SOCIAL ENTERPRISES: Doing Good is Good Business

SOCIAL ENTERPRISES: Doing Good is Good Business

More enterprises and investors across sectors like financial services, healthcare, retail and education are now seeking to combine social good with profits. They are realising that social enterprises do not just positively impact communities, but also bring in competitive returns.

    The rise of market-based solutions to drive inclusive growth is a business opportunity being chased equally by investors and entrepreneurs. The demand for products and services by consumers in underserved economies across sectors such as healthcare, financial services and retail products has served to create a market opportunity that a host of entrepreneurs are seeking to capitalise on. Investors are realising that the business of social good can also offer competitive returns on investment. This intersection of capital, entrepreneurial drive and market demand was first showcased to best effect in the microfinance sector. Despite the regulatory imbroglio the sector has contended within the past two years, risk capital investors have continued to back leaders like Ujjivan Financial Services. More enterprises are now seeking to combine social good with profits. We turn the spotlight on a clutch of such ventures across the country.

FINANCIAL SERVICES

At the height of the crisis that engulfed the country’s 30,000-crore microfinance sector, Bangalore-based Ujjivan Financial Services successfully raised $25 million ( 127.9 crore), largely from two marquee foreign institutional investors—FMO and WCP Mauritius Holdings III.

The capital infusions came at a time when a number of India’s leading microlenders were going under water, unable to recover loans made to the rural poor after Andhra Pradesh issued an ordinance that curtailed debt recovery, capped interest rates and waived loans to arrest a spate of suicides by farmers.

The current fiscal is seen as a litmus test for the MFIs. “Relative to 2010, the sector is going through a very serious transition phase right now. But the doom-and-gloom scenario seems to have abated a bit,” said Samit Ghosh, founder and managing director of Ujjivan, a semi-urban and urban-focused MFI, which has a presence in 20 states. It does not operate in Andhra Pradesh, which was seen as the pilot state for microfinance in India. But Ghosh will be the first to admit the Andhra situation’s fallout on the entire industry. “Earlier, where there was undisciplined lending and borrowing from the banks, a stronger system has come into effect, leading to a more conducive environment,” he said. With the Reserve Bank of India taking over as the sole regulator for the industry, investors too are making a cautious comeback. In September, Ujjivan announced that the International Finance Corp—the investing arm of World Bank—invested 45 crore in the company, making it one of the best-capitalised MFIs in the country. Similarly, Kolkata-based Bandhan, the largest MFI by outstanding loans in India, is now exploring newer markets by taking its first steps in the retail sector. The new entity, Bandhan Creation, will retail handicrafts and leather products made by borrowers of Bandhan, which services over 30 lakh people across 18 states in India.The MFI is a rare example of a micro-lender looking to explore opportunities beyond its core strategy, attracting two major investors—IFC and SIDBI.

“While most MFIs are based in the southern part of India, Bandhan caters to lowincome states, particularly in the North-East. This fit very well into our strategic thrust,” said Swapnil Kant Neeraj, senior microfinance specialist at IFC. In August 2011, IFC invested 135 crore for a 11% stake, the largest exposure the financial institution had in the Indian micro-lending sector. “Bandhan has one of the lowest costs of operations among MFIs in India, and it stringently follows responsible lending practices,” Neeraj pointed out.

But a lot is riding on the Microfinance I n stit ution s ( D eve -lopment a nd Regulation) Bill, which is expected to give a fresh lease of life to the sector. “There has been a lot of talk about greater client protection, and figuring out better avenues for redressal. The industry needs more transparency in interest rates and distribution of profits,” said Bandhan’s founder and MD Chandra Shekhar Ghosh. “There has to be a balance between the social and commercial aspects,” he said.

The financial institutions have sat up and taken note. In February, Bandhan announced that it planned to sell 500 crore worth of farm loans to IDBI Bank, in what would be one of the biggest securitisation deals in 2012. Selling loans releases capital for MFIs and helps them deploy fresh loans to the poor without borrowing directly from banks.

HEALTHCARE

Rohina, 23, a home-maker, and her husband Imtiaz, who owns a mutton shop, had a bitter experience during the delivery of their first child. To avoid unhygienic government hospitals, the couple went to a nursing home which charged them 30,000 for the Caesarean Section. It still did not make any difference. Besides the lack of quality care, the staff demanded extra money and treated them shabbily. Which is why, they decided to have their second child at Hyderabad-based LifeSpring Hospitals, a chain of low-cost maternity hospitals.

