Battleground 2012

With the campaign for the President of the United States in its final, fever stretch, I am proud to have published on iTunes a game that simulates the final eight weeks of a campaign.  I developed the game during the 2008 election cycle, using a map drawn on construction paper, individual cards for each state, and a pair of dice to give the game an element of chance.  My daughters loved playing it, and I made four other copies, for nephews and nieces, children of other friends.

So I met a game developer, the CEO of Secret Builders, and we built the game for the iPhone and iPad.  The game is simple but pretty instructive about the role of money in politics, the difference between the electoral and popular vote, the unpredictable turns of events on the campaign trail, and the central fact that the Presidency often comes down to only a handful of states.  

So while we wait out Hurricane Sandy and the candidates presumably head for Battleground states west of the storm, I encourage you to give the game a try.  A premium version with attack ads and a few other bells and whistles should be released this week.  The free game can be found at: http://bitly.com/TuL8Jf

Reverse Innovation

I've had the opportunity on a few occasions, and again this coming Tuesday in Toronto, to talk about what innovations I have seen in emerging markets from the Acumen Fund portfolio might have relevance in the United States.  Since we largely got rid of malaria in the 60's, have large scale irrigation systems for agriculture, and we have an effective emergency services in most of our major urban areas, investments like A to Z, GEWP and 1298 do not seem so relevant.

Other companies, like Aravind Eye Hospital, with its high volume, high quality, affordable eye services (not to mention its growing telemedicine practice) in India, or Bridge International Academy, with its affordable private education model in Kenya, are certainly examples that we can learn from as we look into new health and education models in the United States.  We even had one company in Acumen Fund portfolio, Voxiva, which has shifted its SMS based health information business from the global to the US, with its rapidly growing Text4Baby and Text2Quit programs.

But as I reflect on the companies that I have seen overseas, there are few replicable models that can port immediately back to the developed world.  Sure, money transfer businesses like mPesa (in Kenya) may inform how mobile payment platforms are built or how remittances flow in the United States, but  where I see the real reverse innovation coming from is in how those models emerged.

Unconstrained thinking about new ways of doing business.  Radical design innovations that place customer need at the center of the product development process.  Capital that is willing to take risks on blended financial and social returns.  Entrepreneurs with the empathy and skills to merge mission and margin, while navigating with a widely unpredictable public sector to build real value.  An impulse to start with a small amount of capital and adapt and build from the early prototypes.  

It is the model of social innovation, rather than the specific business models, that I am eager to adapt  the proliferation of social enterprises outside of the United States.

MDG 2.0?

We are within three years of the deadline the world set to hit the Millennium Development Goals (MDGs).  While it is too early to declare victory or defeat, I fear that it is the 8^th inning, we are down by four runs, and poverty has Mariano Rivera coming in from the bullpen in to shut down the development All-Stars in the 9^th inning.  

While we have admittedly made substantial progress in the last decade in cutting extreme poverty in half, expanding primary school enrollment, particularly for girls, and improving access to clean drinking water, we are far behind where we need to be in other areas like improved childhood nutrition and access to sanitation solutions.  

Optimists believe we can still hit the goals if we try hard enough, pessimists are doubtful given the current economic crisis, and cynics think that we are fiddling while Rome burns.

At the United Nation’s last month, Secretary General Ban Ki-moon convened a “High-Level Panel of Eminent Persons on the Post-2015 Development Agenda” (I am not kidding about the name) to take stock of progress to date and outline options for new development goals. 

So what if rather than another top-down, large aid strategy, the HLPEPP2015DA (um, how about the HLP for short?) flipped development on its head and listened to what the poor want and need.  What if rather than setting out another eight broad, perhaps unachievable goals, they committed to finding the eight highest impact solutions with the strongest evidence linking use at the household level and economic development?

What if the MDG 2.0 had targets for adoption of clean cook-stoves to improve maternal health and enhance local sustainability?  What if another goal were to provide comprehensive affordable eye-care services, which have been proven to increase education and incomes?  Or, what about solar lanterns, drip irrigation, affordable primary schools, secure mobile banking services, etc.  In some cases, the market might take care of these services, and in others, like ARVs, vaccines or anti-malaria bednets, wide-scale subsidies may still be needed to make the products affordable.

