CASE: SM-158 DATE: 04/06/07

ACUMEN FUND AND WATERHEALTH INTERNATIONAL: THE ROLE OF VENTURE

Two million people, most of them children, die annually due to preventable waterborne diseases. Millions more suffer from stunted growth and development. It’s time for dramatic change—a revolution that will make potable water available, affordable, and accessible more rapidly, and on a wider scale than has been possible before. —WaterHealth International1

In October 2006, Yasmina Zaidman reviewed the documents spread before her in the conference room at the Acumen Fund offices in New York. Zaidman, Water Portfolio Manager, was presenting an intriguing and complicated array of investment opportunities to Chief Investment Officer Brian Trelstad. Two years earlier, on the basis of Zaidman’s due diligence and recommendation, Acumen made an equity investment in WaterHealth International (WHI), a U.S.-based that produced water treatment systems for underserved markets around the world. To continue its growth, WHI was starting another round of fundraising, seeking $10 million for intensive marketing in current locations, further product development and expansion into new target markets.

In addition, WHI was looking for a partner to guarantee a credit facility for water systems in . WHI’s efforts in India had attracted the attention of ICICI, the country’s second largest commercial bank. ICICI was willing to loan WHI the needed to establish a financing facility that would allow potential consumers to buy water systems using loans at commercial rates. But ICICI wanted a guarantor for a percentage of the total loan, and WHI was looking for a reputable partner to stake them in this new financial venture.

Zaidman considered Acumen’s options in the context of the fund’s current situation. The Acumen Fund team had just put together a five-year report that articulated the mission statement and laid out a plan for the next five years. How did WHI’s proposals fit into Acumen Fund’s current goals? Should Zaidman recommend increasing Acumen’s equity investment in WHI and showing support for its speedy accomplishments? Should Acumen step into the role of loan

1 http://www.waterhealth.com/ (February 13, 2007). Jane Frances Healey and David Hoyt prepared this case under the supervision of Professor Bill Meehan as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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guarantor, helping to bring the financial power of commercial banking to WHI’s customers? Could Acumen do both? Or, had they already fulfilled their objectives as venture philanthropists, and was it now time for conventional financing sources to move the company forward? Zaidman sorted through the alternatives.

VENTURE PHILANTHROPY

Acumen Fund sought to achieve social objectives primarily by investing in commercial ventures whose goals included making a social impact. This approach to social change had become popular in recent years as philanthropists strove to take advantage of market forces and to bring their business expertise, as well as their , to bear on social problems.

Acumen Fund’s model for social change was part of a developing field known as “venture philanthropy.” In 2006, the definition of venture philanthropy was still evolving, but generally included traditional grantmaking to nonprofits in which the donor took a highly engaged, active role in the helping the nonprofit grantee, and focused heavily on performance. The active participation of philanthropists in providing both financial and non-financial support, and focusing on performance metrics, was often termed “high engagement philanthropy.” Investing in commercial ventures that made a social impact was also a form of venture philanthropy.

In 2006, five years after its founding, the Acumen Fund described itself as “a hybrid institution that on the one hand, operates like an investment fund with a rigorous due diligence process, financial controls and clear reporting, and on the other hand, provides management assistance, measures social returns and shares breakthrough insights with the world.”2

While charitable giving in America had roots dating back to colonial days, the philanthropic foundation, which managed a large amount of money in order to make grants for social purposes, was invented in the early 20th century. One of the pioneers, Andrew Carnegie used $125 million of his fortune to set up his now-famous foundation in 1911 as an enduring conduit for making grants and conducting programs for social benefit. His expressed guidelines to the future generations who would run the foundation were to think big, concentrate on clear goals and be willing to invest heavily for long periods to achieve them.

