Does India Need Its Own ‘Impact’ Investors?

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The sun has appeared in Delhi.  The “fog,” that clogs Delhi mornings in the winter, or as locals joke, less fog, more smog, has gone for a hiatus today.  Perhaps in celebration of the “do-gooders” who are gathering to discuss the challenges of investing in India.

About 100 venture capitalists, entrepreneurs and want-to-be entrepreneurs have gathered on the lawns at Adianta School of Innovation in Chhatarpur, South Delhi.  The dress code is Silicon Valley meets Nehru: jeans with smartly fitted, collared vests reminiscent of India’s first “architect.”

The venture capitalists here are India’s new architects.  Investments, not votes, is their tool to better healthcare, ease transportation, and produce alternative energy models for the country.

Entrepreneurs, however, complain that India’s venture capital scene, particularly for “impact” investments, is limited.  That is, investments which produce some social benefit to the society.  Most of the capital for these investments comes from abroad: Omidyar, Acumen, Dell Foundation, for instance, operate funds in India.  Other US-based funds such as Gray Ghost Ventures invest heavily in Indian entrepreneurs.  But, the capital trails back to the US.  So where are the Indian investors for homegrown social entrepreneurs?

In 2011, there were about eight impact investors in India.  That list has grown to approximately 35 funds as of 2013, including more local investors.

Note, the question of Indian investors is not merely nationalistic.  Rather, the Indian government prohibits foreign investors from taking debt in a company, explains Arun Gore, managing director of Atlanta-based Gray Ghost Ventures.  Thus, financing options are limited to equity, leaving entrepreneurs with few choices.  Consequently, can these entrepreneurs branch out beyond impact investors and still fundraise for a social venture?

There’s a dynamic debate taking place, here.  Does India even need “impact” investors?  The telecomm industry, and the rise of companies such as Airtel, which enabled the rural market to connect via mobiles was not a “social” investment, argues Ashish Gupta, co-founder and managing director of the Helion Venture Partners, a $605-million, India-focused fund.

“I wonder at the entire logic of impact investing,” says Mahesh Murthy, co-founder of Seedfund, which focuses on early-stage tech-loving companies.  “Arguably the digital innovations that have had the most impact on our planet, including bringing down governments and saving lives, are Google, Twitter, and Facebook.  But these are regular investments, and not “impact investments” by any yardstick.”

Srikrishna Ramamoorthy of Unitus Seed Fund says, he has heard the comparisons to Airtel and other tech giants before.  But he’s not sold.

“There is no doubt Airtel is creating impact, but that wasn’t the explicit reason that they were setup for in the first place,” he says.  “One could argue that had competition not come in and policies not forced call costs to drop, mobile penetration in low-income India (urban and rural) might not have happened as quickly as it has. It might have stayed a luxury product.”

He is, perhaps, the odd man out in this conversation, working at Unitus Seed Fund, a social impact fund that began last year with $25 million, $10 million of which comes from Indian investors.  He says, jokingly, that the terminology matters in enticing investors: “Use ‘social’ less, ‘impact’ more.”

To create some parameters on what constitutes an “impact investment,” last year, India established the Indian Impact Investor Council (IIIC), a self-regulatory body.  This was inspired by the blunders of the microfinance industry in 2009, in which the money-driven philosophy of “doing well by doing good” got in the way of noble intentions.  The council, compromising of 9 top funds, will help define impact investing in the country.  For one, to be a part of the community, an impact fund’s portfolio needs to deal with low-income populations only.

Bombay-based Ronnie Screwvala, Managing Director of Disney-UTV, is a part of the IIIC.  As the founder of a new $100 million fund, Unilazer, which includes a mix of impact and non-impact investments, and a trustee of the Swades Foundation, a philanthropic program to provide clean water and health services, Screwvala has seen both ends: the commercial and the so-called social.  He rallies for smarter investments that are more concerned with scale and viability, less with just social good.

“For real scale to happen in the impact sectors, you need a lot of funds turning their attention to these sectors and that will happen when the business and the innovation is looked at from a commercial point of view,” he says.

One sector that straddles both social and commercial well is healthcare.

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