And I am not even sure what the right eight products might be, but I am sure that the HLP can learn from the experience of Millennium Promise, the likes of the Poverty Action Lab and the portfolios of Acumen Fund and the Grassroots Business Fund, among others, as to what bundle of goods could make the most difference in the lives of the poor.   

Lets hope that a new development agenda, MGD 2.0, can learn from the experience of MGD 1.0, and that we start to see wide-scale, sustainable and efficient distribution of these high-impact goods and services making a measurable difference in the lives of the poor.    

Principled Leadership for Social Enterprise

At the SoCap conference, one hears the consistent refrains that the challenges that the world faces are daunting and growing, and that impact investing and social enterprise can and must play a role in meeting those challenges.  But there are also words of caution that impact investing and social enterprise don't get caught up in its own hype.  The Monitor and Acumen Fund "Blueprint to Scale" report and Omidyar's "Priming the Pump" blog series reinforce that a serious reflection is now happening in the sector about what is needed to solve sector-wide problems and how investment capital and philanthropy need to co-exist.

To navigate the next stage of growth for the field, I think we need a generation of principled leaders who are committed to not only solving these problems, but ones who are trained to deal with their complexity.  And I as I thought about the challenge of leadership, I reflected on a talk I gave to students at MIT last year where the theme was on "principled leadership". 

So what are principled leaders?

To me, principled leadership is a recognition that not only the generic traits of leadership such as courage, humility, self-awareness, the ability to listen are needed, but that in a complex world, the specific skills required to succeed in the non-profit, for-profit and public sectors are needed for ventures that increasingly work across domains. 

That principled leaders have the moral imagination of a nonprofit entrepreneur, with the ability to define a compelling mission, to generate resources literally from nothing, and to ask people to join them on a journey to solve problems that no one thought were solvable.    

That principled leaders have the operational excellence, the disciple and focus to manage an efficient and effective “enterprise”, be it social or not-for profit, that they have a keen eye for not only the financial margin, but also the social and environmental metrics of their business. 

That principled leaders understand how to influence policy and deploy resources ethically in the world of power and politics to promote not just their personal financial interests, but to create broader public mandates in the long-term interests of their shareholders, their stakeholders their country and ultimately humanity at large.

And that principled leaders not only consider what they do, but HOW they do it. In a winner take all society, principled leaders not only play by the rules, and not only do they help others onto the playing field, but they continue to refine the rules so that everyone on the field has a chance… not necessarily an equal chance, but a chance… of winning.

So you wanna be an impact investor?

Over the last eight years at Acumen Fund, I have been on the receiving end of roughly one or two requests a week for informational interviews about working for Acumen Fund or "becoming an impact investor".  As someone who has always wanted to be the alumnus that a student could look up in the University directory, or that friend of a friend who actually returns the phone call, I've tried to be responsive (perhaps too responsive).   I have very much enjoyed "meeting" literally hundreds of emerging leaders to hear their stories and to share my perspectives.

Unfortunately, with a shift to a new start up, I have had to curtail these interviews significantly and will for the foreseeable future.  So I thought I would use this forum to share what I often find myself repeating to people interested in becoming an impact investor or getting into the social enterprise field.  Obviously, the generic advice that follows is no substitute for the thirty minute conversation with specific recommendations of who to talk with next, but here are a few thoughts for those looking to get into the field.

Before I begin, an observation: while the opportunities in impact investing and social entrepreneurship are growing, the supply of talent is vastly outpacing the demand for it.  The market dynamics are such that for every open position there are literally dozens (if not hundreds) qualified applicants.  And what was a bit of a Wild West a decade ago, where a portfolio manager could get hired at a place like Acumen Fund with no prior investing or operating experience,  

So, how to navigate a crowded and chaotic marketplace?

First, know your hook.  I often get calls from people who have never been to an emerging market and are interested in problems both home and abroad, care equally about health, education and the environment, and just want to help.  From a prospective hirer's perspective, that's like having a door to door salesman ring the bell and offer "anything you might need".  Slam.  

