Designing Change http://www.businessweek.com/print/magazine/content/07_11/b...

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MARCH 12, 2007

INSIDE INNOVATION -- IN SOCIAL

Designing Change
How venture philanthropy fund Acumen uses design thinking to help solve real-world problems

Travel northeast out of New Delhi, and long after the paved roads have given way to dirt, you'll reach Thathia, a tiny village in Kannauj.
Tucked away beside the sacred waters of the Ganges, it's an impoverished rural district in one of the poorest states of India, Uttar
Pradesh. Less than 20% of people read. Infant mortality is 8.5%, nearly the highest in the country. Disease is rampant.

This is where Garima Devi runs her Drishtee Telekiosk, a humble office from which she offers Internet access and technical support.
Villagers walk miles to get her help, according to Drishtee CEO Satyan Mishra. I need a loan because my sugar cane crop failed,
someone will say. My husband has died and the government pension never came. My son lost his job; can he get computer training?
Devi, who is 21, listens, then logs on to her computer and goes to work.

Devi is neither social worker nor missionary. She's an upwardly mobile career woman. Think of her kiosk as the local Kinko's franchise.
She owns the PC and the table it sits on. She charges 10 rupees to 25 rupees—about 20 cents to 50 cents—per transaction, and keeps
up to 65% of the profits. This lets her support her parents and her school-age little brother. By Kannauj standards, it's a good living. The
remainder goes to Drishtee Dot Com, which, according to a recent Deloitte survey, is the fastest-growing high-tech startup in India.
Drishtee, or "vision" in Hindi, is in turn financed by the Acumen Fund.

Billing itself as a nonprofit venture capital firm, the Acumen Fund uses the principles of design to solve the problems of the poor. Just as
the Procter & Gambles (PG ) and Motorolas (MOT ) of the corporate world conduct extensive ethnographic research on consumers,
Acumen finances companies that create from the bottom up. Instead of shoppers at a Los Angeles mall, however, it begins with people
in villages like those in Thathia. "Start with the individuals," says founder Jacqueline Novogratz. "Build systems from their perspective.
Really pay attention, and then see if they can scale."

Under Novogratz's leadership, the New York-based fund manages $20 million in investments in companies that fall within three
portfolios: health, water, and housing. It's not a lot of money compared with any of the traditional venture funds in Silicon Valley. But
Acumen's goal is not to launch initial public offerings. Rather, Novogratz and her team are building prototypes for new business models
that measure returns in social benefits as well as monetary rewards.

Novogratz has a gift for pulling together disparate people—financiers and aid workers, say—to come up with new ideas. A former
banker who worked in Rwanda in her twenties, she writes in a journal nightly during her frequent trips to visit Acumen companies. She
also jogs daily, and makes time to have coffee with everyone from Goldman Sachs (GS ) partners to Kenyan health-care workers.
"We're creating an overall design for how you provide goods and services to poor people," she says.

Observing customers to uncover their unmet needs, creating prototypes of new products and services for them, iterating and improving
those until they work, looking for new business models—these are all the critical fundamentals of design that Acumen uses in its work.
At a recent workshop given by Tim Brown, chief executive of the innovation consultancy IDEO, these same principles of design thinking
were inculcated in eight Acumen Fellows, the young professionals the venture fund sponsors to work with its companies in Africa and
Asia.

It's also an approach to alleviating poverty that is winning favor among business and political leaders. Novogratz has built an extensive
global network of counselors, donors, and well-wishers. Acumen counts among its advisers Tae Yoo, the head of philanthropy at Cisco
Systems, (CSCO ) Louis Boorstin of the Bill & Melinda Gates Foundation, former U.S. Senator Bill Bradley (D-N.J.), marketing maven
Seth Godin, Chris Anderson, chairman of TED Conferences, and IDEO's Brown. Major donors include Google (GOOG ) and the Bill &
Melinda Gates Foundation.

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Lack of money is no longer the major hindrance to solving many of the world's most vexing social problems. Philanthropists such as
Gates, Warren Buffett, Richard Branson, and Joan Kroc now make gifts in the billions. Charitable giving in the U.S. has jumped 23% in
the past four years.

Rather, there's a paucity of creative ideas. "It's all about innovation," says Brown. He explains that using the methodology of design can
solve social, as well as business, problems. "We're pretty good at taking a bunch of disparate components and figuring out the solution,"
he says.

By working closely with Acumen entrepreneurs, donors, corporate partners, and governments, Novogratz and her team are creating a
laboratory to design new business models and funding mechanisms. Much of the philosophy is drawn from the University of Michigan's
Ross School of Business economics professor C.K. Prahalad, whose bottom-of-the-pyramid theory holds that there's great untapped
market potential among the 4 billion people who make less than $2 a day. Novogratz travels frequently to India and Africa to spend time
in the communities she serves. She and her staff search for promising business models like Drishtee's. They draw from philanthropic
and business resources to help them grow. And they partner closely with social entrepreneurs like Mishra.

