BACO Concept Paper final

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1 Acumen Fund Concepts The Best Available Charitable Option Acumen Fund Metrics Team January 2007 Measuring Social Returns 1 Contents almost by definition, believes that there have to be more Social venture investing, 1 Measuring Social Returns cost-effective ways of achieving social value than the traditional philanthropic approaches. Acumen Fund seeks to prove that small amounts of philanthropic capital 2 Acumen Fund's Approach combined with large doses of business acumen can build thriving enterprises that Insecticide-Treated Bednet Example 2 serve a vast number of the poor. Just as venture capital funds seek out opportunities Cost Analysis + 2 for disproportionate financial returns by investing in disruptive new technologies or Social Impact Projections + 3 business models, social investors believe they can achieve higher “social returns” by BACO Ratio 3 backing talented entrepreneurs with innovative and scalable approaches to solving Qualifying Our Results 4 social problems. But unlike venture capital investments—where the measure of return Scenario Analysis + 4 is purely financial, comparable across industries and geographies—finding a standard 4 Conclusion metric to measure the success of a social investment has been a vexing challenge for this field. Many people and institutions have dedicated years of work to develop tools, such as Jed Emerson’s “Blended Value Proposition” and the “social return on investment” (SROI) 2 methodology, that would define an absolute standard with which to compare various social projects. TechnoServe is currently completing a comparative analysis of “double 3 approaches to small and medium enterprises (SMEs) in low-income bottom-line” countries. A number of Acumen Fund’s peers have developed their own tools that drill towards the cost-effectiveness of their social impact, such as E&Co’s “Triple Bottom 4 It seems there is a constant struggle to balance being practical, comprehensive Line.” and comparable across institutions and issue areas (i.e., comparing a clean water project to an HIV/AIDS treatment program), particularly in the face of a growing multitude and diversity of institutions seeking social returns. 1 An entire paper could be dedicated to defining “social venture investing.” For more information on Acumen Fund’s approach, please refer to our website (http://www.acumenfund.org/). In this paper, we use “social venture investing” to encompass the fields of social entrepreneurship and venture philanthropy. 2 Refer to www.blendedvalue.org and http://www.redf.org/results-sroi.htm. 3 The “double bottom line” strives to measure both social and financial outcomes. For more on TechnoServe’s approach, refer to www.technoserve.org. 4 Refer to http://www.eandco.net/tbl_table.php. The “triple bottom line” includes environmental as well as social and financial outcomes. January 2007 · Copyright © 2007 Acumen Fund 1

2 Acumen Fund Concepts: The Best Available Charitable Option Acumen Fund's Approach $325,000 to UNICEF or an international NGO to distribute Rather than seek an absolute standard for social return traditional insecticide-treated bednets. In cases where a viable across an extremely diverse portfolio, Acumen Fund looks to local comparison does not exist, we try to develop realistic quantify an investment’s social impact and compare it to the hypothetical options based on other geographies or from 6 universe of existing charitable options for that explicit social In general, our BACO analysis plausible “what if” scenarios. issue. Specifically, this tool helps inform investors where their typically aims for a narrow and least common denominator of philanthropic capital will be most effective—answering the output provided—individuals with improved housing, people question “For each dollar invested, how much social output years of clean water, or patients on ARV treatment. will this generate over the life of the investment relative to the best available charitable option?” This methodology, which In our experience, the BACO calculation is essentially driven by three factors: we call the BACO ratio (for "best available charitable option"), is a useful starting point for assessing the social impact and + since Acumen Fund seeks a return of Financial leverage: cost-effectiveness of each of our investments. The point of capital through loans and equity, our investments’ net costs the analysis is to inform our portfolio decision-making with a quantifiable indication of whether our social investment will are typically lower relative to grants. If Acumen makes a “outperform” a plausible alternative. loan of $325,000 at a 6 percent annual interest rate, repaid over five years, we expect a return of $422,500, while grants are a sunk cost. (See Table 1 below.) Whenever possible, the BACO is based on existing charities providing similar goods and services to those of Acumen Enterprise efficiencies: Fund’s investment. For example, consider our $325,000 loan + because many of the BACOs are to A to Z Textile Mills in Tanzania. With the loan, we sought to public sector or nonprofit delivery models, it is our belief transfer an innovative technology from Sumitomo Chemical that private sector cost structures and incentives will enable 5 for long-lasting insecticide-treated bednets (LLITNs) to a local Acumen’s investees to show 50 to 100 percent cost recovery manufacturer and to expand their capacity to produce these in the implementation of a social project. For instance, nets. It is plausible that instead of making a relatively risky loan a number of Acumen’s investees use a business-minded franchising strategy to impact low-income populations on to A to Z, Acumen Fund could have made a zero-risk grant of ne Ts ed AT Tre CTICIde Inse Table 1: Cost Analysis BACO Acumen Fund investment $325,000 Committed funds $325,000 7 $130,000 $65,000 Cost of disbursement & management $0 6% annually for 5 years Expected return $422,500 $0 (financial Return [ principal + interest earned = ] leverage) ($32,500) ($390,000) Net revenue (Cost) [ return – disbursement – costs = ] 5 The Olyset LLITN has unique properties with time-release pesticides that have been proven to be effective at killing malaria-bearing mosquitoes for up to five years. 6 If we find ourselves stretching to come up with an even remotely plausible BACO, we’ll conclude that the ratio is “not applicable.” 7 In calculating the net cost of an investment, we assume that our investments will incur greater disbursement and management expenditures than traditional charitable models, given the complexity of our financing and our hands-on approach to supporting investments. January 2007 · Copyright © 2007 Acumen Fund 2

