In this episode of The Workwise Pod, hosts Sujatha Rao and Deepak Menon speak to Ravi Sreedharan about what for-profits can learn from nonprofits. Ravi is the founder and director of Indian School of Development Management (ISDM); he spent 24 years in the corporate sector before switching over to the social sector in 2011. In this conversation, Sujatha, Deepak, and Ravi talk about what complexity means in the business world versus in the social sector, the future of social entrepreneurship, and why it can be hard for individual for-profit enterprises to change without a systemwide shift.

Here are some excerpts from the conversation.

7:10

What can the social sector teach businesses about complexity?

Deepak: Can you just explain a little bit more about the leadership quality that you saw in the social sector, and the complexity of the problems that you saw?

Ravi: In [the] corporate world, there was always a formula to solve a problem. Here [in the social sector], there was no formula; there was a starting point. There are diverse aspirations, complex needs, forces that [have] exist[ed] for thousands of years. And you’re dealing with real [problems].

First of all, I don’t think a manager in the commercial world would recognise the complexity because there is a myth that ‘my corporate job was very complex, because it involved 80 countries, it involved a balance sheet of so many billion dollars’—a numerical complexity. Here, there was a social complexity, and the moment it’s social, it’s [to do with] human being[s], which is very, very complex. There it was a balance sheet, and it was a process that was far more problematisable and solvable. So that is one complexity that I don’t think we recognise at all when we come from one side.

The second side is, there is a belief that everything can be captured in a data point. And thereby it’s easier to solve a math problem. Because once I have data, I can solve the problem. And if I don’t have data, I can’t solve the problem right here. And thereby there’s a tendency to use data a little excessively when you come in as a corporate guy. [I’m] not saying you shouldn’t, but it’s not easy to capture data for what does it mean to be a mother who ties a towel around her child while she goes to sleep hungry at night?¹ What data is going to capture that? I remember talking to [this person called] Periodi (in Yadgir). For six years in Yadgir, our work didn’t show any change in the results. And in the sixth year we are having a conversation with Periodi, asking him how things are going. “It’s going really well.” “How are you saying it’s going really well? Because the data shows there is no change at all.” He says, “No, the children are very happy.” “How do you know children are very happy?” “They’re playing, they come and talk to me. They are running around. They are burping”—that was a data point he gave. Now, I can’t imagine saying in the corporate world that my customer burped. But these are important things to understand. It is completely different. It is so complex, and you have to figure that out.

How do you operate in a pluralistic society, where you respect everybody’s opinion, desires, and aspirations?

The third thing is, how do you work in a system that is democratic? We know that a good society is driven by liberty, equality, and fraternity. The corporate world has completely avoided that. And how that is happening in today’s society is a wonder for me. Samaaj, sarkar, bazaar—these are the three pillars for any good society. How do you operate in a democratic society, in a pluralistic society, where you respect everybody’s opinion, desires, and aspirations?

17:55

Why should social complexity matter to the commercial sector?

Sujatha Rao: I’m imagining myself as the CEO of a commercial organisation, and let’s say I’ve been manufacturing furniture…I’ve been doing this for a significant period of time. I might sit back and ask myself the question, is my space as complex as the social space that Ravi is talking about? And while I acknowledge that the social space complexity requires me to pause and not jump into solutions, or to collaborate, or to look at my people quite differently, does it make sense for me in my context?

Ravi: That’s a beautiful question, Sujatha. And I’ll be honest. Initially, I used to think that it’s fine to be that way. Today I have come to the point, it’s not fine to be that way. And it’s almost like climate change. Can I keep producing something at the risk of the climate getting destroyed in, let’s say, 100 years from now, when I’m not alive?… Earlier, because I didn’t have that 100-year vision, I used to say, how does it matter? I’m not breaking the law… I am now completely convinced that you don’t have a choice but to accept the complexity. What the corporate world has done is to conveniently define their system in a very narrow sense—I follow the laws of the land. Don’t now say that I’m not doing anything.

I’ll give you a very interesting example…and it can apply to a furniture start-up also. So [this guy is] starting some venture where he wants to organise the car cleaners of the city because he believes that’s a huge opportunity. Every rich guy in this country, in the city, has a car; one thing they all need to do is to have the car cleaned. So I’m now going to uberise. And ‘uberise’ has become this new English word, which is, I will organise them, I will create an app, I will create access, and I will learn, etc. And I’m thinking, this is the classic capitalist mindset. You’re trying to make money. You’re not trying to solve anyone’s problems. Even if you’re trying to solve the problem, you’re trying to solve the problem of the person who doesn’t really have a problem, because that person can find ways of paying. You need to solve the problem of the car cleaners versus the car owners. That mindset doesn’t exist.

Now, if you agree that all of us are part of the citizenry, whether I’m in the corporate [sector], the social [sector], whether I’m in the state—if we have to agree on what is a desirable or an aspirational society, and if that definition revolves around just, equitable, humane [systems], or justice, equality, fraternity, then that has to guide what you’re doing. Today, unfortunately, that has been conveniently kept aside.

27:06

Is social entrepreneurship the future of all businesses?

Deepak: This new trend of social entrepreneurship is trying to balance a business model with a social problem. Do you see that, over time, all businesses will become social enterprises? Right now, we see that there is a commercial world, there is a nonprofit world, and there is a social entrepreneurship world. But essentially all businesses are social enterprises any way.

Ravi: So social enterprise is a good thing. There’s no doubt about that. But enterprise management, the way it is [done], is a bad thing. If you manage a social enterprise, the way your business is traditionally managed, where you narrow your boundaries, and you have a very narrow view of what success is, you have a serious problem. And that’s the biggest danger to social enterprise. And today, that force of the management view is not easy to run against, because that’s a huge tide. And some small enterprises claim that ‘I will go against that’, I think you’re fooling yourself—it’s like, you try to push the waves back, but you’re just going to finally give up and tire yourself. So management has to change.

If you don’t bring a healthy respect for human beings and the planet, you will have a serious problem.

Now, social enterprise, impact investment, pay for performance, social stock exchange—these are all newfangled ideas to figure out how to bring the money. So the objective is good. But if the way you do it is not correct, it can turbocharge a bad thing. And that’s the risk you have with social enterprise, impact investing, and all this sort of newfangled stuff that’s happening. You’re all good intentions. But if you don’t bring that transformational nature of management, the collaborative nature of work, a healthy respect for human beings and the planet, respect for the ideas of justice, equality, and fraternity, you will have a serious problem. But if we can figure out how the management itself can change, then social enterprises can be a very, very powerful way [to create change].

33:09

How can for-profits that are willing to change take a more equitable approach?

Sujatha Rao: Let’s talk about a commercial enterprise CEO or manager, who has begun to realise that the way that they had been operating and the techno-managerial systems that they had put in place are not right. And they do want to make this change. Looking at the nonprofit world, what could be one or two things that could kick-start these little levers [so] that we begin to change, that could help them move closer towards the kinds of organisations and workspaces we are looking at—just, equitable, flourishing?

Ravi: There is no easy answer to that question, Sujatha, because I’m in a system, and you’re telling me to change while the system remains the same. I as an organisation can’t change because there’s no way I [can] succeed, all I will do is I’ll set myself up for failure. So what can I learn from the social sector’s structures? It’s very simple. How do I ensure that there is a voice of the common man in any business that is done?

Now, in the democratic system, we have created a way to get the voice of every person in the state. In the market space, we haven’t figured that out. But the principle of, how do I involve human beings in deciding whether I’m doing a good job or not, in the reward structures that I get [is fundamental to a democratic system]. There are ideas that are talked about in the corporate world. How do I give a lower cost of funds for somebody who’s great on ESG (environmental, social, and governance) guidelines? Now, those are [some] ways of doing it—and there must be more ways of doing this sort of stuff—but that’s the principle that we have to follow.

39:20

In the absence of a systemic shift, can individuals exercise agency?

Deepak: Ravi, the system’s not going to change. But we also know that humans have a power to change the system. If you were to go back to a bank, let’s say HSBC, having spent the last 10–12 years in the nonprofit sector, and having [had] these complex thoughts and experiences, how would you be different as a manager?