In 2005, philanthropic ideals flourished in the United States as Americans donated more than $260 billion to charitable organizations.3 Financial titans like Bill Gates and Warren Buffet made headlines, but even average Americans made donations—$1,600 per household or 2.2 percent of a family’s disposable income.4

A New Generation

In the 1990s, entrepreneurs from the technology boom became interested in using some of their new to improve society. They were frustrated by the lack of transparency and accountability at traditional charities, wanted to put their stamp on the business of giving and

2 Acumen Fund, Five Year Report, (2006), p. 23. 3Giving USA (2006). 4 Ibid.

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desired tangible results for their efforts. Their efforts to use entrepreneurial skills for social purposes gave rise to terms like “social entrepreneurs.” This was not limited to technology entrepreneurs, as exemplified by 2006 Nobel Peace Prize winner Muhammad Yunus and his Grameen Bank, a commercial venture that made small loans without collateral to millions of poor Bangladeshis. The success of Grameen Bank in improving the lives of millions of people made micro-loans the most well-known example of this contemporary hybrid philanthropy.

The Acumen Fund model of venture philanthropy involved investing in that provided that improved social conditions among their customers. Ideally, the commercial success of these companies would make them self-supporting, so that they could continue to help an ever increasing number of people, without relying on a never-ending need for charitable donations. Thus, providing early funding and expertise to help these companies could be extremely efficient for the philanthropist, leveraging the business success of portfolio companies to bring social benefits to far more people than could be reached through grantmaking alone. In this way, use of and private equity methods of active partnership to giving would result in higher social returns than traditional models.

While there was no single definition of venture philanthropy, as previously noted, venture philanthropy pioneer Mario Morino described it as follows:

We define venture philanthropy as the process of adapting strategic investment management practices to the nonprofit sector to build organizations able to generate high social rates of return on their investments. Strategic management assistance is provided to leverage and augment the financial investment made. This approach is modeled after the high end of venture capital —the relatively few who work to build great organizations instead of just providing capital.5

Some estimates claimed that 50 high-engagement firms or emerged from 1997 to 2006, overseeing $100 million in funds available for investment. These firms shared core patterns of operations: They concentrated their assets on a small number of projects, made long- term commitments, actively shaped strategy and let results dictate how programs should be run.6

Critics of Venture Philanthropy

Opposition to high engagement philanthropy centered on the image of meddling donors with a business-oriented approach upsetting long-respected conventions. Critics claimed that the new leaders were too aggressive, often crossing the line between engagement and control and disrespecting the culture of organizations that had honed their processes over many years of operation. Critics argued that the “bigger, faster, cheaper” philosophy of business clashed with the traditional, nonprofit culture, creating resentment and tension—not productivity. Likewise, financial critics pointed to the practice of making large investments into a small number of projects and offering those with no previous experience an “opportunity” as being too high risk and foolhardy.

5 http://www.morino.org/advan_sp_lev.htm (February 14, 2007). 6 Dahlia Fahmy, “Adventures in Philanthropy,” Institutional , (December 2004), p. 60.

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High-engagement firms countered that applying the rigorous due diligence and reporting standards of Wall Street to charitable funds helped battle a troubling public skepticism surrounding nonprofits. After the September 11th terrorist attacks and subsequent natural disasters like Hurricane Katrina and the Indian Ocean tsunami, Americans responded with an outpouring of financial support intended for those affected by the tragedies. But media coverage of scandals at charitable foundations and reports about diversion of funds dampened public enthusiasm and fueled U.S. Congressional calls for greater regulation of the field. High- engagement philanthropists’ emphasis on accountability addressed these concerns.

Supporters of the new breed of philanthropy also pointed to the investment dollars that followed the path of their philanthropic efforts when a project succeeded. Groups who previously could not attract funding from mainstream sources found those financial institutions more interested in them after a high engagement firm provided monetary support and managerial assistance. Perhaps most importantly, the new generation of philanthropists argued that most nonprofit groups could benefit in concrete and measurable ways from the professional managerial skills and mentoring that comes with venture-style investment.

An International Stage High-engagement philanthropists, however, faced large obstacles entering the field of international development. Often, economic development was channeled to developing countries by governments, multilateral organizations and private voluntary organizations, typically referred to as nongovernmental organizations (NGOs). Whereas plenty of information existed about potential NGO partners in the United States, grant-makers investigating opportunities in remote locations had greater trouble identifying partners and potential enterprises or entrepreneurs with whom to work.

Also, logistical issues with international development presented daunting challenges, including Internal Revenue Service regulations, Patriot Act safeguards, local regulations and statutes.7 Managing fluctuating exchange rates and establishing fund transfer arrangements also required considerable expertise.

