SOCIAL ENTREPRENEUR SPECIAL........... Double Bonanza

Double Bonanza 

For investors and entrepreneurs in businesses serving low-income groups, doing good while making money is an alluring prospect.

    In April, when Somak Ghosh quit Motilal Oswal Private Equity to set up his own venture fund that backs businesses focussed on lowincome communities, the veteran fund-manager was taking a calculated bet. Ghosh, 45, was leaving behind a slowing market in private equity to join a nascent industry where growing pools of risk capital are seeking to generate profits and do good. Ghosh’s $50-million fund ( 332.4 crore), Contrarian Capital India Partners, will invest in companies that provide financial services, affordable housing, livelihood and energy, largely for consumers in nonurban markets. “Impact investment creates returns for investors by delivering social value to consumers,” said Ghosh, a former group president and cofounder of Yes Bank. His fund expects to close its first lot of investments over the next few months. In the past three years, impact investors like Ghosh have backed numerous companies that bring services ranging from healthcare and energy to education and agricultural inputs to low-income communities. Termed as social enterprises, these ventures have so far raised close to $800 million ( 5,318.4 crore) of risk capital, according to research firm Venture Intelligence. Apart from the growing market, investors are also drawn to the steady returns. India’s first social venture fund, Aavishkaar Venture, which began investing in 2001, has made nine exits, with returns of between 18% and 42%. It has returned 33% of its capital to investors in the past four years. “The notion of returnable capital is gaining traction and hopefully it will become the sweet spot for social impact investing,” said Rajiv Lall, founder and chairman of Lok Capital, which manages assets of about $87 million ( 578 crore) and has invested in companies such as small business provider Vistaar and rural business process outsourcing firm Rural Shores. Research firm Monitor estimates the global impact investing industry will have assets of $500 billion by 2019.

 
Commercial Interest
In India, social ventures are also gaining because of attention from mainstream commercial investors. Bangalore-based Vaatsalya Healthcare, which got seed capital from Aavishkaar, raised followon capital from Singapore-based Aquarius India Fund. “Companies such as Vaatsalya have demonstrated their ability to serve as role models for social enterprises to an extent where valuations are not really much of a concern,” said Vineet Rai, founder of Aavishkaar Venture. Last month, the Mumbai-based fund closed its latest $94 million ( 625 crore) fund and now manages total assets of $160 million ( 1,064 crore). Other investors, such as The Omidyar Network, founded by eBay founder Pierre Omidyar, expect to pour in about $200 million ( 1,330 crore) in Indian social ventures over the next three to five years. As the flow of capital into the sector rises, more entrepreneurs are being emboldened to try their hand at building social enterprises. “When we started babajob more than five years ago, I could count on one hand the number of funding agencies for such a social venture,” said Vir Kashyap, 33, chief operating officer of babajob, an online portal that connects blue-collar workers with prospective employers. Kashyap partnered with former Microsoft executive Sean Blagsvedt to launch the company in 2009 and has since raised 7 crore from venture fund Gray Ghost Ventures. Registrations at the company recently crossed one million.

Consumer Pull
Experts are of the view that rising aspiration levels of low-income consumers is also boosting social entrepreneurship and capital flow into the sector. “There are massive opportunities to invest in ventures that offer skill development and livelihood while offering attractive returns,” said Krishnamurthy Vijayan, a former executive chairman of JP Morgan Asset Management India. Santanu Chattopadhyay, 46, who founded Nationwide Primary Healthcare Services, worked with impact investment consultancy Intellecap to raise 25 crore from global venture firm Norwest Venture. “Being a social startup does not reduce our operational and logistical cost. But we have to distinguish between profit making and profiteering,” said Chattopadhyay, who expects his company to earn revenue of 6 crore this fiscal and 20 crore in the next fiscal. What is different about impact investing is the expectation of return on investment. While commercial risk capital typically aims for returns of more than 25%, impact investors settle for payback of between 15% and 20%. Furthermore, impact investors back businesses whose customers are low-income groups.

Network Effect
Entrepreneurs said raising money from impact investment firms helps tap into a vast pool of resources and networks. “Being funded by an impact investor meant that we could be connected through their network to other stakeholders and leverage the connectivity to expand our business,” said Sanjay Gupta, CEO of EnglishHelper, who has worked at American Express and PepsiCo. Founded in 2011 to provide inexpensive English tutoring, the startup has over 1, 75,000 users across the country and is present in over 500 schools. EnglishHelper, which has received 20 crore from Omidyar Network, has targetted earning a topline of between 50 crore and 100 crore over the next five years through its operations in India and overseas. “We will launch in the Philippines and Sri Lanka in the next three months, and in a few years we hope to target countries like China, South Africa and Russia, as well as developed countries that have a large immigrant population,” said Gupta. According to Gupta, if the startup is able monetise its model successfully in India, it will provide confidence to launch and scale in overseas markets. But challenges—and big ones at that—remain. The rise and spectacular fall of India’s much-heralded microfinance industry continues to serve as a warning to investors and entrepreneurs alike. In 2010, the government of Andhra Pradesh, the hub for the sector in India, promulgated a controversial law that barred micro-lenders f rom recovering loans, estimated at 9,000 crore. But there are lessons. “The desire to create the same value as commercial investments has to be blocked. This business has complicated models and inherent flaws, and calls for extraordinary efforts,” said Aavishkaar’s Rai.

The Need for Social Capital
 109 ($2.2) In India, there are an estimated 186 million households earning less than 109 a day
The penetration of insurance, savings, remittances, and pension products for base-of-pyramid is extremely low 90,000 cr
India’s Small and Medium Enterprises sector is severely underfinanced and the credit gap is estimated at 90,000 cr, of which 78% is required by small businesses alone
Access to finance for micro and small businesses across the country has been a big bottleneck
Banks and larger non banking financial corps have not been able to serve this group

Impact Investing in India
As the flow of capital into the sector rises, more entrepreneurs are building social enterprises
Top Funds Aavishkaar Venture, Lok Capital, Elevar Equity, Omidyar Network, Villgro Capital
Capital Invested
472.9 cr in 2013 1,104.4 cr in 2012 1,647.3 cr in 2011
Sectors Healthcare, education, skills development, livelihood, water and sanitation, energy access
Companies Vaatsalya, Vortex Engineering, Drishti Eyecare, IFMR Rural Channels, Glocal Healthcare, Aarusha Homes
Recent Deals Electronic Payments and Services– 40 cr from Aavishkaar; Suryoday–20 cr from Aavishkar, Lok Capital; Drishti– 2.5 cr from Lok Capital

write Biswarup Gooptu and Vasumita S Adarsh ET130906