Ravi: This is a very personal question for me.

The first thing is, I had a certain arrogance when I was in the corporate world, and I lost the humility that I had as a lower-middle-class child. [I thought,] I’m in control, I know what’s going on, I can make things happen. I need to lead people, I need to show the way, so there’s an arrogance. So if I were to go back, I would resort to humility. I think somewhere the business world has forgotten or lost that understanding of how a Gandhian idea can be very powerful in leading change-making… and so on and so forth. It’s become very techno-managerial.

The second thing is that I think businesses will…I hate to use the word ‘profit’…but will derive a lot of value if they believe in the agency of the people versus creating pigeon holes for people to say, this is your job. And I don’t need you to comment on anything other than that. In fact, there are business processes (such as the quality circles used in Japanese manufacturing) built on the idea that the greatest ideas can come from anywhere. In fact, more likely from the field rather than from the conference rooms and chambers that we sit in. So how do you create some frameworks and systems to believe in that agency and bring those ideas to bear on the work that you do? That will be the second thing.

The third is that, and this is the one that is very personal to me, you don’t realise that when you’re in a job, that job defines the person that you are. And eventually, you become a person who is a function of all the jobs that you did over a 10-year, 20-year period. And I try and say this to youngsters, and I’m not sure I’m able to communicate, that the career path you choose will make you a certain [kind of] person when you’re 50. And if I had somebody who had explained this to me in a manner that I would have understood when I was 20, my career choice would have been very different.

You can listen to the full episode here.

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Footnotes:

1. People facing poverty see stomach binding as a way to deal with hunger pangs. In the 2022 Global Hunger Index (GHI), India ranks 107th out of the 121 countries with sufficient data to calculate 2022 GHI scores. With a score of 29.1, India has a level of hunger that is serious.

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Know more

• Listen to this podcast to learn more about what social impact means and how it is measured.
• Read this article to learn how business leaders can build a more equitable workforce.
• Read this article to learn how an ethical business can also be a profitable one.

Most investors firmly believe that catalytic capital is the type of impact finance that entrepreneurs value most. It offers flexible terms and can attract additional capital from third parties. It accepts disproportionate risk and/or concessionary returns. It is patient and provides more innovative and tailored financing structures. And it is the most crucial part of any blended finance transaction. But since most research has only explored investors’ views on catalytic capital, we wondered whether their assumptions about its value align with entrepreneurs’ actual opinions about it. What advantages do they see in the practice of catalytic capital and blended finance? How do they feel they benefit from the development of this field? And what improvements would they like to see in the efforts of investors and other funders to support entrepreneurial impact solutions?

To help provide answers to these questions, the Initiative for Blended Finance at the University of Zurich, the Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town, and Roots of Impact conducted research with a different perspective. With support from the Catalytic Capital Consortium, we focused on the end users of catalytic capital and asked quite provocatively: “What’s in it for the entrepreneur?”. Our goal was to learn what value they really find in this type of financing—and as a result, how these structures might be improved. To that end, we asked the following questions:

• Does catalytic capital deliver on its promise?
• Does it, in fact, catalyze?
• And what exactly are the features that enable it to help entrepreneurs deliver on their missions?

The difference between ‘just useful’ and ‘truly catalytic’ capital

Our research was based on in-depth conversations with 26 experienced entrepreneurs from different sectors in Asia, Africa, and Latin America. Each of them is driving positive change and has come up with breakthrough innovations. What we found is that they have nuanced perspectives and can describe exactly what is most catalytic and valuable to them. Yes, financing terms are important, but there are additional factors that matter a lot. Our interviewees clearly see a difference between capital that is “just useful” and capital that is “truly catalytic”. More importantly, their experience is affected by the specific characteristics and broader context of the catalytic capital provided to them.

For social entreprenuers, having a lead investor who offers shared due diligence is important.

For instance, many entrepreneurs like blending capital within single financing rounds (vertically) as well as over the entire entrepreneurial lifecycle (horizontally). And they prefer to do this by blending grants and concessionary capital with investments from a range of capital providers, including impact investors, development finance institutions and foundations. We found a lot of unexpected diversity in entrepreneurs’ experiences and opinions of catalytic capital. Yet there were some common characteristics of truly catalytic capital that stood out, which highlighted what entrepreneurs value most in these investments, including:

• Introductions to other investors and field resources.
• Collaborative investors that lead, share, simplify and/or streamline due diligence processes with co-investors.
• Capital structured to be flexible, efficient, patient, concessionary and reputable for early- and growth-stage enterprises. Also, capital that rewards outcomes and incentivizes additional capital through matching.
• Capital that is blendable within a financing round as well as over the funding lifecycle of an enterprise, which provides reasonable terms facilitated by grants, concessionary and subordinated positions, and by using tools such as convertible notes. Within a financing round, having a lead investor who offers shared due diligence and respect for the entrepreneur is important, since this streamlines the process for entrepreneurs and enables them to continue working on their businesses.
• Interconnection between capital and strategy. Entrepreneurs think of capital as a tool for developing and growing their businesses, and to that end, they must keep both their funding needs and their broader strategy aligned. Therefore, investors who also think long-term and relationally between capital and strategy are key partners.
• Long-term innovation support through grants. This support enables entrepreneurs to experiment, innovate and improve, and these grants take risks that equity investors do not want to finance, but that they expect to see from scaled enterprises.
• Relationships with investors who respect entrepreneurs’ local knowledge of impact and their vision for the enterprise and its impact strategy—and who encapsulate this respect in the terms of the capital itself. One-on-one relationships with this sort of investor are highly valuable for entrepreneurs.

What can capital providers do with these insights?

If we really care about driving positive change for people and the planet, it is essential to regularly scrutinize our assumptions. Therefore, we would like to encourage everyone in the impact field to listen carefully to what entrepreneurs have to say. As the value creators on the ground, they are the ones who make the difference.

Investors can maximize the value of their funding with actions and terms that are aligned with the company’s growth plan, timeline, and broader financing journey.

We very much hope that catalytic capital providers will review and discuss our findings, draw their individual conclusions, and put them into practice to achieve better impact. Our study is meant to be a holistic consideration of capital that can make a difference for early- and growth-stage enterprises. Since entrepreneurs connect the structure of finance raised to the broader context in which it can be catalytic, investors can maximize the value of their funding with actions and terms that are aligned with the company’s growth plan, timeline, and broader financing journey. This way, they can establish a partnership that truly supports the needs of the entrepreneurs.

While this broader context is often considered secondary, our research has made it clear that it’s actually essential: Funders must listen to and honor entrepreneurs’ viewpoints, in order to make their capital not “just useful”, but “truly catalytic”.

This article was originally published on NextBillion.

On our podcast ‘On the Contrary by IDR’, host Arun Maira sat down with Hari Menon, the India office lead of the Bill & Melinda Gates Foundation, and Vineet Rai, founder-chairperson of Aavishkaar, to talk about what social impact really means, how it should be measured, and what needs to change in how we think about it.

Below is an edited transcript that provides an overview of the guests’ perspectives on the show.

Defining social impact is complicated

Vineet: This is a debate I’ve had since the time we coined the term ‘impact investing’. The impact that I define for myself is very different from the impact that my investor sitting in New York sees, and [it] is very different for the person I’m trying to impact because their aspiration for impact is very different.

So [for instance], whether you go to Reliance or the Tatas, or anybody—they are making some positive impact, some negative impact. We are probably trying to talk about the summation of the negative and positive and see whether there is an end result which is positive, and then you can call it an impactful enterprise.

Acknowledging that what we are doing is probably efficient but less impactful is probably the first way to go.

