Stepping in for social enterprises

With nearly a decade and a half of working in the social enterprises space, Paul Basil firmly believes that there is a huge gap in funding for-profit ventures that cater to the bottom of the pyramid. There are funds available at the angel space and then at the Series A stage, when the ventures get their first round of funding from VC firms. But, between the angel and the Series A stage, there is a huge gap.

After the angel round, says Basil, Founder and CEO, Villgro, an incubator for social enterprises, the ventures need more capital. With the network of angel investors growing, the ticket size has gone up – to about ₹50-60 lakh. The Series A round typically sees investors putting in about ₹5 crore in a venture. But, the ventures need to demonstrate certain level of unit economics for a Series A investor to feel comfortable putting in the money.

The business model, especially in the case of a social enterprise, may also call for a lot of iterations and hence a slightly larger round of seed funding is required.

It is this gap that the recently-launched Menterra Social Impact Fund 1 hopes to plug. Basil, who is Advisor to Menterra Venture Advisors, which manages the social impact fund, says it is not a capital problem alone for the ventures. Till they are ready for a Series A round, they need advisory support and mentoring. “This is where we see Menterra and Villgro co-existing,” he adds.

Villgro, as an incubator, can provide the mentors and the fund can de-risk the model by helping with the elements of the business. That way, he says, Menterrra will not be yet another impact investment fund.

Just to give an idea of the impact investment space: In 2015, social VCs invested about $95 million in 53 deals in India compared to $106 million through 49 deals in 2014, according to Venture Intelligence, a research service focussed on venture capital and private equity transactions.

Last month, Menterra launched a ₹40-crore Social Impact Fund 1 that will invest in early-stage social enterprises in education, health, agriculture and energy. The fund will offer start-ups ₹1-4 crore, in multiple rounds. With Villgro providing incubation support to enterprises and Menterra stepping in to provide crucial funding, Basil expects that more social enterprises will be in a position to go in for larger institutional investment earlier than before.

He also expects that better quality entrepreneurs will come to Villgro, “because they are seeing a conveyor belt.” It benefits the entrepreneur, Villgro and Menterra too as they know each other quite well from an early stage. There is an element of trust that has already been built between the entrepreneur and Villgro and this trust will also get translated to Menterra as it steps in to provide pre-Series A funding.

Menterra stands for ‘land of mentoring’ and the new fund will provide enterprises the much-needed support to the social enterprises as they step out of the incubation phase. Menterra has secured investments from angel investors like Chandu Nair and Meenakshi Ramesh, and international organisations such as the Lemelson Foundation and the Michael & Susan Dell Foundation, both of which have an on-going relationship with Villgro, have also invested in it. Between Villgro and Menterra, entrepreneurs will get funding starting at ₹10 lakh and going up to ₹4 crore.

According to Basil, Menterra will stay invested in a venture anywhere from 12 to 36 months, but he expects it would be able to exit its investment – selling a part or the full stake to a venture capital firm – by 24 months. It is like a relay race, he says; the angels run the first lap, then Menterra picks up the baton and runs with it till the VCs are ready to step in.

On the challenges in raising the fund, Basil says “initially the big challenge for us was we weren’t known as investment managers.” There is appetite for a fund like Menterra’s, says Basil, but “my sense is maybe a slightly larger fund is required.” They decided to keep the fund size small so that they could retain their focus on serving the base of the pyramid ventures. A follow on fund is, of course, possible.

Menterra has roped in veterans such as Vijay Mahajan, Founder and CEO, BASIX social enterprise group, and Kanwaljit Singh, Founder, Fireside Ventures, a family office that invests in early-stage consumer-focussed ventures, in the investment committee. According to Basil, the investment committee has evaluated a few deals and should be able to write its first cheque within the next month or so. Healthcare and education, according to him, will be big focus areas. In healthcare, most of it will be devices and diagnostics. It will look at healthcare delivery ventures too, but only those that have an innovation in the delivery model built into them.

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