JULIA KENNEDY: Welcome to the Carnegie Council's Global Ethics Forum. I'm
Julia Kennedy.
I'm sitting down today with Brian Trelstad. He's the chief investment officer
for Acumen Fund, which
funnels philanthropic money to business ventures in emerging markets, in an
effort to encourage entrepreneurship and combat global poverty. Acumen Fund
supports business ventures on a larger scale than a microlending organization
and has gained backing from the Gates
and Rockefeller Foundations,
among others. Brian Trelstad decides which ventures to support, weighing a business'
viability with its potential to effect change in its community.
Trelstad began by telling me why so many of the businesses he ends up choosing
are in health care.
BRIAN TRELSTAD: Lack of access to health services in HIV/AIDS, TB, malaria
is huge. The unaddressed market is massive. Over the last decade, development
organizations have funneled billions of dollars to address these problems, some
of it quite effectively, some of it not so effectively. We have been looking
at opportunities to fund businesses, some of whom sell into those aid markets.
We funded a malaria bednets company in Tanzania that sells now roughly 20 million
nets, largely to Global
Fund-funded distribution schemes at the national level.
We have also been looking at service gaps in low-income communities—primary
health clinics, which will provide you with an ethical, high-quality, affordable
diagnosis and then access to primary treatment drugs, whether it's an aspirin
for a headache or an antimalarial if you are properly diagnosed with malaria.
But the infrastructure right now for basic primary health services in many low-income
communities is insufficient. There are entrepreneurial solutions to expanding
those services.
JULIA KENNEDY: Tell me a little bit about Acumen Fund's mission and how
you mix capitalism with a conscience.
BRIAN TRELSTAD: Our mission, really, is to encourage the world to think
differently about solutions to poverty. We take a venture capital approach,
using philanthropic money to invest in businesses that might have innovative
solutions that otherwise would not have gotten funded. We are willing to take
much greater risks over a longer time period. We have invested about $40 million
to date. That $40 million is a rounding error on the global development-assistance
budgets. The IFC [International
Finance Corporation], the World
Bank's private investment arm, has an $8 billion portfolio. But we think
that with each of our 35 or 40 investments, we can demonstrate the potential
for a new way of doing businesses.
The best example right now might be the bednet factory in Tanzania. We were
part of the public-private partnership and the technology transfer from Sumitomo
to a very small textile company in Arusha. The fact that the company, with a
$325,000 loan from Acumen Fund—since fully repaid—was able to broker
this partnership and then scale up to become one of the largest private employers
in Tanzania and one of the largest makers of long-lasting bednets in the world—they
are producing about 15 percent of the world's output right now—has woken
people up to the potential that, "Wow, maybe we can do this in Nigeria,"
or, "Maybe we can make fortified foods in Kenya," or, "Maybe
we could do this in Malawi."
So there are a lot of development and finance institutions now saying, "Wow,
this is interesting." They don't want to necessarily replicate the A-to-Z
model, but they want to understand how it might influence their investment decisions.
JULIA KENNEDY: I would imagine an important piece to that, then, is the
assessment of how well your investments do, so that they can serve as a model.
BRIAN TRELSTAD: Yes. We have been engaged in a broader conversation
with the development community about how you know what matters and how you prove
that what you have done is what you think you have done. It's a very complicated
story that I'll try to summarize.
We have built the measurement ethic into our entire investment process. Before
we make an investment decision, we ask ourselves, does this investment matter?
Does the product matter? Do people need it? If they have access to it, is there
evidence that it will help them?
Malaria bednets are a case where it matters. There is plenty of peer-reviewed
scientific evidence that says this is a significant public health benefit.
Access to solar LED
[light-emitting diode] lanterns, in terms of the income effect of formal energy
services on rural households—there is evidence that demonstrates that.
In some cases, there is more conflicting evidence. Does access to community
clean-water systems lead to health gains in the short term? There's some mixed
evidence.
Unless you do it the right way, it may not drive to the impact you had hoped
for.
But we want, in our diligence process, to understand, does this matter? Is
there evidence?