Lastly, corruption had been endemic in many developing countries. Analysts estimated that only a small percentage of the $2.3 trillion the Western world had poured into foreign aid over the last 50 years reached the people it was intended to help and made a significant and enduring impact on their lives.8 Instead of translating into results on the ground, one economist suggested that foreign aid money tended to “disappear into government bureaucracies, sometimes into outright corruption” and got absorbed into ineffective aid agencies.9

As a result, philanthropists found that investments in the global nonprofit sector were difficult without the assistance of an intermediary who was familiar with the locations, knew the requirements, had a financial skill set and could anticipate the pitfalls of distributing valuable

7 The Council on Foundations publishes texts like Beyond Our Borders (2nd ed. 2006), a 66 page guide explaining terms, rules and models. 8 Bill Easterly, “Mind Over Money,” In the Money, CNN, Dec. 24, 2006. 9 Ibid.

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funds. Firms like Acumen Fund were established to gather the essential knowledge and expertise needed to locate opportunities for philanthropic investments according to the terms of high-engagement.

ACUMEN FUND

Acumen Fund was started in mid-2001 with seed money from the , Cisco Systems Foundation and a core group of individuals. The fund started with the intent “to demonstrate that small amounts of philanthropic capital, combined with large doses of business acumen, can build thriving enterprises that serve vast numbers of the poor.”10 Its first-year goals included assembling a team, investing in at least two enterprises in health services or housing and raising $2 million.

Chief Executive Officer Jacqueline Novogratz explained the power of markets to achieve social goals:

No agency or organization can talk to as many people as needed to know what kinds of solutions might work. This is why markets are so powerful. By affixing price to the delivery of critical services like housing, finance, water and health, they allow a person and a community to tell us so much about what they want, need and can pay for.11

Acumen Fund raised money from people who possessed both higher incomes and a desire to bring resources to underserved markets so that individuals could make their own decisions. The fund invested this money like a venture capital or a private equity firm through loans and equity investments in both nonprofit and for- organizations that developed new products and services for “the bottom of the pyramid”—people living on less than $4 per day.

Philanthropic funds allowed Acumen to support ventures with high financial risk and likely low financial returns in the short term, but very high social returns over time. Any returns on Acumen’s investments came back to the fund for reinvestment while the investors reaped the social return of individuals served and systems changed in often neglected regions of the world. Investors’ money was leveraged many times over as it was reinvested and as Acumen’s involvement attracted funding from more traditional financial institutions.

Acumen’s continued growth depended on its ability to attract and maintain donors, to identify, fund and support entrepreneurs and to learn lessons, listening to the individuals with whom it works and responding quickly to the emerging needs of entrepreneurs serving low-income markets.

The Beginnings of Acumen Fund

In 2001, Acumen Fund made its first investments in healthcare companies. After September 11th, the fund raised an additional $1 million to begin work in Pakistan and Egypt. At year’s end,

10 Acumen Fund, op. cit., p 4. 9 Acumen Fund, Five Year Report, (2006), p. 8.

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the fund had an eight-person staff and two interns. Twenty-two partners provided financial, managerial and mentoring support to the fund and its portfolio companies.

By the end of 2006, Acumen Fund had provided $20 million in new capital12, mostly in the form of equity investments and loans, to companies that produced essential goods and services to underserved markets. (See Exhibits 1, 2, and 3 for Acumen Fund financial and portfolio information.) By this time, the team had grown to 31 staff members and 16 interns, with support from 120 global partners. Acumen opened on-the-ground offices in Karachi, Pakistan, and Hyderabad, India, as well as Nairobi, Kenya, and launched a Fellows program to train highly skilled and highly motivated postgraduates and deploy them to tackle specific challenges that portfolio companies needed to overcome to meet targeted objectives.

Lessons Learned From the Fund’s First Five Years

In its first two years, the fund had provided some traditional grants, in addition to its equity financing and loan activity. After two years of operation, the team decided that its grant-making model did not provide the financial discipline needed to attract capital from traditional financial sources instead of philanthropic ones. Access to capital markets was essential if the portfolio enterprises were going to become sustainable over the long run.

