India’s Startup Focus Needs to Include Social Enterprises: How the 2014 budget can improve the ecosystem
Whether they’re connecting rural farmers in Bihar to urban markets in Delhi, or providing power to off-grid villages, for-profit social enterprises are increasingly gaining traction in India. However, despite the significant opportunity, catering to low-income markets and scaling both operations and impact in the long term can be complex and risky.
The initial Indian budget, recently tabled by Finance Minister Arun Jaitley, has focused on startups and entrepreneurs by setting aside INR 10,000 Crores (USD $1.6 billion) in various initiatives. But it’s also essential that social enterprises and their specific funding requirements are considered to ensure the 2014 budget creates an enabling ecosystem.
While the initial 2014 Budget has already been announced, it still needs to be ratified by majority vote in both the houses before being sent to the president for approval. However, unlike the recent past, the newly elected government in India has a clear majority in the lower house. Unfettered by the pressures of coalition politics, it is widely expected to adopt innovative and constructive measures aimed at far-reaching long-term benefits.
Access to Capital
Despite the capital flowing into low-income markets, a large number of enterprises in the pilot and prototype phase continue to struggle in accessing equity capital. Impact funds typically invest in enterprises where, at the very least, there is some proof of concept backed by a viable business model. However, due to the challenges of building a product or service for low-income markets and innovating around fragmented value chains to build a viable business model, it’s often necessary to use “soft” funding, particularly early in an enterprise’s development.
Overall there is an urgent need to open up avenues of domestic capital flow to enterprises in low-income markets, in the form of debt from banks and grants from foundations and corporate social responsibility players, which have traditionally focused on the non-profit sector. The amendment to the Companies Act 2013, which mandates CSR funding contribution by mid- and large-sized private players in India, came into force this April and is a good example of needed government intervention which can be extended in the 2014 budget.
Fostering Early Stage Investing
It is also imperative to recognize and promote early-stage investments and corresponding impact investors such as angel investors and impact funds through the development of appropriate policy measures and fiscal incentives. While there are several crowdfunding platforms which have also come up in the last couple of years to provide early-stage capital to enterprises in the pilot stage, there is a need to recognize and streamline the regulation process around such platforms.
The 2013 move by India’s financial regulator, the Securities and Exchange Board of India (SEBI), to ease several norms for funds targeting social ventures through an amendment to the Alternative Investment Funds (AIF) regulations, is a good example of a policy intervention. Another move that can spur much-needed financing in the segment is the central government’s envisioned creation of the India Inclusive Innovation Fund, constituted in 2010 under the National Innovation Council, to infuse capital into entrepreneurial ventures targeted at innovative solutions for the bottom of the pyramid.
However, such initiatives often do not create the expected impact due to lack of accountable and time-bound fundraising mechanisms. Therefore, with the 2014 budget, the government must continue to create an environment conducive for external social fund aggregators to operate in the market.
Debt funding is critical to meeting the working capital requirements of enterprises that have achieved some scale in low-income markets. Traditional debt providers like banks, however, do not lend without collateral. Efforts have to be made in supporting banks to create capacity and capability for lending to such ventures, which needs to percolate down to the branch level with whom entrepreneurs interact the most.
Government sponsored financial institutions like SIDBI or NABARD can expand their role in the area of venture debt by providing funds to specialized NBFCs focused on venture debt to social enterprises.
Having large institutional players like pension funds, insurance funds and provident funds invest a small part of their corpus in early-stage venture funds could also significantly improve capital flows. Banks must also be encouraged to invest in early-stage venture capital funds by treating such investments as “priority sector” funding, without capital market exposure and provisioning norms being applied.
Creative partnerships to encourage growth of enterprises in low-income markets
Low-income markets are characterized by several challenges, such as last mile distribution, inadequate infrastructure and low disposable incomes. In such markets, enterprises need to constantly innovate in the value chain through their own operations, and look at establishing creative partnerships with NGOs, government bodies, corporations and community groups. One such example is creative partnerships in which a social enterprise producing a low-cost medical diagnostic device partners with the Ministry of Health & Family Welfare to reach its target segment of rural women via Accredited Social Health Activists.
By bringing enablers, enterprises, NGOs, government agencies and CSR bodies together, such creative partnerships can be explored at a greater level. The Bihar Innovation Forum, an initiative by the government of Bihar in partnership with the World Bank, is one such platform. It identifies, celebrates and scales rural livelihood innovations in Bihar. It has shown tremendous promise and has provided an enabling environment for innovative social enterprises to set up and scale their operations in Bihar.
History shows us that enterprises that have achieved scale in both operations and impact in India have done so by having access to early-stage equity capital and regular debt funding for working capital requirements. By structuring creative partnerships in the ecosystem, they’ve managed to expand their sales efforts, thereby improving profits as well as the impact their organization can create.
By exploring initiatives that address the above concerns, the 2014 Budget can truly create an enabling ecosystem for entrepreneurs working in low-income markets.