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Liquid Returns: These women in Nagaram village, AP, pay as little as Rs 1.50 for 10 litres of water, thanks to Water Health International-India and its backer, Acumen Fund.
Social Investing
The New Colours Of Venture Capital
A new breed of VC funds is looking to invest in social enterprises that deliver developmental benefits, AND, generate decent financial returns.
Antony Bugg-Levine, Managing Director of the US-based Rockefeller Foundation, shared with Naren Karunakaran
Naren Karunakaran
Social Investing
Banks go by the book and don’t like lending to schools. A clutch of social investors is going beyond the book to help affordable private schools build quantity and quality.
Rajiv Bhuva

The sun sets and a shroud of darkness descends rapidly over Bihar’s West Champaran district. Without electricity, much of the population turns to kerosene lanterns. But Tamkuha and 45 other villages in the district are glimmering islands of light, even late into the night. A little company called Husk Power Systems (HPS) has been setting up mini power plants in these villages. As its name suggests, the plants are powered by rice husk—512 kg of it in a day. Each plant costs under Rs 15 lakh, employs 3-4 people and generates about 32 kilowatts of electricity—enough to power about 500 households and shops, or about three villages.

The first such plant came up in Tamkuha. “We chose the worst possible place to start business. Tamkuha was a hotbed of bad things,” recalls Gyanesh Pandey, CEO of HPS. It was infamous for being the ‘university of kidnapping’. If Pandey could prove his business model here, he figured he could do it anywhere.

Electricity started flowing out of the husk plant in Tamkuha in 2008. And it brought light into the life of 14-year-old Haresh Kumar Yadav. Till he was 11, Yadav had to work the fields in the evenings to pay his school fees. He would sit hunched up over a kerosene lantern to catch up with his studies after sunset. But now, he is doubly blessed. “I can study late into the night and the power plant pays my school fees of Rs 50 a month,” says a delighted Yadav. HPS pays the fees of 200 students in Tamkuha as part of its corporate social responsibility initiative.

The cost of electricity is Rs 40 for 15 watts of electricity, enough to light one bulb for one month. Some can draw more depending on their propensity to spend. About 200 watts of power is enough to run a TV, fan and light in one household for a month. “Electricity has given us a new lease of life,” says Mohammad Imtiaz Alam, a Tamkuha resident and the engine operator at HPS’s plant.

Rice Power: Husk Power Systems, backed by investor Oasis, builds mini-power plants. It has lit up children’s lives in Gorakhpur, UP and also pays their school fees.

The company has also electrified 20 villages in other parts of Bihar and Uttar Pradesh. In the next three years, it wants to electrify 5,000 villages in 10 states.

If HPS can dream about electrifying large swathes of rural India, it is only because it has itself been powered up by a $2 million investment by two social venture capital funds—the $30 million, Switzerland-based Oasis Fund and the $40 million, Hyderabad-based Acumen Fund. Others like Cisco and Draper Fisher Jurvetson are also investors.

New Breed

Oasis and Acumen are part of a new, growing breed of ‘social venture capital funds’. These funds look to invest in companies that deliver social benefits and generate decent financial returns. They embody the new mantra: doing well while doing good. “Social capital is an emerging trend both globally and in India,” says Varun Sahni, Country Director, Acumen Fund. It plans to invest $100 million over the next six years.

“There will be $1 billion coming into this space in the next five years,” Sahni forecasts. Monitor India, a management consulting firm, conducted a two-year study on identifying eight low-cost business opportunities. It further narrowed this down to four: water, healthcare, education and affordable housing. “In each of these we went and talked to 2-3 entrepreneurs running the more successful enterprises. They were all good candidates and people had invested in them. So, there is a lot of interest in this space,” says Anamitra Deb, consultant, Monitor Group. “But a lot more needs to be done before this becomes a flourishing investment market.”

Many of these social investments have one thing in common—the venture capitalists backing them have pushed the entrepreneurs to go after growth and scale. Not just for better returns, but also to widen the social benefit.

Already, seven such social venture capital funds, interviewed for this story have raised around $180 million and invested about $125 million in 72 social enterprises. All this has happened in the last six years (mainstream VCs invested a total of $3.31 billion in the same period, according to Venture Intelligence, a research service tracking private equity and M&A activity in India). Each of these funds has its own comfort zone in the social-benefit versus financial-return balance.

On the one hand, there are funds like Acumen, which raises philanthropic capital to invest in sustainable enterprises that provide affordable products and services to the poor. For Acumen, social impact, not financial returns, is the primary consideration.

