East Bali Cashews, an innovative partnership in Indonesia, underlines how big business can use its know-how to help social enterprises become financially sound and still deliver on their fundamental goal, says founder Aaron Fishman
Two years ago, my wife Lindsay and I had some big ideas: move to rural Indonesia, volunteer in remote health posts, and hopefully make a positive impact. We never imagined that leaving Vermont for the arid slopes of north eastern Bali would change our lives and those around us as quickly and profoundly as it has.
In just two years, we started a social enterprise from the ground up, created new employment for hundreds of villagers, obtained expertise and mentoring from the global private equity and investment firm KKR, raised nearly a million dollars in third-party funding, and partnered with Impact Investment Exchange to quantify the social impact of our endeavour.
Let’s start at the beginning. Desa Ban is among the poorest and most arid areas in Bali. The villagers have an average income of $2 per day. Isolation, poverty, malnutrition, lack of water and lack of education and jobs, especially for girls and women, make life difficult for the 3,000 families living in the Desa Ban area.
Two years ago, a group of friends who worked with us in community health development in the region decided to invest in a social enterprise. We realised that social and health programmes were not enough to change outcomes. Put simply, people needed jobs.
East Bali Cashews (EBC) started operations a little over a year ago and is now the largest employer inthe area, employing 130 people, 90 per cent of whom are women. When we arrived in Bali, we quickly learned that most of the villagers earned income from harvesting cashews.
The farmers then sold the nuts to traders who shipped them to India and Vietnam for processing, after which they came back to Indonesia to be consumed. In observing the farm-to-shelf life-cycle, I saw a business opportunity to process cashews locally in Bali and save on shipping costs. At the same time,we could enhance the lives of villagers, especially the women, by giving them first-time jobs and much-needed income.
This new business,East Bali Cashews, was formed as a Social Enterprise – a business specifically aimed to create a positive return to society. In choosing Karangasem for the new factory, one of the poorest regions of Bali, we sought to provide employment for women and make it easier to work with the farmers to improve their agricultural methods.
The hitch: we didn’t have any funding. We needed roughly $200,000 to rent the land, build the facility, buy all the equipment and hire the workers. On top of that, we needed an additional $200,000 in working capital to purchase all the cashews in the three-month-long harvesting season to last for the year. In April 2012, contributions from our friends and families – and my credit card – allowed us to raise the $180,000 we needed to get the factory started and to purchase the equipment. After borrowing an additional $200,000 from another 10 people, we were then able to buy the cashews.
Making a difference locally
By October 2012, we had created 130 jobs for villagers, 90 per cent of whom are women. This effort raised the income of poor families and stared to have a positive impact on the education and health of the local community. The business was generating $32,000 per month in revenue. Our cashews proved quite popular, giving us the opportunity to expand our sales. To do that, however, we needed even more money than we thought possible to get on our own.
Getting the first round of funding was hard enough. And now, I had run out of friends and family. So I reached out to Impact Investment Exchange (IIX), whose mission is to help social enterprises like ours grow, as well as to measure our social impact. IIX said they could provide technical assistance which would enable us to go for the much-needed second round of investment.
They wanted to know if we were interested in working with their new partner, the private equity and global investment firm KKR. They said the firm could assist us in developing our business plan, financial model and capital structure. I told them I had no idea what a private equity firm did. I had never even heard of KKR. But, we were happy to work with anyone who could help us.
During our first meeting in May 2013, I realised the great opportunity I was being presented. We knew we were making a social impact, but it was IIX and their sister organisation Shujog which could quantify it. We knew we were onto something with our business, but we had no idea how to present it to investors, or the best way to structure our finances to put us on a
sustainable economic footing.
Before we met KKR, we were worried we would need to raise money every single year by selling equity in our business. Their private equity team showed us another way. They helped us create a plan of requiring every investor to provide both the equity needed to expand the factory and the working capital, or debt, to purchase the cashews. Known as “stapled financing”, this approach gave
us a way to achieve financial sustainability while allowing the founders to keep our majority stake. It is a concept I never knew existed.
The KKR team also developed a business plan and an economic model based on what we had done. Without a business plan, it is difficult to get people to invest serious cash. Indeed, one such investor had been looking at us for some time, but would not commit the funding. However, when I presented the new business plan to him in September 2013 he told me: “Those documents are incredible for a start-up business. I have not seen them done as well as that before.” Two weeks later, he invested.
With this funding, construction is underway to quintuple the size of the factory, which will triple the processing capacity. By next August, we will expand our processing capacity from 20 tons per month to 50 tons per month, creating 150 new jobs.
Enhancing our impact
Beyond expanding the factory, we are aiming to build a childcare and nursery school at the facility with capacity for 60 children. Currently, there is no education available for children under the age of seven in the village, and many women cannot work without access to daycare. This co-located childcare centre, we hope, will change the face of the community and the lives of the children whose mothers work at East Bali Cashews, and will indeed be open to other village children as well.
We continue to have more big ideas. East Bali Cashews currently processes only 0.3 per cent of Indonesia’s cashews. Next year, we are looking to build a second facility in eastern Indonesia, which will be 10 times the size of the current one, growing our processing capabilities exponentially. That will take $9 million in capital. With what we learned from KKR, and how to show the measureable impact proven by IIX, we are much better positioned to get there than we would have ever been doing it on our own.
The impact of our partnership with KKR and IIX will go on long after this project has ended. With the investment from this project, East Bali Cashews’ measurable social impact will be $560,000 per year, primarily from the increased income and improved
health for our workers and their families. Before we received this technical assistance from our partners, our social impact was $205,000 per year. Thus, the social value of KKR and IIX working with us is already $350,000 each year.
I believe this is a model that others can, and should, follow. Social enterprises like ours can have an enormous impact, but they need technical assistance to move beyond the proof of concept stage. They often need investment mentoring, legal counsel and accounting expertise. In order to justify additional funds from investors, we need to measure everything.
Much as we had a big idea to create a social enterprise in Indonesia, I hope corporates can develop their own big ideas in which they focus less on pure philanthropy and more on using their business skills to grow social enterprises. The model exists for how to do this with Impact Investment Exchange and Shujog. Sharing best practice can have a major impact on the participating organisations and the communities in which they operate. This is a successful model that is not just for small entrepreneurs. Large corporations have immense talent that can be used similarly and I hope that we will see strategic impact investing outpace pure philanthropy in the years to come. Their impact on society will be much greater than what they are doing today.
Aaron Fishman is one of the founders of East Bali Cashews. EBC is the first large-scale cashew processing facility in Bali and uses sustainable, eco-friendly business practices to process unshelled cashews, package and sell them. EBC creates employment for women from farmer households who have had limited formal education and have never had salaried employment.