Acumen Fund is a venture philanthropy fund that provides loans and equity capital to social enterprises in developing countries. Acumen Fund is particularly concerned with reaching the poorest people in those countries—those at the “bottom of the pyramid” (BOP).

To assess a potential investment, Acumen Fund asks whether it is likely to outperform the best alternative charitable option (BACO). BACOs may be real or hypothetical. Although comparisons to BACOs have a large margin of error, they inform Acumen Fund’s due diligence process and help ensure that its investments will deliver more social output per dollar than conventional grantmaking alternatives.

Acumen Fund’s loan to A to Z Textile Mills in Tanzania is illustrative.[i] With this $325,000 loan, Acumen Fund sought to help a local firm produce long-lasting insecticide-treated bed nets (LLITNs) which would protect people against the mosquitoes that transmit malaria. LLITNs are effective for five years, while conventional insecticide-treated bed nets (ITNs) are effective for only two and a half years. The BACO for this investment in A to Z was a hypothetical $325,000 grant to an international NGO that would use the money to distribute ITNs.

Acumen Fund’s analysis has three steps: 1) calculate the expected return of the BACO; 2) calculate the expected return of the investment in A to Z, and 3) compare the expected returns of each option.

1. Expected Return of the BACO (i.e., a grant to an NGO). Acumen Fund first estimated the outcome of making a $325,000 grant to an NGO that would distribute ITNs. An NGO could purchase and distribute conventional ITNs at a cost of $3.50 per bed net, for a total of 92,857 nets. As a grant-driven approach can have more control over the end-consumer profile than a market-based approach, Acumen Fund assumes that 100 percent of these nets would be given to BOP people. Each net would protect an average of 2 people, for a total of 185,714 people living at the bottom of the economic pyramid.

Acumen Fund chose not to assign a dollar value to this outcome because valuations of health and life are complex and controversial.[ii] Rather, it calculated the benefits in terms of people years of malaria protection, multiplying the number of people served by the number of years they could use the nets—an average of 2.5 years. Acumen Fund estimated that the BACO grant could produce 464,285 people years of protection from malaria.

Although Acumen Fund acknowledged that the probability of either the BACO or the investment’s success was certainly less than 100%, for the sake of simplicity it did not account for risk in its calculations of expected return. Hence it assigned 1.0 as the probability of achieving the outcome in both cases. Because Acumen Fund would fully fund the grant, its philanthropic contribution for the BACO was 100 percent—also a value of 1.0 in the equation.

Acumen Fund next calculated the cost of the BACO grant. Unlike Robin Hood, the organization includes the costs of administering the BACO grant--in this case, $32,500--bringing the cost of the $325,00 grant to $357,500. Because grants do not earn returns, Acumen Fund accounts for the sunk costs of the grant and administration in the denominator of its expected return formula. Solving the equation, Acumen Fund figured that the expected return on the BACO would be

Expected Return (BACO) = 464,285 X 1.0 X 1.0 = 1.3 person years of protection per $1

$357,500

2. Expected Return of Investing in A to Z Textile Mills. Acumen Fund next estimated the outcome of investing in A to Z Textile Mill. Fully funded, A to Z Textile could produce two million LLITNs, half of which would be used by Tanzania’s BOP population. As with the BACO, Acumen Fund multiplied the number of nets (2 million), by the portion of nets going to BOP people (0.5), by the average number of people using each net (2 people), by the number of years they would use the nets (5 years). By this calculation, A to Z textile factory could provide 10 million BOP person years of malaria protection, if fully funded.

As was the case with the BACO, Acumen Fund did not directly factor in the risk of not achieving the outcome, and so the value for the probability of outcome in this calculation is 1.0.Whereas Acumen Fund fully funded the BACO, however, here its investment would be 20 percent of the total capital invested in A to Z for this project. Thus the value for its philanthropic contribution was 0.2. Using these numbers, Acumen Fund estimated that its investment in the A to Z Textile Mill would result in a total benefit of 2 million BOP person years of protection.

Acumen Fund then calculated the cost of its investment in A to Z Textile Mill. Making this loan would cost Acumen Fund an estimated $65,000 on top of the $325,000 cost of the loan itself, for a total of $390,000. But unlike the BACO grant, which delivers no financial returns to Acumen Fund, the loan to A to Z Textile should theoretically yield both the return of the principal and (a below-market rate) 6 percent interest compounded annually over the course of the three-year loan. But Acumen Fund made the conservative estimate that A to Z would repay the principal but not pay the interest. Subtracting the projected financial return (i.e., the $325,000 principal) from the total cost of making the loan (i.e., $390,000), Acumen Fund calculated a cost of only $65,000.

Acumen Fund thus estimated the expected return on its investment in A to Z Textile Mill:

Expected Return (Investment)= 10 million BOP person years x 1.0 X 0.2

$65,000

= 30.77 person years of protection per $1

3. Comparing investments. As summarized in the figure below, the expected return numbers indicate that investing in A to Z Textile is some 24 times more cost effective than donating to the BACO. Moreover, if A to Z Textile pays the 6 percent annual interest as well as repaying the principal, the loan/BACO ratio increases substantially. If A to Z Textile defaults entirely but nonetheless manufactures the bed nets, the ratio falls to 4—still a better deal than the BACO.

	BACO (an NGO)	A to Z Textiles
TOTAL BENEFIT (in BOP people years)	464,285	2,000,000
TOTAL COST (in $)	357,500	65,000
IMPACT (BOP people years per $1)	1.30	30.77
BACO Ratio (A to Z impact / BACO impact)	24