The Unitus Seed Fund: Harnessing Small Equity for Scale at the BoP
I recently had the opportunity to interview Dave Richards, managing director of Unitus Seed Fund – a new seed stage venture fund investing in startups with high potential to improve the lives of many BoP families in India. Dave is also CEO of Unitus Labs, which I consider a pioneer of innovative approaches to reducing global poverty through market-based solutions. (Full disclosure: I previously worked with Dave at Unitus Labs out of Bangalore, India).
SG: Could you briefly explain Unitus Labs’ latest initiative, Unitus Seed Fund (USF)?
DR: Unitus Seed Fund is a new seed stage venture fund launched in October 2011 focused on investing in for-profit social enterprises which have potential to improve the lives of millions of BoP families in India. We expect to accelerate the development of a large number of innovative social enterprises in multiple sectors including education, skill development, small farm productivity, affordable healthcare solutions and more. We are willing to take risks on investing in great social entrepreneurs who are beyond the concept stage but need to further validate and refine their business plan and operations before they will be ready to scale up. If we are successful, there will be more new, large and growing businesses which benefit BoP populations in significant ways.
SG: Why do you think that now is the right time for an initiative like Unitus Seed Fund?
DR: While there has been a lot of investment going into microfinance recently, there has been very little investment into social enterprises in other sectors such as education, healthcare, energy, livelihoods, clean water, agriculture, rural distribution, etc. Our research showed that there were only 18 seed stage equity investments (rounds of $500,000 or less) in non-microfinance India social enterprises from 2009-2011. That’s only six seed investments per year in all of India! The No. 1 issue stated by impact venture funds is that there aren’t enough investable businesses for their investment sweet spot, which starts at Series A rounds of typically $1,000,000 to $2,000,000.
We have also been very impressed with the quality of many of the Indian social entrepreneurs we’ve recently met who are struggling to raise the seed capital they needed to move forward. To put our money where our mouth is, Unitus Seed Fund has already completed four seed investments in India since January 2012.
SG: The last few years have seen a number of funds targeting the BoP. How is USF positioning itself in this space?
DR: We’re focused on making small equity investments – typically $50,000 to $100,000 – at the seed stage where round sizes are less than $500,000 and usually less than $250,000. Most other impact equity funds are focused on Series A stage investment rounds where round sizes are at least $500,000 and usually $1,000,000 or more. USF is industry and sector agnostic and instead we focus on the potential for BoP impact. We also have a commitment to make investment decisions and complete investment transactions in much less time than the norm in India. Finally, we invest with terms that are very straight-forward and fair to the entrepreneurs taking the long view that we want them to have flexibility to adapt and pivot as they learn through experimenting.
SG: Does USF have a geographic and industry focus? What are some of the must haves for potential USF investees?
DR: We will invest in any region of India and we are sector and industry agnostic. We look for businesses for which our small amount of capital can help them make significant progress on their business plan. We put a lot of emphasis on the leadership team as we know they will need to successfully navigate the multiple challenges ahead of them. Businesses also need to have significant scale potential. Finally, businesses must have BoP impact as a core to there operating process. Here are some more specifics on our investment criteria.
SG: Where has USF invested since inception?
DR: USF has already made four seed investments in startup social enterprises in India since January:
Bodhicrew Services, New Delhi. Bodhicrew provides skills training, job placement and post-placement support to BoP workers in the unorganized sector.
Milaap Social Ventures, Bangalore. Milaap raises microcredit loan capital through an online crowd-sourcing model to fund new kinds of loans including toilet loans, student loans and small business expansion loans.
Hippocampus Learning Centres, Bangalore. HLC is building rural learning centres to improve the education outcomes of BoP children.
Villgro Innovation Marketing, Chennai. VIM is building an innovative last mile rural distribution system to sell products which increase the income of small farmers.
NB: As a seed investor, what are some of the challenges that you have faced? Are there initial learnings that you can share with our readers?
DR: The ultra early-stage businesses we are looking to invest in have many unknowns and unproven assumptions about almost everything! What’s common to our investees is that they have initial demonstration of market demand and promising progress on unit economics (that is, at scale they might have revenues higher than costs.) We’re looking for entrepreneurs who are sufficiently tenacious, creative and have the skillsets to complete market validations and to build an operating company that ultimately will be able to grow rapidly. The nature of seed investing is that some (maybe many) of our investee businesses will fail. Our hope is that some will break out.
NB: Finally, what kind of impact is USF looking to make in the next five years?
DR: For the social enterprises we invest in, we work with them to set specific BoP impact goals and measurements that are appropriate for their business. Because we are investing in many sectors and types of businesses, this varies for each business. Typically, we expect that successful businesses will impact at least 100,000 (1 lakh) BoP within 5 years.
From a bigger picture perspective, we are hoping to demonstrate that there is a viable model for investing at the seed stage which results in more successful, scaled social enterprises delivering BoP impact AND that investors can realize a reasonable financial return. That is, delivering on a double bottom line value proposition.
We hope that we can continue to add the impact of the Unitus family.