammond's series on taking Base of the Pyramid models to scale. This week, NextBillion.net will publish responses from a number of BoP experts and practitioners, followed by a concluding post from Hammond. By Brian Trelstad

Al Hammond's enthusiasm for the bigger picture is refreshing. His transformative sector strategies are a bit of a departure from the norm for someone like me, who spends most of his time evaluating individual investments and, as a result, often loses the forest for the trees. I am surprised, however, to hear that this topic doesn't keep Jacqueline up at night, as the entire Acumen Fund team is constantly thinking about how to take businesses - even those serving upwards of a million people - to the next level of scale.

Our strategy is to find great models like Medicine Shoppe or Water Health International and build them into profitable companies that are providing critical goods and services to the poor at scale (defined as 1 million plus customers). It's also critical for us to share the lessons and insights gleaned from the investing/management experience with the private capital markets and public sector to help shape the next generation of investment strategy and public policy.

It's helpful to think through the sector strategy and ask what each player's role is. Furthermore, we can use the strategy to understand how this kind of approach might allow the whole to become greater than the sum of the parts. We know that inventors and entrepreneurs are impatient and are not going to wait to collaborate. They want to get things done, change the world and innovate. So asking them to partner is a bit like herding cats; let's view them as a resource to be tapped, but not a force to be marshaled.

A group of entrepreneurs in a specific geography or sector will allow clusters to form, and an ecosystem of innovation might enable these small and growing businesses to learn from one another, to adapt, and to partner for more effective growth. We are seeing this in India, where the dimensions of a health care delivery ecosystem have begun to develop and where we have supported three low-cost hospital chains, a pharmacy targeting urban slum dwellers, and a cross-subsidized ambulance service that offers "ambulance access for all".

Then there are the intermediaries like Acumen Fund, Root Capital, E+Co and New Ventures, which provide patient capital to these impatient people. Our role is to try to make these investments as successful as they can be by providing investment capital, insights, access to networks and - most importantly - help in finding the right people. Talent, not capital, seems to be the most binding constraint in the sector, and I would encourage the WRI team to be thinking clearly about what it takes to scale sectors until the stock and flow of trained professionals (e.g., nurses, network engineers, teachers, masons) is either sufficient or can be readily addressed as scale begins to take off. The beauty of microfinance is not that there were millions of surplus loan agents just waiting for sales and collection jobs, but that the job itself is eminently teachable.

The intermediaries need help in a few places. Foundations must continue to experiment and to support the patient capital providers, because in some sectors it will be a long time before we hit commercial viability. Hopefully that will happen sooner than the 30 years it took microfinance to tap into the global capital markets. Foundation support is also critically important in terms of supporting experimentation and impact assessment work. WaterHealth International, for example, has 85 operating community water systems. Before they scale to manage thousands of installations and replicate to another part of the world, we are working with them to document the health benefits of clean water provision. We are also working with IDEO to see if there are low-cost transportation and water storage devices that can keep the water clean during that "last mile" Al writes about.

We also need help in establishing links to the policy communities and to the established businesses who might take the bets we have placed on the table and find ways to take them to scale. Businesses, be they local telcos or multinationals, are increasingly interested in this space, but are naturally wary of putting big bets on single sector approaches. They are actually risk averse, and so need to be coaxed into understanding the nature of the commercial opportunity and the risk of the investments they might make.

Trusted thought leaders like Al and WRI can help companies navigate what will be a growing number of opportunities to "invest" in ways that people with skin in the game can't do objectively. We really do believe that WHI is the answer to community scale water treatment and we would say that even if we didn't own part of the company and weren't desperate for it to be successful. Really, trust us. We are totally unbiased. (You see my point).

Finally, the link to the policy community is where it gets harder for us as intermediaries to navigate. There is real potential at the national and international level to craft good policy that can promote sectoral change. People who happen to enjoy working with entrepreneurs, however, typically don't enjoy watching legislation get made, nor do we enjoy sitting through long-term strategic planning sessions for the eradication of malaria. We need help connecting with the right policy makers and sharing our insights in ways that move the dialogue forward. A more robust dialogue between policy makers, business and investors could be a platform for significant change, and the more specific the agenda, as Al lays out, the more likely there will be movement.

Sadly, however, it might be a bit optimistic to think that most governments have the capacity to make good public policy that uses resources cost-effectively and promotes solutions that have an immediate impact on the well-being of millions of their citizens. Perhaps if the United States, the world's richest country can find a way to provide health insurance to 44 million low-income Americans, then the Government of Kenya can also find a way to enable (not even build) a nationwide system of WiFi-enabled, solar-powered, high-quality, low-cost health clinics.

But we must forge ahead anyway, aware of the contradictions, sure of our convictions, and all the smarter from our mistakes. To quote F. Scott Fitzgerald, "The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise."

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