March 2014

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‘For a social enterprise,affordability is the key metric’: Vishal Mehta

Launched in 2002 with support from the Rockefeller Foundation, Lok Capital manages two funds.Vishal Mehta, Co-Founder and Partner at Lok Capital, along with Associate Arun Asok, talk about the challenges faced in scaling Indian social enterprises

Q: Microfinance has been a no-go sector for many investors over the last few years. But your first funds are invested in a few such firms. Why do you think they were able to tide over the crisis that hit the sector?

Vishal Mehta (VM): The issue was with those who had a portfolio in Andhra Pradesh (AP), where the crisis hit. They could not collect their money. So the loans had to be written off and anyone with a substantial portfolio saw their network being eroded.

The only one who was able to function despite having a portfolio in AP was SKS Microfinance because of their net worth, and the money they raised. They were able to write off loans and still survive. It was a simple net worth calculation. Other institutions, not operating in AP, did foresee the state getting saturated with too much competition and stayed away. That was good thinking because if you had a large portfolio‚ you would suffer.

Post-crisis, some companies adapted to the new regime quickly, despite having a large portfolio, like Ujjivan Financial Services and Janalakshmi Financial Services in our portfolio. Any change in the field requires a lot of adjustment, including educating customers. Some dealt with operating changes on the ground well, showed that their portfolio quality in non-Andhra spaces was healthy and continued to raise equity‚ which is important in this business to grow. So it was largely Andhra versus non-Andhra portfolio issues.

Q: You have invested over the wider social enterprise space. What are the typical pain points for social ventures in India as they scale?

VM: Policy will remain a hurdle, something one will have to keep tackling. It cuts across all our businesses. If you look at Right To Education (RTE), one clear outcome was that most low-cost private schools that had achieved decent scale over the last decade have vanished, because of the implementation of RTE. The RTE Act was not drafted keeping in mind that there is a private low-cost education model emerging in India. The other challenge is around the stage of evolution of social enterprises. We are an early stage sector, so most non-Micro Finance Institutions (MFIs) businesses have hardly had any proof of concept. There are no benchmarks. There is a mismatch in terms of what kind of capital is available for social enterprises and the stage of sector.

All of us started investing in India in this space through microfinance, where the inherent nature of business is capital-intensive. Some assumptions came in regarding size, stage and money required. The reality today is that many non-MFI businesses require smaller doses of capital and most funds have become large enough now. This adjustment between size of opportunities and fund size will have to happen.

Fund aid: Vishal Mehta

Q: Could we say that over the last five years, the understanding of social enterprises and the impact of such firms has become much clearer?

VM: A decade ago anyone doing good and investing was called a social investor. But impact parameters are clearer now. However, defining impact is still largely happening at a fund-specific level than an industry level, despite some industry metrics emerging. Funds have their own approach.

At Lok‚ we run a social action plan in each of our portfolio companies to measure impact. Within the first three-six months of investing in a company, we do a thorough operational analysis to see if the impact is getting captured at the investor level.

Q: Is it fair to say that for social enterprises, you have to go beyond general metrics for regular firms?

VM: A couple of things emerging are that focus, in terms of product and service, is important. Healthcare models which work are those focussed on a particular field such as eye care or paternity care. For a social enterprise, affordability is the key metric, while replicating a model and scale are other important metrics. The way to achieve it is to simplify your model to one key field. Then it can be replicated in multiple geographies. There seems to be merit in models where the focus, at least initially, is well defined.

Entities which understand a specific region well and spend time modifying models for the states they enter have been more successful. The rural context could be different in terms of human resources and infrastructure available to deliver services. One has to be more systematic and modular in the expansion approach. The assumption that copy-pasting models can work needs to be validated again and certainly calls for a rethink.

Lastly, businesses focussed on developing a lasting relationship with customers work because risks here are political in nature. If customers understand the value of social enterprise well, and consider themselves as a part of this ecosystem, they will safeguard it from unnecessary political intervention.

Q: Can you cite some businesses that have been able to define and achieve these metrics in their space? Have any of them achieved commercial success even as they have achieved social success?

VM: Take Hyderabad-based LifeSpring Hospitals’ maternity care model, for instance. I will not say it has achieved full commercial viability but they are on the right track. They have done a good amount of thinking on how to make a low-cost model, which can be capital-intensive, and scale it with systems and processes required to make it replicable. HippoCampus’ rural kindergarten model is present in 100 villages in Karnataka. Of this, 95 per cent of children are regular and we are able to generate expected revenues. This is on the path to prove its viability, though I cannot say we have. RuralShores, a rural BPO in our portfolio, generates $7 million in revenues, and will break even shortly. We have had two-three rounds of capital, and are getting interest from five to six investors, some being strategic investors. Ziqitza Healthcare in Mumbai is at break even too. There are six–seven companies only. It is hard to say which company is an impact business because we are at an early stage. Many have created social impact, but those creating impact with scale are fewer; and those creating impact with scale and commercial viability are even less.

 There are 50 enterprises which will prove their viability soon. But, there will be another 50 where even the business model will take three-four years to prove itself. Though the sector is getting lots of attention, as people are joining it as entrepreneurs and investors, as business models we are at an early stage to prove ourselves.

Q: Do hybrid models address some of these issues that you talk of?

Arun Asok: Yes, virtual integration of not-for-profit and for-profit arms has been successful in terms of empowering producer groups and bringing them under a corporate structure. From a commercial viability perspective it makes sense‚ but I cannot say it works across sectors. In a production or manufacturing scenario when you are dealing with artisans or farmers, it works. However, I have not seen it in healthcare or education.

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