The that Acumen Fund brought to fledgling enterprises centered on its management assistance, measurement of financial and social returns and the structure of financial products that attracted additional capital. Thus, in 2003 the fund decided to provide only equity and loans, and to terminate its grant program. The fund charged near-market interest rates for loans, and used local loan or investments agreements whenever possible.13

Before 2003, Acumen’s portfolio included investments in healthcare and housing enterprises as well as a range of finance and income generating enterprises in Egypt. In 2003, they clarified their focus on housing, dropping “economic enterprises” as a portfolio. They also added water to their list of portfolios, looking for market-driven solutions that could teach them about the complexities of delivering clean water to poor people in accessible and cost-effective ways over a significant duration of time. Given that one in five people on earth had never had a glass of clean water and that the poor often paid 30 to 40 times what their middle-class counterparts did for water, the sector seemed ripe for visionary enterprises to make an impact.

As Acumen’s initial investments started to mature, a consulting firm helped systematize the measurement of both financial and social returns. Sound metrics offered proof of concept, helping to attract further investments in Acumen and more local backing of the enterprises Acumen had helped get off the ground. But calculating a quantitative social return on investment proved elusive due to the difficulty of measuring benefits to a society, so Acumen developed a “best available charitable option” (BACO) evaluation format. BACO was used to assess whether the fund’s intervention over five years was more or less (or comparably) cost effective than existing programs in that investee’s marketplace. This internal metric was re- calculated on an annual basis.

12 $20 million in investments were approved, and $13 million disbursed. 13 Acumen Fund, Five Year report, (2006), p. 16.

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Acumen decided not to strain its portfolio companies’ management resources by requesting financial reports that measured information that was not fundamentally significant to the supervision of their or that Acumen would not be capable of measuring itself. Eschewing such superfluous reporting, Acumen developed simple portfolio investment scorecards that were tracked quarterly. Social impact data was shared with donors through a quarterly update and on Acumen Fund’s website.

Quarterly scorecards consisted of, on average, 15 investment-specific data points and financial data that apply to all investments, such as revenue, cost of goods, operating expenses, net income and profitability. As a quarterly communication mechanism, scorecards provided Acumen Fund with a synopsis of the investment’s status, as well as information on its financial sustainability, social impact in the target market, and growth toward scale and cost-effectiveness relative to alternative solutions to the same problem. This data was used primarily to help identify and address major management challenges faced by the portfolio companies, as well as to determine how effective various business models were at achieving scalable and sustainable social change.

After several years of experience, the team had developed insights about how to adapt private- sector mechanisms to the needs of the poor in local contexts. Overall, Acumen found that entrepreneurs were the key to successful investments. Give strong, visionary leaders in socially oriented businesses enough opportunities to connect, and they would find ways to use one another and create networks where none existed previously. Proven entrepreneurs were the essential resource for creating enduring solutions to problems in underserved markets.

Future Plans

According to Novogratz, by the end of 2006 Acumen Fund was situated at the intersection of two powerful forces—the effective application of private initiative to major public problems and a growing sense that individual achievements depended on collective achievement. In the next five years, Acumen planned to expand operations to invest at least $100 million in approximately 80 ventures, yielding 10 or more proven models for delivering basic goods or services to poor people. They wanted to accomplish this goal by helping to catalyze a movement around market- driven approaches to social change, by creating a culture of greater accountability, sharing their insights and building a cadre of entrepreneurial leaders who could have a substantial social impact in local communities.

WATERHEALTH INTERNATIOAL AND ACUMEN FUND

In October 2004, Acumen Fund invested $600,000 of equity in WaterHealth International’s (WHI) series B round of fundraising, giving Acumen Fund a minority share of WHI and a seat on their board of directors. Acumen based its investment decision on its desire to develop effective approaches for working in the quickly growing and evolving water market, the strength of WHI’s management and track record, and on the attractive financial prospects for WHI.

