Indian VC’s social imperative

The progress of Dalits in Indian politics has not translated well to the sphere of economics. They may have revolutionized local politics in electing the iconic Mayawati chief minister of Uttar Pradesh, but members of the multi-caste Dalit community - who historically worked as manual laborers - have been conspicuous by their absence in India's business history.

According to a recent Harvard Business School paper, Dalit entrepreneurs are significantly under-represented in both the ownership of private enterprises and the employment generated by them. And while Dalit millionaires do now exist - having been the subject of numerous media reports over the past year - the typical Dalit business tends to be smaller than those originating from other groups, and less reliant on labor from outside a single family.

In 2006, the Dalit Indian Chamber of Industry and Commerce (DICCI) was formed, in an attempt to combat some of these problems. But the market really opened up last November when India's Central government announced a policy to procure 4% of its annual purchases from micro and small enterprises (MSEs) owned by Dalit and tribal entrepreneurs. DICCI's response to this was to form a venture capital fund with local GP Varhad Capital that will invest exclusively in companies run by its members.

"This opportunity has opened up a market of around INR100 billion to Dalit enterprises, but if you get market access, and $10 million of orders, how do you execute those orders?" says Prasad Dahapute, the Mumbai-based banker leading the team setting up the fund. "The Dalit Venture Capital Fund is the only tool which is going to provide Dalit entrepreneurs with access to capital."

Investing for good

The vehicle might be India's first venture fund focused on a specific community, but investing for social good is a concept that has thrived in the country over the past three years.

Examples of so-called social venture capital funds abound, including Song Investment Advisers - which aims to "increase economic opportunities and jobs for the masses in India" - and Aavishkaar India Micro Venture Capital, which invests in small- and medium-sized enterprises (SMEs) that increase income in or provide necessary goods and services to rural India.

Regardless of their specific philosophy or management structure - and there is currently great variety in this area - what broadly separates the funds in this space from their purely commercial counterparts is a belief that investors don't need to sacrifice social impact to achieve financial return. But can such an approach really be sustained without compromise?

Dahapute and the others leading the Dalit fund believe they may have found a way of ensuring that pressures don't interfere with their goal of supporting entrepreneurs. Instead of charging a 2% management fee and 20% carried interest, they are prepared to accept as little as 1.5% and 15% "so the GPs will not make much but the LPs will make more money."

One of the reasons for this is Dahapute's conviction that while his own goal for the fund is to help accelerate the pace of Dalit capitalism, the investors - a mixture of high net worth individuals and financial institutions - will see reaping the best possible commercial returns as their priority. The fund has a target of $95 million and plans to hold a first close in September. It will then start investing $2-5 million of equity per deal, with a view to supporting six enterprises this year.

No returns for LPs

If taking a cut in fees at GP level is one way of keeping the returns burden to a minimum, social investors may achieve the same end by getting rid of the LPs altogether. Acumen Fund, a venture capital firm active in India, still calls its backers 'investors' but their money takes the form of philanthropic capital from which they never receive financial returns.

"What that means is that we have the flexibility to invest that capital as we see fit," explains Acumen's India Business Manager Molly Alexander. "The primary goal isn't to create returns for them but to support innovation with both financial and management support, to help those innovations to grow and scale to help more people."

Acumen principally provides debt and equity capital to companies that have a product or service that directly impacts the lives of the poor, such as clean drinking water or rural electrification. Although investors do not receive returns, Acumen does aim to get a portion of its money back eventually. "We're first and foremost trying to maximize the social returns though", says Alexander. "That means our expectation on financial returns is drastically reduced."

Any capital that does come back - so far $70 million has been invested globally and returns have reached $7 million - gets reinvested in Series B or C rounds or in other projects in need of funding. One of the biggest advantages for entrepreneurs is that once Acumen puts its faith in their business proposition, larger-scale commercial investors often follow suit.

A strong example is WaterHealth International, an Andhra Pradesh-based supplier of water to underserved communities. It received an initial $2.5 million from Acumen before securing up to $40 million in funding from the International Finance Corporation and Dow Venture Capital.

Supporting enterprises that benefit low-income communities through the provision of basic products and services is also the focus of Bamboo Finance, another social investment firm with a strong presence in India. Unlike Acumen, however, Bamboo does invest for profit, and though it specifically targets companies where the social impact is an intrinsic part of the business model, it manages a conventional private equity-structured vehicle, the Oasis Fund.

"Our assets under management are from investors, not donations," clarifies Chief Investment Officer Eric Berkowitz.

Niche markets

Bamboo doesn't see the need to generate returns for investors as a demand that cannot be met. On the contrary, Berkowitz points out that by focusing on low-income and rural markets, which have typically been under the radar of more traditional private equity firms, Bamboo has identified a niche with the potential to generate extraordinary returns.

He tells of how Bamboo invested in a company called Vatsalya Healthcare, a company that is building a network of healthcare clinics targeting rural and semi-urban areas of India. "This wasn't just an opportunity to have a significant social impact," he says. "It was also an incredible market opportunity, because if you look at India, clearly healthcare access is very low, and it's even worse in the semi-urban and rural areas."

While Bamboo has "very significant unrealized gains," it is yet to realize an exit due to the newness of its fund, which was constituted in 2007. Its biggest challenge for the future - and the same applies to the rest of the growing number of impact investors in India - will be to generate financial returns for investors that match the social impact generated by its involvement with local entrepreneurs. Berkowitz is mindful that they still have a lot to prove.

"It's all very well for me to say that there is no trade-off and we're going to get a commercial return, but the reality is, there's very few exits in this space and until we have a full cycle of funds where they've proven that it is possible to have a financial return and social impact, it's just talk," he says. "Before we can be taken really seriously as an asset class, we need to prove that."

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• Topics
• LPs
• South Asia
• Investments
• India
• LPs
• IFC
• Bamboo Finance
• Acumen Fund