Social business: some investors wade in, but most testing waters

The Sankalp Unconvention Summit 2014 that recently concluded in Mumbai showcased how $1.6 billion has been pumped into more than 220 social enterprises since 2000.

Sixty per cent of the capital has reportedly been invested in 15 enterprises alone, with microfinance, healthcare, agri and clean energy sector initiatives receiving about $341 million. This is, arguably, fine progress compared to some years ago.

The big picture, though, is uncomfortably mixed. On one hand, large investors seem to be opening up to the idea of funding social businesses. On the other, investors are still reluctant to put their money into business models without a clear time-window for exits with healthy returns. And seen purely from the point of view of catalysing more impact organisations and entrepreneurs to think in terms of ‘for profit’ models, this is reasonable.

Vineet Rai, CEO of Aavishkaar and Founder-Chairman of Intellecap, says, “We’re a country of constrained thinkers. All our innovations are around better and lower cost delivery. Can social entrepreneurs think audaciously? Can they come up with a business model that will make poor people rich? The social business space has seen only frugal, incremental innovations so far.” Large investors have stayed shy of impact investing because they assess opportunities on three basic pre-requisites – the calibre of the entrepreneur, the quality of the start-up’s management team, and the potential for the business to scale up.

Govind Shivkumar, Investment Manager (India), LGT Venture Philanthropy, opines, “This is a nascent space and we’re looking at complex problems that have not been solved for decades. In a country like India, in spite of our population, you cannot take scale for granted. It’s possible, but it’s not seamlessly replicable because contexts differ depending on the area or market the start-up is addressing.”

In the last decade, a few well-known firms have reportedly succeeded in achieving returns from investing in the social sector. However, significant hurdles remain. “Unless there is paradigm-shifting innovation, investments will be low in this space,” declares Rai.

Shivkumar explains that the overall lack of innovation in the space has a lot to do with the talent available. “Specifically, people with expertise in banking and rural banking or in the telecom sector moving into social enterprise to either work with investors or in an impact start-up will obviously help. Poor remuneration is one of the hindrances,” he says.

It is encouraging to see from the Impact Investment Report that investments are balancing themselves between the microfinance sector and sectors like agriculture, clean energy and healthcare. However, with the focus on ‘profits’ alone at many events across the country like the summit, the discourse seems to be changing, according to Ramakrishna NK, Co-founder and CEO of Rang De.

“In spite of the money that will potentially be available for investing, especially with large corporate foundations moving into the impact investment space, there is a loss of human capital going on because of disillusionment,” he says, explaining that he meets some very discouraged social entrepreneurs. He feels this isn’t being talked about enough.

Intellecap’s Rai says there is a large number of corporations willing to invest in social enterprises and learn from entrepreneurs. Still, as advantageous as this looks for the impact sector, Ramakrishna underlines that the cookie-cutter approach commonly used by investors and the intellectual appeal of “do good and make money” isn’t doing many social entrepreneurs entering the fray any favours.

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