3 Acumen Fund Concepts: The Best Available Charitable Option BACO ratio a greater scale. In the example below, the bednet factory was able to reach economies of scale and keep costs low for The BACO calculation ultimately conveys the net cost per unit higher outputs. (See Table 2 below.) of social impact. The figures in Table 3 below are taken from Tables 1 and 2. + in many cases the invention of a new Technology leverage: product or business system can fundamentally transform Upon making the investment in A to Z, we could estimate that it would cost Acumen Fund less than $0.02 to protect one the output per unit. For example, the anti-malarial LLITNs individual from malaria for one year, compared to $0.84 through in this investment are proven to last five times longer than regular insecticide-treated nets (ITNs) that dominate the the BACO. In other words, Acumen Fund’s investment in this scenario is 52 times more cost-effective than the best available charitable marketplace in Sub-Saharan Africa. New product innovation can typically show higher social output for each charitable option. dollar invested and, therefore, a higher BACO ratio, even assuming the same cost structure. Acumen Fund Table 2: s ocial Impact Projections BACO investment Comparable product cost - $3.50 bed nets Total output 2,000,000 92,857 8 Investor share of output 100% 20% Investor output (enterprise efficiency) 92,857 400,000 bed nets Impact factor 2 2 persons protected / bed net Social impact [ total output * impact factor = ] 185,714 800,000 9 Bottom Of Pyramid (BOP) Penetration % customers in BOP 100% 50% 185,714 400,000 BOP impact [ social impact * BOP Penetration = ] Product efficacy (technology leverage) # of effective years of malaria 2.5 5 protection 2,000,000 464,286 person years of malaria protection Total social impact [ BOP impact * product efficacy = ] atio BACO Acumen Fund investment Table 3: BACO r Net cost [cost – return] $390,000 $32,500 Total social impact person years of malaria protection 464,286 2,000,000 $ / person year $0.839 $0.016 Net cost / Unit of social impact BACO Ratio cost-effectiveness multiple 52 8 Acumen discounts its social impact based on what percentage of the company’s output can be credited specifically to Acumen’s financing (we assume that the scale of impact is roughly proportional to the capital invested as a percentage of the enterprise’s total capital base). 9 Acumen further discounts its social impact based on how effective the solution is at reaching the BOP (i.e., what percentage of the customer base is in the BOP). 3 January 2007 · Copyright © 2007 Acumen Fund