For example, instead of setting up a factory and trying to actually manufacture shirts, are you going to rural India, working with rural artisans, which is a far more cumbersome, complex process, and getting shirts stitched in the villages and then bringing them to the urban world to sell them? Both approaches are creating impact. But in one, you are not really trying to move all the workers to one place and creating a new ghetto to get a shirt stitched and create livelihood. In the other, probably what you are doing is you are taking livelihood [to] where people live, so you’re not displacing them, and in the process are actually allowing a local ecosystem to thrive. And I think it’s very difficult for a large number of people to actually give this context to the idea of impact, especially when we are talking about impact investing. And, therefore, it has been simplified to create the ghetto because it’s far more efficient, far better. And this is where the math comes in. So acknowledging that what we are doing is probably efficient but less impactful is probably the first way to go.

When we think about impact, we need to factor in how systems work

Hari: Our foundation is driven by that line: ‘All lives have equal value’. So, at one level, the impact we try to track is: Is the work improving the well-being of the communities you’re trying to serve?…Our approach to serving these communities is often through what are seen as vertical programmes. We work with partners or we work with the government on health interventions, on nutrition, and financial inclusion, on sanitation, on agriculture-based livelihoods, increasingly also looking at gender equality as a bedrock. And what we find is that you can get locked into a particular programme and the impact metric for that. So, for example, with vaccines…there’s a very clear metric which is obviously [that] you need to have…a product that’s cost-effective for a country to roll out. But once that’s there, how do you maximise coverage of the populations that will benefit from the particular vaccine?…That’s where things get trickier. And if you start looking at what impact you are having there—is the infrastructure in the right place? Does it have the right kind of quality? Are there people there when communities need them? Are they trained? Do they have empathy on the community side? Do people have the awareness, the knowledge, [and] the information they need to be able to make the best choices? What are the power equations that determine the choices they make? So if you start looking at the system overall and then ask yourself, ‘Okay, did you have impact?’ then it gets a lot more complicated.

Numbers don’t paint the whole picture

Hari: We end up looking at numeric measures of impact, because that’s what the world seems to value and understand. But two problems with that. One is you often default to averages and averages hide inequities, and variations. [For example] India is much better off on many development indicators, visibly [than it was] a couple of decades ago. But if you drill down, you get down to state numbers, you get down to district numbers, you get down to block numbers—the averages hide huge variations. And we don’t often factor in those variations into how we are thinking about improvements and change. And that’s where this focus on numbers and averages can have a distortive effect.

The second is the point of sustainability, and sustainability to my mind only comes if the people are really brought into the change, that is supposedly to improve their lives. And this urge to measure often takes us towards supply side interventions, because those are easier to track, those are easier to control. And we leave out the factors around demand, cultural norms, all of which can have lasting influence on impact, well beyond the time period of interventions.

So I think there is a need to take a much more integrative approach that is beyond quantitative, in which we spend a lot more time on qualitative conversations, understanding the cultural context within which interventions need to be delivered, and truly getting the communities more empowered and engaged and giving them more agency in determining the kinds of interventions they want to receive.

The new paradigm of impact moves away from efficiency and focuses on sustainability

Vineet: Most venture capitalists say that we are a partnership but the reality is that’s not the truth…The only skill that they are seeking from me is that ‘When you take over my money, you will make it work on the most efficient paradigm,’ which I said is the old paradigm. The new paradigm is not [about being] the most efficient, but the most sustainable and resilient. Efficiency is not necessarily what will deliver sustainability, and this conflict is a very deep and inherent conflict. And now I have actually had this debate with a lot of very successful and very large corporate CEOs. And I think their ability to understand this conflict is very limited even now, when we are actually challenged with it. And climate is actually a very good example. Growing trees seems to be a very good solution. But now the debate has moved on [to] that people who are actually dealing with creating the biggest amount of pollution are now more interested in buying carbon offsets rather than changing the behaviour of drilling in the Arctic. There’s an inherent culprit. So they will keep drilling in the Arctic, but keep buying carbon offsets—will that actually solve the problem?

Impact at scale can only come through effective partnerships

Hari: When we think of scale, there is often this monolithic vision of scale, which is an…intervention that can be done all across massive geographies, massive populations—that’s what’s going to drive change. In the corporate sector, you often do see that when entities are successful, [they] grow, and they get bigger and bigger and bigger, and swallow up more and more and more. And that’s how scale is thought of. I think, in the social sector, and the development context, scale might actually need to be thought of very differently. The only way we can have impact at scale is through effective partnerships of different actors who understand [and] can engage with communities on the different sectors where the government and partners are trying to make a difference…And right now, I think a lot of mental energy goes into the intervention at scale, right? How do you come up with the frameworks, the operational guidelines, cascade it down? The fact that all of these interventions and guidelines will land in very different contexts, very different realities, and if you’re not creating the intelligence and the ownership to problem-solve, evolve, and morph those interventions and guidelines into whatever is called for locally, we will not have impact.

Listen to the full episode here.

—

Know more

• Read this study about accelerating impact and scaling social innovations
• Read this article to learn why size may not be the right metric to measure impact.
• Understand how focussing on measuring impact can be counterproductive to collecting other important data here.

While the number of deals rose by only 5 percent compared to 2020, there was a 135 percent jump in total investment volume. The Impact Investors Councils’ (IIC) annual impact investment research report 2021 in Retrospect: India Impact Investment Trends highlights key investment trends across six sectors—climate, agriculture, education, tech4dev, financial inclusion, and healthcare. Here’s what 2021 looked like for impact investment in India.  

Late-stage tech investments drove most of the growth in 2021

The post-pandemic growth in investments across sectors was the result of an increase in the number of big-ticket deals (greater than USD 100 million) in the later stages of funding. Our analysis shows that a disproportionate percentage of these investments went to a handful of enterprises—only 14 enterprises accounted for almost 60 percent of the total impact investment volume in 2021. This trend reflects investors’ comfort in funding established and proven tech-driven business models that have significant capital needs as they grow and expand their operations.

Climate tech emerged as a vibrant sunrise sector

Owing to the effects of climate change globally, investors have increasingly steered their attention towards Indian impact enterprises that focus on climate change mitigation, adaptation, and resilience. These enterprises’ potential to deliver disruptive climate tech solutions that cut across diverse sectors and industries is increasingly being recognised. Our analysis revealed that climate tech witnessed the highest number of deals across all sectors. The total investment volume in the sector reached an all-time high of USD 590 million in 2021—a 200 percent increase from 2020. This exponential growth has been driven by increasing early-stage innovation activity, which is reflected by the outsized share (65 percent) of seed-stage deals in the sector.

The next frontier of climate tech will lie in segments that are directly influenced by sustainable consumption habits. As more and more consumers desire products that do not contribute to climate change, greater impact capital will flow towards enterprises that focus on environment and natural resources, such as those that develop bio-packaging solutions for everyday goods. Similarly, waste management innovations that use deep tech to break down contaminants such as microplastics will also receive greater investor interest.

Agriculture continued to exhibit steady growth

Agriculture forms the backbone of India’s socio-economic fabric and is directly responsible for the employment and incomes of a majority of its workforce. Therefore, the sector is a key focus area for impact investors looking to balance financial returns with societal impact. This is reflected in the sector’s robust deal flow across the years. In 2021, the overall investment volume reached an all-time high of USD 889 million across 62 deals—an increase of more than 114 percent from 2020. We also saw signs of the sector maturing as capital moved away from the seed stages to the later stages with the objective of supporting the scaling up of agri-tech start-ups.

Market linkage platforms that provide farmers with online access to a variety of offline products and services continue to dominate the sector, attracting approximately 40 percent of the investment volume.  Furthermore, technology start-ups that address pre- and post-harvest issues such as logistics and transport, food processing, and food safety and traceability received heightened investor interest.

Investments in financial inclusion rebounded strongly in 2021

Financial inclusion has been the traditional mainstay of India’s impact investing ecosystem. The sector has resultantly attracted almost half the entire impact capital flowing into Indian enterprises since 2017. While 2020 was a challenging year for financial inclusion thanks to the economic shocks induced by COVID-19, the sector rebounded strongly in 2021, with the total investment volume rising by 146 percent to USD 1.8 billion. Despite the sector’s robust pipeline of deals in 2021, its recovery largely resulted from the substantial increase in big-ticket investments (greater than USD 100 million) in growth-stage enterprises.

