For Acumen Fund, ROI = Profits + Social Impact
Monday, August 11, 2008
The New York based Acumen Fund is a non-profit venture fund that invests in businesses that have a social and economic impact. It will invest in companies providing affordable, critical goods and services in sectors such as health, water, housing and energy. The geographies it focuses on are South Asia and East Africa, besides the US. Since it set up shop in India a couple of years ago, the fund has made equity investments in Kochi based ayurvedic chain, Ayur Vaid Hopsitals, Hyderabad-based LifeSpring Hospitals, Mumbai-based ambulance start-up service ?Dial 1298 For Ambulance?, and Drishtee, a rural communications company. Acumen does not believe in a profit maximisation model and would invest only in businesses that benefit people socially.
They generally don?t invest at the idea stage, and also try and stay away from pure technology plays. They want to diversify into agriculture and nutrition in India and are scouting for investments in these sectors. They typically invest between $500K-$2 million in companies. Being a non-profit venture fund, it is often dificult to find companies catering to low income markets and matching the requirements of the fund, Varun Sahni, India portflio Director, Acumen Fund India, said in an interview to VC Circle. Prior to Acumen, Sahni has worked with both for-profit and not-for-profit organisations focusing on enterprise creation across India. He has also been an angel investor in a number of companies in the hospitality aervices, food and beverage sectors. Excerpts:
How big is the ?Bottom of Pyramid market in India?
There is no such a research done which say that the market is this big, because we are looking at an informal economy.
Do you have an India focussed fund?
Acumen basically functions in three geographies and we invest through New York into these locations -South Asia and East Africa, besides the United States. The investments that we make are driven by opportunity. Our focus is on health, water, housing and energy. We are thinking about agriculture and probably getting into nutrition as well. What we are keen to see is a healthy return and we are not looking at profit maximisation.
Any other sectors that you are looking at particularly for India?
We are getting into agriculture and nutrition as well in India. We are looking at both manufacturing and distribution side of it. Quite honestly, even if we just did health care and energy, there is enough to do for the next 10 years. The point is how do you provide affordable services for low income communities and if that mandate is met we look at the investment. For instance, drip irrigation for farmers who have got small acreage, because the large irrigation companies don?t provide those services. The other is water filter services where we don?t see large multinationals or companies providing water services to India.
What are the challenges that you face while investing in businesses catering to low income markets?
Access to finance is the key. For businesses which require franchisees for distribution, for example, there is the problem of a lack of finance. It?s not that a franchisee in a small town is not bankable, it?s just that we don?t have a credit history, so things like these are challenges for these businesses to scale up. Second challenge is that a lot of these business do not have access to collaterals when they want to raise debt. Uncollateralised debt from the market costs them some 18% interest which is a huge challenge for their growth. And being a foreign investor, you cannot bring debt to India easily because of the strict ECB (external commercial borrowings) regulations. So at the firm level, companies require patient capital and patient debt at about 6-8% interest rate. Even though there are funds like Acumen that are willing to provide it, the regulatory environment does not permit us, so that?s a significant challenge.
We do come across these challenges but we have a very clear focus that we want to fund businesses that have a social impact. For each investment we make, we want to see a million people being impacted across the lifespan of that investment. You could, for instance, find enough investment opportunities in a 20 MW plant, but can you actually find opportunities for micro hydel supply from grid to villages? The challenge for entrepreneurs doing this remains in the execution. There are challenges in licensing and contracting too. Also, the raw material cost has gone up tremendously, and it is not easy especially when you are looking at smaller units.
What are the other areas in which you help your investee companies apart from providing them an access to capital?
Apart from capital, there is a lot of work we do at the management level. At a strategic level we are active on board, and at the operational level we help the company set up processes starting from providing access to technologies, accounting, financial services or even access to experts in brand development, marketing and supply chain management.
We also have an annual Acumen Fund fellowship programme in which we select 8 to 10 people every year. Last year we had 60 applications, and the Acumen fellow spends one year with us – with three months in New York and 8 to 9 months in the countries. They work on specific problems for these investments like a project manager. The fellows are of very high quality in terms of education and experience and will provide direct management support to the companies.