The second thing we want to do is think about measuring the operations of the
business over time in a way that helps the business scale and grow. Venture
capitalists, private equity professionals will think about the five to six performance
measurements, the key indicators that a management team should be keeping their
eye on. We want to really focus on what those are. How do you build your business
in a way that it will survive and grow and thrive? We want to layer into those
a few core social-impact indicators. Are you reaching the poorest of the poor?
What is the customer profile? How are they using your product? We want to collect
those on a monthly or quarterly basis.
We have built a tool with Google
and Salesforce that
allows us globally, as a portfolio team of about 20 people—most of whom
are sitting in India, Pakistan, or Kenya—to share information in real time
as these new performance measures come in. We also have a way of thinking about
our investment relative to a charitable contribution. So if you wanted to give
$1 million to Save
the Children or CARE
or Malaria No More—all
incredibly effective organizations—we want to understand how our investment,
which is a bit longer-term, a bit higher-risk, might generate outputs that would
be comparable to a fairly risk-free investment in the best alternative charitable
option. It helps us think about the opportunity costs of our capital.
Finally, we are continuing to ask questions about how we can push beyond just
counting products delivered or customers consulted, but rather, are they, in
fact, living higher-quality, healthier lives as a result of these services?
We are talking to a number of different research efforts around customer surveys
that will take the questions down to the level of the individual consumer, at
least on a representative sampling basis. That would give us comfort that our
broader hypothesis that lots of bednets or lots of clean water or lots of community
health-worker consultations translate into health gains—we actually want
to see that evidence in a sampled way to reinforce those suppositions.
JULIA KENNEDY: As you are doing your due diligence, looking for businesses
to partner with in the developing world, how do you balance serving the poorest
of the poor and investing your money in a place that has the kind of infrastructure,
that has the kind of environment where a business can flourish and pay back
that loan?
BRIAN TRELSTAD: This is the overarching meta-quest that we are on: Where
do the markets work and where do they not work? There is absolutely, fundamentally
a role for pure charity in communities that are in abject poverty and don't
have the resources to access goods and services. There are also plenty of exciting,
dynamic, high-growth urban investment opportunities that don't really need a
subsidy or charity. The question is, where is the middle ground?
We will often invest in businesses that have a broader footprint, from the
poor to low-income customer segments. Our investment committee, which consists
of outside donors to Acumen Fund and board members, is as often tough on our
team for what the potential financial return is as what the customer segment
is looking like. We don't want to be too commercial, but it has to be viable.
JULIA KENNEDY: That has to be a hard line to walk.
BRIAN TRELSTAD: It's a very tough balance. There are times when we'll
invest in a business leader who has great market skills, has built a successful
business, and now says they want to add the poor as a customer segment. We really
have to pressure-test: Do they share our values? Do we believe that they are
going to go after this segment, or are they just going to retreat when they
realize that it's a much more difficult, more expensive customer segment to
serve?
Conversely, we have invested in people who have given their lives to serving
the poor, who have grown up in the NGO community, who have products and services
that are expressly designed for the poorest rural farmers in northern India.
The question we ask them is, are you tough enough to build a business on this
basis, and you are not just going to rely on grant making?
That middle ground is really the tension that we are trying to hold between
social impact and financial viability.
JULIA KENNEDY: When you step back and look at what you're doing, why do
you see capitalism as the driving force for this social mission that you have?
Why do you see that as the answer rather than a more grant-making organization?
BRIAN TRELSTAD: I guess the response is that we don't necessarily see
capitalism per se as the answer. We believe that there is an important principle
in the market, which is that it listens to the customer and that it allows for
a feedback loop which is virtuous if what you are doing makes sense. There are
also cases where unregulated capitalism leads to real problems.
JULIA KENNEDY: I didn't mean to use a dirty word there.
BRIAN TRELSTAD: I'm a capitalist and believe in capitalism. But I also
believe that it's really, to me, about the micro-markets, where you have these
feedback mechanisms, you have transparency, you have the opportunity of choice
at the individual level. I think there is a limit to viewing everybody as a
"consumer," and not as a citizen.
