The state of philanthropy: A conversation with Acumen Fund’s CEO

| Interview

As global philanthropy reshapes itself to accommodate a widening array of private-sector involvement and a blend of private and public investment, discussion of both the ethics and effectiveness of these diverse methods has moved front and center. In this video interview, Jacqueline Novogratz, CEO of venture-philanthropy firm Acumen Fund, shares her perspective on the current challenges facing the philanthropic community and the opportunity she sees to move past a traditional public-sector approach to charitable giving.

This interview was conducted by Bill Javetski, an editor with The McKinsey Quarterly, in February 2009.

The Quarterly: The philanthropic community is divided to some extent these days around this question of the private sector’s role in helping the poor, particularly in the area of microfinance. There are some who would argue that there should be no place for the private sector—that in some ways it’s exploitive. But obviously, when you talk about a third way, you’re talking about much more of a private-sector blend.

Jacqueline Novogratz: Yeah, I always get really nervous with absolutes in a world that is as messy as our world. When we started in 2000, 2001, it was a pretty uncrowded field. We were pretty much one of the only—well, maybe the only player at the very beginning that was using philanthropic money and investing equity in loans in for-profit companies. Now, it’s a crowed field. Now, there are other players who are coming in under the rubric of venture philanthropy or social-impact investing—you know, all across.

And, having started a microfinance organization in 1986, I’ve seen that movement go from then—where the big argument was whether it was ethical to charge any interest at all, and I was one of those who believed that we should charge interest—to a conversation we’re having today, which is, “Is the interest that’s being charged usury or not?” And the hope that I have is that we will continue to experiment and ask those moral questions as well as those questions of efficiency, without saying, “This is good. This is bad.” There’s opportunity for both in almost all that we do.

Having seen particularly through the Rwandan genocide—but also other big messes—having seen what big top-down government and charity programs also have potential to do in stripping people of their dignity, but also in breading corruption—in making the metric for decision power rather than profit. It is equally problematic a metric. And so where I’ve come from, which is also imperfect, and I don’t think there is a perfect solution, is this idea that power is not a good listening device, because power is all driven from who you are: my tribesmen, my family, my community. But the market actually is a good listening devise. I give you a pair of blue shoes as a gift. You say, “Thank you very much, they’re wonderful.” And then you throw them in the garbage as you leave. I ask you if you want to pay for it, you say, “Yes. No. I’d pay for it if they were brown or pink.” We’re having a conversation. So I see real power in the private sector as a way of listening, as a way of creating efficiencies.

And at Acumen Fund we absolutely see the limitations—and that we need moral conversation in the world around what we’re trying to do at the end of the day. And there are absolutely interventions that need to be given free. And there are interventions that need to be given at a highly subsidized rate—sometimes to all people, sometimes to some.

With water, it’s a little less ambiguous, because it is a scarce commodity. I have been asked to speak at many conferences: the dialectic is, “Is safe water a human right and therefore should it be distributed free to all people or should it be privatized?” I, frankly, am incredibly frustrated by these conceptual theoretical conversations.

So what we did was come in, and we identified an incredible entrepreneur, Tralance Addy, a Ghanaian entrepreneur living in Los Angeles who wanted to build a company in India to test whether it was feasible to sell safe water to low-income rural people, in Andhra Pradesh. In the state there were many politicians that told us, “Our policy is free water for all.” My response was, “You have 200 million people in the country that have no access and upwards of 400 million people who have extremely limited access, so maybe a little experiment wouldn’t be such a bad thing.”

The Quarterly: The charitable community doesn’t understand well how to sell things to the poor does it?

Jacqueline Novogratz: No. In fact, I’ve been in many meeting over the last decades where marketing is seen as a dirty word, which is really unfortunate because we market ourselves, we market things that we do every day. And I was just in one of the toughest slums on the planet and really struck by how capitalist the slums are, how capitalist the farmers are, in the way that they interact with each other, even if it’s within a more social-oriented system.

And so I think in a way it’s demeaning not to think about marketing to the poor. I think it’s not caring enough about what they want, because it’s all about what you think is right for them.

The Quarterly: What have you learned about the challenges and the opportunities to scale some of these businesses up?

Jacqueline Novogratz: There are three critical factors: leadership being the most important; sustainability—can you cover your costs in time?— including with some permanent source of subsidy; and then, finally, scalability. For us for short hand, just in terms of operational efficiency, we focus on whether we fully believe that this enterprise can reach at least a million customers, so that we then have a model that we can take to the world.

Some of the opportunities to scale would be in East Africa, recognizing that, if 92 percent of the malaria cases are in Africa, then why not find those opportunities to invest in entrepreneurs in Africa to provide services and products for Africans? Some of the challenges to scale: there’s often a challenge with the entrepreneur herself or himself, in that they’re comfortable getting the organization to a certain level and then, sometimes philosophically, sometimes from a fear place, sometimes from a capability place—can’t get to that next level.

Capital is obviously a major constraint to scale. And I would say at the beginning we erred on generosity. We were patient capital. We were the nice guys that were going to help you build. And what we learned is that, that works at the beginning, but then, when we want to get to the table and bring in other more traditional investors, that we need to scale the enterprise; our generosity actually worked against the organization. And so now we have to think through, in much more market-oriented terms than when we started, what kind of capital structure would make most sense to give this enterprise the best chance possible of success.

So those are two of the major constraints. And then the third is—which happens to us unfortunately more than I would like—is when the success of the enterprise is threatening to local politicians, in which case policy can really come in and make it very difficult for the success of the organization.

The Quarterly: And what about the economic crisis? What has been the impact of it?

Jacqueline Novogratz: I think we are seeing a lot of fear, a lot of pulling back, a lot of, “I don’t have enough to give,” in the philanthropic sector. But we’re also seeing a lot of people who recognize that, when the rich stumble, the poor can’t fall off a cliff and are still giving—not necessarily at the same levels that they were, because they feel less secure. It’s interesting on a market-by-market basis that in some ways, when you look at a country like Pakistan, there was really no mortgage market to speak of anyway. And so you don’t see the same levels of crisis within.

On the other hand, you are seeing the lowest levels of society—particularly if they’re in any export-driven business, and I’m including exporting from the slums into the city center—facing higher prices. In countries like Pakistan: 27 percent inflation rates. So if you hire anybody, it’s very difficult to meet those margins.

So it’s a very tense time for low-income people. And on other hand—which is why our investments, while they may be slightly slowing, are still quiet robust—our companies sell basics: foods, health, water. And people are still finding ways to get that. So it’s a mixed bag. It’s not completely straightforward.

I think that, you know, we’re small players but hopefully we’re becoming part of a bigger movement—that people will start to see that there’s a different way of doing things. And maybe, with what’s just happened in the financial crisis, there will be a growing craving for doing business in a different kind of way that includes people all over the world, regardless of class, in ways that are more transparent.

The Quarterly: Jacqueline Novogratz, thank you very much.