Acumen Fund, a nonprofit impact investment fund, raises charitable donations to make equity investments in early-stage companies that provide a product or service to the poor.
Acumen Fund, a nonprofit impact investment fund, raises charitable donations to make equity investments in early-stage companies that provide a product or service to the poor. It invests across the agriculture, education, energy, and healthcare sectors in several geographies, including Latin America and the Caribbean, North America, South Asia, and sub-Saharan Africa.
Acumen uses capacity-building support to add value to its portfolio companies across three broad themes: governance, operations, and finance. Within these areas, Acumen focuses specifically on five core aspects of investees’ operations:
- Sales: Customer segmentation, creating an effective sales team, and developing effective marketing strategies
- Talent: Executive coaching, group trainings for senior and middle management, building organizational culture, and recruiting/retaining staff
- Technology: Adopting systems and processes to scale the business
- Finance: Managing cash, structuring capital, and raising funds
- Impact: Measuring, communicating, and improving impact
Acumen developed these objectives based on historical data regarding over 50 investments across a 10-year period. Through its research, it has found that, in most cases, investees have needs in all five areas at some point during the investment period and that companies with the same business model (i.e., product vs. service companies) tend to face similar challenges at each stage of business growth. For example, an early-stage clean cook stove company in East Africa and an early-stage water pump company in India will face challenges identifying viable customer segments, building and training a sales team, and establishing distribution channels.
Sample Capacity-Building Project Goals
To improve a renewable energy company’s understanding of its target customer segments, Acumen conducted a brief survey via mobile phone using its Lean Data methodology. The survey provided the income distribution (USD 1.25 to USD 8 per day) of the customer base, along with their respective value drivers, product usage patterns, and product satisfaction ratings. The investee used these data to refine customer segmentation, tailor marketing and sales messaging, and improve customer service. Acumen measured success by management’s actions in response to customer feedback and customer ratings over time.
|Improved Technology Infrastructure
To strengthen an agricultural company’s infrastructure and ability to scale, Acumen helped the company find an IT consultant to identify and implement a migration from simple accounting software to an enterprise resource planning (ERP) system that integrates different aspects of the business, such as inventory, sales, finance, and human resources. The investee used this system to consolidate financials and streamline reporting, and it updated its standard operating procedures to leverage the new technological infrastructure. Acumen measured success by staff adoption of the new technology and improvements to EBITDA margins over time.
How it Works
STEP ONE: IDENTIFY CAPACITY-BUILDING OPPORTUNITIES
During due diligence of prospective investments, the Acumen deal team assesses the company’s capacities across governance, operations, and finance. Needs identified during due diligence often help define key milestones that must be reached before releasing further investment tranches. Once a company is in the portfolio, the Acumen portfolio team conducts annual reviews, revisiting the company’s governance, operations, and financial performance to identify further gaps that could be filled by capacity-building support.
STEP TWO: DESIGN A CAPACITY-BUILDING PROJECT
Acumen has developed two project structures:
- When a company’s capacity or management gap is discrete and non-recurring, such as an ERP implementation, Acumen facilitates introductions to consultants that deliver cost-effective support specifically for early-stage social enterprises.
- When a company’s capacity or management gap is fundamental and recurring, such as developing a recruiting and retention strategy, Acumen takes a long-term approach to support the investee’s development. These projects typically begin with data collection to understand the company’s specific needs. Acumen then provides ongoing coaching to improve skills.
Regardless of the project type, Acumen initiates discussion of these projects at the Board level to create an environment of dialogue and accountability amongst key stakeholders.
STEP THREE: IMPLEMENT THE CAPACITY-BUILDING PROJECT
Acumen implements capacity-building support through a combination of their own in-house staff, external consultants, and group training programs (see table below):
- In-house staff provide support when the task is recurring and fundamental to an organization’s business model. To build the organization’s capacity, Acumen works across multiple teams to collect data, develop insights, and provide coaching over a period of three to 12 months.
- Consultants are used when the task is discrete and nonrecurring or when a consultant has specific expertise focusing on early-stage social enterprises in emerging markets.
- Group trainings bring senior or middle managers from portfolio companies together to learn from other participants using a curriculum developed by Acumen and its regional partners. Acumen has found that attendees from the various investee companies share practical insights from their daily work, creating a learning network that extends beyond the trainings.
STEP FOUR: MONITOR AND ASSESS THE PROJECT
Acumen monitors its investments by tracking the progress against milestones set annually. As a company achieves these milestones, Acumen releases further tranches of investment or decides to allocate additional capital to the company. Acumen assesses the success of a capacity-building project based on key indicators established for each project. Over the long term, Acumen hopes to define a return on investment for capacity-building projects, as well as a total return on investment including the cost of capacity-building support at the point of exit.
The funding model for capacity-building support at Acumen has evolved over time. Acumen initially worked with probono consultants but found that the level of service provided failed to meet investees’ expectations, and investees lacked enough stake in the project to ensure its implementation, since they had not paid for the consultant. Next, Acumen funded its capacity-building projects through a pool of grant capital. Portfolio companies applied for support to receive grants up to USD 50,000 each. The companies were required to cover a minimum of 20% of the direct costs of support and to manage implementation of the projects. Acumen found that this model had several undesirable features:
- raising capital for this type of support was difficult;
- larger companies garnered an unfair advantage in the grantmaking process, having more resources and staff to apply for grants and share the costs of capacity-building support; and
- Acumen found it difficult to define and measure the effectiveness of the projects while being removed from the design and implementation process.
In its current model, Acumen sets aside 10% of the total capital it has raised for capacity-building support to fund its inhouse staff. Portfolio companies can access Acumen’s in-house resources free of charge because, in Acumen’s view, these services attract investment pipeline. In addition to the in-house team, Acumen has built relationships with a short list of high-quality consultants offering tailored products for early-stage social enterprises in emerging markets. Pre-negotiated fees for this support are paid in full by investees using part of their investment capital from Acumen. Over the first two years, Acumen subsidized executive and manager trainings for participants while proving the model; these trainings will now be offered to investees without subsidy.