India’s digital revolution has been a key factor driving the radical transformation of this sector, which has evolved from a constrained, physical ecosystem to one where anyone can service their financial needs through their phones. This is particularly apparent in the small- and medium-enterprise finance space, with financial services being embedded within various value chains, including the agri-value chain and the fast-moving consumer goods (FMCG) value chain. Furthermore, we are also witnessing traditional lenders like non-banking financial companies incorporating digitally driven value-added services, such as insurance and savings, into their business models to better serve their borrowers.

2021 was a dynamic year for the tech4dev ecosystem

Technology continues to emerge as a driving force in India’s socio-economic development, be it through supporting micro, small, and medium enterprises (MSMEs) or providing rural Indians access to products and services once restricted to the metros. Investments in tech4dev-focused social enterprises rose to USD 1,298 million in 2021—a 224 percent jump from 2020. Despite the substantial spike in investments, the number of deals in the sector was lower than that in 2019 (49 in 2021 vs 60 in 2019). However, the sector has the potential to attract more capital in the short term by expanding support to a larger base of early-stage enterprises that bring B2B and B2C commerce and regional vernacular content (social media, audiobooks, e-books, etc.) to India’s underserved rural and peri-urban markets.

Boosted by the lockdowns and stay-at-home orders, enterprises offering local-language content attracted the most capital in the tech4dev space. Furthermore, after the success of B2C commerce in urban India, small towns are the new frontier for investors, as reflected by the rapid scaling up of social commerce enterprises such as Citymall. The pandemic has also pushed a large number of MSMEs to look for digital tools that can help them scale faster and become more productive and cost-efficient. Consequently, SME tech enterprises that digitise supply and improve quality of production received increased investor interest in 2021.

The pandemic sparked a renewed interest in healthcare

The adverse consequences of inequities in access to healthcare infrastructure became particularly apparent during the COVID-19 pandemic. This reinforced the need for affordable, quality, and accessible healthcare, particularly in low-income rural and semi-urban areas. There was subsequent renewed investor interest in the sector in India, but it was limited to very specific segments and stages of enterprises. The healthcare sector bounced back reasonably in 2021, with the total volume of investments increasing by 6x over the 2020 levels to USD 1.2 billion. However, the total number of transactions over the last three years remained flat. While the early-stage activity plummeted by almost half as investors looked to fund business models with an established proof of concept, late-stage activity contributed significantly to growth in the sector.  

Segments with strong online components such as digital pharmacies, diagnostic chains, and primary care continued to receive disproportionate investor attention. For instance, digital pharmacies received almost 70 percent of the total impact capital in the sector in 2021. The current investment trajectory shows that investor confidence in digital health start-ups and healthcare delivery/clinic platforms is driven by technologies that improve accessibility in remote areas and foster business model innovation. However, the sector is yet to witness noticeable movement from seed to Series A—particularly in disruptive segments such as diagnostic devices, therapeutics, and other products that hold the potential to transform the healthcare sector and propel long-term meaningful social impact.

After its sharp initial growth, the education sector consolidated in 2021

The COVID-19 pandemic and the consequent nationwide school closures facilitated the rapid digitisation of learning and skilling platforms. In 2020, investment volumes in education almost doubled to USD 732 million, while the number of deals in the sector reached an all-time high of 58 during the same period. However, the sector observed only a 7 percent increase in overall investment volume in 2021, and the number of deals declined considerably (by 27 percent). The small uptick in investment volume was driven by a couple of large, individual late-stage deals that alone raised more than 50 percent of the total impact capital invested in the sector.

Going forward, the digitisation of India’s education sector is expected to continue as physical centres of learning increasingly embrace a hybrid model. As a result, investors are seeking new-age technologies that can further improve the quality of K–12 digital offerings. Simultaneously, more impact enterprises are striving to plug India’s skilling gap through employability platforms that train blue-collar workers and college students and connect them to the right employers.

Slow but growing momentum towards gender-lens investing

While a vibrant entrepreneurial ecosystem continues to underpin India’s growth trajectory in creating jobs and wealth, considerable gender gaps exist at multiple levels. Our initial analysis indicates that of the 597 impact enterprises that received equity investments across 2019, 2020, and 2021, only 130 were (co-) founded by women. These women (co-) founded impact enterprises raised a total of USD 2.3 billion across this period compared to the USD 14 billion raised by impact enterprises founded by men, reflecting a significant gender gap. The lack of a gender-inclusive perspective, especially in impact investments, is a missed opportunity not only to augment market returns but also to deepen social impact.

That being said, the recent return of gender to the fore of the investing landscape as a key mandate has been encouraging to witness. In 2021, women founders raised 22 percent of the total impact capital—a 5x jump from 2020 thanks to big-ticket investments in women-founded enterprises. Initiatives such as the 2X Challenge have propelled a variety of asset managers and other actors to actively incorporate gender considerations into their investment thesis and organisational strategies.

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Know more

• Read this report to understand the Indian impact investment trends in 2020.
• Read this article to know more about how the ecosystem for climate tech start-ups in India can be strengthened.
  
  

In response, I asked him if he could recall a nonprofit he is associated with that is more than 150 years old, and he could not. I said, “St Joseph’s Boys’ High School in Bangalore, where both of us studied.” Our school was established in 1858 and is still going strong as a nonprofit. Then I asked him if he could recall a nonprofit he is associated with that is 2,000 years old, and again he could not. I replied, “The Catholic Church, into which we were both baptised.” These two organisations have always been nonprofit entities and have survived longer than most for-profit corporates.

Similarly, take Alcoholics Anonymous, which was set up in 1935. It operates in approximately 180 countries and has more than 2 million members. The meetings are free to attend and there is no complicated organisational structure. Members take turns to help the organisation as ‘trusted servants’, and each group is a self-governing entity that relies primarily on donations from local members. There are no age or educational requirements. Most importantly, Alcoholics Anonymous has been around for 87 years.

These organisations show us that if you have a product for which there is a demand and one that does not require repeated infusions of large amounts of capital, you can be sustainable for decades, if not centuries. The legislations that govern nonprofits in India—the Indian Trust Act 1882, the Societies Registration Act 1860, and the Companies Act 2013—enable them to be set up in a way that they are sustainable for a long period of time. Their governance structures are tried and tested—requiring nonprofits to set up supervisory boards, conduct audits, comply with regulatory audits, and more—thereby allowing them to continuously raise funds for decades.

Of course, if governance is poor and only lip service is paid to these structures or if the team has limited fundraising capabilities, organisations cannot be sustainable, irrespective of their structure.

Distorted incentives

So why do social entrepreneurs feel the need to set themselves up as for-profits in order to be sustainable? This myth has been perpetuated for a long time and creates an unnecessary distortion of incentives along the way. The reason for this is that organisations end up being driven by the need to make money for shareholders—as opposed to improving the lives of the communities they are working with.

It is worrying to see social entrepreneurs get caught up in the stories of venture capitalists and smart bankers about how there is a fortune to be made at the bottom of the pyramid.

I remember a social entrepreneur telling me about her business that had both a for-profit and a nonprofit entity. She argued that she needed the for-profit component to be able to raise capital, create economic value for herself and others in the team, and build a sustainable organisation. It’s been more than five years and no significant additional capital has been raised nor has significant economic wealth been generated because the business model did not justify it. But both entities are still alive and thriving and continue to positively impact marginalised communities.

Another social entrepreneur told me that she needed her organisation to be structured as a for-profit. When I asked her why, she replied, “So that we can distribute dividends to the shareholders.” The shareholders were primarily she and her family. When asked how much surplus money she thought she would earn to distribute as dividends, she mentioned a figure of INR 25 lakhs. I told her that if she structured her organisation as a nonprofit and got donors to fund it, she could easily pay herself a monthly salary of INR 2 lakh, without worrying about being a for-profit entity and being unable to access donor money. 

