JOIN USImpact investments or investments with a social cause, though trying to make a headway in India, still has a long way to go before they can compete with the established PE and VC industry, believe experts.
Such investments are basically categorised under non-profit or very little profit garnering investments. Some say that social impact and profit are inversely proportional in any impact investment.
The main points of difference between VCs and impact investments is the size. In case of impact investments, the fund could be anywhere between $10,000 and $500,000. Another difference between traditional venture capitalists and an impact investor is that while the former has a pre-set agenda to exit in 5-7 years, the former has no specific exit horizon.
Senior Advisor at investment banking firm, Resurgent India, Raman Ahuja believes that impact investing is a relatively recent phenomenon in India and will take some time to get to a level of maturity. “It does have a long way to go and I would say it will take at least next 7-9 years before it reaches some comparative level where the PE-VC space is today.”
According to the Planning Commission, though many global and local funds have presence here, investments to the tune of only Rs 1,200 crore (around $260 million) have been made in India in the last five years.
One such fund was created by Pierre Omidyar, founder of eBay, who became a billionaire overnight when his company went public.
“I created (eBay) with the belief that people are good. If you give people the opportunity to do the right thing, you'll rarely be disappointed. After eBay became so financially successful, I really felt a sense of responsibility to put that to good use,” Omidyar had said.
In a paper released by the Harvard Business School, Michael Chu and Lauren Barley write that in March 1999, Omidyar left eBay’s day-to-day operations to transition into full time philanthropy. Case in point: Omidyar Network. Founded in 2004, it had committed $291 million in non-profit grants and $246 million in for-profit investments. It came to India in 2009 and at present (year till date) has invested close to $113 million in the country. Their investment size was $106 million in 2012.
“We plan to add another $100-200 million in the next 3-5 years,” Omidyar Network India Advisors Managing Director Jayant Sinha says.
Its investees include ventures from the field of property rights, education, financial inclusion and others. Prominent names include Janaagraha, Teach For India, Aspiring Minds and Quikr.
In the case of Omidyar Network India, their investments in any company range from $500,000-$5 million in non-profit ventures and $1-10 million in for-profit ventures. It recently invested in iMerit, an IT-enabled services company which draws on local talent, utilises a signature market-aligned skills training programme, and delivers services through social media, cloud-computing platforms, and web portals.
Element of risk
An element of risk in impact investment is not quantified and there is no current market for impact investment bonds and there is no liquidity of that risk.
Anudip, founded by Dipak Basu and his wife Radha Basu (also founder of iMerit), who have spent distinguished careers at the helm of a few IT companies, works with the marginalised youth, training them with necessary skills to acquire jobs.
In fiscal ’09, Dipak and Radha Basu’s contribution to Anudip was $67,000 and they received grants worth $27,000. However, in fiscal ’11, the Basus’ contribution was $30,000, whereas Anudip received grants of $1,29,000. This shows that though they received grants later on, the venture had to be heavily bootstrapped in the begining by the founders.
Bapu Das, a 24-year-old Market Allied Skills Training (MAST) graduate bagged a job at Firstsource, doubling his family income. He says, “At my age I needed a job. MAST is a good programme for me and my friends.”
Even the Planning Commission in its report titled ‘Creating a vibrant entrepreneurial ecosystem in India’ released in June 2012 says, “Impact investment is imperative in India. This kind of investing seeks businesses and social ventures that can deliver measurable social and/or environmental impact as well as appropriate financial returns in sectors such as education, healthcare, sanitation, environment and infrastructure.”
Another impact investment firm Lok Capital Co-founder & Partner Vishal Mehta says that in terms of human capital, the industry has been growing positively and steadily over the last few years. Professionals are looking at this space as a serious career option.
Students from management and engineering institutions are increasingly opting for careers in social enterprises.
Also, there is enough financial capital though there exists some mismatch in the type, size and stage of capital available and what opportunities exist on the ground. “Policy is also a big gap,” Mehta explains.
Social impact investing does see substantial inflow of new ideas but quality and scalable models that capital providers find attractive are limited, notes the Planning Commission.
Other prominent funds are Aavishkar and Grassroots Business Fund (GBF). Aavishkaar has funds close to $112 million in India under four funds, Aavishkaar I, Aavishkaar II, Aavishkaar Goodwell I and Aavishkaar Goodwell II.
Over the last decade, Aavishkaar has deployed a combined capital of $29 million in 32 companies across India, comprising of seven microfinance institutions (MFIs) and 25 innovative businesses targeting rural and underserved populations.
“Impact Investing is an emerging area globally and India is one of the key leaders in this space. But since it is a new area, it has many issues to resolve including defining what is impact. I personally believe Impact investing has a long distance to go to prove that it can transform lives though it can reach out to people and impact them,” Aavishkaar CEO Vineet Rai told Deccan Herald.
GBF has also been active in India, with investment commitment close to $3.5 million. It makes equity, mezzanine equity, mezzanine debt, and straight debt investments of $500,000-$2,000,000 and has an average investment horizon of 6-8 years.
In January 2013, impact investors Rockefeller Foundation and Omidyar Network joined hands with Dasra – a philanthropy foundation – launching India Impact Economy Innovations Fund (IEIF)
TIEIF will support approximately 5-8 proposals; interested organisations may apply to the fund for grants up to 12 months with a maximum request of $200,000, and may participate in more than one grant proposal.
IEIF will fund projects that seek to enable earlier stage capital solutions, foster entrepreneurial ecosystems, produce research into policy development, promote and establish impact investing industry infrastructure, develop market ecosystems for specific sectors and form leadership and networking platforms for common actions.
Whatever might be the pace at which impact investments are growing in India, it still looks like there is a long way to go before the country can be at par with the developed nations and as many experts note, there needs to be paradigm shift in investors putting their money on a social venture and cannot expect to profit from it.
According to Mehta of Lok Capital, given the extra patience one requires as an investor, the mathematical internal rate of return (IRR) will be lower but dual return (financial and social) is obviously higher.
“This is a space where there could be opportunities for collaboration between government and private enterprises - eg. Impact investors. However, there is no framework available for collaboration,” Resurgent India’s Ahuja explains.