$358 billion in disposable income: can impact startups unlock the market?
Following our series of posts on global trends in impact investing, let’s take a deeper dive into the reasons behind the global trends we highlighted and how they vary from country to country. We’ll examine the same three categories of Impact Investment Activity, Investment Ecosystem Readiness and Entrepreneurial Activityto provide more context for the impact investing ecosystems in the countries shown below.
We begin with India, where we have unique insights through managing the most active impact seed investor, Unitus Seed Fund. With a total population of approximately 1.2 billion, India has a per capita GDP of approximately $5,800; but about 1 billion live “at the base of the economic pyramid” on under $10 per day of family income. India has a relatively active impact investment ecosystem and strong entrepreneurial pipeline. The increasingly pro-business political and economic climate has helped open up the impact investment scene to different types of investors and increased the overall amount of impact capital available. While there are huge opportunities for entrepreneurs and investors in essential services delivery for the low-income masses, entrepreneurial activity is still largely restricted to specific regions and entrepreneurs struggle to find seed-stage funding.
Impact Investment Activity
Significant growth in impact capital
While development finance institutions (DFIs) and microfinance institutions (MFIs) continue to play a large role in overall impact investment, the ecosystem is changing. A 2014 study found that approximately 50 impact funds with over $1.6B AUM were created over the prior 15 years. This significant growth was supported by our numerous interviews with entrepreneurs, fund managers and finance professionals. “We see a lot of interest from resident Indian investors looking to get a piece of the burgeoning startup action and a growing number are focusing on the BoP market with its immense numbers of underserved consumers,” said Srikrishna Ramamoorthy, a Partner at Unitus Seed Fund.
Investment landscape becoming more diverse
Many believe that the relatively diverse composition of investors targeting impact in India is partially the result of nearly two decades of investment in microfinance. India has the world’s largest unbanked population, totaling 223 million in 2015, and microfinance has attracted $458 million in India over the past 14 years. Both mainstream and impact-oriented investors report that the sectors attracting the most investment are financial services and energy.
Much of the funding for financial services startups came from mainstream investors who were not specifically impact-oriented. A recent example isJungle Ventures’ investment in Abra, which provides a suite of money remittance tools enabled by bitcoin/block chain technology. Another example is Sequoia India’s recent investment in Cuemath, a micro-franchiser of after-school learning programs.A snapshot analysis of Unitus Seed Fund pipeline of potential investment opportunities shows a significant number of deals in healthcare and education.
Significant disparity in entrepreneurial activity across regions
According to our extensive conversations with investors and ecosystem professionals, most early-stage impact companies are located in India’s south and west. This geographic concentration is also reflected in a snapshot analysis of Unitus Seed Fund pipeline of potential investment opportunities, with over 70% coming from south and west India.
Huge need for early-stage funding
Many mainstream and impact-oriented investors reported that there remains a huge need in India for investors who are more focused on early stage funding. Of the $1.6 billion invested in 220 ventures in India since 2000, close to 70% was follow-on funding. Many promising startups end up failing because of the lack of early-stage funding required to scale. As we’ve discussed in earlier blogposts, this missing middle in India is a global phenomenon.
Investment Ecosystem Readiness
Encouraging economic trends
The economic and investment trends influencing the impact startup ecosystem in India are encouraging. India’s Finance Ministry expects GDP growth of over 8% this year, which could make it the world’s fastest-growing large economy. With a BoP population representing $358 billion in disposable income, there are huge opportunities for bottom-up business models. Nevertheless, according to Stanford Social Innovation Review, over 50% of the impact enterprises in India today have only raised their first round of financing post-2010. Access to capital for new ventures still remains their biggest challenge moving forward.
Enormous potential in basic services delivery
Data from the World Bank shows that the Indian government spends a lower portion of its GDP on public services than other BRICs. As a result, our sources saw enormous potential for delivering commercially viable solutions for healthcare, education and other basic services to the masses of urban and rural poor. For example, India has 240 million people who lack electricity, mostly living in rural areas, signaling a huge demand for electrification and encouraging investment in renewable sources. A specific example of this isHippocampus Learning Centres, a chain of 200+ affordable learning centers, which aims to open 500 by 2016. “By focusing on rural areas, Hippocampus has tapped into an enormous market that is beginning to realize the value of early education,” said Radha Kizhanattam, Principal at Unitus Seed Fund.
Entrepreneurial Activity
Dynamic entrepreneurs leverage mobile infrastructure
Despite capital constraints for startups, many innovative entrepreneurs have taken advantage of improving local infrastructure to build innovative ventures across the country. In particular, India has the world’s second largest telecom market by subscribers, which enables entrepreneurs to deliver crucial services like healthcare, financial services and access to agricultural information through mobile platforms. For example, the iBreast exam by UE LifeSciences offers affordable, scalable mammograms via smartphones.
Partnerships driving entrepreneurial activity
Local universities can help develop future entrepreneurs and increase the supply of skilled workers. Our sources believe that a key step forward will be to connect these talented graduates to higher-quality incubators and support communities to provide impact-oriented companies with the mentoring and resources to scale. For example, the Centre of Innovation, Incubation and Entrepreneurship offers training and investment for entrepreneurs at the Indian Institute of Management, Ahmedabad.
Capria Application Highlights
Almost 10% of Capria Accelerator applicants are from India, with 15% targeting South Asia for investment. The top sectors for investment in India from Capria applicants included education, clean energy, agriculture, healthcare and financial services (with most applicants targeting multiple sectors).
If you are interested in learning more, check for updates in the next few weeks or contact us.
Will Poole is co-founder and Managing Partner of both Unitus Seed Fund, the leading impact venture fund in India and Capria Accelerator, the first global business accelerator for impact fund managers. His funds’ LPs include Bill Gates, Vinod Khosla, T.V. Mohandas Pai, Hemendra Kothari, Diane Isenberg (Ceniarth), and Jim Sorenson.
More info http://usf.vc and http://capria.vc