Acumen eschews giving money away. Instead, the fund leverages its charitable dollars through equity and debt. Its donors are labeled
"investors." They receive semiannual statements tracking the social and financial progress of portfolio companies. Acumen has brought
in $667,000 in repayments and interest to date. It made a $600,000 investment in WaterHealth International to help the startup expand
its franchise model for delivering safe, affordable water to Indian customers. It's creating Pakistan's first home ownership market for the
poor by putting up $1.25 million to generate a $3.75 million guarantee by OPIC, Washington's Overseas Private Investment Corp. That
money will release $50 million in mortgages from the National Bank of Pakistan.

Acumen's most successful company so far is A to Z Textile Mills, a Tanzanian family-owned maker of mosquito nets to protect people
from malaria-carrying insects. The nets currently safeguard more than 5 million people in the country, and production is ramping up to 7
million annually. A typical charity would have had to invest $390,000 in grant money and management costs to finance the factory,
without reaping any real return. Acumen experimented with lending the money to A to Z instead. Last fall the company made its final
payment on a $325,000 loan at a 6% annual interest rate, delivering $422,500 back to Acumen. The investment cost the fund $130,000
over five years to manage, for a net loss of $32,500. Considering the 2,000 jobs that Acumen helped create at the factory, paying better-
than-average local wages, this was indeed a tiny loss.

Novogratz has mapped out a vision to reach $100 million under management over the next five years through a combination of
increasing profits and attracting new donors. Google has given Acumen $5 million to fund its fellows program, and the company's
engineers are building a system to track its investments. The fund's offices recently have moved to a floor in Google's New York
building.

Drishtee founder Satyan Mishra is a typical recipient of Acumen financing. A soft-spoken 33 year-old, he is as passionate when he
describes his tech startup to his parents' neighbors in their small Indian village as he is when selling an audience on his vision at the
Clinton Global Initiative, a program that convenes global leaders in New York to discuss social problems. Traditionally, welfare agencies
and philanthropies have looked on the poor as burdensome, requiring expensive social services and government handouts. Mishra, by
contrast, sees potential customers. After getting his MBA from the Delhi School of Economics, he ran a software-development outfit
called Cyber Edge that gave the city of Bhopal access to the Net. "I wanted to earn a living, yes," Mishra said recently while visiting
BusinessWeek's New York offices. "But it wasn't enough. I needed to do something that would make a real difference." In 2000,
government officials asked him to help bring those services to villages, and he saw an opportunity for both financial and social rewards.

In classic design form, Mishra began with an unmet need: In 638,000 rural Indian villages, there was little access to information about
health, pensions, and government resources. Could he devise a service that was seamless yet affordable? Mishra tried several
prototypes to come up with an information kiosk, a hub housing a PC, modem, digital camera, and fax machine.

To roll out the kiosks, he launched a contest. Villagers competed to sign up the highest number of new clients. Mishra offered franchise
opportunities to the winners, making them owners, not employees.

By 2006, Mishra had 1,000 kiosks up-and-running, but he needed more resources to increase the number of kiosks and provide new
services, such as connecting villagers with lenders for small loans or linking them with health-care providers. Enter Acumen, which
made a $1 million equity investment in 2006. In 2007, Acumen will lend an additional $600,000 for new kiosks. Drishtee is now opening
four daily and will expand to 10,000 in two years.

Novogratz combines a business pedigree with experience in philanthropy. The oldest of seven children in a close-knit family, she worked
her way through the University of Virginia and then took a job with Chase Manhattan Bank (JPM ). In her mid-20s, she left Chase to go
to Rwanda, where she worked with local women to start a bakery. (Returning later after the 1994 massacres there, she found only a
patch of green paint where the bakery had once stood.)

Back home, Novogratz earned an MBA from Stanford University in 1991 and then landed at the Rockefeller Foundation. There she
launched the Philanthropy Workshop, a program to teach the wealty how to put their charitable dollars to good use. In the mid-1990s,

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she spent two years distributing more than $100 million in New York City on behalf of an anonymous donor. It was hard to find initiatives
that made a real impact. That inspired her to start a nonprofit that would use design to shape new kinds of programs and capital markets
to finance them. With seed money and advice from several prominent philanthropists as well as the Rockefeller Foundation and Cisco
Systems, she started Acumen.

The fund's most crucial contribution to young companies isn't capital. It's the staff's ability to see old problems with fresh eyes. Drishtee
has used this skill to great advantage. Last April, Novogratz paid a visit to the company's office near Delhi. She sat down and asked
Mishra : "Where do you need help?" "It's the women," he replied. "They make better kiosk owners because they open earlier and stay
open longer." But many banks in India don't lend to women.

On returning to the U.S., Novogratz made a call to the Nike (NKE ) Foundation to talk to director Maria Eitel. Acumen immediately
received a $250,000 grant. It gave $50,000 to Drishtee to train village women in basic business skills, and is negotiating with an Indian
bank to use the remaining $200,000 as a one-to-five guarantee toward $1 million in loans. "We said: 'Look, we'll take the first 20% of
your risk, because we want to prove to you over the next three years that women are indeed bankable income,'" says Novogratz.

That's an example of the inventive way Novogratz puts the fund's money to work. It's smart design.

By Jessi Hempel

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