If you can't convince yourself that you care about renewable energy in sub-Saharan Africa or education reform in Detroit or health innovations looking to expand telemedicine (in Africa or Detroit), you'll never convince me or anyone looking for talent.  Think critically about what moves you, pull out the  threads of your prior experience to weave a personal narrative that excites you and will excite the person you are interviewing with.  The story may not be a perfect fit, it may be incomplete, so if your gut tells you something doesn't fit, try a new version.  But you have to have some story, any story, otherwise, without a hook, it will be hard to find a place to hang your hat.

Second, realize that impact investing is not somehow easier than traditional investing.  It's harder.  Not only do you have to know how to do financial analysis, help businesses operate in tough environments, manage fluid and sometimes conflicting sources of capital and stakeholders, but you also have to understand mission.  Social change is hard to understand and even harder to measure.  People with deep investment banking experience but little to no experience with social change initiatives, or global exposure to different cultures, are usually never going to make the transition.  I have seen people who are stronger on the social change dimension and weaker on the financial skills thrive, in part because it is generally easier to learn excel on the job, while understanding how change happens usually requires more time and reflection.

Third, take the plunge.  Based on your narrative, pursue an opportunity that either builds on your strengths or compliments your weaknesses, but that fits with your hook.  In the case of exploiting your strengths, you may hate your current job, but try to find roles that bring your supply chain experience at IBM or your product marketing experience at P&G to an early stage social enterprise that might need those skills.  Interested in emerging markets but never have been?   Go volunteer in (insert country of that most fits with your personal narrative) for three months with a company that could otherwise never afford someone with your experience.   In fact, we designed the Acumen Fund Fellows program in large part to give people the chance to take this plunge in a structured way.

In my experience at Acumen Fund, roughly half the time that someone took the plunge to work for us or one of our portfolio companies (often for free), within three months a paid opportunity to continue emerges.  And more than half of the Acumen Fund Fellows received offers to stay from the companies that they worked with.   If you dive in and make your indispensable, you'll find new doors opening.  

And if there you don't land someplace where an offer materializes, you are probably better off looking from within an operating social enterprise or impact investor, where news of emerging opportunities often get circulated before they are posted on job boards.

Finally, think of this as a marathon, not a sprint.  The intersection between business, government and non-profits is continuously shifting.  Accumulate a set of experiences that will equip you to navigate this shifting landscape for the decades to come.  Don't sit on the sidelines waiting for the perfect opportunity; get in the game and you'll learn more than conducting the Nth informational interview.  

R.I.P. Neil Armstrong

Since I was born the day man landed on the moon (July 20, 1969), I have always had a strong affinity with the Apollo missions, the moon, and Neil Armstrong.  So I was saddened to learned that he passed away this weekend.  Beyond the accomplishments of Neil Armstrong and his generation of astronauts, engineers and policymakers who literally "shot the moon" (in response to JFK's galvanizing challenge, what most struck me about Armstrong from his obituary in the New York Times, was his unbelievable sense of humility and service.  He felt privileged to have been given the opportunity to be part of the historic space program and he acted that way.  May we take as lessons from that glorious day in 1969 that we should have the audacity to dream bold dreams, and the humility to pursue their conquest of someone like Neil Armstrong.   

Hopes vs. Expectations

I had an interesting debate with a friend about whether we should have hopes or expectations for our children.  I had mentioned that having expectations is a form of a gift, in that it helps the child see possibilities beyond what might be currently within that young person's scope.

He interpreted it as perhaps a burden of reliving one's life through the child, and was aghast that any expectation should be set in specific return for, say, paying for a student's college education.

My counter was that I don't expect my children to become or do anything specific.  It's not expectations about the what, but about the how. That they will live their lives with integrity, grace and pursue a path that fulfills their purpose.   To find one's calling and to be the best at it is my only expectation.

In any event, as I walk by the Obama '08 campaign poster on the way to my home office every morning, I reflected whether or not the "Hope" theme from 2008 was in fact interpreted by voters as "Expectation".  And perhaps "Expectation" was not the how but the what: more jobs, lower deficits, less conflict in DC and abroad, etc.

But maybe we are past the point where we actually "expect" anything from the political process, but can only "hope" that it gets better.

