Let me share a little more about the research I’ve been doing in Bangalore this past year.
There have been many ups and downs along the way, working independently in a field I have known very little prior in a country very different from the U.S. and Korea. It was tough at many points, but the journey has been rewarded with infinite inspiring moments, meeting brilliant and passionate entrepreneurs and learning about the ever-evolving social entrepreneurship landscape at an exciting period first hand.
Context and Motivation:
Experiencing significant economic growth since liberalization in 1991, yet with persisting poverty in many parts of the country India is uniquely positioned for social entrepreneurship. With a growing upper and middle class, the country has a significant amount of capital as well as a well-educated talent pool. Yet 800 million people still live at the “base of the pyramid”, collectively with disposable income of more than $358 billion, thus creating an unparalleled market opportunity for social businesses to tap into.
(This isn’t to say that that market-based solutions, where products or services are sold , rather than given, to the underserved population will solve all social and economic problems today. If anything, I learned the importance of NGOs and charities in reaching and tackling the last mile, the poorest of the poor, and the most challenging problems).
As Indian entrepreneurs respond to this opportunity with exciting business innovations suited for the local context, there has also been an immense amount of capital flowing into fuel the growth of these enterprises. As I mentioned in the previous post, there has been a growing amount of impact investment capital with a growing number of deals. There has also been a growing number of venture debt providers, and the government has been working with banks to ease access to credit for MSMEs through schemes such as the Priority Sector Lending requirements for retail banks, or providing credit guarantee through CGTMSE that will provide collateral-free loans.
Nonwithstanding the positive trends, the “pioneer gap” is a clear phenomena that cannot be denied in the space. Of the $1.6 billion deployed to Indian social enterprises, 60% goes to just 15 (of the 220) investees, and 70% of the investment is from a follow-on round, rather than a first round. The few enterprises are the ones that are able to continuously receive funding, but it is ever-more challenging for ones who at the earlier, pre-growth stage.
An overwhelming consensus early stage funding is severely lacking in the space — many early-stage funds have moved up, and even venture debt and financing through banks are extremely difficult. On the other hand, investors also find that while there are many enterprises, few are investment-ready (or in other words, too early).
It makes sense. Whereas the appeal for traditional VC is to spot the next Facebook, early stage social enterprises do not promise the potential of outsized financial rewards that justify high-risk and costly investments.
But the truth is that even though these investments may not be attractive, they are crucial. The From Blueprint to Scale report by Monitor Inclusive Markets identifies 4 crucial stages of social enterprise: Blueprint, Validate, Prepare, and Scale. As the report puts it:
In the validate stage, the firm requires up-front investment to enable multiple rounds of market trials as it tests and refines its core business model, and good counsel to help it stay focused on the key questions it must address. In the prepare stage, heavy investment is often required to improve the tough conditions of the BoP business environment and to pave the way for growth.
If nobody is willing to fund these needs, how can social enterprises successfully reach the next stage and scale? How do they get to the stage where they are considered investible?
The Monitor report’s answer is philanthropy.
I don’t disagree – in fact, I wholeheartedly agree with the conclusion. That said, that is an solution for the ecosystem, for the system. As we wait for more grant-giving agencies to enter, what can the entrepreneurs do now?
I thus decided to focus on understanding the funding journey of social entrepreneurs across different stages, specifically understanding the different financing instruments, the rationale behind them, the barriers they faced, and their strategy to overcome the barriers.
How:
While I spent the first couple of months trying to refine and specify my sample, in the end, I ended up rather broadening it. Issues that enterprised faced were different across different stages at different points in time, and I wanted to understand both challenges and strategies of the past that have been overcome, as well as those of today.
I spoke with 18+ founders of social enterprises in semi-structured interviews. Here’s what they look like:
- Sectors: Energy (7), Livelihoods (5), Health (3), Education
(1), Waste Management (1), Technology (1) - Legal structures: Private limited (11), Hybrid (5), Partnership (1)
- Funding stages:
- Series B and above (5) — $2-4M
- Series A (2) – 30M~105M INR ($500K~$1.6M)
- Seed (6) – 1.2 M ~ 20M ($20K~$300K USD) INR
- Pre-seed (4)
- Age: 1 – 22 (Median: 4)
- 1 enterprise was 22 years old (founded in 1994). The rest of the enterprises interviewed were 8 (founded in 2008) or younger
In भारत (Bharat): 