Innovation for the BoP: The Patient-Capital Perspective

by Robert Kennedy, University of Michigan and WDI, andJacqueline Novogratz, founder and CEO, Acumen Fund*

Co-authors Robert Kennedy and Jacqueline Novogratz explain how socialentrepreneurs and philanthrocapitalists are changing the BoP landscapeby connecting innovative business approaches to patient capitali.e.,money that is expected to generate returns over a longer period than is typ-ical of (say) venture capital. They identify four types of innovation that areproving critically important to success in operating in BoP markets, andshow how a range of enterprises are applying these approaches in the field.

The past decade has witnessed a revolution in thinking about how toaddress the persistent issue of poverty. Thoughtful observers in govern-ment, business, and nonprofits are moving beyond the old markets versusdevelopment assistance debate and are now converging on a newapproach to addressing poverty.

What is driving this convergence? Simply put, neither traditionalmarkets nor traditional development assistance has worked well.Globalization has lifted millions out of poverty in countries like Mex-ico, Brazil, China, and India. But those benefits have largely bypassedthose living in base of the pyramid (BoP) marketplaces. As notedelsewhere in this volume, more than two billion people still subsist onless than $2 per day, and the gap between rich and poor is growinga disparity that in the long run is not sustainable.1

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* The authors acknowledge and thank Rob Katz for his support in researching andwriting this article.

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But traditional approaches to development assistance have notworked either. Over the past 60 years, more than $1.5 trillion hasbeen disbursed as aid-based grants and donations to developingcountries, with little improvement in poverty measures.2 WilliamEasterly, Dambisa Moyo, Robert Calderisi, and others have arguedthat traditional top-down development programs, while well inten-tioned, inevitably fall short of their goals because they neglect individual incentives, create opportunistic behavior, and fail to tapinto the innovative potential of citizens in recipient countries.3

While this history is discouraging, new approaches that com-bine the best of the markets with the best of traditional aid areshowing much more promise. Two complementary developmentsare transforming how we think about development. First, a newgroup of so-called philanthrocapitalists has taken an interest inglobal poverty.4 Organizations such as the Gates Foundation, Omid-yar Network, Google.org, and Virgin Unite are devoting newresources to social investment. Unlike traditional developmentorganizations, however, they are insisting on the adoption of busi-ness tools and techniques in their programs: using private capitalorganizational forms to get incentives right, pushing for efficientand effective use of resources, insisting on rigorous measurement,and so on. The goal is to identify and scale organizations that canhave a large impact.5 One important outcome is the emergence of anew patient capital sectora set of intermediaries with privatecapital structures who direct their energy toward creating socialreturns. Examples include Acumen Fund (with which one ofthe authors is affiliated), New Ventures, E+Co, Root Capital, andTechnoServe.

A second development is the rise of social entrepreneursindividuals who create innovative organizations to address socialneeds. Like classic entrepreneurs, social entrepreneurs look forunmet needs, organize resources in new ways, and bring their solu-tions to the marketplace.

When they work together, social entrepreneurs and patient capi-talists can have a transformative effect on BoP marketsin sectors asdiverse as housing, water, sanitation, agriculture, and health care. Thesocial entrepreneurs innovate and create new solutions. The patient

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capitalists identify the best ideas, help build organizational capabili-ties, and provide the capital to scale.

This chapter draws on our experience with patient capital organiza-tions to explore what it takes to run a business that serves the BoP com-munity. The answer is much more complex than simply importingsuccessful business ideas from the top of the pyramid (ToP). BoP mar-kets differ from ToP markets in important ways and thus require uniquesolutions. The factors that make BoP markets unique are discussed inmore depth elsewhere,6 but five key factors are briefly highlighted here:

There are many unaddressed needs at the BoP. These rangefrom services where the government often does not meet itsmandate (clean water, sanitation, and so on) to needs that areneglected because people are perceived as being too poor tobuy (health care, housing).

BoP markets are beset by poor infrastructure (roads, water,power) and inadequate distribution networks. As a result, firmscannot count on the basicsconnectivity, roads, water,powerwhen they are setting up a factory, warehouse, bankbranch, or sales office. Poor infrastructure also means that thelow-income customer generally has poor access to educationand informationwhich makes marketing and service deliverydifferent from a companys approach to ToP customers.

Corruption is common, sapping economic value from the sys-tem and adversely affecting those who follow the rules.

Low purchasing power makes it difficult for new products andservices to enter the market. A 2007 study indicates that thereare more than 4 billion people living in conditions where theyare subject to a poverty penalty, whereby the poor pay signif-icantly more for products and services than their middle-income counterparts (in some cases, up to 40 times more).7

A lack of equity capital. Traditional capital providers typicallybypass BoP entrepreneurs, including those who are trying tosolve tough problems in healthcare, water, sanitation, and alter-native energy because they are perceived as highly risky.

Taken together, these factors make BoP markets very differentthan ToP markets. We see this in the types of products and services

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offered, how ventures are run, and in the ways in which organiza-tions innovate to design and deliver products and services to theircustomers.

This chapter is organized into four parts. The first provides a briefintroduction to the patient capital sector. The second introduces andexplains four types of business model innovations that are critical tosucceeding in BoP markets. The third explores the experience of foursuccessful BoP ventures. The conclusion serves as a summary andwe hopea call to arms.

The Emerging Patient Capital SectorThe patient capital sector is relatively new, but it is growing rap-

idly and having an important impact. BoP firms often require nontra-ditional financing. In many of the situations described in this chapter,firms require some type of patient capital. Why? Because the innova-tions and advances undertaken by BoP firms usually take time topilot, develop, and grow. Patient capital is not a grant; it is an invest-ment intended to return its principal plus interest, which may be at orbelow the risk-adjusted market rate. It does not seek to maximizefinancial returns to investors; rather, it seeks to maximize socialimpact and to catalyze the creation of markets to combat poverty. Onthe spectrum of capital available to both nonprofits and for-profits,patient capital sits somewhere between traditional venture capitaland traditional philanthropy and also between development aid andforeign direct investment.

Patient capital organizations differ from traditional capitalproviders in at least four ways. These are:

A longer time horizon. Patient capital is often appropriatefor BoP firms because there are few opportunities for quickexit. Whereas a traditional venture capitalist might hope to exita company after three or four years, a patient capital investormay need to be willing to tie up money for ten years or longer.This is also a sharp contrast to the short time horizon of many tra-ditional development aid programs. A renewed focus on account-ability among bi- and multi-laterals has led to the proliferation of

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three-year funding cycles for many development projects,including project ramp-up, wind-down, and evaluation. This onlyleaves somewhere between 18 and 24 months for the real workto be done. Our experience is that firms operating at the BoP findit difficult to prove their concepts within such a short time frame.

A willingness to forego maximum financial returns inexchange for social or environmental impact. Differentorganizations approach this trade-off very differently. Some startwith expected market rates of return, andif an investment hashigh social or environmental impactindicate their willingnessto forego some return (for example, 15 percent as opposed to 20percent). Other firms take the opposite approach, seeking tomaximize social returns with some lower bound on acceptablereturns. These organizations strive for break-even on a commer-cial basis, with the primary goal being maximum social impact.

A greater tolerance for risk than traditional investors. Thesource of patient capital may be philanthropy, investment capi-tal, or some combination of the two. Many patient capitalinvestors raise their mone