Investing discipline applied to Philanthropy.
Monish Pabrai and the Dakshana Foundation.
The theory of investment is to evaluate investment opportunities to allocate scarce capital to a portfolio of opportunities which offer the best risk adjusted returns. There is a good case for the portfolio to be as concentrated as the investors knowledge and risk tolerance permits. If you have too much diversification you are likely to get average results. One should focus on the best opportunities and do not waste capital on the more marginal investments.
Can this approach be applied to philanthropy? - Monish Pabrai, an Indian-origin investor, based on the United States is convinced this is the case. He decided to “invest” in some charities in his native India . He wanted to evaluate charities in the same way he analysed potential investments. Pabrai tried to understand the returns on investment the non-profits were achieving. Many said they did a lot of good but did not measure this -this is like a company that did not keep any accounts.
Other charities did too many things – they lacked focus and were like overdiversified Funds – and predictably they were getting subpar results Pabrai spent two years looking for a charitable organisation that met his criteria and finally heard about Anand Kumar in Patna, Bihar who runs the the Super-30 project.
Kumar had been a brilliant student who due to the poor financial circumstances of his family had been unable to go to university. In Super 30 he carefully selected 30 bright but very poor students and coached them for a year for the entrance examinations for the Indian Institutes Of Technology (IIT).
The IITs were founded by Nehru and have a track record for producing science and technology graduates who have become academic and corporate leaders in India and globally. About 2% of applicants to the IITs are allocated a place and the competition has given rise to a big money private coaching industry. Kumar’s Super 30 success rate was sometimes as high as 100%.
To Pabrai the investor, this was a brilliant example of capital allocation. For a small fixed-up front cost, a huge return was made. The successful students are almost guaranteed a high paying job in a large Indian or Multinational Company. They can completely transform their own lives as well as those of their extend family. The return on the investment can be measured as the present value of the lifetime of earnings of the student more than what they might have earned if they had not participated in the Super 30. The Return on Investment is very high. A clear no-brainer investment.
Pabrai offered Kumar capital to scale u but Kumar said he was happy with just 30 students. However, he told Pabrai he was welcome to copy the project.
Imagine if Macdonald’s having perfected their concept had restricted themselves to one restaurant in Illinois. It would have made no sense. Pabrai decided to scale up the Super 30 concept and founded the Dakshana Foundation.
Pabrai discovered that India had a network of boarding schools for poor rural children which had been founded by Rajiv Gandhi in the 1980s. He decided he would leverage off their efforts and select the brightest students from these schools and coach them intensively for the IIT entrance examinations. The project has been working for 20 years and has been a great success. Every year it takes 600 of the poorest students on the planet and gets about 70% of them into IITs or the leading medical school in India. The 30% who do not get into IITs win places in very good Indian Engineering or Technology Institutes. As the programme has matured and scaled the success rate has increased while the cost per student has fallen. It now cost about US$ 2500 (GPB 2000) per year to coach each student. The return on this money is measurable and clearly very high.
The next step is to expand from 600 students to 2000 per year in the next three or four years. Many thousands of lives have completely been transformed and lifted from grinding poverty. Dakshana Alumni are working in large Indian and foreign companies. They have formed a network which supports the current generation of students. Some have come back to teach at Dakshana full time.
Pabrai has spent thirty years reading annual reports of companies and feels that he has the obligation of complete transparency to his supporters. He produces a remarkably detailed annual report which you can find at www.dakhshana.org.
Both companies and charities are quite similar as both are involved in capital allocation. They are investing precious scarce capital to achieve the highest possible return. Both have to apply the same discipline in a precise ruthless manner. It may be more difficult for the charity to measure their returns, but the essential process is the same.
Charities cannot just say they are doing good and therefore are not subject to the rules of economics. If they are getting poor results they are wasting capital and the world would be better off if they re-allocated to higher return activities.