The (Real) Trouble With Impact Investing

I had the opportunity to co-lead a discussion at the Aspen Institute this summer (with Seth Goldman, CEO of Honest Tea) where we read Part I of Kevin Starr's provocatively written piece in the Stanford Social Innovation Review, titled the "Trouble With Impact Investing: Part I".  This, and his follow up this past week (Part 3) are a clear and skeptical voice in the debate about impact investing, and a sober reminder that impact is indeed hard to measure.  While I agree with much of what Kevin writes, I disagree on what he thinks is the real trouble with impact investing.

But first, I have been working for the past eight years to measure and manage the performance of Acumen Fund's 70+ investments.  It is not easy, and we have been the first to acknowledge the challenges of balancing competing demands of returns and impact, uncertain interest in the results from donors, and, at times, deep reluctance from our entrepreneurs to expose their business to a level of scrutiny not required of their pure for-profit competitors, or for that matter, their pure non-profit counterparts.    

Often, the link between business growth and impact is in lock-step.  For example, Husk Power's renewable energy business grows as it adds new customers, who are accessing formal energy services for the first time.  And while we don't measure impact at the household level, we have gotten comfort with the evidence in the academic literature that demonstrates the solid link between access to formal energy services and increases in household incomes.

In other cases, the link is harder to define and therefore, even harder to measure.  In those cases, we continue to look for evidence, and/or invite researchers in to truly understand the impact of the business intervention.  And as Kevin notes, the problem with this is the cost and time of actually measuring impact, which no one is really truly willing to bear.  In the US, we spend about 1% of a nonprofit's budget on a financial audit that gives donors comfort that the organization is legitimate. What if we sent that as the bar for spending on some assurance that claims of organizational impact are not simply made up?

But, back to the main argument... the trouble with impact investing is not that there is no universal measure for impact to compare one intervention with another, but rather, the challenge with impact investing is that there are no nodal points on which to rest our conception of impact.  Instead, anyone doing anything vaguely impact-oriented is all lumped in together, from place-based economic development to paradigm shifting investments like the One Acre Fund.

On the financial side, there are some clear mental models, or nodal points, where returns congregate.  What do I mean?  Consider the financial axis in the two by two of "returns and impact". The nodal points include but are not limited to: "risk adjusted market return" (which is in the 10%+ range); "below market returns" (which is in the 0-9% range, depending on which market); "get me my capital back" (which is a 0% real return); and "philanthropy" (which depending on your tax bracket is effectively a negative 70% one time return).  What kind of financial return you have is an absolute measure, but also reflective of which nodal point, or strategy you pursue.  If you deliver a 5% return and were aiming to deliver "below market returns", that is pretty good... if you were aiming for "risk adjusted market returns" that is not so good (but still better than the average VC firm over the last decade!)

On the impact side, let me propose four nodal points, all conveniently starting with the letter "P".

The first is process impact.  A fund like DBL in the Bay Area often helps purely for-profit companies improve their community or environmental footprint, engaging employees in local charities, or thinking about the carbon footprint of the office.  A company like Pandora would fit that bill, where DBL helped the company think more strategically about non-financial stakeholders.  Indeed the GIIRS rating system is largely about "process" measures of a company's impact, including governance, worker training, environmental health and safety.  It is a very good start.

The second point of impact would be around place.  Any economic activity in some places is a good thing.  Think of investments in entrepreneurial activity in New Orleans or Cleveland or Detroit or Oakland (where Pandora is based).  The majority of SBA money and CRA money in the US is "place based" investing.  Whether it is a ball-bearing factory or rugged courier bags (like Rickshaw Bags in San Francisco, supported by Pacific Community Ventures), employing people in economically disadvantaged communities has real impact.

In fact, our first investment at Acumen Fund in A to Z was NOT to solve the malaria distribution problem, but was to bring private industry to Arusha, Tanzania; 7,000 some jobs later, we are proud of the economic impact of that investment.  And our second investment in the same company was to help the company solve the distribution problem,.  With the support of the Exxon Mobil Foundation, we worked with Pascaline Dupas to run a randomized control trial on pricing from which we concluded that private distribution would require large subsidies to become viable.

