How impact investing could affect biz in India

The Rockefeller Foundation reports that impact investing is set to grow at an annual pace of 30 percent. India is the second-largest market for impact investing after the US, with USD 500 million worth of investments made in 2012 alone. But what does this mean?

When Pierre Omidyar saw his networth cross a billion dollars in 1998 as Ebay listed on the capital markets, he knew he had to do more with his wealth that had come to him in just three years. So, he set up the Omidyar Network, an organisation that invests in promising social enterprises.

Today, the Omidyar Network, sponsored by Pam and Pierre Omidyar has put in over USD 550 million in impact investments. The network operates with two cheque books, investing roughly half its corpus as grants to non-profit organisations, while the other half goes to early-stage social entrepreneurs whose businesses are perceived too risky by commercial investors. Omidyar set up shop in India in 2010 and has a portfolio of 27 organisations in which it has invested about USD 100 million. 70 percent of these are for-profit ventures.

Venture philanthropy, impact investing and flexible capitalism. These are some of the terms that have been used to describe the approach that Jayant Sinha, partner, Omidyar Network India Advisors and his team have taken to capital investments in the social sector. But Jayant likes to keep it simple. He believes social impact and financial returns are a means to an end. Jayant uses examples of two of his investee companies to explain how they operate - D Light, a solar lantern manufacturer and Tree House, India's largest self operated pre-school chain.

Sinha says, "The social impact cannot be an add-on it has got to be built into the value proposition. So, Tree House tracks the number of children that are in their preschools. That is an impact metric because we know if the child is in one of the Tree House preschools, he or she is going to get tremendous education and in doing so achieve social impact. 

Similarly for D Light. D Light makes solar lanterns. So, for every solar lantern they ship, they are actually substituting kerosene lanterns. They are reducing the cost of using kerosene, providing a much healthier alternative, and reducing the risk of fire. So, built into that solar lantern is already that social impact. You track solar lanterns, you are tracking social impact.

For someone who didn't know what LP (not sure) stood for in 2001 to managing four funds worth over  Rs 800 crore Vineet Rai, founder and CEO, Aavishkaar has come a long way on a very challenging road. One really must put this in context at a time when regular venture capitalists (VCs) were reluctant to make investments in purely commercial ventures in urban India, Vineet's mission is to create a fund to service enterprise in India's most rural areas.

Vineet survived the rough and tumble of impact investing because of his ability to take disproportionate risks and the capacity to be extremely patient, the virtue of which he learnt when he first began working for a Gujarat government-backed rural enterprise incubator in 1998.

Rai says, "My job was to go to the villages and help the innovators into converting their innovations into products and then into businesses. One of the key learnings I gained in that process is converting an innovation into a product, and a business requires an entrepreneur not an innovator as the lead. The entrepreneur is taking the risk and he requires risk capital in trying to build that business. The biggest challenge was not in finding the entrepreneur or helping the innovation to become a product, but providing that risk capital. That was my key learning out of the three, three and a half years I spent as incubator.

Aavishkaar is not very different. We are a venture capital fund. The only difference is that we are focused on rural India. We have made 38-39 investments till date. We are the first investor in almost 38 of them. So, 98 percent of the time we are the first investor. Almost 50 percent of the companies that we have invested in actually didn't exist, that means they started with our capital. More than 50 percent of our capital is deployed in the low-income stage. So, that could tell you that our capacity or appetite to go and take risks where returns are actually unexpected is very high.