Another example is the $12 million not-for-profit Gray Matters Capital, which invests in companies that bridge the digital gap between the country’s rural and urban markets. “Applying market principles to guarantee responsible use of money is the biggest realisation of philanthropic institutions today,” says Arun Gore, Managing Director and Principal of Gray Ghost Ventures. “Social entrepreneurs are passionate about helping people, so the commercial returns aspect is usually a secondary concern,” says Deb.

On the other hand, there is the $189.4 million NEA-Indo US Venture Partners, run by Vinod Dham, Vani Kola and Kumar Shiralagi. It will invest only in profitable ventures that promise good returns. Social good is incidental. The philosophy of these investors is clear: they want to make money by serving the needs of people at the bottom of the pyramid.

Acumen Fund

  • Fund size $40 million (approx)
  • Fund manager Varun Sahni
  • Investment philosophy and focus To support sustainable enterprises providing the poor with critical goods and services at an affordable price. Primary focus on healthcare, housing, water, energy and agriculture
  • Companies invested in 12
  • Fund-raising strategy Gets philanthropic donations from individuals, institutions and foundations locally and abroad
  • Social good Vs financial profit Social impact is crucial for all investments

Varun Sahni, Country Director, Acumen Fund Vikas Shah, CEO, Water Health International, India

"There is an ecosystem being built for social impact with some returns."

Some, like Aavishkaar Fund, which raises money mostly from commercial sources, fit in the middle. It manages around Rs 200 crore now (for investments in social enterprise and microfinance) and plans on taking this to about Rs 1,000 crore in the next four years. “We are hard-core commercial capital, not grants looking like equity,” says Vineet Rai, Founder, Aavishkaar Fund. He doesn’t like to be labelled a ‘social investor’ as his fund invests in ‘emerging economy’ companies. Rai’s objective is to make money, but Aavishkaar will not do a deal with an entrepreneur who focuses only on profit maximisation. “We make a judgment on the soul of the guy instead of depending on excel sheets alone,” he says. Aavishkaar’s philosophy is to create wealth in order to distribute it.

Some are driven by a passion for development. Others see development as just another business opportunity. And still others want the best of both worlds. But whatever the colour of their money, venture capital funds are beginning to swoop in to fund social enterprises.

Still Nascent

Social venture capital is only a three-year-old experiment in India, though it has been around for many years overseas (see interview with Antony Bugg-Levine, Managing Director, Rockefeller Foundation on page 56). It is still an experiment, because investors are testing out the fundamental thesis that their money can be used for social development and earn decent financial returns. There are many success stories among the 72 such investments that Outlook Business surveyed for this story. Rangsutra, a garment, accessories and home furnishings company is one striking example. It creates employment and business opportunities for desert artisans in Rajasthan’s Churu, Bikaner and Jaisalmer districts.

Power Duo: Gradatim CEO Prakash CV (left) and Indo US Ventures Managing Director Kumar Shiralagi.

Rangsutra’s shareholders comprise a unique mix of three constituents. There is Sumita Ghose founder, Managing Director and a social entrepreneur—she holds 50% of the company’s equity along with a microfinance institution that works with artisans. There is Aavishkaar Fund, which bought 23% of Rangsutra’s equity for Rs 25-30 lakh in 2007. And then, there are 1,070 artisans, who own the remaining 27%—they pooled in money and bought the stake for Rs 10 lakh, at Rs 100 per share. “We wanted to ensure that rural artisans get work round the year and become shareholders as this gets them more involved,” states Ghose. The artisans make the garments and furnishings. Rangsutra supplies these to Fab India outlets across the country. This is a high-volume, low-margin (15-20%) business. But exports, primarily to Europe, rake in 50% margins, though the volumes are low.

Social entrepreneur-venture capitalist-community—the combine that drives Rangsutra—is a microcosm of a larger, similar ecosystem that is slowly evolving.

Rangsutra keeps all three constituents happy. The community is happy. Mathiri Bai, a 23-year-old artisan in Dandkala village, 250 km from Bikaner, has found a steady source of income in Rangsutra. Bai was working as a construction labourer three years ago. “It was like slavery, and I made Rs 3- 5 a day,” she reflects. Now, she earns Rs 4,000 a month—typical wages of a home-based artisan who doesn’t work more than 4-5 hours a day. Rangsutra recently got her to meet designer Ritu Suri, whom Bai gave a sample of her embroidery work. “I almost went to South Africa for an exhibition but couldn’t get a visa in time,” boasts Bai. “I have forgotten my old life now.”