The third node would be product.  There are products like Embrace's infant incubator or d.light's solar lantern that in theory, when widely adopted, could lead to substantial impact.  Now, this is where impact can get much harder to truly measure, and where the marginal social value of the product is critical, not just the absolute value.  For example, Honest Tea, is a healthy product that should lead to marginal health benefits, particularly if it is replacing highly processed and very sweet soft drinks.  There are plenty of products that combine profit and impact, but Kevin is right to point out that many of the highest impact products do have some subsidy built into the R&D, marketing, or distribution.  Our "Blueprint to Scale" report went into great detail about the important role of enterprise-grantmaking.  

The final node would be paradigm-shifting products or services, like One Acre Fund or Revolution Foods, both of which are trying to take an unsustainable equilibrium and fundamentally reinvent  agriculture extension or delivering healthy school meals.  Kevin is right that most seismic shifts that have lead to substantial changes in the quality of life of low income people have historically not been investments.  Social change is often the purview of individual action, political initiative, philanthropy or civil disobedience.  But that does not preclude the possibility that some truly transformative ideas might in fact allow for compelling investment returns.

The trouble with impact investing is that we are still talking at a very high level about process, place, product, and paradigm-shifting impact.  Until we invent the universal impact ruler, we need more sophisticated vocabulary to understand and measure what is working and what is not within each node.  It's great that Kevin continues to stoke the embers of the debate, but he needs to work with the field to keep pushing for more accurate, standardized and transparent measures.  It's a collective action problem, so only if we join forces will we make any progress on the trouble with impact investing.

From CSR to CSO?

Despite increasing number of business cases where corporate social responsibility (CSR) has led companies to build substantial competitive advantages, generate higher revenues, or lower costs substantially, the skeptics of CSR still abound.  Milton Friedman wrote in 1970 that the “social responsibility of the corporation is to generate profits”.  Today, many business leaders echo the view that a business’ principal, if not only, responsibility is to its shareholders.

The logic behind Friedman’s argument endures.  First, the principal-agent theory, which binds managers to act solely in the best interests of their investors, still applies.  Second, any diversion of resources from a company’s core business for social purposes would amount to an undemocratically levied tax on the investor is still a legitimate objection.  (Of course, I assume that Friedman’s scorn for diversion of corporate resources would also apply to excessive executive compensation or the lavish trappings of the C-Suite). And finally, Friedman’s point is that even if it were acceptable to commit to social causes, how is a manager to know where to invest, as he writes that “one man’s good is another man’s evil.”

But if the logic has endured, the context has not.  A lot has happened since 1970 that challenges Friedman’s critique of social responsibility.  The first is the sheer number of companies that have embraced “CSR” as a core part of their strategy.  Companies like Whole Foods or Honest Tea have moved beyond the “window dressing” that Friedman mocks to strategies that integrate concern for employees, suppliers and the environment into the products they sell in ways that translate into strong market share or a robust bottom line.  Measured by sales per square foot, for example, Whole Foods is the most profitable grocery store in the country, and a commitment to CSR is a central part of their strategy.

Second, a small but growing group of investors has started to look for options that combine financial returns with positive social and environmental outcomes.  Moving far beyond the “screened investment” portfolios of the 1990s, funds like Generation Investment Management or Parnassus believe that publicly traded companies with strong environmental, social and governance practices will outperform the markets in the long term. 

And moving from public equity into private equity and venture capital, a new generation of impact investor like DBL and the Calvert Foundation are raising money from investors who want to see it invested in privately held companies or socially responsible projects that generate positive social and environmental returns.  So while Friedman’s principal agent theory may still be a legitimate concern, there are now a large and growing number of investor who would be willing to back business managers who aim to deliver more than just financial returns.

Third, while it is true that “one man’s good can be another man’s evil”, the emergence of new ratings systems like the B-certification, GIIRS and IRIS promise to enable managers to track and communicate non-financial performance measures in clearer and  more comparable ways.   We still have a long way to go to get to a single, coherent measure of social and environmental performance, but we are making progress.  There is also increasing consensus on the urgency of certain national and global priorities, from the jobless recovery to a stalled public education system to the threat of global climate change, that have allowed many business leaders to make clear and measureable contributions that go well above and beyond what is required of them by law. 