As of September, the five-year-old LifeSpring had delivered more than 17,000 babies and treated over 1.5 lakh outpatient cases. LifeSpring gets over 70% of its customers from low-income communities who earn between 150-300 a day. Most of them are unskilled labourers having daily-wage jobs or running small businesses. A delivery at LifeSpring costs around 4,000, including the fee for doctors, staff and medicines, compared with 10,000-15,000 at private hospitals, according to Anant Kumar, founder and CEO of LifeSpring, a 50:50 joint venture by Acumen Fund and HLL Lifecare, a Government of India enterprise.

India’s maternal mortality is higher than even sub-Saharan Africa. More than 63,000 women die every year from pregnancy-related causes and an equal number suffer moderate-to-severe complications, according to data collated by Registrar General of India. “Around 70% of these deaths are preventable,” said Kumar. In the next five years LifeSpring, which now runs 12 hospitals in Hyderabad, aims to set up 100 hospitals across cities like Delhi, Mumbai and Bangalore. The company which has revenues of 8 crore aims to touch 25 crore in the next three years.

Vaatsalya Hospitals, another affordable healthcare chain started by doctorsturned-entrepreneurs Ashwin Naik and Veerendra Hiremath in 2005, has 17 hospitals that treat over 400,000 patients a year. It employs 1,400 people and provides services such as gynaecology, paediatrics, general surgery and general medicine.

Before co-founding the firm, Naik was involved with the Human Genome Project at California-based Celera Genomics. He came back to India and was involved in a couple of startups. Naik and Hiremath, who were roommates at Karnatak Medical College in Hubli, hailed from small towns and so realised there was opportunity in these areas. “While majority of the hospital chains focused on the lucrative urban middle-class population, we were looking at the non-urban market,” said Naik, who raised an initial funding of 1 crore from angel investors based in the US and Europe.

The company also raised first round of venture funding from early-stage fund Seedfund. Subsequently, the firm raised money from Oasis Fund and Aquarius India Fund, raising a total of $17.5 million since inception. Vaatsalya is expecting to earn revenues of around 100 crore by next year. “An affordable healthcare model is sustainable because it offers volumes,” said Devi Prasad Shetty, cardiac surgeon and founder of Narayana Hrudayalaya. Naresh Malhotra, a former Cafe Coffee Day CEO, is taking a contrarian approach and recreating the old model of family physicians. “We are targeting middle-class and lower middle-class. Patients pay 125 as doctor’s consultation fees,” said Malhotra who got funding of 10 crore from Silicon Valley Bank. “The model of healthcare has to change and we believe that the Indian low-cost model will be able to address those issues,” said Shetty of Narayana Hrudayalaya.

RETAIL

A handful of entrepreneurs in the highly competitive retail segment are proving that for-profit business models with a strong social focus is sustainable. Companies like Fabindia and Mother Earth are attempting to balance profitability and social good, and are succeeding. They are doing this by focusing on handmade products and by empowering the artisans who create these products. “It is a myth that mixing social good and profitability will not work. Profit ultimately comes from the value created,” said William Bissell, MD-Fabindia, which was launched in 1960 by William Bissell’s father John Bissell. The company, which recorded turnover of around 500 crore in FY 2011-12, retails 60,000 products ranging from handcrafted apparel and organic food to jewellery, sourced from 80,000 artisans spread over 200 districts. It operates 168 outlets in India across 73 locations and eight stores internationally.

Nearly 700 Fabindia employees got a stake on its 50th birthday in 2010. It has also set up three community-owned companies that manage 17 community-owned clusters of artisans from which Fabindia sources its products, with nearly 40,000 shareholders. This has provided artisans with capital, access to market and infrastructure and greater ownership.

One reason for the success of these retail ventures is their focus on handcrafted products, say industry analysts, as consumers are willing to shell out more for unique products. “These brands have better margins and are able to charge around 20-25% over mainstream retailers,” said Saloni Nangia, president of retail and consumer products at Technopak.