  • Fund size $250 million
  • Fund manager Sarath Naru
  • Investment philosophy and focus To build profitable businesses that cater to under-served markets. Focuses on meeting India’s domestic needs (primarily rural and semi-urban markets) by backing early-stage / rapid-growth businesses
  • Companies invested in Over 50 (including 25 social enterprises)
  • Fund-raising strategy Raising capital from institutional investors—Indian commercial banks, insurance companies, foreign developmental financial institutions, foreign family offices—that are commercial returns-oriented
  • Social good Vs financial profit Purely returns oriented. The social good is a by-product of the investment strategy

Sarath Naru, Managing Partner, VenturEast; Sameer Sawarkar, CEO, Neurosynaptics

"One can make money via companies focused on the bottom of the pyramid."

The social entrepreneur is happy. Ghose has seen her company grow from Rs 1.5 crore in FY08 to Rs 4 crore in FY09. “They are reasonably profitable and paid 10% dividend last year,” says Aavishkaar’s Rai. Now Ghose has plans to expand her business in East India.

The investor is happy too. Rai is hoping Rangsutra will become a Rs 100 crore company in the next five years. That will facilitate one of his exit options: a stake sale to Fab India. “Otherwise, if it is still a Rs 10 crore company, we will sell our holding back to the promoters,” he says. Aavishkaar is a commercial fund in every sense and has to earn profits for the investors, who have put money into its Rs 60 crore micro-venture fund.

Health Is Wealth

Rangsutra is not a stray success. If a social enterprise is able to meet a clear developmental need, it is highly likely that it can be turned into a profitable and sustainable business. And, of course, a little help from socially inclined venture capitalists is welcome. If Husk Power Systems built a sustainable business around power, and Rangsutra around artisan livelihoods, the Indian arm of Water Health International (WHI) did the same with water. It too had a godfather investor in Acumen, which picked up a 10% stake in 2005 for an undisclosed sum.

WHI’s story is an interesting one. Early this decade, Dr Ashok Gadgil, a professor at the University of California, Berkeley, patented an ultra-violet waterworks (UVW) treatment to kill pathogens and other microbiological contaminants in water. This treatment is three times more powerful than the UVW technology available in the market today. WHI, which was initially set up in the US, bought the patent from Gadgil. The company’s India outfit was set up in 2006.

Oasis Fund

  • Fund size $30 million (still raising)
  • Fund manager Bamboo Finance
  • Investment philosophy and focus To support enterprises that develop innovative solutions that provide the poor with better access to critical goods and services. Invests mostly equity, with some debt. Investments generally range between $1 million to $6 million
  • Companies invested in 4
  • Fund-raising strategy Targeting high-net-worth individuals and institutional investors
  • Social good Vs financial profit Aims to have a significant social impact while earning attractive financial returns

Eric Berkowitz, Chief Investment Officer, Bamboo Finance

"We have a significant portfolio here with $7 million already invested. India is a very important country for us."

WHI wanted to build a business around community water systems. It began building water purification plants in villages with a perennial source of water and electricity. Villagers could walk into the plant and buy water at a minimum price.

Philanthropically inclined high-net-worth individuals, and sometimes, villagers, pool in to buy the water systems. By setting up a plant in the middle of a village, packaging, distribution and logistics costs are eliminated. “We eliminate around 60-70% of the cost of branded retail water,” says Vikas Shah, CEO, WHI. Villagers can pay a minimum 15 paise per litre for purified drinking water (a regular bottle of mineral water costs Rs 14.) “The biggest challenge was to be low-cost and high-quality,” he adds.

The other challenge was to convince villagers of the need for purified water. His social marketing team works with women’s Self Help Groups and children in local schools. “We take a microscope and show them the pathogens crawling in the water. This draws a strong reaction,” says Shah. Parvathi Ponasanapalli, a 60-year-old widow from the village of Padampudi, 450 Km from Hyderabad, is a regular customer. She has been buying water for the past two years. “I spend Rs 2 for 12 litres every day,” she says.

Today, Shah has over 300 such community water plants in four regions of the country: Andhra Pradesh, Gujarat, Tamil Nadu and Maharashtra. Each plant costs between Rs 8-12 lakh. WHI purifies 21,000 litres per day at its smallest plant and 1.3 lakh litres per day at its largest. On average, the company purifies 40-50 million litres of water every month. Shah plans on doubling his current capacity and extending his footprint to other states this year. Each plant can break even by running at 30-40% capacity. Acumen’s Sahni seems happy with this investment: “If you outprice your product with profit maximisation as the goal, the consumer’s cost will be high and scalability becomes an issue.”