It is also worrying to see social entrepreneurs get caught up in the stories of venture capitalists and smart bankers about how there is a fortune to be made at the bottom of the pyramid. I recently attended a well-structured presentation on impact investing. The presenter spoke about one investment with a targeted return of 25 percent. I do not see how that can be achieved if the communities they serve were to get a fair share of the revenues. Clearly, the corporate entity would be gouging a significant share of the profits and the communities creating the product would continue to be exploited. In contrast, I recall the amazing transparency of an organisation (whose name I can no longer remember) that sold handmade products online. Every product had a detailed break-up of the selling price, indicating what the artisan made and what was spent on each part of the supply chain.  

So how can nonprofits be sustainable?

The Forbes Nonprofit Council recommends nine steps that nonprofits can take to become self-funding.

1. Monetise your services: Review the services and/or programmes that you offer and monetise one that clients would be willing to pay for.
2. Apply an open-source model: Sharing and pooling resources—especially technology, tools, and talent—between organisations can help create a self-funding nonprofit model.
3. Have dominant and secondary source funding: Diversify funding streams so that you’re not dependent on a few sources of funding.
4. Become a social enterprise (and still be a nonprofit): Integrate other business models, such as consulting services or specialised products, that allow nonprofits to work towards being sustainably funded.
5. Leverage social media and automation: Using new technologies and social media tools allows nonprofits the opportunity to regularly engage with their supporters and makes it easier for them to give securely online.
6. Create proprietary knowledge: The products or solutions created by individual nonprofits can often be helpful to the wider ecosystem as well. Leveraging and licensing this research, programme, or knowledge can become an effective source of self-funding.
7. Sell your value: Almost every nonprofit creates value as a by-product of its service to the community. Making this available for sale can cover a portion of revenue needs.
8. Create mission-aligned earned income: Identify sources of income that align with your organisation’s mission. Doing this creates room for more creative and self-directed funding.
9. Treat your beneficiaries as customers: While this might seem counter-intuitive initially, providing additional products or services to the communities you work with can translate into real benefits for both individuals and the nonprofit.

Setting up a social enterprise as a for-profit is not inherently a bad idea, but to do so on the belief that the only way to be sustainable is by being a for-profit is wrong. So, when thinking about setting up a social enterprise, remember that nonprofits can be sustainable for centuries as long as they are satisfying a need that users are willing to pay a reasonable price for and do not continuously need huge capital investments.

However, during a women farmer producer interaction in 2016–17, when we asked them if the enhanced produce was translating into more income, the answer was no. This forced us to reflect on and rethink our approach. What was the point of intensive training and focus on inputs if they weren’t resulting in prosperity for the women and their families? We realised that one of the ways to change this was to build linkages between the farmers’ produce and the end-consumer market.

This was when we moved from being a production-oriented nonprofit to also building a market-led social enterprise. It’s not an easy journey to make, and nonprofits who have attempted this haven’t always succeeded; many of them are still struggling to find viable models. Over the last five years of building these women enterprises and a new brand—Katori—we have had several learnings, some of which I would like to share here.

The challenges of a market-led organisation

1. Building a brand

When we started promoting these women enterprises in 2016–17, we were still thinking as nonprofits do, believing that we could accomplish everything ourselves. The brand was initially called Apni Saheli, after the farmer producer group. Our packaging was amateur, and the decision makers for this business continued to be people with nonprofit and community development experience. This initiative did not work as we had imagined, and we realised that we needed to rethink the product.

We decided that our product packaging would carry the faces of the farmers we work with so that consumers can see the people behind the product.

We started by looking for people with specific expertise whom we could bring on board. They needed to have the same vision and mission as Manjari—one of building a unique brand that embodied the spirit of ‘by the women and of the women’.

In our initial meetings and discussions we all agreed that the word katori—which means bowl in Hindi and has a different ring to it—would be easy to remember and recall as a brand name. Red was picked as the brand colour because it represents energy.

In the later stages of product development, we also decided that our product packaging would carry the faces of the farmers we work with so that consumers can see the people behind the product— the producers and owners of the brand. This was done to improve the traceability of the product.

We set up a private limited company called Katori Fresh Private India Limited (KFPIL) to market all the food products manufactured by the women enterprises promoted by Manjari Foundation.

Manjari Foundation’s women farmer producers and sellers are at the core of Katori. Currently 5,200 women farmers are engaged with Manjari and registered in producer groups, enterprises, and cooperatives as shareholders. There are six production units in Dholpur, Chittorgarh, Ajmer, Baran, and Bhilwara in Rajasthan, which convert the farm produce—dairy, honey, mustard, spices, pulses, ginger, and garlic—into finished products. The production units are registered as farmer producer companies (FPCs) so the financial benefits go to the women. The FPCs in turn are shareholders in KFPIL. Thus, women farmers are shareholders at all levels from the FPC to the umbrella private limited company.

Initially we invested some of our personal money to do a proof of concept for Katori, following which KFPIL was registered with an incubator that lent it some funds. However, this did not yield the desired results.

2. Hiring for the market

Early on in our journey we understood that we could not run Katori the way we ran our nonprofit, Manjari Foundation. The skills, capabilities, risk orientation, and mindsets required to run a market-led enterprise are different from those required to work closely with communities. We needed people who knew how to manage quality, set prices, build marketing campaigns, work with FMCG distribution channels, and so on.

Manjari Foundation’s core group does not interfere with the business aspect of Katori. These are two separate entities with different leadership at all levels. Our role at the nonprofit is only to make sure that the consumer brand does not diverge from the ethos of working for the women farmers.

The 30-odd people’s marketing and sales team in Delhi that works with Katori Fresh is entirely market-oriented; they comprehend and speak the language of sales and marketing. They also help the production units understand consumer behaviour and demands. Because of them we now know that Rajasthan overall has more demand for pickle and, within the state, Chittorgarh consumes cow ghee; Delhi on the other hand consumes fresh paneer, traditionally made ghee, and raw honey. Different cities and towns demonstrate different trends, and understanding these from the Katori team helps us plan our production better at our women enterprises.  

3. Finding and managing unlikely partnerships

For nonprofits used to raising institutional grant money, finding funds that would support a market-led initiative isn’t easy. We are however beginning to see interest from the more progressive CSR teams who see value in supporting programmes that can become financially sustainable.

Companies fund Manjari through their CSR for market development activities, hiring people with marketing and sales experience, and enhancing the production capabilities of the women-run production units.

However, given how CSR works, even though they might commit to funding for three–five years, the actual budgets are allocated year-on-year, which makes planning for and sustained investment in market development difficult. And there are pitfalls we have to be mindful of, especially when working with new corporate partners.

Corporate funders often think that since they give so much money, it should be easy for us to build a new brand under their name. However, our objective is to help farmers and to create a market for women farmers instead of creating new brands. The objective for building a brand is to reach the market and increase women’s incomes. We are not brand-building people, and it is important to communicate this to corporate funders. However, CSR money is a valuable resource we can tap into and make accessible to the farmers, so we need to balance the pulls and pushes of these relationships.   

Learning to do business as nonprofits

Today, Katori is a one-stop food products aggregation platform for women farmers. Our distribution network is spread across villages and cities in North India—from rural kirana stores in Rajasthan to supermarkets in Delhi and Mumbai and e-commerce platforms such as Amazon and Flipkart.

Producing large quantities is important but it is also necessary to understand the demands of the market.

Katori caters to rural women workers and entrepreneurs, and being part of the consumer market has helped us increase incomes for women significantly. The women who sell Katori products in rural India—our business sakhis—make INR 10,000–12,000 a month from sales. The women who work in the production units on an hourly basis make INR 3,000–5,000 a month from their labour, depending on the number of hours they work.

However, this change from producer to market-facing, from sub-par incomes to sustainable livelihoods for women, from hyperlocal to national, did not happen overnight. Here are some lessons we would like to share with producer-led nonprofits looking to enter the market:

1. The market demands patience

Brand building is a long process. It requires investment of time and money at various levels. An organisation has to find the right marketing team, partners, and sources of finance. And even with all this, brand recognition takes time. Nonprofits must understand that a brand cannot be built in a day. They have to convince themselves and their funders about the value of doing this, and know that this is a brand they want to invest in for the long term.

