Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online-views/  What is an impact start-up?
BackBack

What is an impact start-up?

If impact investors must invest in e-commerce firms and the lines between impact and non-impact businesses have indeed blurred, it's perhaps time to get rid of the labels

When impact investors, also known as social venture capital investors, back companies such as Lookup, it’s always a bit of a puzzle. Premium
When impact investors, also known as social venture capital investors, back companies such as Lookup, it’s always a bit of a puzzle.

Lookup, a messaging and chat app developed by Bengaluru-based start-up Hatchery Software, has just raised $2.5 million from a group of investment firms and individuals. The lead investor in the group is Menlo Park, California-based Khosla Impact, the impact-sector-focused fund started by Vinod Khosla about four years ago.

Consumers can use Lookup’s chat interface to connect with local merchants in and around their neighbourhood without giving out their phone numbers. It’s a nifty idea that aims to take messaging services currently offered by a WhatsApp, for instance, to the next level.

But is Lookup an impact investment?

When impact investors, also known as social venture capital investors, back companies such as Lookup, it’s always a bit of a puzzle. Why does Lookup qualify as an impact enterprise while hyperlocal search and delivery services such as PepperTap and Grofers, which address similar markets and deliver pretty much the same results, are deemed non-impact enterprises?

It’s a question I’ve put to several impact investors in the past. The answers have been inconclusive. Going by the classical definition, as articulated by the Delhi-based Impact Investors Council (IIC), which represents impact investors active in India, such investors back businesses that serve underserved consumers, often the rural poor and those below the poverty line. They seek to create positive social or environmental impact beyond financial returns through such investments.

Khosla Impact is not a member of IIC. But Omidyar Network India is an anchor member. The Mumbai-based firm, which invests from eBay founder Pierre Omidyar’s private capital pool, has invested in companies that deliver low-cost education to the underserved, made loans available to micro-entrepreneurs who cannot access bank credit and help organize blue-collar service providers such as plumbers, painters and carpenters. There’s no ambiguity on the impact agenda in such cases.

It gets a bit hazy when one considers some of the firm’s other investments, notably in the consumer Internet sector. There’s online classifieds platform Quikr, play schools operator Tree House and health and fitness products e-tailer HealthKart. All good businesses in their own right but far removed from the “serve underserved consumers, often the rural poor and those below the poverty line" agenda of impact investing. In fact, none of these companies would be particularly pleased themselves to be labelled impact or social enterprises.

They have good reasons for that. Being tagged an impact enterprise has its downsides, especially in India. It becomes extremely difficult to attract follow-on capital from conventional venture capital funds. This is rather unfortunate given that most impact start-ups are as profit-driven as their non-impact peers, their businesses address equally large markets and the terms of engagement with their investors are as stringent (the investment term sheets for impact start-ups are as riddled with rights and clauses that favour investors as those for non-impact start-ups).

Yet, because impact investors have a stated agenda to generate lower-than-market financial returns, their portfolio companies suffer from the perception that generating revenues and profits are not as important. This is one of the primary reasons Vineet Rai, one of the pioneers of impact investing in India, has lately started distancing his firm, Mumbai-based Aavishkaar, from the impact investor tag. Rai has even put his discomfort with the tag on record in the recently released 2015 Aavishkaar Impact Report. Ironically, all of the firm’s investments are in businesses that target consumers in rural India and at the bottom half of the pyramid.

Aavishkaar and Omidyar Network are part of 30-odd impact investment firms that have together invested $1.6 billion in impact start-ups over the past decade. That’s small change compared to the quantum of capital that the legion of so-called non-impact investors have pumped into start-ups just this year—over $1.4 billion was invested just in the last quarter (July to September).

Impact investors such as Aavishkaar and Delhi-based Lok Capital also have to grapple with constraints when raising funds because the capital pools available to such investors are limited. Developmental finance institutions such as the International Finance Corporation and corporate foundations focused on the impact sector constitute the primary source of capital for such funds.

Inadequate access to capital, especially at the later stages, when impact investors are no longer able to support the needs of their portfolio companies, has restricted the ability of several promising impact start-ups to scale. It doesn’t help matters when the limited resources available with impact funds find their way into companies that would otherwise find it quite easy to raise capital from conventional sources.

All businesses create social impact. If impact investors must invest in e-commerce companies and the lines between impact and non-impact businesses have indeed blurred, it’s perhaps time to get rid of the labels.

Snigdha Sengupta is the founder of StartupCentral, a digital news and analytics platform focused on venture capital. She also periodically contributes stories on venture capital and private equity to Mint.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 16 Oct 2015, 12:16 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App