How important is the Indian market for you as an investment destination?
It is extremely important. Around 700 million people comprise of the low income market in India. If we look at the next 20 to 30 years in India, one needs to improve their education, healthcare, energy needs and so on to be able to make a difference in the country. If you look at the US in 1960 and venture financing then, a lot of it started through some kind of subsidy models. So the same thing is happening in this case, but its all going to become mainstream model in next 5 to 10 years.
There are other funds like Aavishkaar also targeting the similar space. How is your strategy different?
Aavishkaar looks at one segment lower than Acumen, so their average deal size is a bit lower than us, so we would in fact look at entrepreneurs which Aavishkaar has financed.
How much do you typically invest in your companies?
It ranges from $500K to $2 million upwards.
What is the kind of returns do you expect on your investment?
We don?t typically have an approach of maximising profits. We believe that you can make returns without having to maximise profits. You don?t really need 60, 70, 80 per cent margin and 20X returns. We started doing equity investments only two years ago in India. We haven?t exited any investment till now.
Talking specifically about healthcare, you have an investment in LifeSpring Hospitals. Do you think that high quality medical care could be provided at affordable prices ever?
The average cost of delivery in a typical private hospital in Hyderabad is Rs 12,500, while at Lifespring it is Rs 500. For a caesarian, the average price is Rs 37,000 at the former, and at Lifespring it is Rs 5,000. The commercial viability is certainly there.
Also another point to noted is the relationship between indebtedness and lack of healthcare. People in the low income market don?t go to doctors in the beginning of their illness. They unfortunately wait till they are chronically ill. At that point, they can?t afford healthcare services and they have to go to the money lender. So the question is how do you actually give affordable services initially? We think we are on to a significant path-breaking model through Life Spring, but it remains to be seen how quickly will the company be able to scale over the next five years, even though we are doing 20-30 bed hospitals which is a good number, but certainly a drop in the ocean for what is needed here.
What do you specifically look for before investing in a company?
We want to understand their philosophy behind doing this, because we want to know why they are interested in low income markets for social impact. Secondly we also want to understand the business proposition, both of which will go hand in hand. We typically don?t invest in pure technology plays. We want to understand distribution mechanism, whether there is a distribution network set up etc. And we don?t invest in ideation or at seed stage.
We like to see some kind of proof of concept. We want to see a balance sheet. Sometimes we have invested in idea only if that is highly innovative. We have a line of capital which we call Lab Investments, where we put in a little bit of money and incubate the idea. (They are smaller-scale, high-risk experimental investments, where funding can be disbursed rapidly and lessons can be learned in the short-term.) Also, we look at the business model and see if the entrepreneur has been able to succeed on per unit economics. That is critical for us. How long does it take for one unit to break even? We want to know the unit basis economics of the model and finally the social impact of the work and if they are actually able to reach out to a million people.
So, for example, in the water investments we make, we don?t only measure the output or the number of litres of water that have been sold, but what we also measure if there has been a reduction in diarroheal diseases over years.
How has the experience been till now of investing in India?
We are still learning. Like any venture fund, some investments are doing far better than others but overall what we are excited about is that we see growth, and we see consumer uptake of the products. A lot of these consumers do not have alternate choices, because they are purchasing health products at exorbitant price. A lot of awareness generation is also required as in why do I pay for drinking water if I live in a village? If I live in a village, why should I go to a hospital to give birth so on and so forth.
What is the IRR expectation from your investments?
Frankly, I don?t want to give you any number. There are a range of investments where some are more profitable than others and we are fine with that range. Given the opportunity in India, we are sure we will come out very positively.
Do we see other funds planning to cater to the SME/BOP (base of the pyramid) market?
I think they need to. Today if you are seeing 600-700 million people in the BOP space, after 20 years there will be a billion plus people in that segment and there is a need to provide services of high quality in that space. There will be more SME/BOP funds coming to India looking at similar market.
Source: VC Circle