I think where we are fiercely critical of grants-based approaches is the design
of services that either ignore the customer or the end recipient or that are
taken up in Geneva or Washington or New York, in sort of one-size-fits-all solutions—the
bednets should be blue because blue is the color of the UN, so let's make the
bednets blue. I don't know if that's how they made bednets blue. But why not
have pink bednets or green bednets or white bednets? The only way you are going
to know that is if you start asking the customer. Even purely grants-based approaches
that are serious about understanding the needs, wants, dreams, desires of the
end user, from our perspective, are better than grants-based programs that are
decided top-down.
We think that the market builds in a bit of a discipline around asking those
questions, taking them seriously, and then the feedback is there. If the pink
bednets outsell the blue bednets, then, gosh, maybe people like the pink bednets.
And there are ways, even without there being a market-based approach—and
we think that the free distribution of bednets is a public health good and has
been a huge boon for prevention of malaria in sub-Saharan Africa. But the mentality
of asking and understanding what people want, how they use them, is something
we need to continue to drive for in all solutions, whether they are market-based
or charity-based.
JULIA KENNEDY: That's a really interesting answer.
BRIAN TRELSTAD: As a follow-on to that—I don't sleep under a bednet
in the United States. I have window screens. When I travel, I sleep under a
bednet. It's not a particularly comfortable thing. Your leg touches the net.
You're not sure you're protected. You still hear the mosquitoes. If you are
living in informal construction and you don't have lights, the question is—the
sun goes down, you have to sit under the bednet to get protected, you might
still get bitten by the bug after sunset, and you are trying to read by a lantern,
et cetera. So the bednet is kind of a necessary evil. It's a very effective
public health tool, but it's not a consumer product. People don't want to sleep
under a bednet. They may value it. It may have status elements. It may make
them feel good about being able to protect their families against the scourge
of malaria. But people don't like bednets.
Based on that insight, we have been working with an entrepreneur who has an
antimalaria wallpaper, which takes the same properties of the pesticide built
into the fabric of a bednet that has long-lasting dimensions—three to five
to six years of protection—but allows you to cover the walls of a room
in a modular way so that over time, as you cover all of your walls, you essentially
have either a room-size bednet that you don't have to sleep under or step under
or permanent indoor residual spraying. People can come around and spray your
hut every six months or, if you have this wallpaper, that achieves the same
efficacy for three, four, five years. We are doing tests right now.
But the insight which excites us about this is the behavior patterns of the
people who are living in the hut. It's a home-improvement product. People would
love to see patterns or colors on their walls instead of drab, informal, construction-material
bricks, wood, tin. To think about a product that is not only superior in terms
of how it delivers the malaria protection, but also how it lightens up somebody's
life, to us, was the big breakthrough.
Now, it may be that this malaria wallpaper, if it ever makes it to market,
is still bought by the same people who buy all of the bednets—UNICEF,
the World Health Organization,
Global Fund programs, et cetera. They may still be given away for free to the
"end consumer." That's fine with us, as long as that insight means
that people are better protected and enjoying a higher quality of life because
the product was designed with their needs in mind.
JULIA KENNEDY: How do you select companies to invest in? I'm sure you get
many that are worthy. How do you whittle it down, once they meet your base criteria?
BRIAN TRELSTAD: In India, in 2008, we probably looked at 100 investment
opportunities, spent serious time with about 25 of them, and funded—call
it five. I think the number may be six or seven, but call it five. So about
5 percent of the investments that we look at we will ultimately fund.
A lot of it is our experience as to what we think works. The diligence process
can take three months, where we'll go and visit the company. We'll see the management
team. We'll understand the customer. Are multinationals going to come in and
take over this market? Is it a totally unaddressed space for now? They made
20,000 of these; can they really make two million of them?
So we go through the entire business model. For those 25 or so where we do
diligence but we may not ultimately invest, the time the team spends helping
ask these questions, we think, is a contribution to those businesses. We help
prepare them for investors, whether we are the ones to invest or not.
