NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Sasha Dichter is the Chief Innovation Officer at Acumen, a nonprofit venture fund that is tackling poverty by investing in social enterprises, emerging leaders and breakthrough ideas. He is also a noted speaker and blogger on generosity, philanthropy and social change. He’ll be a panelist at the William Davidson Institute’s upcoming BoP Summit on Oct. 21-23. (NextBillion is an initiative of WDI.)

He spoke with NextBillion Financial Innovation recently about Acumen’s approach to impact investing, growth and challenges in the sector, and the need for more risk taking and innovation.

James Militzer: How has the impact investing sector changed in your time at Acumen?

Sasha Dichter: Thinking back to seven years ago when I joined Acumen, so much of what we were hoping to see has happened. At the time, we had one company that had reached more than one million people. Now we have 10 of those. At the time, we were hoping to prove that businesses that serve the poor with critical goods and services could scale. And now it’s clear that they can scale.

This frees us up to think about the next set of questions, as a result of hitting those big milestones. To give you a sense of what the future might look like: Acumen was a very early investor in [solar lighting company] d.light, along with some of our peers. We put $200,000 into the company when they were just a start-up idea, and they had two founders who wanted to eradicate dirty, expensive and unsafe kerosene. Now, not only have they, by their own estimate, saved their users more than $275 million dollars, they’re serving about 20 million customers today, and they expect to serve about 100 million customers by 2020. That represents 10% of all of the people who are currently using kerosene as their primary source of light – from just one company! Those are the kinds of examples that I think are illustrative of what’s possible, and I think why we all do this work.

JM: What do you think has led to that kind of progress – are companies or investors doing something differently now than when you started at Acumen, or is it just due to general growth in the sector?

SD: Well, at the core it is about enterprise growth, and Acumen and our peers being able to provide the right kind of capital to these new, untested ideas. That can remove a significant barrier for a group of tireless entrepreneurs who are willing to push through all sorts obstacles – whether it’s a plan that didn’t work, or customers that didn’t want to buy, or corruption. I think it’s about them doing the work of executing the plans, and Acumen and others supporting them as we can, both with capital and management support. So yes, it’s the sector growing, but the sector only grows when the underlying companies succeed.

JM: Have you invested in companies that had a great idea, and served a real need, but that just failed? And if so, have you noticed any common factors in those failures?

SD: Well, there have definitely been some that just didn’t work out. Historically at Acumen, one of the lessons we’ve learned is that it’s harder for us to back pure early-stage technology innovation, because it is so hard to pick winners when you don’t have real feedback from the marketplace. So more often than not the kinds of companies that we’re most interested in are ones that have business-model innovation, and that solve significant distribution challenges. This is changing a little bit, with more proliferation of new solutions that build off nearly-ubiquitous mobile platforms, but, by and large, we’re focused on products that are really simple and affordable, and companies that can get the business models right.

And of course we have to remember there are going to be companies that just grow more slowly, sometimes for very good reasons if they are fighting deeply entrenched behaviors, mindsets or interest groups. So we need to remember that if we are risk-takers, and if we’re making a number of bets, there will only be a handful of them that will be breakthrough successes. We shouldn’t expect that it will be most of them. And that’s how we see it playing out.

JM: Do you think investors focus too much on flashy technological breakthroughs, rather than on the fundamental strength of the business model?

SD: I wouldn’t say it’s too much focus. We need people in labs figuring out better devices, absolutely. But for us as an investor looking to build businesses, we need to see those great inventions interacting with end customers, to figure out if in fact they solve the problem in the way that that person wants the problem to be solved. Is the cost right? Is the product durable enough? All those sorts of things.

So technological breakthroughs need to continue to happen. What we’ve found is that building a business in these environments takes a lot more than having a better mousetrap. As an investor, when somebody has something that’s straight out of the lab, we will be supportive of it in principle. But we won’t be in a position to invest until we see evidence that there’s a business model behind it, and that customers have interest in the product and are actually buying it.

JM: You’ve said that much more early-stage, risk-oriented capital is needed for the social sector. How does the investment community move in that direction?

SD: By definition it’s hard to place a concrete economic value on social impact, and so it’s hard to raise the kind of capital that will allow you to take risks that push the limits on putting social impact front and center in your investment philosophy. So there are lots of really good reasons why the impact investing sector looks the way it looks today. But my aspiration is that, as a sector, we get better at articulating what we’re trying to create here: articulating the balance between social and financial, articulating who we’re trying to serve, and having that articulation inform what we’re building. Which it does to a certain extent, but not as much as it could.

Because it’s always going to be easier to quantify the financial, and getting the financial proof points will be a prerequisite to getting more mainstream capital to come into the space. And, to be clear, if something’s a huge financial winner and it solves a major problem, that’s absolutely the best of both worlds. I just think it’ll take time before we will consistently see big financial winners across the full spectrum of impact investments, serving customers down to the real base of the economic pyramid.

JM: Are you trying to push Acumen toward being less averse to risk?

SD: Oh, no. By and large, I’m thrilled with the amount of risk that we are willing to take, and the way we are supporting the entrepreneurs that we have invested in. But I think the reason we are able to do that is because, as a non-profit, we have a significant base of philanthropic capital that we can draw on, and the expectation of our philanthropic funders is that we will push the boundaries on risk and on new business models to serve the poor. What’s needed after that is more capital that can bring those models to scale – and the recognition that even the next stage of investing beyond what Acumen does requires taking on significant risk and having long time horizons.

JM: In terms of financial innovation (however you would define it), is there anything in particular that should be done to help the sector take the next step?

SD: If I had some really great answer on something that wasn’t getting done, we would be doing it. But I do think that overall, as our sector starts to grow, our companies increasingly need working capital. And outside of the agriculture space, where pioneers like Root Capital have really built the market there, we need to figure out a way, broadly, to get working capital into the hands of these companies at prices that they can afford. And that’s not happening as much as it could. So I’m sure that there could be financial innovation around that, both in terms of hedging currency risk, as well as loss guarantees and the like to bring more local and global financial institutions into the space.

More broadly, if you approached the problem with a blank sheet of paper and said, “What are you trying to accomplish, what are the constraints, what are the economics, how are you going to create liquidity?” I have no doubt that we could come up with new products that would at least be worth trying out. So my hope is that we’ll see more of that happening across the sector, rather than just tweaking private equity fund structures.

JM: Do you think that’s the kind of thing that bigger financial institutions are better positioned to do, or are smaller lenders better suited for it?

SD: I don’t think it’s a question of institutional size, I think it’s a question of people who are seeing the real challenges on the ground and are willing to create products that are responsive to those needs. And so I think the most likely thing is that you’ll see more and more people trying to create structures that don’t seem to make sense at first. Then a few people will really be willing to step up as funders and take that risk. And then, over time, they’ll discover that it works.

These sorts of innovations could really come from anywhere. It’s more a question of involving the people who are actually doing the work on the ground, to figure out what their needs are, and what problems they have.

To figure this out, we’ll need to do better segmentation – how is energy different from financial services, which is different from health care, which is different from agricultural supply chains, which is different from sanitation? And then, ask the same questions by geographies and target customers. That’s what I think the future of impact investing is going to be.