Guiding Them Along

The success of Rangsutra-Aavishkaar and WHI-Acumen is not a flash in the pan. “A lot of our companies become successful in a short span of time,” boasts Rai, pointing to Vatsalya, a company setting up rural hospitals, and Vortex, a rural ATM company. Aavishkaar plays a key role in shaping the business models of its portfolio companies—its staff of 14 work closely with the latter. It has a board seat in Rangsutra and helped the management streamline the business, think strategically, and go after growth. “They really helped us work through our business plan, especially on costing and cash-flow issues,” says a grateful Ghose. If Rangsutra does grow to Rs 100 crore in revenues, a lot of the credit will go to Rai. As an investor, it was he, perhaps even more than the entrepreneur Ghose, who first believed Rangsutra could scale up.


  • Fund size $17 million
  • Fund managers Vishal Vasishth and Kartik Srivatsa
  • Investment philosophy and focus To support entrepreneurs in high-growth sectors like education and training, agriculture and food, healthcare, financial services, basic utilities (waste, water, rural telecom, affordable housing, etc) that are aligned with inclusive growth
  • Companies invested in None yet
  • Fund-raising strategy Set up by Soros Economic Development Fund, Omidyar Network and Google
  • Social good Vs financial profit Focuses on sectors and opportunities where both financial and social returns can be generated simultaneously

Vishal Vasishth, Founder & Managing Director, Song

"We see ourselves as partners with entrepreneurs, rather than as financiers."

Across many such investments, it is the venture capitalists who are driving social entrepreneurs to go after scale and growth. The quest for scale is not just to improve financial returns, but for much more—the greater the scale of a social enterprise, the greater the social benefit.

Neurosynaptics, a telemedicine technology and service provider, is a good example. It provides devices and software for video and audio conferencing needed at telemedicine centres. Doctors in cities can monitor patients in real time through an Internet connection that runs on bandwidth as low as 32 kbps.

It had the technology, but the company needed support from VenturEast’s biotech fund to make the business take off. The latter obliged by providing seed funding of just under $1 million in 2003. This was followed by a second investment in 2006. “For companies like us, working in the development sector, it’s always hard to find investors,” says Sameer Sawarkar, CEO of Neurosynaptics. VenturEast helped Neurosynaptics scale up to 130 such centres, costing roughly Rs 1 lakh each, and covering 10 villages in Uttar Pradesh. It is now readying for the next big leap of growth, but needs another round of funding. Sawarkar plans to start scaling up from April this year and set up 2,000 centres by the end of 2010 with a new investor’s support. “This is exactly how it should be,” says Sarath Naru, Managing Partner of VenturEast. “The initial period to stabilise the business model should be very slow (three years, on average), then the ramp-up needs to be fast.”

Aavishkaar India Micro Venture Capital

  • Fund size Rs 60 crore (approx $14 million)
  • Fund manager Aavishkaar Venture Management Services
  • Investment philosophy and focus To create sustainable change by increasing economic activity at the bottom of the pyramid and boosting the entrepreneurial spirit. Investments to date have focused heavily on the rural and agro technology sectors
  • Companies invested in 17
  • Fund-raising strategy Raising funds from commercial and social investors. This includes banks, foundations, Nabard (India’s apex rural bank), commercial organisations and retail individual Indian investors
  • Social good Vs financial profit Working with portfolio companies to provide services in rural areas as well as under-served regions

Vineet Rai, Founder, Aavishkaar Fund

"We believe we are creating the basis for others to invest in. These are emerging economy companies, not social businesses."

Neurosynaptics broke even operationally last year. Sawarkar expects revenues to double this financial year and treble next year. Such growth would not have been possible without a socially inclined investor.

A similar story played out at Dial 1298, an ambulance services company. It started in 2005 with 10 ambulances, only in Mumbai. The fleet did not grow for two years, as the company fine-tuned its model. “Our proposition was not attractive for normal venture capital firms as we were mainly serving a social cause,” says Sweta Mangal, CEO. Enter Acumen, with a $1.5 million investment. Since then (2007), the fleet has increased to 70, and now covers Mumbai, Patna and Kerala. “Acumen connected us to people from the UK and US to help us through their networks. They identified our work and put us on a pedestal for the whole world to see,” says Mangal. For entrepreneurs like Mangal, it is easy to get lost in the day-to-day running of the business without investors like Acumen pushing them to think of the future.