Despite the offtake of its products in the market, KFPIL has not reached break-even volumes. The time frame for operational profitability has also been stretched because of the pandemic and repeated lockdowns in the last two years.

2. Looking beyond production and supply

FPCs are currently more focused on production. They need to start thinking about demand as well and prepare farmers to meet the quality and process requirements of the market. Producing large quantities is important but it is also necessary to understand the demands of the market; only focusing on supply is not enough.

To do this, FPCs need to open themselves to market expertise and work with an entirely new set of people who have those skills and understand consumer behaviour. Value addition is what will bring extra money for the farmers. Without this—by just selling khaad–beej (fertliser and seeds)—it will be difficult to sustain farmer producer organisations.

3. Being part of a platform for producer collectives

Most of the FPCs in our country tend to be small and local. It is hard for them to build marketing capabilities on their own and negotiate with different parts of the agricultural and marketing value chain. It might therefore make sense for them to get on to one or multiple platforms at the state or national level and acquire the benefit of aggregation and collectivisation. This is not a new concept and has been successfully demonstrated by Amul, Fabindia and now, to some extent, by Katori.

4. Grant money is not enough

Nonprofits cannot bank on grants for market development. For Katori, we had to bootstrap the fund—invest our own money. We explored and tapped into funds available for start-ups and MSMEs—a very different set of funders than the ones we are used to in our sector. This gave rise to its own set of challenges.

While there is an increasing interest from corporates, and CSR support can be an important source, a nonprofit will have to explore a combination of sources—many of them new and unfamiliar. This will help us bring in and pay for ‘business’ people—those who sell to consumers, manage marketing value chains, and build campaigns. We will also have to compensate these market experts more than we pay our colleagues in the nonprofits because the pay scales are different for this kind of expertise. We need them because they know the business, consumer behaviour and their demands, and business value chains better than us nonprofit leaders. In terms of the capabilities, expertise, and financing required, the shift for nonprofits seeking to move away from being production-oriented is substantial. However, above all, the organisations require a significant change in mindset. Only when the leadership makes this leap can it successfully transition to being a market-led enterprise that adds tremendous value to its women producers.

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Know more

• Read why women farmers need access to technology.
• Learn why women-led FPOs are crucial for inclusive growth in rural India.
• Understand why market linkages are vital for small businesses run by women.

• India’s long coastline makes it prone to coastal floods. Between 1990 and 2016, India lost about 235 square kilometres of land due to coastal erosion.
• Agriculture in India contributes to around 18 percent of its GDP and is heavily dependent on the monsoon. As a result, any adverse changes in the monsoon levels can have a significant impact on the economy.
• The country has a low per capita income and few social safety nets, which limit its ability to mitigate the impacts of the climate crisis.

In 2019 alone, floods and cyclones in India caused an economic loss of nearly USD 10 billion. The effects of climate change are real, and climate change–induced natural disasters are likely to lead to a significant contraction in the country’s per capita GDP in the absence of large-scale adaptation and mitigation efforts.

There is a need for urgent climate action in India

In response to the situation, the Government of India has made a series of ambitious climate action commitments over the last decade. These include the National Action Plan for Climate Change (NAPCC) and signing the Paris Agreement. While India has made some headway in the renewable energy space, it is considerably behind in meeting other targets, specifically around carbon capture. Moreover, in the last two years, the COVID-19 pandemic has justifiably redirected significant portions of funding to healthcare, away from equally essential issues such as climate action.

Till now much of the work on climate finance in India has centred around large, utility-scale renewable project financing. Moving ahead, we need a deep and sustained decarbonisation of the economy at all levels—food production and consumption, transportation, construction, manufacturing, and retail. To do this, we require new and innovative solutions that transform the way stakeholders engage with the natural world. Climate tech start-ups deploying low-carbon, affordable technologies present a clear pathway to achieve the transition to net-zero greenhouse gas emissions at scale.

Simply understood, climate tech start-ups refer to for-profit, early-stage enterprises that work on innovative technology-based solutions to reduce carbon footprint or improve people’s adaptation and resilience to climate change. Investing in these and building a coherent narrative around the role such enterprises can play in climate action is the need of the hour.

A new wave of climate tech is emerging in India

A recent study by Impact Investors Council (IIC), Climate Collective, and Areté Advisors examined the investment landscape of the Indian climate tech ecosystem. They found that over the past five years, 120 climate tech start-ups raised more than 200 funding rounds from 272 unique investors.

There was sustained growth in both the volume and value of equity deals in the sector between 2016 (18 deals; USD 102 million) and 2019 (58 deals; USD 506 million). In 2020, however, there was a slight dip in numbers (48 deals; USD 236 million) due to the pandemic.

Climate tech start-ups take relatively longer to attract larger pools of capital, and therefore to scale up.

The sector is at a nascent stage and needs mainstreaming. Despite the positive outlook, our research shows that climate tech accounted for only 9 percent of the investments flowing to impact-oriented sectors such as education, healthcare, and financial education between 2016 and 2020. This could be attributed to the fact that a majority of the equity deals in the sector were still in early stages of funding (seed) and of relatively smaller ticket sizes (less than USD 5 million). Further, the conversion from seed stage to the Series A stage of funding is very low (approximately 17 percent) when compared to 29 percent internationally. This indicates that climate tech start-ups take relatively longer to attract larger pools of capital, and therefore to scale up.

The climate tech ecosystem in India has shown distinct characteristics, a few of which have been listed below:

1. Sustainable mobility receives a large share of the investment pie

Within the climate tech space, sustainable mobility—which includes electric vehicle manufacturing and clean logistics—has seen the highest investment activity (84 deals worth USD 705 million) since 2016.¹ This was followed by energy, which covers clean energy generation, energy access, energy storage, and energy optimisation products (44 deals amounting to USD 301 million).²

Climate-smart agriculture, waste management and circular economy, and environment and natural resources are gradually beginning to gain traction.

Both sustainable mobility and energy are relatively mature sub-sectors, and benefit from a favourable regulatory environment and easy-to-capture impact metrics. Climate-smart agriculture, waste management and circular economy, and environment and natural resources are the other sub-segments gradually beginning to gain traction.

2. Start-ups focusing on mitigation and product innovation dominate the space

The energy and sustainable mobility sectors have predominantly focused on mitigation solutions because the carbon footprint in these sectors is high. As a result, mitigation accounts for 86 percent of the equity infusion in the last five years. Other verticals such as smart agriculture, waste management, and environment and natural resources have seen fewer adaptation and resilience solutions as they require more localised modifications.

Additionally, almost two-thirds of the start-ups that have raised Series A funding and beyond have showcased product innovation. This is in large part due to electric vehicle innovations within the sustainable mobility segment.

3. Climate tech start-ups need more women leaders

Only 9 percent of the climate tech start-ups that have raised Series A funding and beyond in the last five years have been founded or co-founded by women. This number is low in comparison to women founding or co-founding 14 percent of the top 150 start-ups and less than half of the 20 percent women-owned enterprises in India. However, within the climate tech space, the participation of women increases as we move to executive leadership positions (15 percent).

Climate tech has the potential for disruptive growth

In recent years, multiple factors have contributed to creating a stimulating environment for climate tech start-ups in India. These include a more conducive policy environment and steady development of low-carbon technologies. Moreover, the development of a large asset base in clean energy over the last decade has propelled new start-up innovations to service these assets. For example, energy optimisation solutions such as energy analytics, energy accounting, drone-based and GIS-based survey companies, among others.

From an investor’s perspective, three key enabling factors have been identified to aid the growth of the climate tech ecosystem in India:

• The growing awareness on the need for climate action.
• A growing interest from global capital allocators and policymakers.
• The emergence of a range of innovative deal pipelines. Even as the number of start-ups working on novel technologies such as green hydrogen generation, alternative proteins, or carbon capture grows, the enabling ecosystem—incubators, accelerators, policy advocacy groups, and think tanks—which helps surface these interesting models is also expanding.