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Water and Sanitation

In 2005, UNICEF estimated that 1.2 billion people lacked access to safe drinking water, because of nonexistent or defunct treatment and distribution mechanisms.14 The problem afflicted both urban and rural areas, both of which lacked effective large-scale water supply infrastructures. As of 2002, the World Health Organization (WHO) reported that 31 percent of the rural population in the developing world did not have access to safe and convenient sources of water while 32 percent of the world’s urban population lived in slums that lacked running water, electricity or even permanent structures.15

Because poor people were most likely to get sick, and ill health perpetuated , unclean water and lack of sanitation triggered a vicious cycle that hampered economic and social development. Diarrhea, and dysentery claimed the lives of approximately 3.2 million people in 2005, the vast majority of whom were children under the age of five in developing countries.16 In addition, the United Nations estimated that in 2005 water-related illnesses cost 443 million days of school and as much as 5 percent of GDP for some developing countries.17 The WHO forecasted that these disease rates and their effects could be cut by up to 80 percent with a safe supply of water.

Several proven water purification and sanitation technologies existed, but identifying a sustainable means for financing, marketing and distributing clean water and sanitation to end- users eluded most organizations. Low-income individuals had shown a willingness to pay for clean water and sanitation, but the prohibitively high initial capital cost prevented the implementation of treatment systems. Enterprises that could generate profits through these innovative water technologies had not been able to attract commercial debt financing to support new installations. The gap between technology and implementation suggested the need for innovative financing facilities that could provide interim incentives and measurements of progress to establish the enterprise models and get them running.

Without access to financing, or a willingness to use debt to finance water infrastructure because of a high perceived risk, most vendors relied on local governments and donors as their only customers. This approach had an estimated 50 percent failure rate18 because government and donor grants seldom accounted for the long-term maintenance and operating costs of new infrastructure. Thus, in the developing world, it was common to see a water treatment system or water source that had ceased to deliver safe water only a few years after it was built. Systems of accountability had not kept pace with these sorts of projects.

WaterHealth International History

WHI was founded in 1996 to develop and market affordable water purification and disinfection systems, with a strategic goal of addressing the underserved needs of a large segment of the

14 “Water, Environment, Sanitation,” 2005. 15 “Water,Sanitation and Health: Facts and Figures.” 2004. 16 Ibid. 17 William M.Reilly, “U.N. Calls for More Clean Water,” UPI, Nov.10, 2006. 18 WaterPartners International, http://www.water.org/watercredit/case.htm

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world’s population without access to clean drinking water. In 2002, Plebys International, LLC, a venture development and management company headed by Tralance Addy, acquired WHI and took it through a reorganization that simplified the structure of shareholders, overhauled the business strategy and leadership and provided $2 million of capital.

As the new CEO and president, Addy brought 20 years of managerial experience from Johnson & Johnson, in the U.S. and other countries, and a PhD in engineering to the goal of providing safe drinking water to the urban and rural poor worldwide. WHI already had a license for a proprietary system that included an advanced UV technology called UV Waterworks, developed by Ashok Gadgil at Lawrence Berkeley Labs. Gadgil, an award-winning inventor acclaimed for his efforts in developing countries, served as WHI’s vice president of scientific affairs.

WHI’s Products

The UV Waterworks system was based on a patented, award-winning technology that used an ultraviolet light source suspended in air to inactivate a broad range of microorganisms in water. This was combined with a multi-stage filtration process, in which contaminated water was converted into clean, potable water that exceeded the World Health Organization's standards for potable water.19

Several other methods were available to create safe water, including boiling, chemical treatment (such as chlorination), or chemical treatment combined with filtration. The UV Waterworks approach had many advantages over these methods. The technique was extremely effective in producing safe water. It did not require chemicals that could contaminate the water with carcinogenic and mutagenic by-products and environmental pollutants. It was also very energy efficient and could work using gravity, without the need for high pressure. It had practical maintenance requirements even in remote and challenging environments with little technical infrastructure. It was also more readily adapted than boiling water, and did not require cutting down trees to provide firewood for boiling water, with the attendant environmental damage.20\

WHI’s products included the UV Waterworks system, pre- and post filters, water storage and distribution mechanisms, service delivery and quality maintenance programs, as well as investments in education on health and hygiene in the communities served by WHI systems (Exhibit 4). In addition, WHI had developed a franchise model that it was scaling up in the . In India, WHI planned to launch water systems through rural community water systems—“WaterHealth Centres”—that made safe water available to the rural poor. These systems were designed to be sustainable under management by local entrepreneurs and non- governmental agencies.