Payback Is Essential

Undoubtedly, venture capitalists are adding value to social entrepreneurs. But this relationship will be sustainable only when the favour is returned. Most social investments eventually need to make financial returns. This happens only when the investor gets an exit either through an IPO or a buyout. So far, this has not happened. VenturEast’s Naru thinks it’s too early to expect an exit now. “It takes about 6-8 years to see an exit in companies like these,” says Naru, in reference to Neurosynaptics. Even mainstream venture capital takes 3-5 years for an exit, so social enterprises will need more time.

Gray Matters Capital

  • Fund size $12 million
  • Fund manager Arun Gore and Brian Cayce
  • Investment philosophy and focus To impact whole communities. Invests in the information, communication and technology space to bridge the urban-rural digital gap
  • Companies invested in 4
  • Fund-raising strategy A not-for-profit fund supported by foundations like Rockdale, Rockefeller and Global Investment Initiative, among others
  • Social good Vs financial profit Prioritises opportunities according to market demand and social impact

But most believe that profitable exits will happen one day. “No one is investing because their primary objective is social good,” argues Somak Ghosh, Group President, Corporate Finance and Development Banking, Yes Bank. “They are investing because they believe that one of the key drivers of the next phase of growth will come from businesses built around meeting a social need.”

Yes Bank started its Social Investment Bank (SIB) division in 2007 to offer advisory services to social enterprises and help them raise funds. SIB has raised $70 million for three companies and is about to close its fourth deal. It helped Gradatim, an IT company that manages microfinancial products, raise $3 million in December 2009 from NEA-Indo US Ventures. The latter is a mainstream venture capitalist with purely commercial objectives. “We have a responsibility to our investors and need to generate returns. If businesses (we invest in) happen to serve a social cause, then we are excited as well,” says Kumar Shiralagi, Managing Director of Indo US Ventures.

Interestingly, 3-4 of the fund’s 18 investments so far have been in social enterprises. So are almost 25 of VenturEast’s 50 investments. VenturEast is also a commercial VC, not a social investor.

Elevar Equity II

  • Fund size $40 million (additional fund-raising on)
  • Fund manager Elevar Equity
  • Investment philosophy and focus To create market-based solutions for poverty eradication. Focuses on sectors like healthcare,
  • education and information
  • Companies invested in 1 (another two in micro-finance ventures)
  • Fund-raising strategy Legatum and Omidyar Network are the anchor investors; approaching other investors for additional funding
  • Social good Vs financial profit Believes in for-profit business models to achieve scale

Sandeep Farias, MD, Elevar Equity

"We invest in good entrepreneurs, so long as the customer is at the bottom of the pyramid."

If mainstream venture capitalists are showing remarkable interest in social enterprises, it is only because they believe these can earn good returns in the long run. There is another bit of evidence that suggests socially focused venture investing is here to stay. Such funds have managed to raise money, even in the depressed market conditions that prevailed through most of 2009.

Mumbai-based Kaizen Private Equity has just raised Rs 600 crore for an exclusive education fund. It has an option to raise a further Rs 150 crore. “In the education sector, there is a need for private players to help the government achieve social targets while providing investment returns to their stakeholders,” says Sandeep Aneja, Managing Director, Kaizen Private Equity. He is targeting an internal rate of return of 25-30%. The fund will invest Rs 5-10 crore in early-stage companies and up to Rs 45-70 crore during the growth phase. Kaizen is close to finalising one deal and has three others in the pipeline.

Song, a social development fund, has just raised $17 million. This India-focused fund, the brainchild of Omidyar Network, Soros Economic Development Fund and Google, plans to invest the entire amount by 2011 in six to seven deals. “At this point, we are seeking to learn from India and take that to other parts of the emerging world,” says Vishal Vasishth, Founder and Managing Director of Song.

Funds with a stronger social tilt get by even if they offer slightly lower returns. “We are very open with our investors about the risks involved. When we explain our due-diligence process and the social business (we are investing in), they are willing to put their trust in us,” says Eric Berkowitz, Chief Investment Officer of Bamboo Finance, which manages the $30 million fund of Geneva-based Oasis. Usually, such investors are willing to settle for returns that are lower than what mainstream VC funds offer. What they will not compromise on is the social impact they expect their investments to make. This is the new colour of the venture capitalist.

With inputs from Mahesh Nayak

Antony Bugg-Levine, Managing Director of the US-based Rockefeller Foundation, shared with Naren Karunakaran
Naren Karunakaran
Social Investing
Banks go by the book and don’t like lending to schools. A clutch of social investors is going beyond the book to help affordable private schools build quantity and quality.
Rajiv Bhuva
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