Yesterday, Acumen Fund‘s Chief Investment Officer Brian Trelstad came to NYU to conduct a live case study on a real company that Acumen Fund invested in, in an effort to educate MBA and other students on the investing strategy and process of this innovative social venture fund. I actually wrote about Acumen’s approach sometime back.
The company under scope was Ziqitza Healthcare Limited (better known at Dial 1298), a for-profit ambulance service located currently in Mumbai aiming to provide ambulance assistance for all in 15 minutes. Using a willingness to pay revenue model, the company subsidies services for the poorest through fees generated from providing care to those that can afford to pay.
Before I jump into the heart of the case study, here is a video that we were shown at the outset of the lunch. In addition to providing ambulance services, the company is now also figuring out innovative ways to power their vehicles with renewables. You can read the rest of the review after the jump.
The first thing that hit me was how similar to a traditional VC Acumen’s investing process is. The issue of valuation and returns dominated the second half of the event. When asked by another student why the social impact of a business is not included in the valuation of the company, Trelstad responded by saying that if the company had not convincingly shown the potential magnitude of their social impact initially, they would not even have gotten to the point in the process where valuation is even a negotiable term. In this respect, Acumen views the social impact of any potential portfolio company as the first major hurdle that must be overcome before capital discussion can start. In order to actually measure this, Acumen utilizes the BACO, or the Best Alternative Charitable Option — a metric used to develop a comparable assuming the money was allocated to a different approach.
Moreover, Trelstad urged us to view it from the perspective of an exit. With Ziqitza, for example, the most likely exit for Acumen is when the company is acquired by a larger healthcare conglomgerate, e.g. Apollo, and they will not be looking at the social impact of the company when making their decision. So it does no good to inflate the valuation of a portfolio company by including social impact in their valuation. This second point is something that has never occurred to me before, but upon hearing it I could not help but agree.
I will return to valuation in a second, but first I wanted to highlight some useful observations that came out of the case itself.
- Deficiencies in the leadership team: One of the evident characteristics of Ziqitza’s leadership team was that despite their entrepreneurial background and passion for the company, none of them had any operational experience in the ambulance service industry before. In order to address this weakness, the management team actively forged partnerships with organizations in London and New York to exchange best practices and knowledge transfer. The lesson I thought that was most crucial here was (1) the ability for the team to recognize its deficiencies and (2) to proactively go out and tap into networks that would help them address those shortcomings.
- Labor Risks: Often times the actual proficiency of staff gets overlooked, especially in places like India, where labor supply is so large. For Ziqitza, they needed to train paramedics or convince doctors to ride the ambulances, resulting in a workforce of either under- or over-qualified personnel. Would such a workforce materialize in Mumbai?
- Barriers to entry v. Network effects: One concern that many of us raised was the apparent lack of barriers to entry for other competitors to come and and drive down profits. Mumbai’s current ambulance services industry is very fragmented, however, and so this fragmentation actually resulted in a pseudo-barrier. The complexity of the actual operations coupled with the lack of a market leader actually appears to have assisted Ziqitza in developing a sustainable market presence — an outcome that would appear counterintuitive at first blush.
Returning now to Acumen’s valuation methodology, of which Trelstad readily admits is often more “art than science,” it seems as though many of the critical criteria that conventional VCs employ apply in the social space as well. For example, Acumen generally is very wary of owning more than 49% of a company, a maxim that most VC’s also follow. One area where Acumen differs greatly is their hurdle rate, or lack of one. Many VCs will value companies in a way that forces them to return a minimum amount that is conducive to the VCs risk tolerance. In doing so, sometimes the valuation of the company ends up fitting the expectations of the investor, as opposed to the other way around.
Overall the talk was a great look at how Acumen, and theoretically other social VCs, are investing their philanthropic capital to help social ventures achieve scale.