One-third of the investors surveyed were also of the opinion that the climate tech ecosystem in India needs standardised language to bring cohesiveness to the sector. The entrepreneurial ecosystem also agrees that if we are to transform the climate tech ecosystem from a niche asset class to a mainstay of venture capital and impact investment, we need to build a coherent narrative and distinct identity for the ecosystem.

Despite these enabling factors, several significant roadblocks remain for climate tech start-ups. Entrepreneurs highlight four key areas where they need support from the wider ecosystem:

• The climate tech sector is hardware intensive and therefore start-ups in this space take longer to get their products market ready. They need abundant patient capital in the early stages to enable this; however, the current ecosystem doesn’t provide adequate early-stage, long-term capital.
• Building a narrative that makes buyers or customers more willing to pay the green premium associated with climate tech products and services
• Business assistance covering tactical support, mentorship, and talent management
• Regulations that ease the compliance burden for start-ups

The climate tech start-up ecosystem needs more support

From a larger ecosystem perspective, start-ups working on science and technology innovations need customised support in the early stages for prototyping, testing, technical validation, and product commercialisation. This can be done by setting up dedicated centres of excellence (COEs), specialised entrepreneur support organisations (including incubators and accelerators), and greater academia– industry interface.

Additionally, the government can play a vital role in creating demand for climate tech start-ups by introducing policies that nudge consumers to adopt green products, subsidising the green premium on such products, and acting as the first large buyer itself. It can also help in improving the supply side by funding infrastructure such as COEs and scientific labs, and providing directed fiscal incentives.

Capital providers such as government-backed funds, corporate venture capitalists, foundations, and philanthropies can take on a larger role in encouraging early-stage climate tech investing. A way for them to do this is by providing capital for longer periods. Furthermore, well-designed blended finance and/or affordable debt structures can help in de-risking private investments and bringing in other relevant actors into the climate tech sector.

Finally, given the multidisciplinary and complex nature of climate tech businesses, the investing community can benefit from capacity-building interventions. These can help cultivate relevant technical expertise for due diligence or portfolio management of climate tech start-ups.

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Footnotes:

1. This USD 705 million includes approximately USD 300 million of funding to Ola Electric in 2019.
2. Well-established and stable businesses like utility-scale renewable energy and rooftop solar were excluded from this study.

Know more

• Listen to this podcast on global climate change policy and the need to include marginalised communities.
• Learn more about global climate tech investment trends since the Paris Agreement.
• Read about how a vibrant, sustainable technology start-up ecosystem is taking root in India.

And while overall investments fell by 25 percent vis-à-vis 2019, impact investors continued to pledge their support to solving critical social and environmental challenges through investments in scalable, tech-based, innovative social enterprises.

According to the annual impact investment research report, ‘2020 in Retrospect: India Impact Investment Trends’, the Indian impact sector will be more tech-led in the future. The COVID-19 pandemic has been a game-changer for the sector, with the lockdown and physical distancing norms rapidly increasing the adoption of internet and digital devices across all classes of society.

Seed-stage tech investments drove most of the growth in 2020

While overall impact investments in 2020 fell 25 percent as compared to 2019, the sector witnessed a 16 percent rise in seed stage investment volume. Investors were most keen to back early-stage tech enterprises in the agriculture, livelihoods, and healthcare sectors. The decline in overall impact investment in fact was led by the fall in late-stage investments in financial access and healthcare enterprises.

Agriculture stayed the course during the year

The pandemic and strict lockdowns caused widespread disruptions across the agriculture supply chain, including the closing of markets, breakdown of procurement, and a halt in several on-ground operations. Despite this, enterprises in the agriculture sector attracted approximately USD 440 million across 52 deals in 2020. The sector continued to see active investor interest, and the number of deals in 2020 remained almost unchanged from 2019. Industry experts expect a steady inflow of investments in agriculture to continue throughout 2021.

The past few years have seen multiple agri-tech start-ups emerge in the agri inputs advisory, and market linkage sub-segments space. It is therefore not surprising that 70 percent of the deals in the sector have been with seed- and Series A- stage enterprises both in 2019 and 2020.

The expectation is that enterprises focused on enhancing market linkages in the agricultural value chain will continue to see investor interest. This is because farmers are increasingly relying on technology to ease supply chain bottlenecks, eliminate middlemen, improve transparency, and ensure they earn a bigger chunk of sale proceeds. Agri-inputs startups in pre-harvesting will also see greater investor attention as farmers adopt innovative solutions for productivity improvements.

Education witnessed a record level of investment

With the national lockdown impacting traditional modes of education, there was a dire and urgent need for remote tech-based solutions to ensure that 335 million students enrolled in schools across the country could continue to learn.

As investors realised the opportunity that the crisis provided to EdTech companies, investment volumes in education rose by 65 percent to USD 660 million, while the number of deals increased to 47, a jump of 20 percent from the 2019 levels. Most of this was due to a rise in Series B and later-stage deals which saw a surge of 70 percent in investment volumes and 50 percent increase in the number of deals.

The COVID-19 pandemic led to a total shut down of all schools for a significant part of the year, resulting in poor cashflows. As a result, the education finance sector seemed less attractive to investors and experienced an 85 percent fall in investment volumes vis-à-vis 2019.

Healthcare sector showed promise only in seed-stage investments

Despite the enhanced focus on health-related agendas during the pandemic, healthcare impact enterprises attracted the least volume of investments in 2020 totalling USD 200 million across 29 deals. This was a stark fall of 70 percent in investment volume, and 20 percent in the number of deals vis-à-vis 2019.

The fall also appears to be substantial because multiple large ticket deals took place in the late-stage online pharmacy segment the year before in 2019.

In spite of the overall fall in investments, there was an approximately 85 percent rise in the number of seed-stage deals across healthcare segments in 2020. The pandemic, subsequent lockdowns, and the perceived risks of physically visiting healthcare clinics or hospitals led to telemedicine and cloud-enabled diagnostic tests gaining prominence in 2020. This was evident with investors putting their money in early-stage healthcare enterprises focused on telemedicine, AI-based solutions, and cloud-enabled diagnostic tests. Diagnostics and decisions support, medical devices and primary healthcare segments also saw a collective 30 percent rise in investment volumes.

Tech-enhancement in the sector will prove to be a critical enabler to provide last mile health care access to the masses. We can expect a renewed investor interest in enterprises providing affordable health-tech solutions, in 2021. 

Absence of late-stage follow-on deals led to a significant decline in financial access investments

While the financial access sector received the maximum volume of investments in 2020—as it does every year—the pandemic adversely impacted its core market segments, namely late-stage enterprises across microfinance, housing finance, and commercial vehicle finance.

This resulted in a 50 percent fall in investment volume and 35 percent decrease in the number of deals vis-à-vis 2019.

In contrast to the more established financial access sub-segments, fintech did well in 2020. This was primarily because digital payments and transactions recorded remarkable growth given the strict norms around physical distancing. The country quickly turned to tech-based financial products for day-to-day transactions.

Financial access models such as insure-tech, banking, and savings tech, that go beyond just lending emerged as key impact solutions for the Indian market in 2020. Overall, this sub-segment saw enhanced interest with investments both in early-stage as well as late-stage enterprises like Khatabook, MoneyTap, and Setu. We expect to see this trend to continue into 2021.

Technology for Development showed promise, especially in the Small and medium enterprises (SME) space

This segment essentially covers cross-cutting use cases of technology for social impact by providing (i) access to new markets and new products (Utilitarian Products), (ii) access to new sources of income (Future of Work), (iii) access to connectivity (eg SME tech) and/or (iv) access to content (media or vernacular). This does not cover the tech-enabled solutions covered in the other sectors.

As mentioned earlier, technology adoption leapfrogged years in 2020. This has opened up exciting opportunities for impact start-ups focussed on SME Tech, utilitarian services, and local language content.

The sector attracted USD 331 million, up 76 percent over 2019 levels. However, a large part of this was on account of a single enterprise, Daily Hunt, which alone received USD 214 million in 2020. The overall number of deals fell from 43 in 2019 to 34 in 2020.