19 WaterHeath International, “Breakthrough Technology for a Better World,” online at http://www.waterhealth.com/water-solutions/ (accessed April 2, 2007), 20 WaterHealth International, “Frequently Asked Questions: What is the Advantage of this Technology Over Other Methods of Purification,” online at http://www.waterhealth.com/water-crisis/faq.php (accessed April 2, 2007).

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The advantages of WHI’s UV Waterworks technology rested on its combination of being high performance, low cost and relatively non-complex, significant factors for installations in unsophisticated environments. The salient features included:

• High efficacy of disinfecting UV dose • User and environmental safety with no chemicals or by-products • Small and lightweight • Low maintenance, rugged design with few moving parts • Low energy demand, even possible renewable power source • Lowest cost-to-performance ratio

In the Philippines, the WHI customers were “water stores,” drinking-water refilling stations for urban communities that were designed to produce 700 to 750 gallons per day. WHI relied on a franchise model where entrepreneurs purchased not only systems, but site selection assistance, sales of equipment, assistance with store leasehold improvements, maintenance contracts, marketing and advertising support and corporate customer negotiations.

The rural model that was designed for Indian villages involved a larger system than the one deployed in the Philippines. These systems were meant to be marketed to local governments, community organizations, and non-governmental organizations. These systems would also be accompanied by marketing and outreach efforts within rural communities. Versions of the CWS made up the bulk of WHI’s current and projected installations. Community installations combined several UV Waterworks systems for a much higher output and lower overhead cost than water stores. The community system was designed to serve between 3,000 and 5,000 people, with an estimated 10 liters per day per person. The CWS offering included:

• Site assessment and preparations • Piping of water to treatment facility • Complete sourcing, assembly, installation and validation of system • Pre- and post-installation continuing hygiene education • Provision of narrow-mouthed containers for water delivery and storage (one per family) • 12-month warranty • Fee-based extended maintenance contracts • Extended-term project financing facility • System operation and fee collection services

This comprehensive approach was designed to assure that each system would deliver a consistent supply of safe drinking water on a financially sustainable basis. Given the global track record of failed or abandoned water projects in India and other developing countries, this represented an important shift.

Acumen’s Assessment

In 2004, Acumen judged that the WHI system was competitive in the global landscape of water companies. Though the worldwide market was commonly estimated at over $400 billion, the industry left approximately 3 billion people underserved. Initial evaluations of the local markets

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suggested that water provided by WHI customers could sell at a price considerably lower than the local price for bottled water—providing an inexpensive source of safe water for large numbers of poor people.

Acumen’s concerns about WHI’s expansion into India focused on the possibility of the company being spread too thin. As operations spanned three continents, the diversity of the countries and their markets, as well as the sheer obstacle of geographic distance, might stretch an already lean organization too thin. The mitigating factor in this assessment was Addy, who had demonstrated an ability to identify local leadership and develop a strong board with significant complementary experience and perspectives.

The plan to span three continents also raised questions about maintaining consistency and efficiency with the franchise system. Without consistency, high growth could be hard to manage and relearning lessons could lead to the failure of new regions. Again, the responsibility lay with Addy and the WHI board to assure that systems were developed to maximize efficiency while still permitting opportunities for learning and adaptation.

In 2004, WHI had completed its Series B round of financing by raising $2.4 million from Acumen Fund, the International Finance , and Anji. Reddy, a respected pharmaceutical entrepreneur. Acumen invested $600,000 and became the only philanthropic investor in the company. Acumen hoped that its distinctive perspective would help WHI stay focused on pricing and distribution models targeted at the poor. David Kyle, Acumen Fund’s chief operating officer joined the WHI board. Prior to joining Acumen Fund, Kyle had spent 20 years in international corporate banking with Citibank. As a member of the WHI board, Kyle would offer strategic support for the company’s expansion in India, where Acumen would offer location-specific guidance.

WHI Series C Funding

In 2006, WHI sought at least $10 million in a third round of funding to focus on the implementation of aggressive marketing and installation initiatives, primarily in India. They also aimed to complete the commercialization of the remaining products in development and to expand into potentially high growth targeted markets. The company had successfully placed more than 450 systems in the field, primarily in Mexico, the Philippines, Sri Lanka and India and hoped to leverage that success, using the business models from those regions for expansion to others.