Fabindia’s Bissell says not just consumers, but even employees and artisans should feel they are working for something special. “These intangibles cannot be measured but when people have a positive feeling towards the company, the business will grow in the long term.”

Neelam Chibber, co -fou nder of Bangalore-based ethnic products company Industree Crafts, takes this a step further. “It is not enough for social enterprises to just have a retail strategy. We are able to handhold producers and manage supply chain thus bringing in efficiency,” said Chibber, who founded the Bangalorebased company with Gita Ram as a forprofit export-focused venture in 1994.

In 2008, the company launched Mother Earth, its retail brand for the domestic market. Three years later, the company went through a structural change and now operates as separate manufacturing and retail companies. The manufacturing company received $1 million investment from Washington DC-based Grassroots Business Fund. While earlier the company procured handcrafted products from a country-wide network of over 650 small producer groups, Chibber said, they are forming their own network of producer companies.

“The producer units will be fully-owned by the producers. We hope to procure up to 70% of our products from these companies in the next two years,” said Chibber, who is targeting sales of around 50 crore in FY2012-13 and 100 crore in the next two years. The company, which operates eight company-owned stores and 60 shop-inshops, had sales of 27 crore in FY2011-12. Mainstream investors have also woken up to the market potential of these brands. While Future Ventures has backed Mother Earth and owns over 50% of the company, Fabindia roped in private equity investors this year. Premji Invest, the investment fund owned by Wipro’s billionaire Chairman Azim Premji, acquired a 7% stake in the company for 100-125 crore. L Capital, the PE arm of the word’s largest luxury goods group LVMH—Moet Hennessy Louis Vuitton—invested 120 crore for an 8% stake, valuing Fabindia at 1,400-crore.

“Social enterprises take a much longer investment cycle of 6-10 years vis-à-vis commercial investment cycles of 3-5years. There is a need for ‘Patient Capital’,” said Arun Gupta, president and chief investment officer of Future Ventures.

Other companies are creating their own social enterprise models.
Five-year-old Earthy Goods does not own stores but retails the organic and handmade products it sources from small producers through online and offline stores. One-year-old Craftsvilla provides an online marketplace where sellers of handmade products can reach out to consumers.

“I hope others will emulate our model, but they should emulate in spirit and not as a gimmick,” said Fabindia’s Bissell.

IFC Report Showcases Indian Social Ventures 

 
A recent International Finance Corp report, titled “Being the Change: Inspiring the Next Generation of Inclusive Business Entrepreneurs Impacting the Base of the Pyramid”, highlights the achievements of three Indian entrepreneurs –Gyanesh Pandey of Husk Power Systems, Sanjay Bhatnagar of WaterHealth International and Paresh Rajde of Suvidhaa Infoserve. Founded in 2007, Husk Power Systems (HPS) is a decentralised power generation and distribution company serving rural India. It has developed a biomass gasification technology capable of generating power as efficiently as conventional biomass gasifiers, but on a micro-scale. Over the last three years, the company has installed 72 smallscale power plants that serve more than 30,000 households. WaterHealth International is a company that develops, installs and operates water purification and disinfection systems that provide affordable, high-quality potable water for underserved populations in rural and peri-urban areas. At an initial investment of less than Rs 520 ($10) per person, WHI can provide more than a decade of healthy drinking water to communities in need. It counts among its backers, Dow Venture Capital, Sail Venture Partners, Plebys International, Tata Capital Innovations Fund, and the Acumen Fund. Founded in 2007, Mumbai-based Suvidhaa Infoserve Private offers the means to make electronic payments—online and over their mobile phones—for a variety of virtual products and services. Through Suvidhaa’s platform, citizens can transact with over 300 businesses, spread across utilities, telecom, entertainment, education, transport and financial services, as well as government agencies. Stakeholders in the venture include founder Paresh Rajde, Shapoorji Pallonji Mistry, Northwest Venture Partners, Reliance Venture Asset Management, IFC and Mitsui & Co, one of Japan’s largest trading conglomerates. Launched in 2010, IFC’s Inclusive Business Models Group mobilises people, ideas, information and resources to help companies start and scale inclusive business7-10% of IFC’s annual commitments, or over $7 billion.  

By Biswarup Gooptu, Peerzada A Radhika P Nair ET 121012