Opportunities in digitisation for SMEs was a substantial focus area for investors in 2020. Early-stage, innovative, tech-based enterprises catering to the SME sector, observed a 7-time increase in investment volume in 2020 totalling USD 51 million in 2020 versus USD 6 million in 2019.

Notwithstanding the pandemic, Indian impact enterprises have proved to be resilient: Entrepreneurs were quick to pivot and re-orient businesses to meet the needs of the people. Tech-enabled impact enterprises gained traction and attracted significant investor interest, especially in the education sector. While there was a fall in investment volumes in 2020, we expect investment levels to normalise in 2021.

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Know more

• Read this article to understand the evolving landscape of impact investment in India.
• Learn more about the future of impact investment in India.
• Read what India’s leading impact investors have identified as catalytic investment opportunities that can help create outsized impact.

Do more

• Connect with the authors, Ramraj Pai, Shriya Nene, and Swasti Saraogi, if you’d like to learn more about IIC’s work on impact investing in India.

Since 2010, impact investing’s support has expanded from microfinance to other sectors—such as agriculture, healthcare, and education—and annual investments have grown from USD 323 million to USD 2.7 billion. However, not all the trends point in the right direction, particularly from the perspective of investment recipients. To date, impact investors have heavily favoured ownership equity in emerging impact enterprises, over lending money for working or growth capital (also known as debt financing). Debt remains particularly challenging for young, growing impact enterprises to secure, in large part because of the perceived risk and lack of creditworthiness. Yet, without an adequate supply of borrowed money, expansion and working capital needs go unmet, leaving impact enterprises unable to reach their full potential.

To better understand these challenges, the India Impact Investors Council (IIC) and The Bridgespan Group have published a report which analyses the balance sheets of 422 leading impact enterprises and gauges their creditworthiness, identifies the barriers to debt financing, and proposes solutions for making debt more accessible.

Related article: IDR Explains | Impact investing

Barriers to debt financing

Cautious investors are only one component of this complex story. Our research and interviews with more than two dozen impact investors and impact enterprise leaders led us to conclude that all the lead actors in India’s debt ecosystem play a role—often inadvertently—in limiting access to credit. We summarise these obstacles below.

• Impact enterprises struggle to find and secure loans. As the CEO of one impact startup told us, they prefer debt to handing over a share of ownership for cash. Yet, the latter is often the only option for impact enterprises because they typically lack the collateral required for standard, asset-backed lending. Furthermore, many impact enterprises have not matured enough to be able to implement strong management reporting systems that capture critical financial, employee, client, accounts, products, and performance data. Weak reporting systems lead to low-quality financial statements that make it difficult—if not impossible—for impact enterprises to obtain a good credit rating.
• Non-banking financial companies (NBFCs) lend when banks are reluctant to. Bank lending practices based on collateral are more suitable for conventional asset-heavy manufacturing enterprises than for asset-light impact enterprises. Many, if not most, impact enterprises have few (if any) balance sheet assets such as equipment and inventory, to offer as collateral. As a result, loan officers often consider small enterprises too risky to pursue. By contrast, NBFCs specialise in servicing enterprises that banks consider too risky. However, the interest rates they offer tend to be higher, because their operating costs are higher than that of banks. This, in turn, puts a strain on the cash flow of many young enterprises, making it difficult for them to accept loans.
• Lack of data inhibits credit evaluations. Lenders acknowledge the need for more and better data to assess the creditworthiness of potential clients. To address this problem, the Reserve Bank of India in 2016 approved a new class of NBFCs to act as account aggregators to consolidate and digitise information from individuals and companies, and make it usable by financial institutions. Also, emerging data and analytics platforms such as Crediwatch can provide independent third-party data on the performance of companies. While none of these approaches are fully proven yet, their performance before the COVID-19 pandemic washed over the economy, was encouraging.
• Government regulations affect domestic and offshore capital. In recent years, the Indian government has taken steps to improve financing options for small-to-medium enterprises, but regulations that slow and even stymie debt investment and impact enterprises remain. For example, impact investing is not recognised as a distinct asset class that would allow regulators to apply a different of standards to impact investors and enterprises. Non-performing loan regulations lack flexibility to allow banks to make loan modifications to accommodate fluctuations in an impact enterprise’s cash flow. Regulations also prevent CSR funds from going to impact enterprises. Finally, external commercial borrowing is highly regulated by the Reserve Bank of India and comes with restrictions and guidelines that limit its appeal.

Making debt more accessible

The mismatch between debt financing supply (too little) and demand (too much) continues to impede the ability of social enterprises in India to fulfil their potential. As we heard from the impact investors and bankers we interviewed, a number of solutions are at hand.

The sector would benefit from the standardised tools and platforms broadly available to banks and other financial institutions. | Picture courtesy: Pixabay

This approach addresses a common complaint of small and medium-sized enterprise (SME) owners in India: Businesses fail to achieve their growth potential because banks won’t extend loans without collateral. Cash-flow lending allows banks, NBFCs, and fintech firms to extend loans based on the present and projected cash flows of the enterprise. Compared to conventional business loans, cash-flow lending requires less paperwork and shorter approval times, in part because it does away with the appraisal of collateral.

Cash-flow lending allows banks, NBFCs, and fintech firms to extend loans based on the present and projected cash flows of the enterprise.

Market observers expect cash-flow lending to be a boon for micro, small, and medium enterprises (MSMEs), startups, and impact enterprises that may not have hard assets for collateral. In June 2019, the Reserve Bank of India recommended that banks should opt for cash flow-based lending. And the country’s largest lender, State Bank of India, announced early in 2020 that it planned to transition from asset-based lending to cash-flow lending. Whilst not aimed specifically at impact enterprises, cash-flow lending no doubt will benefit them.

These address the real and perceived risks that can keep commercial banks, NBFCs, and impact investors from providing debt financing to impact enterprises. For example, IndusInd Bank’s Impact Investing division actively seeks out guarantee deals, such as the USD 5 million in debt financing to Grameen Impact. The loan is backed by a guarantee from the US International Development Finance Corporation (DFC) and supports Grameen Impact’s lending to local SMEs.

Many financial institutions participate in the guarantees by providing credit to otherwise underserved markets and organisations.

Rabo Foundation

, the corporate foundation of Rabobank, a Netherlands-based cooperative bank that focuses on food and agriculture sectors globally, has demonstrated how credit guarantees can work in the Indian market for agriculture. Due to regulations on offshore funding in the agriculture sector, Rabo Foundation could not offer loans directly to Indian farm cooperatives. As a workaround, six years ago it introduced credit guarantees, starting with an organic cotton farmers’ cooperative. Many financial institutions now participate in the guarantees by providing credit to otherwise underserved markets and organisations. Subsequently, Rabo Foundation set up a warehouse receipt financing programme, an agtech support programme, and a climate smart agriculture financing programme for farmer organisations.

Related article: Five myths about impact bonds

AIFs have grown in popularity in recent years. It refers to any fund established in India that pools investment funds from institutional or high-net-worth investors, whether Indian or foreign, in accordance with a defined investment policy. The minimum investment from a limited partner is INR 1 crore. Today, more than 695 funds have registered with Securities and Exchange Board of India.

These methods go beyond traditional collateral-based lending to assess the creditworthiness of potential investees. All impact investors we interviewed have developed proprietary methodologies that vary greatly. At Caspian Debt, for example, each credit decision is approved by a centralised credit committee. Specialised teams conduct the due diligence through extensive desk and field research that includes facility and customer visits. The deal screening also includes a strict exclusion list for companies that do not meet environmental, social, and governance (ESG) standards. By contrast, Vivriti Capital has developed a highly automated, quick-response credit underwriting platform called CredAvenue that links enterprises in need of debt financing with potential lenders.

Whilst proprietary platforms like these can validate new ways to pursue due diligence and credit underwriting, they remain the exclusive domain of their developers. The sector would benefit from the standardised tools and platforms broadly available to banks and other financial institutions.

Swasti Saraogi also contributed to this article.

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• Read this article to know more about calculating the value of impact investing.
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