WHI identified India as its most important market entry point for the WaterHealth Centres. In India specifically, potential customers of the WaterHealth Centres—NGOs, state, district and village-level governments—expressed interest in the systems based on their ability to provide reliable safe drinking water, and to pay for themselves and generate surplus revenue. However, as system prices ranged from $25,000 to $50,000 (for standard installations without any special features), few of these potential customers demonstrated the ability to pay outright for the system. Accessing financing from a bank for a single system would be prohibitively expensive for individual customers, and banks were unlikely to provide funding on a case-by-case basis for an unproven model.

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As a privately held company, WHI’s financial results and projections were confidential. However, the company expected to grow rapidly, led by the business in India, becoming profitable in 2007.

Acumen Fund’s Engagement with WHI in India

Since Acumen’s 2004 investment, the fund provided WHI with management support in the form of site visits, a consulting team to size the Indian market, and an Acumen Fund Fellow to address challenges related to the design of the physical facility for the CWS. The Acumen Fund Fellow was part of an emerging effort to match the skills of early-career professionals possessing leadership potential with the needs of Acumen Fund investees. During that time, Acumen witnessed WHI make swift, significant adaptations to its expansion plans in India.

WHI considered India to be its most important market. The country had the world’s second highest population, at more than 1 billion, yet 70 percent of its people had poor access to treated water. This caused extensive health problems, and the Indian government was spending about $1 billion annually on projects related to water safety and distribution. Among wealthy market segments in India, a private sector water market was growing rapidly, but these providers did not address the much larger problem of serving rural communities and the urban poor.

WHI created a wholly owned subsidiary, WaterHeath India (WHIN) and hired a local CEO and vice president of operations. WHIN was actively recruiting a marketing manager for India as well. WHIN partnered with the Naandi Foundation, a local NGO, to identify and prepare communities for system installations. Naandi secured village-level government buy-in in the form of a down payment and agreement to provide critical resources such as land for the system and a dedicated water source. WHIN gave the NGO a service fee on each sale of a system to cover upfront costs and ongoing community education expenses.

In late 2004, WHI entered the Indian market with two pilot CWS installations in the state of Andhra Pradesh. Andhra Pradesh, located in southern India, was a rich agricultural area that combined regions of great wealth and desperate poverty. Women washed clothes in the Krishna River, and carried heavy metal pots of water balanced on their heads. Large trucks shared narrow roads with pushcarts filled with bananas, coconuts, oranges, and pots and pans. The free water provided by the government was “green and slimy and contributes to serious levels of disease.” By contrast, water from the CWS plants was clean and clear. Most of the people worked in the local farms or rice mills, earning $1 to $3 daily. They could buy 12 liters of pure water from the WHI plants for one rupee. In many cases, customers would buy two liters of pure water per family member each day to use for drinking and cooking rice, using the free government water for other purposes, such as bathing and brushing teeth.21 There was general agreement in the health community, including the World Health Organization, that the minimum amount of potable water for drinking and cooking should be at least 10 liters per person each day. With additional education and rising incomes, WHI expected water consumption levels to increase.

21 Acumen Fund, “India Journal, January 15-27, 2007,” p. 10-11, online at http://blog.acumenfund.org/wp-content/uploads/2007/02/India%20January%202007.pdf (accessed April 2, 2007). In April 2007, 1 rupee was worth 2.3 cents.

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Each CWS plant served about 500 families, or about 2,500 individuals, and had a capacity of about 60,000 liters per day.22 The successful CWS pilot plants garnered attention and generated interest from a variety of potential partners, including local banks and government officials. The company planned to leverage these pilot programs to gain sales momentum for WHIN. That same year, WHI secured exclusive worldwide rights to the UV Waterworks technology when it acquired the India rights from Urminus, an Indian company that had previously been granted an exclusive license in India.

