While evaluating start-ups to invest in, Caspian Debt begins by taking a closer look at how it walks the impact talk. This means checking whether the entity has employee welfare policies like maternity leave or safety processes at its manufacturing units. “If they do not meet those criteria, we will not fund the company, no matter how good it is,” Avishek Gupta, MD and CEO of the debt financing company emphasised.
He cites the case of a start-up that had approached Caspian seeking capital; however, it had poor housing conditions for workers at its manufacturing unit. “We agreed to disburse the loan only if we saw an improvement in its workers’ living conditions. They did this by building a new set of quarters,” Gupta said, underpinning how this is its way of incentivising its portfolio companies to inculcate positive business practices.
Starting as a domestic equity investor in microfinance in 2004, Caspian Advisors rolled out its Rs 800 million ‘Bellwether India’ microfinance-focused equity fund a year later, which saw the participation of Gray Ghost Ventures, Triodos Bank, ICRA Limited's chairman and independent director Arun Duggal and erstwhile chairman of State Bank of India MS Verma. It incubated scalable microfinance entities like Ujjivan Financial Services, Jana Small Finance Bank and Equitas Small Finance Bank.
In 2008, the company launched its Rs 4,750 million ‘India Financial Inclusion Fund’ to offer equity funding to the burgeoning financial services sector, including affordable housing, small business financing, microfinance, and last-mile banking. It has made 12 equity investments to date including three of the 10 small finance bank license awardees and two affordable housing finance companies like Arohan Financial Services, Aptus and Basix. Its equity business now has three funds—two operating and one in fundraising mode—including the SME Impact Fund, Leap for Agriculture Fund and World Bank-backed Rupiah fund.
In 2013, Caspian Impact Investment or Caspian Debt was set up as a multi-sectoral debt fund and it currently operates as a separate entity with an NBFC license. As a permanent investing vehicle, it doesn't create multiple funds and in the past decade, it has funnelled around Rs 4,500 crores of funding through this debt vehicle. “We have annual numbers of how much we want to disburse annually through it; it stands at Rs 750 crores this year and around Rs 850 crore in the coming year,” Avishek said.
These investments will be focused on areas like financial inclusion, climate change and women empowerment. “Since our debt business is sector agnostic, we would consider companies with an impact angle like water conservation and sanitation. Similarly, it could include start-ups providing edtech support to government schools or affordable private schools in addition to affordable healthcare companies setting up clinics in tier-2 and 2 towns,” he added.
Pick, Choose And Win
According to Gupta, founders raising venture capital typically fall into two buckets—those figuring out the business and monetisation models and those wanting to grow faster than a traditional business. “The latter have a proven business model but are loss-making because their expenses are more than what they can afford,” Avishek said. “We fund this type of companies as they can turn profitable within a month if required.”
Equity impact investments in India typically have a holding period of five and a half years with a 30% Internal Rate of Return (IRR). As a permanent vehicle, Caspian usually provides funding for up to three to five years.
“Theoretically we could do seven-year loans, but in the segment that we operate—comprising early growth stage companies—this is unnecessary. We have done seven-year loans for financial institutions where it acts like a subordinated debt, but for non-financial institutions typically there is no requirement as such,” Avishek explained.
Caspian tries to keep its lending interest rates between 14% to 17% with a processing fee of 0.5% to 2%. So, larger companies get funding at a lower rate, while the smaller companies that are still working out their profit model will get funding at a higher cost.
Making An Impact
Over the years, Caspian has realised that companies leading positive social or environmental impact have some common aspects—they are professionally managed by first-generation entrepreneurs, have transparent processes and are impact-oriented in their bones. However, they found it difficult to get access to domestic debt capital.
This is because traditional lending parameters dictate that a company should be profitable for at least three years and have assets to offer as collateral. However, most new-age start-ups are asset-like by design and can’t offer this collateral to avail these loans. According to Gupta, businesses that aim to meet the requirements of lower-income households or the mass market operate differently than conventional tech start-ups but are often more financially sustainable and less loss-making.
Caspian provides customized loans to these start-ups that either have impact orientation encoded in their mission statement or consciously focus on providing products or services to rural areas to democratise access or help the local community. Noticing that the capital flow to women entrepreneurs was relatively lesser, it adopted the ‘2X Initiative’ global norm to ensure that at least 30% of its funds were directed to start-ups meeting certain gender criteria. This includes companies with a woman founder or co-founder, those with a higher percentage of women employees on their payrolls, or those designing products and services that target women's upliftment.
Caspian has funded around 250 companies to date and received around 4,500 calls of funding across sectors including MSME finance, microfinance, affordable housing finance, food, agriculture, clean technologies, healthcare and education. Last September, it was awarded the ‘2X Flagship Fund’ status by the 2X Flagship Fund Committee based on its track record in furthering women's economic empowerment through gender lens financing and enabling gender balance in the team.
Typically, the debt capital provider adds about 30-35 new companies to its portfolio every year. At the same time, the start-ups it funded in the first year, continue to borrow from it—about 150 out of the 250 organisations in its portfolio continue to be its borrowers. The remainder are no longer its borrowers as they either were acquired or became too big for Caspian to meet their funding needs.
Why The Onus On Impact Start-Ups
Aligning its business with climate-related risks and goals, Caspian is now helping organisations measure the emissions of their portfolio companies and identify ways to reduce this. It is also the first Indian entity to become a signatory to the Partnership for Carbon Accounting Financials (PCAF), a collaboration between financial institutions worldwide to enable harmonised assessments and disclosures of greenhouse gas emissions financed by loans and investments.
With more than 350 financial institutions from six continents, the group is rapidly expanding in North America, Latin America, Europe, Africa and Asia-Pacific. “We are in the process of disclosing the finance emissions in our portfolio and will publish the first draft of our report by the end of this fiscal,” Avishek said.
Some wonder about the hullabaloo about impact start-ups since traditional companies also lead to income generation for low-income households or deliver a product or service to low-income households. Avishek agrees that the lines are blurring. It ultimately boils down to whether operating with an impact mindset is the company’s priority. For example, will the company shift its focus to a new segment under profitability pressure?
In 2022, around 25% of all impact investments in India went into the financial access sector. Thereby, the sector still received the highest share of impact investments that year, although its share decreased significantly from 39% in 2019. The technology for development sector followed close at 22%.
The impact investment market in India has grown significantly in the past few years with industry stakeholders and customers becoming aware of issues like climate change, gender inclusivity, etc.
Avishek believes there is a big gap in the Indian market for up to Series B funding for impact-related enterprises, though larger deals are not happening as much. He has noticed that every four or five years, there are larger deals, and then this flips with smaller deals taking centre stage.
“In the next year or so, there will be more activity in smaller deals. But will this be sufficient? The answer is no,” he reiterated.
This is because things are complicated for impact enterprises that must balance profitability with making a difference at a larger scale, and hence, their profitability is slower than that of a normal tech start-up. For example, if an organic foods company wants its farmer suppliers to shift to organic products, the transition will take three years, and the start-up can project profitability only after that after factoring in all associated expenses.
