Archive: Stu Taylor -

5 October 2009 | Posted By: Stu Taylor

Patient Capital

From Stu Taylor, Executive Director of IDE Canada…

I am an avid follower of TED podcasts. Now playing on my iPod is Acumen Fund CEO Jacqueline Novogratz, who, in her June 2009 TED address, cites IDE as an example of “patient capital” – her term for a third way between pure, market-driven capitalism and socially-driven philanthropy.

While her version of IDE’s history leaves a few gaps, her positioning of IDE in this in-between space is largely consistent with the way we view ourselves and the environment in which we operate.

One the one hand, there is a growing chorus of voices (interestingly, many of them from aid-recipient countries) proclaiming the massive failure of international aid to address poverty – especially in Sub-Saharan Africa. Economists Zambian Dambisa Moyo (‘Dead Aid’), Peruvian Hernando DeSoto (‘The Mystery of Capital’) and American William Easterly have all put forward compelling arguments for the scrapping or complete reformation of our current approach to international aid. Despite spending over a trillion dollars on aid to Africa over the past 60 years, we have seen little real growth, and in many cases even contraction and growing poverty. Aid has too often lined the pockets of corrupt officials, undermined local businesses by flooding markets with free or subsidized products and created a dysfunctional handout culture, where recipients’ ingenuity and creative energies are diverted into gaming naïve programs, rather than creating goods or services of real local value. Whether you believe in reform or wholesale abolition of international aid (if you have a couple of slack hours, check out the [June 2009 Munk Debate] in Toronto on the future of international aid), there is no question that the current system is broken.

On the other hand, while unfettered markets have tremendous power to create wealth – and are doing so for many formerly impoverished populations – they often bypass or ignore particularly vulnerable and poor populations. The truth is that many of the populations we work with – poor, rural families who depend on small parcels of marginal land for their livelihood – live with the reality of market failure. The farmers we serve are incredibly resourceful, hard-working and savvy. However, their communities are a high-risk proposition for most would-be investors and service-providers: poorly served by local communications and transportation infrastructure, subject to a variety of nuisance and exploitative policies and engaged in scattered production of low-volume, low-margin products far from major markets. This is by no means “low-hanging fruit” for businesses looking to fill a niche. At the same time, markets are where poor people already fight for survival. And we like the fact that markets, by definition, treat poor people as customers – listening and responding to their needs and priorities, rather than parachuting in ill-suited ‘solutions’ to grateful ‘beneficiaries’.

Novogratz’ definition of patient capital is investment that is risk-tolerant and long-term, seeking social return in populations – like poor rural households earning less than a dollar-a-day – that are notoriously risk-averse and focused on short-term returns. With the exception of a few, incredibly committed social entrepreneurs, willing (and able) to persevere in difficult environments and forego years of potential returns (like my friend Dan Ball of Forest Fruits Honey in Zambia), patient capital is a rare commodity in the open market. Organizations like Acumen – and IDE – stand in the gap between the social aims (but often limited effectiveness) of philanthropy and the power (but often limited social motivation) of the market.

I am often asked why – if IDE’s products are sold to farmers by local businesses and we emphasize the importance of viewing farmers as customers, not objects of charity – we are organized as a charity, seeking personal donations and grants from governments, companies and foundations. In fact, when Bill Gates visited IDE in India last year, his father asked exactly this question. Like Novogratz, we might describe the answer as patient capital. The money we receive as grants or donations allows us to invest in creating products and services for marginal populations that might be considered too risky or otherwise unattractive to businesses. We are not using the money to give stuff away, but we are able to make investments that might not be possible for a business driven by next quarter’s income statement.

These investments include research and development – designing and bringing to market new or modified products that meet the needs of poor customers, marketing – getting the word out among difficult-to-reach communities, training – helping farmers and local service providers develop the specialized skills they need to succeed, and connecting – linking farmers to better markets for what they can produce (a ‘dating service’ for small farmers and prospective buyers). We have demonstrated that, with these investments, formerly subsistence farmers can move into a thriving cash economy, creating wealth for their families and for a growing local service industry that sustains and drives further growth.

As Novogratz says at the end of her talk, this is how we “…build solutions that start from the perspective of those we are trying to help, rather than what we think that they might need.”

Welcome to iDE

© iDE. All Rights Reserved.