If we were to look at two pretty close investments where one may have higher
social impact and a lower financial return and the other may have a lower potential
social impact and a higher financial return, I would like to think that we would
choose the first investment, where the social impact is demonstrably higher
and the financial return might be slightly lower. But it's really hard to make
that—there are not enough pure tradeoffs like that.
We are now at a point, with 35 or 40 investments, that it often comes to portfolio
diversification. If we have three housing investments in Pakistan and none in
East Africa, well, then let's do a housing investment in East Africa. So there
is a portfolio diversification that comes into play in our new investment decisions,
which may outweigh even the better or higher social impact, even higher financial
return, if it's something we have already seen before. We already have three
eye hospitals; why do we want to do a fourth? We might pass on something for
those reasons.
So it's somewhat irrational. I think venture capital investing, if you study
it, even in the United States, is a lot more about the art than the science.
It's about intuition. It's about connecting with the management team. It's about
feeling like Acumen Fund can add value to this business, and not just, does
this business, on paper, look more financially attractive?
JULIA KENNEDY: On the other side, what do your donors look like?
BRIAN TRELSTAD: The donor community has been one of the biggest assets
for Acumen Fund. We have about 220 individual and institutional supporters.
Many of the individuals give us significant multiyear contributions. In addition
to their capital, which is essential for our ability to make these investments,
they give generously of their time, connections, ideas, insights. The source
of the individual donors to date has largely been the United States. We have
a large cluster of donors in New York, in the financial services industry; in
the Bay Area, in technology and venture capital. There are a couple of other
regions—Seattle, Chicago, Boston—where there are clusters of people
who support us. We have made some significant inroads among the Indian and Pakistani
diaspora communities in the United States.
We are increasingly seeing real resonance of our work overseas. I just got
back from a fundraising trip in Norway and Sweden. We have a significant partner
with a private equity firm in Dubai. I also met with people in Egypt who are
interested in what we're doing.
I think it's people who are excited about using the tools of a venture approach
to bet on entrepreneurs with the discipline of a private business, but with
the aim of solving enduring problems of poverty. That really resonates. People
who want to be more engaged with philanthropy, who want to advise a small company
as it's going to scale—the work is really challenging, but it's also very
rewarding. I think we have done a pretty good job of engaging the donors who
want to be engaged in the work, taking them to see the businesses, how they
are operating, what the challenges are, and picking up the phone and calling
one of our donors and saying, "Hey, company X needs a designer. Do you
know anyone who fits this job description?"
Our ability to reach out to some of the leaders of finance, venture, technology,
Corporate America, businesses in Europe, I think, adds a significant value to
our portfolio companies as well.
About half of our money is from individuals, half is from institutions. For
some of the institutions, we are, to some extent, their R&D or their eyes
and ears. They are either wanting to learn about how to do impact investing
and social investing, and we are happy to take them along for the ride, or they
don't think that they can make grants, as well as make investments, but they
think that they might learn from these investments in ways that will inform
their grant making. So we are very engaged with the program officers at our
counterpart institutions on the lessons that we are learning.
JULIA KENNEDY: How has the financial crisis affected you here at Acumen?
BRIAN TRELSTAD: It has certainly made us nervous about the ability of
our companies to serve their customers. The ripple effects of the economic downturn
are, in fact, hitting our customer segments, with employment growth either slowing
or reversing in many of the countries we operate in and with unclear outlook
for the economy, particularly in Pakistan and Kenya. India continues to grow,
although a little bit more slowly. It's having an effect on the people that
we are ultimately trying to serve, which means that the businesses that we invest
in are ultimately tougher. They need more capital. That capital may not be as
forthcoming. If a business in India was scaling up and it needed debt, it may
not be able to get debt in the next six to nine to 12 months.
So there is a real challenge with the core business proposition in some of
the businesses. Some of them are doing quite well, but for some of them it's
going to be a tough six to 18 months, as with any business.
