Scale

Acumen Fund investee WaterHealth International (WHI) announced earlier this week that it had closed a $15M round of financing from the International Finance Corporation. The financing - combined with WaterHealth’s Series D round of funding - will enable the company to bring purified, disinfected water to 3 million more people in more than 600 Indian villages (in addition to the 200 in which they currently operate).

Naturally, we at Acumen Fund are excited to see WaterHealth continue to grow up and out, serving more and more base of the pyramid customers with a critical service. But what’s even more interesting - and encouraging - is the range of co-investors that have stepped forward to support WHI. There’s Dow Venture Capital and SAIL Venture Partners; Johnson & Johnson Development and Plebys International; Dr. Anji Reddy and Acumen Fund. And now, with another huge commitment, the IFC.

We believe in building systems rather than one-off solutions or projects. Who doesn’t? Unfortunately, the process of international development aid grantmaking and monitoring seems to lend itself better to “new” and “pilot” projects - a grant to support something “innovative” or “paradigm-shifting” has a better chance of winning than one to support a “small, struggling - but growing - business”. Donors tire of the same old, boring projects - they want new ideas! - and funds shift around to the cause du jour.

Not so with investing, at least not in this case. WaterHealth International has been at this for 12+ years (it was founded in 1996). If WHI were a traditional development project, it would have had to re-apply for funding at least 4 times (the average development aid grant runs for 3 years). But as a company, WHI has been able to raise angel, Series A, Series B, Series C and now Series D rounds of funding, all based on financial and operational results. And after 12 years of learning, re-learning, adapting, adjusting and innovating - a process that continues - WHI is beginning to reach real scale.

Is WaterHealth International perfect? Some argue that its UV Waterworks technology is too expensive, and that reverse-osmosis filtering is a better BoP-oriented solution. But you can’t argue with results - millions of customers today, millions more in the next few years. And with the IFC dedicating $100M to “infraventures” (infrastructure projects in low-income communities), we’re beginning to see real progress in a space formerly dominated by top-down government and aid projects. I’ll raise a glass to that.

I arrived at Net Impact Philadelphia with a duffel bag, laptop bag and an umbrella only to discover the Wharton did not offer coat or bag check – though they did loop a goody bag on my one free hand and slung a free t-shirt over my shoulder.  With over 2,000 attendees, the conference was beyond capacity.  This posed some logistical problems, but it was a huge testimony to the dedication of students and professionals to creating environmental and social value in their business enterprises.

After the opening keynote, I headed to the first session of the day – Scaling Nonprofits.  (Choosing break-out sessions is harder than you might think: the conference guide book provided 140+ pages of descriptions and information about the speakers).

I choose the scaling panel largely because of my interest in panelist William Foster’s philosophy about the need for philanthropies to reward high achieiving nonprofits with growth capital (I wrote a few months ago about William’s thoughts on this topic here.) In addition to Bill Foster, a Partner at Bridgespan, Mora Segal, Chief Strategy Officer at College Summit and Aaron Hurst, founder and CEO of Taproot Foundation also spoke.

The panelists discussed the dynamics of the philanthropic sector, specifically addressing fact that the environment is not conducive to financing the best and brightest nonprofits out there.  Bill pointed out that there are only 144 nonprofits that have reached $50 million in size, and only 10 nonprofits that have raised growth capital funds.

“There is a limit to what philanthropy can do,” said Mora, who mentioned that College Summit just reached the $20 million dollar mark in large part because of a school fee system that covers the organization’s variable costs.  College Summit started a growth capital fund five years ago and successfully raised $15 million in the first six months.

“We need to talk about how we get foundations to stop giving inefficiently,” said Aaron, who likened the multitude of nonprofits with similar missions to the hundreds of Chinese restaurants across New York City. “All the restaurants serve dumplings, lomein”…to be efficient, “they should all be one Panda Express.”

Some may disagree with Aaron’s proposed monopolization of Chinatown, but his point in well taken.  The philanthropic sector could improve the net social impact by rewarding mergers and partnerships between nonprofits with similar competitive advantages who realize they could achieve economies of scale by working together.

Hopefully College Summit and others who are raising growth funds, like VisionSpring, will continue to speak about their ability to overcome some of the barriers to achieving scale posed by the current philanthropy model. It’s still early to tell if the growth capital model will work for all nonprofits, regardless of their mission, but it’s certainly encouraging to see the impact organizations of those who have been successful in crossing the ramp-up threshold.