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In 2012, global health financing totaled $28.1 billion (just shy of the $28.2 billion peak
achieved two years earlier).1 Governments provide the majority of this funding, but each
year private philanthropists play an increasingly prominent role. Private contributions
through foundations, nongovernmental organizations (NGOs), and corporate giving
accounted for nearly 15 percent of global health funding in 2010.2 Private sector participants can manage their own global health programs or use their donations to fund other
organizations performing work in the sector.3
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The Mulago Foundation is a private foundation focused on the prospect of creating a
better life for the world’s poor. Concentrated in rural settings in developing countries,
the Foundation’s work is in four areas that contribute to this overarching goal—
livelihoods, health, education, and conservation.4 The Mulago team looks for investment opportunities in promising products and services that address these high-priority
problems. When it comes to health, the organization is particularly committed to improvements affecting the lives of mothers and children.
In seeking investments, Mulago looks for the best solutions to the biggest problems in
the poorest countries. The team describes itself as “unabashedly obsessed with impact:
measuring it, funding it, and scaling it up,” and considers its job “to find those [organizations] most able to create change and get them what they need to do it.”5
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At some point, many global health innovators will grapple with a choice between
establishing their organizations as nonprofit
or for-profit entities. Importantly, one of the
key implications of this decision is that it
determines what sources of capital their
organizations can tap into to fund their
work. Nonprofits typically rely on donations from individuals, foundations, or
corporations, often in the form of grants,
which are generally given in anticipation of
some "social return on capital.”6 In contrast,
for-profit organizations commonly raise
money from commercial investors (angels,
venture capitalists, and even impact investors) in exchange for equity in the organization. These investors expect a more traditional return on their money in the form of an
eventual “exit” through which they will recoup many multiples over the original investment amount.7
Because many mission-driven global health innovators are creating social businesses
that will have a revenue stream, deciding between these options can be a difficult
choice with no “right” answer. But in order to ensure the sustainability of the organization, innovators must think carefully about their organization’s legal structure and
capital strategy. This is critical in order to most efficiently identify and pitch to potential investors and will be a key question that credible investors will ask before they will
commit funds to the effort, especially as the investments become significant. As Laura
Hattendorf, the Portfolio Director for the Mulago Foundation, described, “There’s a
valley of death in this space. When somebody gets $500,000 of funding, they think
they’re on their way. But there’s this huge gap between $500,000 and the $3 million
that they need a year or two from now. And that’s when problems start to occur.”8
Accordingly, innovators must assess the pros and cons of their alternatives, make a
decision, and position themselves to bridge this gap.
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In her role at Mulago, Hattendorf interfaces with hundreds of mission-driven innovators
and social entrepreneurs each year, many of whom are working in the global health
sector. Through these interactions, she has gleaned valuable insights that can help innovators as they wrestle with this important issue.
For nonprofits, being dependent on donor subsidies can be frustrating and challenging.
“Relative to private investment capital, the dollars available are tiny and the process to
secure them is ridden with inefficiencies,” Hattendorf contended. In order to qualify for
grant funding, the innovator’s work must align with the focus of the donor and align
with their theory of change. Additionally, funding agendas among foundations, corporations, NGOs, and even governments can be fickle, changing with shifts in leadership,
politics, and public perception. The uncertain nature of donor priorities compounds the
funding risks faced by nonprofit entities. Another source of risk is the timing of grant
cycles, which may or may not match the strategic needs of the nonprofit organization.
Grants are also frequently linked to specific projects or activities, restricting the organization’s ability to decide how those funds can be used and preventing them from supporting general management needs. (Unlike
most foundations, Mulago provides unre!
stricted funding with the view that the
leaders of the organization know better than
few for-profit ventures
anyone else how those dollars are best used
and leveraged.)
bottom-of-the-pyramid]
We find remarkably
that both reach [the
target population and have the potential to
become viable business enterprises.
Despite the known challenges of working
with grant-making entities, if an organization’s mission is to positively affect users at
the base of the socioeconomic pyramid, a
for-profit model can make this difficult to
achieve. According to Hattendorf, “We find remarkably few for-profit ventures that
both reach [this] target population and have the potential to become viable business
enterprises. Cash flow projections are wildly unrealistic, management teams untested,
and market failures unacknowledged. There’s 10 times the risk profile of a standard
U.S. venture deal without the same potential upside.” 9 Kevin Starr, Mulago’s director,
elaborated on a few key points in a blog post on the subject:10
•
“Few solutions that meet the fundamental needs of the poor will get you your
money back,” he wrote. It’s rare for an organization seeking to address basic
health needs to create a business with realistic profit potential serving customers in the target geography, primarily because these opportunities represent
profound market and/or government failures that must be overcome. For the
few that do, it will take years, if not decades, to reach profitability.
•
“When overcoming market failure to reach the poor, it takes subsidy to do the
R&D, launch the business, build the market, and sometimes even to deliver
the product or service over time,” said Starr. “Delivering at a price point the
poor can afford almost always translates into very small margins.”
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•
His next point is that revenue does not equal profit. “There seems to be this
idea that if a revenue stream exists, it could be turbocharged to make a profit,”
Starr wrote. “That’s simply not so.” His belief is that the best organizations currently in the field are already operating on an incredibly lean and efficient basis
and there are limits to how much revenue can be squeezed out of low-income
markets while still serving them well.
•
Finally, Starr is concerned with the idea that the imperative to achieve a financial return can drive organizations off mission. “There really is only one bottom
line,” he stated. “It’s either impact or profit—and the demands of investors can
pull an organization away from the target population toward those able to pay
more. We’ve seen it happen, and we’ve seen more than a few organizations
start in more affluent markets with the intention to move down-market to the
real target population when the numbers are right (they almost never do).”
In combination, these factors make it difficult for for-profit organizations to realize their
goals in base of the pyramid markets and also for them to attract commercial investors
who expect a financial return on their money. As a result, in its efforts to meet the basic
needs of people in some of the world’s poorest countries, Mulago’s portfolio consists of
95 percent nonprofits.11
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Cautioning would be for-profit organizations against additional pitfalls, Hattendorf noted that, “Entrepreneurs like to think that raising
money from investors is somehow
easier than raising money for a nonprofit. But meeting the expectations
of debt and equity investors can be
quite difficult. Most business startups don’t end up raising outside
funding. And just compare how
many businesses shut down—lots—
to how many nonprofits shut down—
not that many.”
Regarding its own investing philosophy, Mulago is open to supporting
both for-profit and nonprofit entities.
However, as Hattendorf summarized,
“The right capital structure needs to
be applied to the right organization at
the right time.”12 She offered Embrace, maker of a low-cost infant warmer as an example: “Embrace … started as a nonprofit, only to emerge four years later as a for-profit
company that will have an ongoing royalty relationship to the start-up nonprofit. In 2008,
moving their first product through research and development and clinical trials was
simply not a good fit for debt or equity funding. There were too many unknowns and a
relatively inexperienced management team, both of which would have limited their
ability to attract investors. But now that they have a viable product, along with a more
mature management team, debt and equity are the right forms of capital to fuel manufac"#$%&'!('#)*%+,')-!.A''=,)&!%!$B&%$!8%)*!.%C,+%$<!=+D#.+#DB!!!!!!6":$;<13!!!!!!N$
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allowed the company to get past research and development and make private financing a
realistic option.13 !
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