It's also having an impact, I think, on the perception of aid versus domestic
investment. I don't study the aid flows closely enough to see if Denmark has
cut its budget by 20 percent next year. But we did hear in Sweden, as an example,
real pressure from the Swedish government to scale back the Swedish Development
Agency's budget for 2010. If that translates globally, you might see funding
for malaria, funding for HIV/AIDS, funding for nutrition diminish.
JULIA KENNEDY: Especially if you're hearing it from Sweden. That's pretty
significant.
BRIAN TRELSTAD: Yes, one of the more progressive countries.
Philanthropically, we are bracing for people to scale back. Foundations whose
endowments are down 30 percent will be giving less money out to new commitments.
I think existing commitments will be met, but new commitments are obviously
not going to be as easy to secure.
Then individuals, many of whom are down 50 percent, are reeling and trying
to figure out what this means. If you were once worth $1 billion and now you're
worth $500 million, you are still extraordinarily fortunate and wealthy, but
we understand, certainly, that that may have forced a shifting of your priorities.
With the exception of one corporation, which went bankrupt, our commitments
have remained firm. People may be asking to do a three-year gift over five years.
We are not really pushing until things sort themselves out.
But we are anxious about where the fundraising environment is going to be for
ourselves and for our peers in this space, but confident that our global strategy
and some of the fundraising we are doing in other parts of the world can counterbalance
some of the potential impact here.
JULIA KENNEDY: Given that situation, what are your plans for the future—expansion,
shifting of priorities? What do you hope to achieve over the next five to ten
years here at Acumen?
BRIAN TRELSTAD: We have been on a path to get a portfolio of about $100
million of investments that we think are the most influential, the highest-performing,
the most innovative, the most instructive portfolio of its kind. We are still
on that path over the next two to three years. We are obviously going to wait
to see how the financial crisis plays out, for us in particular. But we are
continuing on that journey. We believe that now is the time to really double
down on the portfolio, because it is the bedrock of our strategy.
But there is no real change in strategy for us based on the financial crisis.
If the bottom falls out, we'll obviously come up with Plan B. It's incumbent
upon us to have a contingency plan. But right now we're continuing to find good
investments, support our entrepreneurs and the businesses that we have already
invested in, and hope to share more broadly the message that there are innovative
ways of solving problems that have vexed us for decades.
JULIA KENNEDY: Where do you get gratification from this job?
BRIAN TRELSTAD: I get personal gratification from seeing the results
of our tough love with our entrepreneurs. Many of the social entrepreneurs that
we invest in could have gone in a pure for-profit direction. They could have
been quite comfortable living in India, which is experiencing high growth, or
very well connected and networked within Kenya and could be doing something
other than building a chain of toilets in the slums. They are often part of
these global networks that give them access to grants and other opportunities.
We are pretty generous, but we also hold our investees very accountable for
what they said they were going to do. If they need to strengthen their finance
systems, we will pound the table and say, "Look, you need to do this."
Oftentimes, we are a pretty stern voice of, "Now it's time for you to grow
up."
At times, we get a lot of pushback: "Acumen Fund is bringing down the
hammer for no reason." But when companies start to see that their performance
is enabled by that kind of tough love and they are able to achieve greater reach,
scale, customer service from some of the things that we insist on in the early
days—better governance, improved and more transparent information systems,
the highest ethics on finance controls internally—and that translates into
the kinds of services that we invested in the business to do—to deliver
a dignified place to go to the bathroom in the slums if you don't have access
to a toilet or to deliver clean water to villages in remote India or to deliver
a bednet—that's quite gratifying, to see that companies literally grow
up.
It's equally gratifying for me to work with the portfolio team, watching them
deliver that tough love to the entrepreneurs and to provide support and the
generosity, but also to hold true to why we made the investment and keep the
fiduciary interest of Acumen Fund at heart. To see the portfolio team growing
and the entrepreneurs growing in a way that ultimately allows the businesses
to serve the end customer is what is most exciting for me.
JULIA KENNEDY: Great. Brian Trelstad, thanks so much for sitting down with
me and sharing your insights.
