Corporatisation of social projects and the presence of a large base-of-the-pyramid market is driving the attention of new generation venture capital firms into social sector investing, says Raj Kundra, Director of Capital Markets and Energy Portfolio, Acumen Fund, New York. The challenge, however, remains in identifying enterprises that achieve both social and financial returns, he adds. Prior to Acumen, Kundra was Senior Vice President at Lehman Brothers, New York where he worked at the energy division. He also worked in Lehman’s Emerging Markets and Capital Markets groups in various trading and structuring roles. Prior to this, he was with JP Morgan overseeing the marketing and structuring of interest rate hedging products for US corporations. In an interview with VCCircle, Raj Kundra talks about the optimism in the social investing space among VC firms. Excerpts:-
What are the trends that are driving social sector investing?
Social investing is definitely witnessing a growing trend. Corporatisation of social projects is giving a new lease to this space. Providing critical goods and services through innovative, market-oriented approaches for solving the problems of global poverty by building sustainable and scalable organizations are the key attractions. There is business sense in it (social sectors) and this space looks attractive to fund managers.
What is Acumen Fund’s focus in India?
Acumen Fund currently manages over 35 projects worldwide. Addressing a mix of both urban and rural poor, Acumen Fund’s investments in India reflect a range of sustainable, scalable businesses that use market-based approaches to deliver products and services. Ayur Vaid, D light Design, Drishteee, Husk Power Systems, Life Springs, Vision Spring, Water Health International are some of the projects that Acumen has participated (invested) in.
Is India an ideal destination to attract social sector investments?
India is a uniquely compelling market given the market size, focus on entrepreneurship, and overall economic and political stability, economic growth and what this means for the new emerging consumer classes.
The gestation period to see real profits is long in social venture projects. Has this been a deterrent to deal flows?
The traditional fund structure of five-year investing periods and 10-year exits will not work in many cases as the projects just get delayed by their very nature. Also, the capital needs are significant for several years unlike other sectors where they are more front-ended. Besides, social entrepreneurs are typically trying to do something new, to build partnerships, to execute a strategy with government, local distributors and suppliers, and many times these do not come together. VCs are well-prepared to operate in such an environment. Seven to 10-year exit is expected to be ideal in this space.
What are the primary criteria for investing in the social space?
The potential for significant social impact, financial sustainability and scale are the distinct features that a fund manager looks for. Companies need to make a product or deliver a service that addresses a critical need at the bottom of the pyramid. Also, market size is ultimately what determines business scalability. A great innovation in a niche market has limited value unless it’s a big niche. Even in serving the base of the pyramid, it’s important to have broad relevance.
Apart from that, a clear business model that shows potential for financial sustainability in a five-to-seven-year period and has ability to cover operating expenses with operating revenues. Presence of a strong and experienced management team, with a will to grow a sustainable enterprise with positive ethics, scores well in the social investing space.
What kind of projects does Acumen look at? What are the various financing options available?
Acumen Fund invests patient capital in a variety of institutions reflecting the diversity of business models that can be effective in reaching the base of the pyramid or the billions of poor without access to clean water, reliable health services or formal housing options. We finance all kinds of institutions ranging from non-profit organisations seeking to scale their operations and achieve financial sustainability to small and medium for-profit companies or even large companies that are starting specific business units to serve this market.
Our typical capital commitments range from $300,000 to $2,500,000 in equity or debt with a payback or exit in roughly five to seven years. We believe that every investment is unique and are able to provide both patient and flexible capital combining different financial instruments. The object is to provide an appropriate investment package and efficient capital structure to meet the needs of each particular Investee. Investments take the shape of debt, direct equity, guarantees and lab investments.
Has the global economic slowdown impacted investments in the social sector?
VC fund flows saw a steady downtrend in many sectors in the US markets following the slowdown. But this did not result in a major impact in social sector investing in India. Even in good times, social sector ventures are characterized by long exit periods and delays in cycles. To that extent, the slowdown did not significantly alter the situation.