NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Imagine you have devoted the last three years of your life to coming up with a new innovative enterprise to meet the needs of the poor. You came up with the idea, worked tirelessly to prove the concept and put together the best team that you could find. Now imagine that you have 3 minutes to pitch years’ of work to a panel of impact investors who could help you take your business to the next level, equipping it with the financing to reach thousands of more people. This is exactly what a group of four budding social enterprises had to do at the Fourth Annual Sankalp Impact Investing Summit in Mumbai. Last week’s conference brought together impact investors and social entrepreneurs to discuss how the field has moved forward and where it is likely to go; and of course, the conference serves as an opportunity for investors to identify rising stars and make new investments.

As entrepreneurs chatted over tea, the question on everyone’s mind was: What are impact investors looking for? Of course at the most basic level they are looking for businesses that are financially viable, and achieve meaningful and measurable social impact. But how do they differ from typical investors? Are impact investors more risk averse? What size of deal are they willing to make? What stage of maturity do they seek in a business? The panel, “ET (Economic Times) Now’s Pick of Sankalp,” which brought hopeful entrepreneurs under the scrutiny of established investors such as Aavishkaar and Ventureast helped clarify what drives impact investment choices.

Growth. Every enterprise that presented to the panel already had some sales and a market in mind for its product, but this is just the first step. The panel emphasized that to attract capital a social enterprise must have a viable growth strategy. This should include a mix of increasing sales and driving down costs. The first presenter, Ajit Narayan, from Invention Labs pitched his work on Avaz, a bundled software technology package that allows people afflicted with disabilities that prevent or inhibit speech, such as autism or cerebral palsy, to speak through a tablet computer. In India, where tablets are of variable quality and a relatively new consumer good, it is necessary to sell the hardware and software together. The panel commended Avaz’s growth plan to tap into the global marketplace by de-bundling their software app from Avaz’s hardware and selling the program through global online app stores. There are almost no transaction costs to this approach, it brings down the price of the product and opens Avaz to a much wider customer base in higher income markets. One important distinction between social impact investments and regular investments is that investors are willing to wait a little longer to achieve growth. Since the concept of social enterprise is somewhat new and best practices have only recently emerged, so called “patient capital” allows entrepreneurs to carefully test and adjust their models as they scale-up.

Modest Investments. Each of the entrepreneurs had already overcome the difficult, and often expensive, R&D phase that transforms an idea into a product prototype. Driptech, which markets a low-cost drip irrigation system to small plot farmers, already had engineered a new production process for drip irrigation. The refined design allows the company to scale down irrigation systems to perform well in small acreage settings at an affordable price while also consuming less power than traditional systems. Conversations with some of the summit participants suggested that impact investment deals usually do not exceed $5 million, and many are much smaller. This suits many entrepreneurs, but it may limit how far up the R&D value chain an impact investor is willing to go. For example, an impact investor may support the expansion of an innovative hospital chain targeting the poor or the diffusion a new point-of-care screening device, but is unlikely to enter the realm of high-cost R&D for a vaccine or drug of public health importance.

Quality. The poor are aspirational, and they do not want shoddy products. Every entrepreneur emphasized the importance of delivering value for money. Ampere Vehicles has created a line of electric bikes and scooters designed to help small vendors transport goods at low cost or to facilitate commutes to work. The bikes run on a rechargeable battery and can be purchased for 30 percent less than standard motorbikes or scooters. CEO Hemalatha Annamalai stressed that in her initial experiences marketing various models of bikes to low-income customers she found they opted for the better and more expensive vehicles. Especially when a new product or service can help them improve their livelihoods, the poor are willing to invest in quality. The price must be affordable, but the strategy of a successful social enterprise cannot rely on slashing costs by sacrificing quality and functionality.

Market Share. Although social enterprises may incur higher costs from pursuing responsible business practices, they compete in mainstream marketplaces. For example, M S Vinod of Eram Scientific, a company that manufacturers high-tech, coin-operated public toilets that connect to central monitoring systems, has to differentiate his product from regular toilets (see video below for more). Annamalai has to market her electric bikes and scooters against normal forms of petrol-based transportation. The social impact that entrepreneurs create is a top consideration for all impact investors, but the potential for high social impact cannot compensate for a weak market strategy. The investors stressed that creating comprehensive marketing strategies requires a strong management team. An entrepreneur that excels in devising new products must know when to bring in experienced partners with the necessary savvy to elevate a product or service above its mainstream competitors, capitalizing on both its social and financial value.

Shared Passion. All of the entrepreneurs that pitched ideas to the panel had designed their projects to overcome a distinct social need. Conserving water, improving crop yield, giving a voice to the disabled—these are all important goals in India, but when Vinod shared his vision for improving sanitation across the country, the panelists passion for the cause was palpable. They agreed that giving the poor access to toilets and improving hygiene should be a national priority. As they discussed the dimensions of the problem, they became more convinced of the viability of Eram Scientific’s enterprise. By connecting with the investors on a topic that they felt passionate about, Vinod almost immediately established a collaborative relationship. He received the highest scores from the panelists, winning the competition.

These are just a few of the characteristics that investors consider in their due diligence, but they were reiterated throughout the panel. Many of the basic strengths that investors seek in social enterprises are similar to what investors look for in regular investments.This reinforces that social enterprises are businesses first and are an outgrowth of the capitalist model. During a talk about the history and trajectory of business, Pravesh Sharma, the managing director of the Small Farmer’s Agri-Business Consortium, noted that capitalism is still a relatively new way of organizing the economy (compared to top down approaches like feudalism that lasted centuries) and is still evolving. Over 600 participants working in countless ways and across sectors to create social value attended the Summit, and this community is expanding. Although social enterprise is mostly operating in niche markets at present, the values it allows investors and entrepreneurs to practice while pursuing well-designed business strategies may impart new principles on the global model of entrepreneurship.