4 Acumen Fund Concepts: The Best Available Charitable Option full return on investment (1) and uses conservative projections Qualifying Our Results In order to reach the most realistic estimate of cost- of social impact (B). effectiveness, Acumen Fund’s metrics team follows the above process for a number of different scenarios, varying its The above example is given for illustrative purposes. In projection of financial leverage and social impact. The BACO actuality, Acumen Fund generally takes the more conservative cost calculation is, therefore, completed against a range of three “center” value as the most appropriate BACO estimate—in this financial scenarios—assuming: case, showing Acumen Fund’s investment in A to Z as 16 times more cost-effective than the best available charitable option. (1) Full return on investment (principal plus interest); Conclusion (2) Return of only the principal; and Acumen acknowledges that the BACO methodology has (3) Complete loss limitations, the most pressing of which we wish to highlight here. First, it captures neither the long-term impact of our Similarly, the social impact forecasts are broken down into three scenarios: work – beyond the five- to seven-year investment period – nor the more qualitative “system change” that may result (i.e., enabling local African production of life-saving anti-malarial (A) Initial projections: from the original investment plan; bednets and demonstrating that African manufacturing can (B) Conservative projections: developed by Acumen Fund be as efficient as production in Asia). A successful investment portfolio team, based on moderate growth plans; (C) Revised projections: updated on a real-time basis using will have on-going impact after the loan is fully repaid (or the investment is exited), but this “terminal value” is something we actual impact data don’t know how or whether to calculate. As seen in Table 4, these layers of analysis enable Acumen Fund’s metrics team to triangulate the most appropriate BACO Second, the entire BACO methodology depends on choosing the right charitable alternative. When aid organizations or local ratio estimate. The above calculation (Tables 1, 2, and 3) is NGOs are providing similar goods and services, it makes the therefore based on a scenario in which Acumen Fund earns a Table 4: s cenario Analysis SUMMARY of BACO Ratio Results FInancial Return (2) Return of principal only (1) Return of principal + interest (3) Complete loss (A) Initial projections, 2003 90 23 6 (B) Conservative projections, 2004 52 16 4 28 7 2 (C) Revised projections, 2006 Social Output January 2007 · Copyright © 2007 Acumen Fund 4

5 Acumen Fund Concepts: The Best Available Charitable Option BACO a more meaningful comparison. The challenge for the This is Acumen Fund’s first step in sharing the BACO Acumen Fund metrics team occurs when either no comparable methodology more publicly in the hopes of contributing option exists, or when the business model of the comparable to the greater field of social impact measurement. Each of the BACO calculations is based on a number of researched effort is so divergent (say, comparing our investment in bednets with a grant to research a malaria vaccine) as to be inapplicable assumptions about the prevailing good or service in the charitable marketplace. We would like our estimations to be to the exercise. We are constantly looking to strengthen as precise as possible and, therefore, welcome suggestions and all our assumptions and use the most prevalent charitable improvements to our current assumptions. In particular, we comparables, in order to make the BACO methodology as credible and useful as possible. are looking for any additional or superior sources on the unit/ cost of such projects as malaria prevention, malaria treatment, Third, BACO faces the challenge of comparing “apples to low-income mortgages, HIV/AIDS treatment, safe drinking oranges.” Using BACO ratios, we can compare efficiencies water, drip irrigation, etc. across investments—i.e., Acumen Fund’s investment in malaria While it is a work in progress and we continue to pressure-test bednets was 16 times more cost-effective than the charitable the supporting assumptions, BACO has been fully integrated alternatives, while the low-income housing investment is only as part of the approval and on-going management of each twice as cost-effective as the alternatives. However, this does not tell us which investment is more cost-effective at impacting investment in Acumen Fund’s portfolio. BACO has informed our work as a consistent framework ensuring that we allocate poverty more generally. We cannot use BACO to determine whether providing a low-income family with bednets will have our philanthropic capital in the most socially efficient manner, a greater social impact than supplying them with a safe and given the existing charitable and entrepreneurial models. reliable home. Many attempts at quantifying and comparing Complemented by a number of other metrics tools, BACO aids social value in this way are unreliable and sometimes ethically us in understanding the greater context of our investments— problematic. The BACO serves a very discrete function for from clean water delivery in India to rural pharmacy access in Kenya—and serves as a practical tool for Acumen Fund’s Acumen Fund and its investors, which is complemented by comprehensive quantitative and qualitative data. investor community. Acumen Fund is a 501(c)3 social venture fund that invests in enterprises that offer access to critical, affordable products and services to the poor through scalable, market oriented approaches. Our investments currently focus on four key areas: water, health, housing, and energy. Contact Us 76 Ninth Avenue, Suite 315, New York, NY 10011 Phone: 212–566–8821 · Fax: 212–566–8817 [email protected] www.acumenfund.org · www.acumenfundblog.org January 2007 · Copyright © 2007 Acumen Fund 5

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