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When Mohnish Pabrai was a child he was lucky enough to attend an elite private school in his hometown of Mumbai, India. For several years, he sat next to a classroom window that overlooked an immense slum that flooded during monsoons and blistered in the heat. Every day, he watched as the slum's inhabitants struggled with basic survival. Only 10 feet away from this destitution, young Pabrai felt as if there was an unbridgeable gulf between him and the caste of Indians known as "the untouchables." "Not once did any teacher ever acknowledge there was anything worth looking at out that window," Pabrai says. "You had the constant smell of raw sewage, but it was never mentioned."

Decades later, Pabrai, now 47, is doing more than reminisce about the horrors he witnessed outside that window. A wealthy hedge fund manager, Pabrai has come up with a way to lift some of the most desperately poor children out of those slums. By creating The Dakshana Foundation, a market-based philanthropy with clear and sustainable objectives that are easy to measure, Pabrai is sending hundreds of Indian students to the country's most elite technical university — and therefore giving them a shot at a life-changing career.

It would certainly be simple for someone like Pabrai never to look back. As the managing partner at Pabrai Investment Funds in Irvine, California, he is a millionaire many times over. Pabrai was once featured in Forbes magazine in his pajamas, a symbol of the easy life, and in 2008, he shelled out $320,050 to have lunch with his business idol, Warren Buffett (whose investment style Pabrai emulated with his family of hedge funds). Yet, he says that vision of poverty he witnessed through his classroom window has haunted him all these years: "In some subconscious way that permeated and influenced me."

Inspired by Buffett's decision to donate his fortune to the Gates Foundation, Pabrai and his wife, Harina Kapoor, decided they would start giving away roughly $1 million a year as their net worth crossed $50 million. Although at first he wasn't sure how to give away his money, he knew he wanted to be able to quantify his charitable offerings rather than use them to just sit on a museum board with other wealthy investors. He also looked at simply writing a check as an old man's sport. "I have the energy of a lifetime to build something," he says. "I can start experimenting now with the clear understanding that many of my experiments will fail."

A firm believer in education as a golden ticket, in 2007 Pabrai set about establishing special two-year boarding schools where impoverished yet highly intelligent students can study to take the Dakshana-subsidized entrance exam for the prestigious Indian Institutes of Technology (IIT). With a 2% admission rate, it's the most exclusive technical university system in the world. Tuition is free, but the entrance exam is expensive and daunting. Many hire costly tutors prior to taking the test. Five years later, Pabrai's schools are producing some extraordinary results. Nearly three quarters of Dakshana's graduates were accepted by the IIT system last year. And if a Dakshana scholar does not pass the IIT exam, he or she is then encouraged to take the exam for another college, such as the National Institutes of Technology (NIT).

Pabrai runs his foundation, Dakshana (which means "sacred gift" in Sanskrit), as swiftly and successfully as he runs his hedge fund. His foundation has a single, narrow focus and is committed to methodically measuring social return on investment — easy enough, the end game being how many kids get into IIT. After a few trials and errors, which he cheerfully spells out in his annual reports, he has now nailed down a successful formula. He has only three full-time employees, including CEO Colonel Ram K. Sharma in Pune, India, two part-timers and a slew of volunteers.

Pabrai focuses on older students already attending the Jawahar Navodaya Vidyalaya (JNV), a government-funded rural school system. Dakshana plucks the top 10% of the approximately 40,000 kids who take a 10th grade government exam, and offers them an IQ test and entrance exam. The top students from this round are then offered room and board in eight countrywide campuses and full-time coaches to prepare for the IIT exam two years later. In a unique collaboration, the JNV system pays for the room and board, but Dakshana pays for the top-notch education, the exam fees and, according to Colonel Sharma, some extras like quality food and medicine. Once the student is accepted into the IITs or NITs, Dakshana will help with grants and scholarships for out-of-pocket expenses. As word gets out about this program, applicants are growing in number — and so are open slots. Last year, there were 214 new Dakshana scholars; this year about 450. Next year, Pabrai says they will offer scholarships to 700 kids.

