Much has been made of urban India’s rising purchasing power and entrepreneurs targeting a more consumer-oriented public with fancy electrical gadgets for the growing smartphone generation or the latest trendy designs for fashionistas. A much less publicised part of the Indian growth story is the start-up ecosystem in remote or rural regions of the country that are poorly served by much of the business community.
The bottom of the pyramid population (BoP) is estimated to be as high as one billion Indians living on less than $10 a day. Social entrepreneurs play an admirable role through their efforts to uplift remote India and involve society’s poorest members by providing affordable products that aim to reduce poverty and raise standards of living.
“High impact businesses are the last-mile suppliers of products and services to communities that do not have many alternatives or are underserved. It is in their essence to make a difference by placing BoP communities at the forefront of what they do,” says Audrey Selian, director of the Artha Initiative.
One major obstacle facing entrepreneurs is the dearth of seed-stage funding opportunities for social ventures; a situation the Artha Initiative is helping alleviate. “We are filling the gap in the market for financing early-stage entrepreneurs, who are finding it really tough to operate because they are never going to get funding from their local bank or repay double-digit interest rate loans,” she says.
Networking
The Artha Initiative was set up in 2007 to encompass the venture philanthropy and impact investment interests of Tom Singh; the Singh family’s venture philanthropic interests are served by team members of Rianta Capital Zurich, which is an investment advisory to the Singh Family Trust. The program is committed to principles of sustainability of social enterprises that create products and services appropriate for the BoP communities.
“The goal in the early years was to simply understand the meaning of sustainability in a social enterprise context and we quickly realised that many of the non-profit and non-government organisations that supported early-stage businesses were permanently grant dependent,” says Selian.
To address this, Artha began to build a network of like-minded individuals and firms and, after initially providing grants on a sporadic basis, quickly entered into actual direct investments supported by official shareholder agreements. Selian describes the organisation as a “patient investor with a more measured and conservative approach to generating financial returns” over a seven- to ten-year investment horizon.
Indian ties
“We are committed to seeing the disbursement of capital as catalytic and to finding peer funds, investors and foundations that are interested in India. We want to encourage other family offices to dip their toe in the water,” Selian says. “Our strategy is one of co-investment of small chunks of money in syndication with others. Of course, we consider and position ourselves for financial returns — but the social impact and social returns are the explicit part of the package.”
Commitments are relatively small given that Artha only focuses on small-scale businesses. Investment — generally in the form of equity ranging from $50,000 to $500,000 —funds enterprises that crucially have a fundamental aim to serve poor communities across the energy, agriculture, livelihood and water sectors.
The Singh family have their roots in India, so it was an obvious country to target, and the programme was set up to be region-agnostic within the country. Selian adds India was also a natural choice given the country’s enabling environment for social entrepreneurship.
“The beauty is that the Indian story is so unique and other countries and markets pale in comparison,” she says. “There is a concentration of innovation, creativity and brain power that has made the social enterprise sphere extremely dynamic, in terms of the number of pioneers and sheer size and scope of projects that are being tested and tried in every state of the country.”
She explains that sourcing social enterprises and undertaking due diligence on companies can be difficult. These types of businesses are small, volatile, lack controls on governance and public information, given they will not be present on any exchange or official marketplace. “You have to remember that these are risky seed-stage businesses,” she says.
Streamlining the task of investing in small enterprises is complicated because the parties involved are likely to have different expectations and there is a lack of a single set of terms or standard shareholder agreement template.
“Negotiating and putting a transaction through its natural process is not easy for someone that is not immersed in social enterprise in India,” she says. “We are continually trying to find different ways of enhancing the efficiency of finding, sharing and undertaking projects more collaboratively.”
Dealmakers
One important means to furthering partnership and assisting ventures is the Artha Platform, which is an online by-invitation community for impact investors, donors, social entrepreneurs and capacity-building support organisations. The platform is designed to tackle the economics of due diligence for local service providers and to build better coordination through social networking. For instance, the platform has connections to over 30 in-country service providers who help diligence opportunities for potential investors.
“We have certain tenets and core principles that constitute impact investment that we want others to espouse if they want to be considered as ‘social’ investors. So, we often try to enable ventures that support some sort of employee share ownership or community–owned structure,” says Selian.
Two years ago, the Artha Platform started the Artha Venture Challenge (AVC), a nationwide business plan competition that will continue for at least another three years. The AVC aims to discover and support striving Indian social entrepreneurs with matching investment to sustain and scale their ventures. The call out and selection process has been managed to date by Ennovent, which accelerates innovations for sustainability in low-income markets. Villgro, a premier incubator and accelerator based in Chennai, provides hands-on support to social entrepreneurs during their early stages of growth, and carries the ventures through the investment process and beyond. Artha has since March 2015 set the wheels in motion for a deeper partnership with Villgro to further expand the scope of their activity undertaken together.
To take part in the venture challenge competition, entrepreneurs need to meet certain eligibility criteria. For instance, trading for at least one year or demonstrating proof of concept with at least a pilot, having a scalable business model and the ability to raise 30 lakh, or US$50,000 in some form of investment, are the necessary triggers for unlocking $50,000 ‘matched’ equity investment from the AVC.