The outstanding obstacle to WHIN’s immediate plan to install at least 30 new CWS in Andhra Pradesh in the coming year was making financing for the systems more accessible at the village level. The plan was for the local community to contribute at least 30-50% toward the cost of each system as a down payment (in special circumstances, the company might provide up to 10% of the purchase price in the form of a term loan). In some cases, the community contribution would come from a wealthy individual.23 The company had attracted the interest of ICICI, India’s second largest bank, to create a loan facility allowing customers to secure the capital for financing the balance of the cost. But ICICI did not want to absorb the whole risk of such a transaction, and WHIN was looking for a guarantor to help secure the participation of a commercial financial institution.

CONCLUSION

The Acumen Fund team had some major issues to consider. WHI was developing in a way that demonstrated the power of commercial ventures to create important social benefits, and validated the venture philanthropy model. Acumen Fund’s financial support and expertise had helped this development, and helped bring safe water to many poor people.

But, what sort of support, if any, should it provide at this stage in WHI’s development? Which investment opportunity or approach was most aligned with Acumen Fund’s mission and priorities? Was either investment (an equity investment or a loan guarantee) merited given the potential risks, and which would be riskier for Acumen Fund? Finally, if Acumen Fund did not make a new financial investment at this point, how could it proceed in a way that would not send mixed signals to WHI about its ongoing support of their work, and to investors currently being approached for the Series C?

22 Ibid. 23 Ibid.

Acumen Fund and WaterHealth International: The Role of Venture Philanthropy: SM-158 p. 14

Exhibit 1 Acumen Fund Statement of Activities Years Ended December 31, 2005 and 2004

2005 2004 Changes in Unrestricted Net Assets Revenue Contributions – operating 7,227,622 2,459,994 Donated services 416,631 167,135 Interest income – program related portfolio loans 61,700 18,072 Investment income 146,754 75,920 Other income 18,872 11,625 7,871,579 2,732,746 Net assets released from restrictions Satisfaction of program restrictions 828,768 1,160,041

Total unrestricted revenue, gains, other support 8,700,347 3,892,787 Expenses Program services Portfolio expenses 2,040,485 1,577,134 Education and outreach 306,963 360,037 Metrics 285,846 201,379 Total program services 2,633,294 2,138,550 Supporting services Management and general 325,898 484,158 Fundraising 355,513 137,993 Total supporting services 681,411 922,151

Total Expenses 3,314,705 3,060,701

Increase in unrestricted new assets before portfolio loan 5,385,642 832,086 and investment activity Net assets released from restriction Satisfaction of program restrictions – new loans and investments 2,708,334 1,175,000 made Exchange loss on foreign currency portfolio loans (38,384) - Increase in unrestricted net assets 8,055,592 2,007,086

Changes in Temporarily Restricted Net Assets Contributions Portfolio grants 5,266,209 2,799,835 Restricted grants 750,000 180,000 Net assets released from restrictions (3,537,102) (2,335,041) Increase in temporarily restricted net assets 2,479,107 644,794

Increase in net assets 10,534,699 2,651,880 Net assets, beginning of year 10,703,635 8,051,755 Net assets, end of year 21,238,344 10,703,635

Source: Acumen Fund.

Acumen Fund and WaterHealth International: The Role of Venture Philanthropy: SM-158 p. 15

Exhibit 2 Acumen Fund Investments Under Management, 2001-2006

20

Total in US$ millions $ Grants $ Loans $ Equity $ Contractually agreed financings

6.2

3.2 2.2 0.7 1.8

2001 2002 2003 2004 2005 2006*

*Projected end of year

Source: Acumen Fund (reprinted with permission).

Acumen Fund and WaterHealth International: The Role of Venture Philanthropy: SM-158 p. 16

Exhibit 3 Acumen Fund Portfolio by Sector, 2006

Total investments = $20 million (projected at the end of 2006)

Water 11% 22%

India 45% Health 52% Housing 37%

Pakistan 33%

Africa Detail Kenya: $3.7 million Tanzania: $1.9 million South Africa: $1.8 million Egypt: $0.5 million

Source: Acumen Fund.

Acumen Fund and WaterHealth International: The Role of Venture Philanthropy: SM-158 p. 17

Exhibit 4 WaterHealth International Products

UV Waterworks module (left), and UV Waterworks modules integrated into a WaterHealth Centre (right).

Source: WaterHealth International (reprinted with permission).