Finally, Friedman’s concern that the business executive’s social initiatives would amount to an undemocratically levied tax was a legitimate concern in an era when government worked.  But in the United States, at least, tax policy has become a dangerous game of partisan brinkmanship and double-speak, where ending tax cuts is considered a tax increase and no one seems to want to take the long-term fiscal health of the country seriously.   Many entrepreneurs, social or otherwise, are tired of waiting for the government to get things done.  Code Academy, a start-up education company, and IBM’s P-TECH partnership in New York City are just two examples of businesses finding ways to train more people for the technology jobs of tomorrow.  And consumers are also voting with their wallets, feeling more informed and empowered to express a clear preference for local, healthier, or more sustainably sourced products.

So maybe it is not the responsibility of a company to act socially or environmentally, but these and many examples certainly highlight the opportunity.  Perhaps the only enduring objection of the skeptics is the word responsibility, which implies a moral obligation to do something beyond tend to the bottom line.  Corporate social opportunity, instead, points to the new and growing markets, the vibrant and healthy communities, the patient investors, and the talented and committed workforce open to managers who take off the green eye shade that has long blinded them to the new capitalism taking shape just outside their window. 

Why Affordable Care Matters...

The Affordable Care Act was upheld by the Supreme Court.  On the one hand, this matters a lot.  On the other hand, it may not.

I am a big believer that the decision is a significant milestone for public policy: we have many big problems to face and the Obama Administration, Congress and the Courts have found a way to make substantial progress on solving one of the hairiest: health care reform.  Obama Care is not perfect and it is still viewed through a highly partisan lens, but when it comes to other big problems we need to solve (climate change, education reform), the recent decision renews my faith that when the stars align, our country is still capable of making (incrementally) good policy.

On the other hand, as Bob Kocher and Mohit Kaushal point out in a recent Forbes article, there is a significant amount of innovation already happening in health care that may not but totally dependent on federal policy.  The unsustainable costs, the aging of our population, and the rise in chronic diseases are a gathering storm.  Entrepreneurs and investors have taken note and are building innovative businesses that increase access, improve personalization and strip out the inefficiencies of health care.

I personally look forward to new innovations in pay for performance that link reimbursement not just to procedures provided, but outcomes delivered.   

The Open Road

AFOOT and light-hearted, I take to the open road,
Healthy, free, the world before me,
The long brown path before me, leading wherever I choose.
Henceforth I ask not good-fortune—I myself am good fortune;
Henceforth I whimper no more, postpone no more, need nothing,
Strong and content, I travel the open road.

The opening to Walt Whitman's Song of the Open Road, a part of his poem Song of Myself, speaks to me as I consider the heady, early days of a new venture fund.

Whitman seeks an open, inclusive society, where "none but are accepted", and he brings a spirit of adventure and curiosity to his journey through the still young Republic, recovering from a Civil War and finding its way in a globalizing economy at the turn of the last century.

As the not so young Republic turns another century, buffeted by civic rancour and a turbulent global economy, we need the same intrepid spirit, the same openness to all comers, the same endurance, courage and health that Whitman summons in 1900.

The inspiration for this blog, Open Road Ventures, is to pay homage to Whitman's spirit while I chronicle the new pioneers of inclusive, high impact innovation who are pushing new boundaries in search for both social impact and financial returns.  From the innovations in emerging markets that I have been privileged to know at Acumen Fund, to new ideas transforming the American health,  education, finance, philanthropy and energy sectors, there are thousands of Whitman's now traveling the open roads, helping create a more just and sustainable Republic.

This blog will be dedicated to those traveling the Open Road, those starting or leading new hybrid ventures that are looking to combine impact with financial returns, and those looking to join them in a  professional journey marked by freedom, innovation, curiosity, inclusion, and impact.

From this hour, freedom!
From this hour I ordain myself loos’d of limits and imaginary lines,
Going where I list, my own master, total and absolute,
Listening to others, and considering well what they say,
Pausing, searching, receiving, contemplating,
Gently, but with undeniable will, divesting myself of the holds that would hold me.