The funding comes in part from Pabrai's own money. After studying how Warren Buffett gives away his earnings, Pabrai decided to go with an annual give-away of 2% a year, which is about $1 million. He also brings in about $1.3 million from other donors. While they initially spent approximately half a million a year, this will increase to about $2 million as they add more scholars and contribute to new campus infrastructure. Pabrai expects Dakshana's growth rate to be about 40% or 50% over the next four to five years — and that his family's contributions will eventually end up at about a quarter of the total contributions. So far, since Dakshana's inception, the foundation has spent just over $3.5 million.

Jason Saul, CEO of Mission Measurement (a consulting firm that measures social impact), says The Dakshana Foundation is part of a new swell of philanthropies. "People are giving in ways that are more market-based, more sustainable and more consistent with their world view," he says, citing the Skoll Foundation and Kiva as examples. "This generation doesn't want to just give to charity, they want to solve social problems and see results — and know that their solutions are sustainable."

Dakshana's results thus far have been easy to measure (mostly because Pabrai mandates complete and public transparency of his organization). Since 2007, 276 Dakshana scholars out of 713 (38%) have been successfully admitted into the IITs. By 2020, Pabrai says he hopes his schools will account for 10% of the Institutes' 20,000 freshmen.

This May, the first handful of Dakshana scholars will be graduating from the IITs and other Indian universities. One of these, Shashank Dubey, contacted Dakshana after he, his mother and his aunt left an IIT testing site in tears after they were turned away in 2007 (they had gone there to beg the testers to allow the boy to take the test for free.) A top student, but desperately poor after his street vendor father had passed away, he easily passed Dakshana's entrance exam. Dubey has since has gone on to Maharashtra Institute of Technology, a top-50 engineering school in India, where he has majored in petroleum engineering. He did an internship with Halliburton in Malaysia last summer (arranged by Dakshana's CEO) and when he graduates, he has a job with Cognizant Technology Solutions. "It's because of Dakshana my dream came true," he says now, with great emotion in his voice. "I'm deeply indebted to it and will try my level best to return to Dakshana until my last breathe."

And this is the crux of what Pabrai is hoping to instill in his scholars — and banking on for the future of Dakshana: future wealth recycling. At one point, Dakshana scholars were gently asked to give 10% of their upcoming earnings back to Dakshana. "I think the Dakshana approach strikes me as being very hands on, more engaged and very focused which is not unheard of but it's also not the norm in philanthropy," says Lucy Bernholz, the managing director at Arabella Philanthropic Investment Advisors and a visiting scholar at the Stanford University Center on Philanthropy and Civil Society. "But there is interesting idea here that is not common — the idea that young people who earn great wealth would pay back some earnings into the foundation. There is a lot to be said for over time building intellectual capacity and economic viability — building from the beginning a sense of knowing who helped you get there."

Pabrai, however, insists this is a mere suggestion that will more likely evolve into nothing more than a "nudge" down the road to some of the wealthier graduates. And Dakshana's CEO Colonel Sharma says he simply wants his scholars to become good citizens. "We say, 'If you help your own brothers and sisters and family and town, we will be very happy.'" Pabrai is more interested in encouraging others to steal his idea. "Humans don't appreciate the power of cloning," he says with a laugh, explaining that he cobbled together the idea of Dakshana himself by studying many other philanthropies and approaches. "I think a lot of people are getting more serious about how to do the most good, but there is no road map. I'm hoping I can offer an example."

For now, though, he's content with offering a new life to needy students who are willing to work hard. As Poonam Narain wrote in her Dakshana application essay in 2009: "I am very thankful to Dakshana as it has given this golden chance to poor children to fulfill their ambition. These poor children that can't afford to go on to further study are unable to do anything in the future. Dakshana has given us an opportunity to come forward to prove our hidden talent. In this world nothing is possible without money, the money which God has denied us." Thanks to her Dakshana scholarship, Narain is now a full-time computer science major at IIT-Roorkee with a summer internship at Deloitte.

• Kristin Kloberdanz / Livermore