Bangalore: In December 2005, when Anant Kumar set up a hospital offering maternity and childcare services in Hyderabad targeting low-income customers by pricing services at about a quarter of what other hospitals charged, it was an instant success. Set up as a pilot 25-bed facility by a trust run by India’s largest condom maker, Hindustan Latex Ltd, the facility addressed a need that is felt all over India: affordable mother and child healthcare.
But when Kumar decided to expand the business—branded LifeSpring—into a chain by replicating the model at Moula Ali, a locality in the Andhra Pradesh capital, and went out in search of capital to back his idea, he kept running into a wall.
Social enterprises: (clockwise from above) Servals Automation’s fuel-conserving kerosene burner being tested at the company’s Chennai facility; Vineet Rai, chief executive officer of Aavishkaar India Micro Venture Capital Fund, a venture fund that invests in start-ups that promote development; and Anant Kumar, chief executive officer of LifeSpring Hospitals (Bharath Sai / Mint).
He was confident about the LifeSpring business model and scalability of such hospitals and made numerous rounds at banks, financial institutions and venture capital, or VC, firms.
Much to LifeSpring’s disappointment, it found no buyers in this group of investors for its idea. “The returns expectations of these investors were very high. The talks always boiled down to these numbers. They would say your business model is too good to be true. Show us that it can work,” recalls Kumar, chief executive of what is now LifeSpring Hospitals Pvt. Ltd.
Elsewhere, Servals Automation Pvt. Ltd, a Chennai-based firm that made kerosene stoves and burners capable of conserving 30% fuel, was also looking for funds. Working with non-governmental organizations (NGOs) and providing employment to rural youth, mostly women, the firm felt its business model was in place with its stoves finding many takers in the market. The firm was, however, not able to find any investors from banks or the VC fraternity for its social enterprise.
LifeSpring and Servals Automation were what are called social ventures, or enterprises that aim to accomplish social or environmental goals in addition to meeting financial benchmarks. The traditional reaction has been that such ventures under-deliver on financial returns even though they can eventually become self-sustaining.
Both LifeSpring and Servals Automation ultimately found investors, albeit not the typical VC funds. Social venture fund Acumen Fund Advisory Services India Pvt. Ltd, a non-profit venture fund, invested $1.9 million, or Rs9.5 crore, in LifeSpring, forming a 50:50 joint venture with Hindustan Latex, while Aavishkaar India Micro Venture Capital Fund, a venture fund that invests in start-up companies that promote development in rural and semi-urban India, funded Servals Automation with $20,000 in the first round.
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.
“A normal VC would not understand a free or a subsidized service. That kind of mindset is not there with them. Profitability is their prime target,” said Sweta Mangal, chief executive, Dial 1298 for Ambulance, which has been funded by Acumen Fund India.
Experts say that inclusion of the financial markets for social uplift is a good move, though the success of these ventures will set their pace for the future. So far, social ventures have had the backing of the government, philanthropists, or not-for-profit trusts. The government’s efforts, though extensive in reach, have suffered initiatives from a lack of focus and execution in the past.
Initiatives by NGOs and a group of people are intensive but not extensive, said D. Rajasekhar, professor and head, Centre for Decentralisation and Development, Institute for Social and Economic Change, Bangalore. “Financial viability of such endeavours has (yet) to be seen as these funds will need some degree of returns,” he says.
Meanwhile, these funds also face issues when it comes to raising funds, due to the very nature of their business profile. Aaviskaar, which recently closed a fund, said investors are turning increasingly risk averse and are not too inclined to invest. “We have 50 times more difficulties in raising fund than anyone else. Till the time we create returns, investors’ hesitation will continue,” said Rai.