“We are looking for strong teams with clarity in vision and mission that must focus on serving the poorer, more marginalised populations and communities with something that is importantly critical to their well-being and potentially transformative for their livelihoods,” says Selian. “We, and our partners, work with companies for eight months and pay for capacity support to sustain and grow businesses. With Villgro as our partner, we are hoping to extend this period of capacity building support. ”
The AVC has funding for ten investments of $50,000 a year across any sector and identified 15 finalists in its first cohort of 2013/14. The list was whittled down to 11 ventures, of which the AVC has invested in six and is currently working on finalising the seventh investment out of that vintage.
Now in its second year, the AVC has selected 11 finalists, ten of which are being actively engaged. The first transaction was completed in March 2015 and Artha estimates it will undertake six or seven further investments from this cohort as well.
The Artha Initiative is close to achieving its first exit from within its portfolio of 17 small social enterprises. The expected internal rate of return from the company in question after capital gains tax is anticipated in the range of 18-20%. “We have just under $5 million in commitments; we plan to invest a couple of million more and then will revisit the size of investment budget in the portfolio,” says Selian. “Artha and its affiliate entities have invested in a couple of bigger funds but we do not undertake large investments on purpose because the gap in the market, and ultimately our mission, is in financing high impact, early growth stage small businesses.”
Rural energy
It is estimated that over 80 million households — roughly 50% of India’s rural population — have little or no access to grid-based electricity and adequate lighting. Many households still rely on kerosene lamps, which provide only dim lighting, produce damaging carbon emissions and can cause chronic illnesses from indoor air pollution.
Social enterprise is playing an important role in bringing clean tech to the off-grid populace and developing a range of small-scale renewable energy solutions. These include biomass gas cook stoves or solar products, like torches, lanterns, home lighting systems and pumps. In the energy sector, Artha has made investments in Frontier Markets in Rajasthan and Andhra Pradesh, ONergy in West Bengal and Boond Engineering & Development, which mostly serves Delhi and Uttar Pradesh.
All three offer affordable clean energy products; for instance Frontier Markets has a range of solar lighting systems. Boond also provides water pumps and inverter systems, while ONergy has launched new solar innovations for TV, computer, micro grids and irrigation systems.
In certain cities in India, women can waste roughly 20 hours a month waiting for water, while across the country it is estimated that women spend 150 million work days every year fetching and carrying water. More worrying is the fact that of the 325 million people living in rural eastern India, an estimated 80% have no access to safe drinking water.
Spring Health, another Artha investee, is a water distribution business based in Orissa, and has come up with a novel micro-finance solution to provide clean water. Through its franchise, local village shops can set up safe water kiosks that use fairly basic chlorination methodology for purifying water. When Artha invested in the company in 2013, Spring Health was operating in 26 villages; today that number has risen to 250 villages and the company is expected to achieve operating breakeven within the next year.
“Tribal areas, a couple of hours drive from Bhubaneswar, now have access to safe water which they would otherwise struggle to find. Spring Health use a typical hub and spoke model for distribution, where someone in a village can set up a tank and then make money by selling and even delivering jerry cans of water,” says Selian.
In the livelihood sector, Artha has invested in Mela Artisans, an e-commerce platform that supports the artisans and handcraft industry at the root of its supply chain through non-profit grant making and micro-credit programmes.
Many master craftsmen are forced to give up their trade due to the lack of local demand for their work. Mela has helped artisans keep their livelihoods and skills passed down over generations by generating healthy margins as a luxury lifestyle brand for high-end home accessories and jewellery collections. The firm’s handcrafts are distributed through many major retailers, such as Bergdorf Goodman, Neiman Marcus, Holt Renfrew and Bloomingdales. “Mela has a very social and ethical structure to their supply chain,” says Selian.
Synergies
As the Artha network grows, Selian believes there is a greater prospect for creating synergies through “cross pollination” and collaboration. Artha is increasing communication with the companies in its portfolio to look for ways to partner up, for instance piggy backing on each other’s existing distribution channels.
“There may be ventures delivering water to the last mile in Bihar and Orissa or delivering seed in Jharkhand which could help each other,” she says. “Promoters are open in talking to others and I think we will see that happen more in the future as we become more sophisticated in how we structure investments, provide incentives for collaboration and basically build trust between the entrepreneurs.”
Even though Artha’s investment budget is solely focused on India, its technological intellectual property is open to be distributed anywhere in the world and to support similar networks beyond India. Through Artha Networks Inc, the Artha Platform’s architecture was licensed last year to the Inter-American Investment Corporation to launch InvestAmericas.com, a platform focused on small- and medium-sized enterprise financing in 26 Latin American countries.
In addition, there has been dialogue with other foundations and networks interested in setting up similar networks for impact investors and effective ‘operating system’ platforms for their own regional context. “We are trying to be more than just an investment advisory or fund,” says Selian. “Our absolute investments are India-specific but the use of the infrastructure that we have built is international in scope, and social in mission.”
