Impact Investing: Fueling Change in India (part 3)

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This is part 3 of a 4-part series titled Impact Investing Reaches a Tipping Point in India.  In part 2, we looked at how impact investing is operating today in India. In this part 3, we look at sectors where impact investing is seeing success and where the funding is coming from.

What is an impact business (or what some call a social enterprise)? In the words of Manish Sabharwal, CEO and Co-founder of Teamlease Services, “Isn’t every company that creates jobs and does so without breaking the law a social enterprise?” Can Airtel be classified as an impact business? It has, after all, been instrumental in connecting India’s BoP population with the rest of the country via its expansive telecom network. There is no right or wrong answer to these questions. In this part of our series on impact investing, we will look at some models that have fueled change for low-income families recently and the impact investors can have on them.

A New Mindset

In recent times, there has been a shift of mindset from pure not-for-profit enterprises/NGOs to sustainable and scalable market-based models to tackle poverty. A market-based approach focuses on people as consumers, suppliers, and producers and on solutions that can make markets more efficient, competitive, and inclusive so that the base of the economic pyramid can benefit from them (see World Resources Institute). However, attaining scale with these models is not a given. “I find it uncomfortable that the businesses that are most vociferous about calling themselves social enterprises are often those that have not scaled or are unsustainable. Being socially impactful should be many things, but not an alibi for [lack of] scale or sustainability”, says Manish Sabharwal. Example domains where such organizations are reaching scale today include healthcare, rural livelihoods, agriculture, and education.

Sectors Beyond Microfinance Where Impact Businesses are Succeeding

Aravind Eye Care is a massively successful example of a market-based healthcare solution that has managed to scale. While it is set up as a not-for-profit, the business is sustainable and scalable, and has been since the 1970s. Aravind is an eye clinic headquartered in Tamil Nadu that provides low-cost or free surgeries to people of all income levels. Their business model is optimized for volume and quality. Among other innovations, they use para-skilled workers to do low-risk clinical and administrative tasks thereby increasing the productivity of the skilled doctors.  Doctors at Aravind do more than 2,000 surgeries a year and the rate of surgical complications is half that of eye hospitals in Britain (see New York Times, Jan 2013).

Affordable Private Schools (APSs) are example of a model moving towards scaled impact. They generally operate as a hybrid dyad, with a nonprofit trust owning the school and a for-profit services company delivering education. While quality varies from group to group, for the most part they deliver a good quality education for as little as INR 300 ($5 USD) per month, per child, often surpassing any alternative public options. It is estimated that there are between 3 and 4 lakh (300-400 thousand) APSs in India. Over the past few years, enrollment in private schools across India has increased from 18.7% in 2006 to 28.3% in 2012. According to Pratham’s annual ASER report, if this trend continues, by 2018 India may have 50% of children attending APSs even in rural areas. The Pearson Affordable Learning Fund is collaborating with Village Capital to operate the Edupreneurs accelerator to incubate and grow quality affordable private schools. The next advancement will be establishment of truly scalable and quality regional and national APS service organizations.

The village level entrepreneur (VLE) model is another good example of market-based models where the beneficiary is now also the supplier. A VLE network enables a new rural supply chain. The VLE acts as the ‘last mile’ distributor and serves two purposes. Firstly, he/she serves as a locally knowledgeable sales person to the rural consumer. Secondly, the VLE concept enables new livelihoods opportunities for low-income populations. ITC e-Choupal and HUL Shakti are established VLE models in the country. HUL Shakti today employs about 45,000 women across 15 states and is targeting 75,000 by 2015. Similarly, ITC e-Choupal services reach over 4 million farmers across 10 states. Well-run VLE models not only have social impact built into their businesses, but also aim to create financial value for all stakeholders in the supply chain.

Funding the Impact

As touched upon in previous articles, there are many avenues to source capital for impact businesses. For example, crowd-funding is emerging as a platform for bootstrap capital. It is still in a very nascent stage in India but is slowly gaining momentum particularly with young Indians who are looking at more ways to give back to society. Kiva.org launched its India operations in 2012, and Milaap, an India-focused online fundraising platform, recently raised its Series A investment of INR 6.6 crores in July 2013. Both provide small loans for education and life-improvement needs, as well as loans to early stage entrepreneurs and established small businesses that need extra capital to expand operations.

Umesh Malhotra at village-based Hippocampus Learning Centre
Umesh Malhotra at village-based Hippocampus Learning Centre

Seed and growth venture funds are providing capital to the most promising business ideas and teams. Unitus Ventures focuses on BoP Startups – high-growth potential startups which serve large low-income populations. The firm aims to accelerate the growth of early stage businesses by providing capital, support and connections. Some of the firms recent investments include iSTAR, a skills development platform that aims to bridge the gap formed due to the demand and supply mismatch, and Jack On Block, a new facilities management company that offers handyman and maintenance services for homes, offices, apartment complexes. While most investments in the past have happened through foreign investors, the growing interest among domestic investors seems to be shifting this trend slowly, but steadily.

Angel investor networks such as Indian Angel Network (IAN) and Mumbai Angels are investing in companies that offer financial as well as social impact. A recent example of the same is an INR 3 crores ($500,000 USD) investment by IAN in Gram Vaani, a technology startup that builds solutions for consumers at the BoP (see Startup Central, Jul 2013). Gram Vaani’s flagship solution is called ‘Mobile Vaani’, which is a “voice-based social media network for rural citizens”.

Catalytic “venture debt” for small and medium enterprises is also gaining traction with pioneers such as Kinara Capital and IntelleGrow.  They both provide loans to small businesses which banks will not lend to due to their lack of profitability track record or perceived risk.

Given India’s progress so far with impact investing, the country seems to be heading in the right direction. With the right amount of support, partnerships between foundations, NGOs, impact investors, and for-profit entities, the right ecosystem for sustainable social models can be inculcated and encouraged.

The final article in this series will explore examples of philanthropists, foundations, NGOs, and impact investors working together to create thriving new ecosystems that can scale far beyond what any organization can achieve on its own. Read part 4: Philanthropy Accelerates the Impact Investing Ecosystem >

Read the full Impact Investing Series >

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