The high risk-high reward world of venture capital is an ever-shifting world where the future of business is predicted today. Inc42’s Moneyball is series which focuses on the who’s who of the venture capital world, deconstructing the trends, how it works, the impact it has, why it works and what it feels like to be part of the world of venture funding.
While traditional venture capital investors deal in creating new markets and behavioural change and expectations of high returns, impact investing deals in the social sector and towards the poorest and most underserved population. In this space, Aavishkaar Group is one of the world’s largest impact investors.
Aavishkaar’s group COO and partner Anurag Agrawal’s journey with the fund began in 2005. Aavishkar Group was founded in 2001 and comprises five entities — microfinance institution Arohan; Aavishkaar Capital, which runs a slew of venture capital funds; Intellecap, which undertakes consulting, research, investment banking and social entrepreneurship; fin-tech-focused lender Tribe3, and SME-focused debt finance provider IntelleGrow.
Under its equity investment arm, Aavishkaar Capital, the Group has launched six funds, across India, Africa and Southeast Asia. India continues to be Aavishkaar’s core market, with Asia’s third-largest economy having about 65% of its total AUM. Aavishkaar has undertaken about 68 investments and recorded 30 exits till date. We talk to Agrawal about the ins-and-outs of impact investing. (Edited excerpts)
Anurag Agrawal: I started out my career in corporate banking in ICICI, but I did not see myself being very attached to that. While I was there, there was a small group called Alternate Channels Group which was exploring ways of using technology to reach unbanked potential customers. This department used to write a lot of white papers on financial inclusion. While I was in the bank I got introduced to the people in that group and started reading some of those papers and realised that there is a huge opportunity in the unbanked sector. There was very little industry participation and a huge number of poor people without any banking facilities. As I come from a business family in Varanasi, I thought there was big opportunity and down the line it is something I can do myself as well. Later on, I joined Intellecap (a group company of Aavishkaar) and joined Aavishkaar five years back as a partner and COO.
Anurag Agrawal: We essentially look for industries which are operating in underserved markets and underserved geographies and through business are increasing incomes or reducing vulnerabilities. For example microfinance, this involves essentially giving loans to low-income population and mostly these are income generation loans where the loan taker will be able to create a livelihood for themselves. Or it could be healthcare or sanitation, where at a very low cost you are reducing vulnerability. So we invest across a very broad range of sectors from microfinance, to agriculture, to healthcare, sanitation, clean energy etc. For example, we have invested in a bunch of companies which supply products to FabIndia (a premium lifestyle brand). So we work at the back end with the artisans. In sanitation, we have invested in Saraplast who provide portable toilets at construction sites and even the Kumbh Mela. So these are also very large opportunities as well. The company (Saraplast) is profitable and has managed to attract other investors and we have managed to exit out of the company with good returns.
Another good example of impact investment is one portfolio company called Nepra which is a waste management company. Our focus was on identifying a company which can manage waste in a profitable way but also at the same time not be dependant on the government. Nepra organises waste pickers and then segregates the waste into paper, glass, metal etc which it then sells to small SMEs. So there is a significant value add and an unlimited market currently. It is a profitable business as well.
Anurag Agrawal: Our evaluation is at two levels. First, we won’t invest in a business unless we see a tangible impact on the low-income population that they are focussed on. So there is an assessment that we do on what kind of impact that the business can create on the target population. And we also see that if the business grows, will the impact grow or will the growth come in conflict with its original aim. After these two steps, like any other investor we see what is the growth potential of the company, what sort of unit economics are associated with that business, can you scale that business. At the end of the day in venture capital, so it is capital which also needs to generate a return. And scale is important because without scale it will be extremely difficult to exit the company. And what it the team behind it and will they be able to deliver results.
If you look at our investments, we have invested in 68 companies and had about 30 exits in the last 18 years. We do not invest in very high tech companies. Of course, technology plays a key part. But essentially we take traditional businesses to segments of the population or to markets which are still under-penetrated. And our investment thesis is that by taking these options to underserved markets and populations we are able to create employment and social change.
Anurag Agrawal: If we do our job well, impact investing can also create outside returns. For example, we have invested in two dairies. Now dairies or not a new business but if you look at the map of India most of the large dairies are in the west and southern part. But the eastern part of there is no diaries as states like Orissa and Jharkhand have large tribal zones and tribal communities don’t have cattle. Therefore these areas are very under-penetrated when it comes to dairy. Being invested in many microfinance companies where people take loans for owning cattle and milch cows etc. we thought if we have dairies in Orissa and Jharkhand we would be able to create a huge impact plus there is very little competition also. So we created two dairies from scratch, one is called Milk Mantra in Orissa and HR Foods in Jharkhand, and both have created a huge impact in terms of providing employment and earning opportunities for farmers and are also profitable businesses.
Anurag Agrawal: Firstly we have not yet invested in a lot of fintech so far but we are looking at opportunities. We have found that in the garb of fintech there is neither finance nor technology and when you put the two together, you are not doing either of the two. So we have ended up not investing in a lot of fintech. Looking beyond microfinance, we are looking to invest in credit facilities for MSMEs (medium, small and micro enterprises). Basically using technology to source, do credit assessments and collect in a sustainable manner. The size of this market is very large so if we are able to crack it and do it in a profitable manner then there is a lot of money to be made as well.
Anurag Agrawal: Well there are levels to that. As an investor the first level is you try to get a macro feel of the industry, who are the players, the business models. Then at the second level, we would try and assess the backgrounds of the people behind it. Third level, we get into the business itself, the key drivers, cost and revenue metrics and once we have done these assessments we make a decision. Also, the pricing should be good as we need to get a return on the investment.
Anurag Agrawal: Yes this is broadly true in venture capital. Generally, the failure rate is very high especially when you are in early-stage investments. Our experience has been slightly different. Aavishkaar has been a very early investor, most of the companies we invest in we are generally the first institutional investor. We have had about 30 odd exits So in our exits we have had 7 investments in which we got less than our capital back. Most of our successful companies we got 3x to 4x returns. So we are not investing in the next Google or Uber of the world. We are investing in tried and tested models and taking them to difficult geographies. It’s mostly an execution game. In most cases, we are expecting three to five times our investment back. Our failure rates are more in the 20-30% range (Usual failure rates in VC investments is around 80%)
Anurag Agrawal: We are looking at opportunities in fintech and MSME financing. In agritech there is micro warehousing. We are looking at an interesting company in the gig economy space for servicing the informal job market and a company which is working on making a platform for women. Aavishkara Group is are looking at three or four investments from our Bharat Fund in the next year. Read more