This post was originally featured on ImpactAlpha.com.
What a difference a year makes. Last Spring, Acelero Learning, the pioneering early childhood education provider was struggling to repay its early impact investors after the company's Head Start programs generated impressive academic gains but modest returns.
A year later, those investors are staying in and Acelero has an additional $30,000 each month to spend on expanding its services for low-income children, rather than interest payments. (See, "Kids Get a Head Start, but Investors Must Wait.")
The difference: A $4 million investment from the David and Lucile Packard Foundation.
Packard's investment came in the form of a "program-related investment," a category under the tax code through which foundations can invest in for-profit ventures in order to advance a charitable purpose. Packard, a longtime backer of early childhood education through grants, has a $180 million mandate for such "PRIs" and has invested more than $500 million through such vehicles since the '80s.
Though still only a tiny fraction of overall philanthropic funding, PRIs are emerging as a key strategy for leading foundations that are increasingly using them to unlock larger pools of capital. Low-cost PRIs can be used to lower risk or raise returns, thus making more deals work for market-rate investors. Packard also has made a number of program-related investments in conservation, such as the Freshwater Trust and Ecotrust Forests.
"For foundations, PRIs are a great tool for spurring new innovations and attracting private capital to support the activities we care about," says Susan Phinney Silver, Packard's program-related investments manager.
Acelero Learning, based in Harlem, was launched in 2001 to disrupt the Head Start non-profit status quo with a for-profit model that could attract private venture capital. Indeed, Acelero attracted equity investments from Boston Community Capital and Ironwood Equity Fund.
Today, Acelero Learning does $60 million in business each year. From a single program in New Jersey, in 2005, Acelero Learning this year will serve more than 5,000 children around Philadelphia, Las Vegas and Milwaukee as well as one of the largest Head Start networks in the $8.6 billion federal program.
Regulations restrict the profit potential of such contracts however, so a growing share of revenues comes from Acelero's Shine Early Learning platform. That business helps other Head Start organizations win contracts and improve their programs by adopting Acelero Learning's curriculum and assessment tools.
Acelero Learning's shift to such an indirect technical assistance strategy gives it added reach: Shine Early Learning reaches more than 35,000 low-income students with Acelero Learning's curriculum and tools.
Shine Early Learning is the focus of Acelero Learning's growth strategy, but by 2014, the company was still unable to repay the $4 million in private investment it had raised. After 10 years with the company, these fund managers had their own impatient investors to satisfy and pressed for an exit.
"We had breakthrough social impact," says Aaron Leiberman, founder and CEO of Acelero Learning. "But we realized that the part of the world we operate in is modestly profitable and not attractive as an acquisition, even though the social returns are attractive."
Last spring, Leiberman went to the market looking for fresh capital. He secured a short-term, $3.8 million mezzanine loan from Ironwood, which had invested $1.25 million in 2005. The loan also allowed the company to buy back Boston Community Capital's preferred shares from the $2 million Series A financing round.
The 12 percent interest rate looked set to reduce Acelero Learning's flexibility in making new investments, but at least appeared to let Acelero Learning build its Shine technology and technical assistance business without pressure to sell out to a buyer that may not share its mission focus.
That's where the Packard Foundation came in. The director of the foundation's Children, Families, and Communities Program, Dr. Meera Mani, had taken an interest in Acelero Learning's curriculum and diligent progress benchmarking. A member of her team had visited Acelero Learning's Las Vegas program site. The low-interest program-related investment appeared to be the path to highest impact, saving Acelero Learning $30,000 in interest payments every month.
When Acelero Learning swapped out the 12 percent mezzanine loan for a 1 percent PRI, Lieberman was prepared to completely buy out two of its early equity investors.
Leiberman did not anticipate the effect Packard's PRI would have on its investor base. With Packard's loan helping to mitigate the company's risks, other investors agreed to take a two percentage-point reduction on their accruing dividends. In return, they gained common shares with the potential for additional long-term returns.
"Our entire investor group agreed to take a lower return on their existing positions because Packard's loan, at such a low interest rate, made their returns more secure," says Lieberman. Acelero Learning repaid its initial Series A investment at an 8 percent return.
In addition, Ironwood contributed some of the warrants it received last year to Acelero Learning's charitable foundation. Acelero Learning's three founders matched, giving the charitable foundation a 5 percent stake of the company.
The extra cash from the interest savings are marked for growing the Shine Early Learning platform. Acelero Learning wants to see another 4,000 kids benefiting from its curriculum through Shine Implement over the next four years. Through its Shine Assist business, which provides technical assistance to other Heads Up organizations, it hopes to extend its reach to another 10,000 kids per year.
"We are thrilled to support the expansion of Acelero Learning's promising early childhood education model and services within communities across the country," said Packard's Silver.
The $4 million question is, What does such low-cost financing say about Acelero Learning's commercial viability? At least some of Acelero Learning's investors were initially expecting market rate returns.
Leiberman turns the question around. How appropriate is the venture-capital model for high-impact companies that while profitable, are unlikely to be acquired or generate "unicorn" returns?
"As the business progressed, we realized we just didn't need that much capital to get where we wanted," Lieberman says. "We are on a clear path to give our investors an appealing return without forcing an exit that might not make sense."
This reporting for Impact Alpha was contributed independently by Jessica Pothering. The Packard Foundation is a sponsor of Impact Alpha.
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