Social Investing - An Idea whose Time has come

Author: Madusudanan Ramani,NMIMS,MBA-Capital Markets

Social Entrepreneurship – Exploring Newer Frontiers 

Social investing refers to investing in the firms that are in operation to bring about a social change in the society and such firms are called as social enterprises. The ultimate objective of these social enterprises gets reflected more in the empowerment of underprivileged than in just profit statements. Most of avenues available for development and upliftment are available in forms of charitable donations and grants. Sustaining the operations for a long period of time with donations is difficult on account of lack of adequate funds. Unlike public causes, social enterprises require knowledge support other than just funds.

The huge opportunities for social entrepreneurship stem from the inefficient government schemes to uplift poor and to improve their standard of living. Some of the examples of successful social enterprises in India are Ela Bhatt’s SEWA Bank, Dr. Verghese Kurien’s AMUL and Nand Kishore Chuadhary’s Jaipur Rugs. Given the nature of India, most of such opportunities lie in rural areas.

Most of the Social Enterprises can be classified into these broad areas –

1. Agriculture, Food and Rural Business – Firms that are involved in enhancing productivity in rural areas with an innovative practice. Some of the firms operating in this segment are Masuta Producers Company Limited, Star Agri, Champion Agro, Grameen Infra, Janani Foods, Native Conbac Bamboo Products, Drishtree and KNIDS Green.

2. Education – Enterprises committed to provide affordable education to the underprivileged. Some of the firms operating in this segment Levelfield Schools, Bookbox, Sudiksha Knowledge Solutions and Edaxis Systems India.

3.Clean Energy – Firms who provide solutions to reduce the carbon footprint. Some of the firms operating in this segment are d.light design, Husk Power Systems, SBA Hydro and Renewable Energy (SHREY) and ORB Energy.

4.Technology – Enterprises that have leveraged technology to enable development. Some of the firms operating in this segment are FINO, Gradeim, Embrace Global, B2R Technologies, Comat Technologies, SMV Wheels and Forus Health. 

5.Housing, Health & Sanitation – Enterprises that have provided affordable healthcare and sanitation to enhance the quality of living. Some of the firms operating in this segment are AyurVAID, Environment Planning Group limited, Ziqitza Healthcare, WaterHealth International (WHI), VisionSpring, PVRI, LifeSpring and Neurosynaptics.

      

The concept of social investing has started only in the last 5 years and is slowly evolving, whereas it has been in developed nations since a long time. Some of the Funds that provide funding to such enterprises in India are Lok Capital, Rural Innovation Networks, Acumen Fund, Aavishkaar Fund, VenturEast, Oasis Fund, Song, Elevar Equity II and Grey Matters Capital. Social Enterprises have attracted more than $ 140 million and has also been attracting some mainstream VC firms such as Nexus Ventures, IndoUS Ventures, Seedfund and Draper Fisher Jurvetson (DFJ). This segment is expected to receive almost $ 1 billion in the next five years from the VC/PE investors.    

Prospects for future

In a country like India, such enterprises benefit from the demographic nature of the country. Profitability in such enterprises increases significantly with vast scale. Given the population and the income profile of the country, such firms would be able scale up significantly and be attractive to investors.

Household Income Profile in India

More than half of the households in the country earn less than 1,12,000 per annum. There is a huge opportunity to provide basic services like Health & Sanitation, Education, Housing and Food at affordable prices.

Most of the segments other than Micro Finance have not been exploited. Of the total of $ 140 million received by such enterprises, an estimated $ 50 million has been received by the Micro Finance segment.  

Challenges for Social Enterprise

1. Finding the Right Kind of Investor – The funding for such business is big issue that the entrepreneur deals with. The entrepreneur faces a huge challenge of convincing the investor about the idea as a sustainable business proposition. Generally, Venture Capitalist and Private Equity investors have a investment horizon of 3-5 years. But given the nature of business (Profitability and Scalability), an exit in social enterprises could range from 5 to 8 years. It is imperative on the part of entrepreneurs to find an investor with larger time horizon. Predicting the future cash flows in the case of such business is not predictable and makes the valuation of start-ups difficult.

Dealing with people’s perception with is a huge challenge in this sector. The receptiveness to buy a product or consume the services of a social enterprise is generally low.

2. Profitability - Balancing Social-benefit versus Financial-return remains a key challenge for such entrepreneur. The entrepreneur has to build a asset light model to reduce the requirement of capital and improve the return on capital employed. Narayana Hrudayalaya saved money by asking the vendor to park the machine there and charge money by selling the reagents required for the test rather than buying the device.  

3. Scalability - The opportunities for such business in India are in plenty but they are scattered over a large catchment area. The businesses have to invest in technology to enable flow of information and better administration. The key to success of such firms lies in the reaching the consumer by right implementation and reaching a certain degree of scale.

Some renowned business models are profiled below

Narayana Hrudayalaya

Narayana Hrudayalaya was established in 2001 by Dr. Devi Shetty as a cardiac facility in Bangalore and it has become Asia’s largest Cardiac Care center with around 1,000 beds and performing 30 heart surgeries in the day. They have reduced cost of surgeries by altering processes, hard bargains with medical devices companies and creative partnerships. The heart surgeries in Narayana Hrudayalaya cost less than $ 3,000 as against $ 5,000 - $ 7,000 in other hospitals in the country and the hospital has one of the lowest levels of mortality rates. It initiated a scheme of micro insurance for the farmers of Karnataka, where in farmers are insured against heart surgeries at a monthly premium of Rs. 10.

Even though more than 15 percent of the patients have are charged a subsidized rate, the hospital makes healthy profit margin of 7.7 percent (post tax). JP Morgan and PineBridge investments have investments in the hospital and own close to 25 percent

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Vortex Engineering

Vortex Engineering has innovated to produce low cost ATMs to enable banks to penetrate into unviable locations. The portfolio of Vortex includes Gramateller Indi ATM and Gramateller Duo ATM. The cost of vending machine and the power consumption is lower, factors that would help the banks to set up ATMs in unbanked areas. It has received funding from organizations like Oasis Fund, Raymond Stata, VenturEast, Aavishkaar and Vishal Bharat Comnet.      

SEWA Bank

Shri Mahila SEWA Sahakari Bank (SEWA Bank), a SEWA Group affiliate, has raised $ 10 million from International Finance Corporation (IFC) in January 2011. In 1974, SEWA bank was registered as a co-operative bank and is under the purview of RBI and the State Government of Gujarat. It generally lends to economically active low-income women. The bank has used mobile van and a team of field-workers to promote “Doorstep Banking”. SEWA Bank provided loans to 25,000 borrowers and has mobilized deposits from 348,000.

Greenway Grameen Infra

Established in 2010, after four years of ground work and research, Greenway Grameen Infra sells portable metallic chulas (stove), which is four times more fuel efficient that the traditional mud chulas. All the households not using a LPG form the market for Grameen Infra. The company sells the metallic chulas at Rs 950 and estimates the total market demand to be Rs. 10,000 crores.  

Husk Power Systems

Husk Power Systems (HPS) operates in the clean tech space, which uses to produce electricity using rice husk rather than diesel. It has set up such 60 mini power plants, each of them produce enough electricity for four villages. Each power plant has saved 42,000 liters of kerosene and 18,000 liters of diesel. HPS has received funding from Shell Foundation and Acumen Fund.