Social venture funds, a variant of the hard-nosed venture philanthropy, are slowly taking root in India and are being driven by generous high net-worth investors, trusts and associations.
Much like typical venture capital firms, which invest in new risky businesses, social venture firms also look for ground-breaking ideas. They, however, support entrepreneurs who are working on ideas that have social impact and bring betterment to the lives of the unprivileged. These investors not only provide capital of as much as Rs10 crore, they also give strategic management tips. They set targets and seek realistic returns (often, bank rate returns) measured in part by the impact a venture has on the life of the people targeted. Also, these investors are willing to wait longer than traditional VCs, who generally have a horizon of three-seven years.
“There is a class of investors who want to see socially impactful businesses. Our aim is not profit maximization, but profitability. We want to know how this business idea can impact the life of a million people in five-seven years,” says Varun Sahni, director, Acumen Fund India. The fund has invested about Rs100 crore in 12 deals across healthcare, water, energy and agriculture sector over the last three years.
Though cheaper when ranked alongside return expectations of VC firms, the investments from social funds are not free. These funds seek returns in the range of 8-12%, say industry insiders, unlike VC firms, which look for return of 25-40%.
“We basically do what can be called greed management. We realize that these firms won’t become million or billion dollar (firms) overnight. We are not forced to take investment decisions on the basis of questions like if the company will grow 10x,” said Vineet Rai, chief executive, Aavishkaar India.
Except for return expectations and the social viability of an enterprise, the approach of social venture funds and their mode of investments is not very different from VC funds. The due diligence is on the same lines, as are questions on the feasibility of a business idea.
“We have same protocols as other VCs. Capital is available, but the challenge here is also in creating deals. It’s difficult to find entrepreneurs who are building companies of scale,” said Acumen’s Sahni.
Also, these firms do not offer seed capital. The capital is provided either through debt or equity. The exits are mostly through stake sale and buyback. Only one in 10 such firms go for an initial public offering, which remains a distant dream for such enterprises.
Aavishkaar’s Rai says after the first round of funding most of these firms do scale up to become worthwhile for VC funding. “Seventy per cent to 80% of our deals may fit into VC profile,” he said, adding that second round funding deals are mostly syndicated with the likes of SeedFund, an early-stage funder of start-ups.
Social enterprises find it easier to raise capital from such investors. With VC firms they generally face issues such as benchmarks to compare their business model with and a proof of concept.