Acumen’s Investing Acumen

Brian Trelstad on The Acumen Fund’s blog posted an article going through how this fund is trying to establish criteria for the valuation of social ventures. The article highlights many of the difficulties that the fund faces when trying to create an entirely new investing model yet still remain sustainable financially.

Venture investing, as our investment committee (comprising several members of our board) likes to remind us, is more art than science. Social venture investing takes that art to a whole new level.

Acumen’s starting point appears to be traditional enough as they start at the bottom and build up.

Our analysis always starts at the unit level: what is the product or service? Who are the customers? What are the costs to serve? How do you make money? How do you beat the competition? Any good analysis is clear on the assumptions at the unit level and builds up from there.

By doing this the Fund can quickly assess scalability of a given venture and also its fit with Acumen’s mission. Within this analysis, Acument does something interesting as it indexes the venture to the Best Alternative Charitable Option.

We also look at the relative social impact compared to the Best Alternative Charitable Option, are clear about the risks, think about the team and their alignment with our mission and values, and what value Acumen Fund brings to the table.

Maintaining a clear consensus that there are social problems that exist that are still better served via charitable organizations or traditional models, would seem to keep the Fund focused and limit the possibility of wasting limited financial resources. The post also discusses two other unique features of social venture investing — the role of patient capital and the lack of a hurdle rate.

What discount rate should we use to value the cash flows? Standard venture capitalists use 30%, but often use a rate of 35 or 40% in emerging markets. Should we go even higher because we are serving riskier customers in these risky markets, or should we have a social discount because these investments need our patient capital? If so, how low should we go? What assumptions should we use about how we exit? There aren’t many comparables that we can use to benchmark the company’s financial value: what should the price to earnings ratio of a private ambulance company be in Mumbai in 2012? Finally, many VCs will determine the valuation by their own required hurdle rate. Acumen Fund, using philanthropic capital to make venture investments, has no hurdle rate. Our obligation is to support innovative businesses and share lessons with the world, that’s our cost of capital.

The entire post can be read here.