Fund infusion is helping 5 social enterprises develop for-profit business models
The social enterprise ecosystem in India has evolved over the past decade as social impact funds, venture capital and private equity firms, and development financial institutions increasingly back organisations that cater to the low-income population with innovative and for-profit business models.
The funding of these enterprises has gone beyond philanthropic gestures. Today the outcome of such funding is measured both by the impact these enterprises make and the returns they generate. Ajit Mahadevan, India Country Director at Acumen, a global venture fund, says that, while the aim of such funds is to help create enterprises that improve the ability of the poor to live with dignity, "in the long run we do aim to see a return on capital".
According to Intellecap, an impact investment advisory services firm, social enterprises in India attracted $435 million in funding by impact investors between 2000 and 2014. (A total of $1.6 billion was invested in social enterprises in this period.) The funds have spotted an opportunity at the bottom of the pyramid. Vishal Mehta, Co-founder and Managing Director, Lok Capital, an impact investor, expects the momentum in the social enterprise space to continue. "We see more talents setting up social businesses. The conservative estimate of capital (risk and equity) needed is around $300 million a year and it is growing annually at 20-25 per cent," says Mehta. Shreya Deb, Principal, Omidyar Network, says the number of social enterprises in India has surged in a range of sectors since 2005/06. "We expect social enterprises to grow even further in crucial sectors such as agriculture, livelihood, health, clean energy, water and sanitation, and education," she says. Also, entrepreneurs, impact funds and companies - through their CSR mandates - are increasingly working together to create sustainable and scalable business models for social enterprises.
BT zeroes in on five such enterprises that are growing steadily and delivering a bang for the buck for their investors.
LabourNet Services India
INVESTMENT ($ mn):
2012: Sankhya Partners 0.27
2013: Acumen Fund, Michael and Susan Dell Foundation 0.43
(Source: VCCEdge)
TOTAL INCOME (Rs mn):
2011/12 - 4.0
2012/13 - 36.0
2013/14 - 184
(Source: Registrar of Companies)
A TEST OF SKILLS
Babita Saini never imagined that a skill she sparingly practised for 15 years at home would one day help her earn Rs12,000 a month. And help other women stand on their feet, too.
Saini, 29, teaches sewing to women at the Panasonic Swabhimaan vocational training centre in Dadri Toye village of Haryana's Jhajjar district. In a state notorious for female foeticide and a skewed sex ratio, women like Saini stand out. And supporting them in their endeavours is LabourNet Services India. LabourNet runs the Jhajjar institute as part of the corporate social responsibility (CSR) initiative of consumer electronics maker Panasonic India, which has a factory close by. Besides sewing, the institute teaches skills such as mobile repairing and beauty treatment, and also helps candidates find employment.
LabourNet began as a project of the Movement for Alternatives for Youth Awareness, a Bangalore NGO, in 2006, and was incorporated as a company in 2008. Today, it provides training in nearly 500 locations in 20 states through 85 centres, 200 worksites, 170 schools, and 70 Industrial Training Institutes. It has so far trained more than 1.5 lakh people.
LabourNet plays the role of an intermediary whereby it helps companies meet their CSR targets while imparting employment skills to people in the unorganised sector. "LabourNet's main aim is to solve a company's business needs. It is a largely corporate-paid model, where a corporate house pays LabourNet because it satisfies its CSR needs, training and quality needs, and/or procurement needs," says Gayathri Vasudevan, Co-founder and CEO. CSR projects and training budgets of corporates contribute 80 per cent to LabourNet's revenue kitty.
LabourNet has so far worked with more than 140 companies, including L&T, ITC and Hindustan Unilever. It charges Rs100-500 from candidates for a course and gets a centre management fee from the corporate house that sponsors a centre along with a training fee of Rs4,000 to Rs6,000 a month per candidate. LabourNet's aim is to train 10 million youth by 2020. "In the next two years, we will provide vocational education services at 800 locations," says Vasudevan, who is looking at Odisha, Chhattisgarh, Jharkhand and Bihar for expansion.
LabourNet has received backing from several social impact funds and non-profit bodies. It has raised Rs40 crore from Sankhya Partners, Michael and Susan Dell Foundation, social venture fund Acumen, besides a soft loan from National Skill Development Corporation. Ajit Mahadevan, India Country Director at Acumen, says LabourNet's training model is difficult to replicate because of the knowledge required to deliver quality training that addresses multiple stakeholders and manage a corporate sales model. "We want to support an organisation like LabourNet until it achieves complete sustainability and scale," he says.
Invest India Micro Pension Services
INVESTMENT ($ mn):
2010: Michael and Susan Dell 0.98 Foundation
2013: Kreditanstalt Fur 3.75 Wiederaufbau, Michael and Susan Dell Foundation
(Source: VCCEdge)
TOTAL INCOME (Rs mn):
2011/12 - 14.9
2012/13 - 21.5
2013/14 - 34.2
(Source: Registrar of Companies)
Last October, Umesh Kumar Singh got the gift of a lifetime. Singh, an office boy earning Rs4,000 a month at Noida-based software firm Optimizory Technologies, was enrolled into a pension scheme by his employer.
"We plan for our future in an organised way, but our workers don't. They, too, need to plan and save for their old age," says Pankaj Jangid, Founder, Optimizory, who paid a onetime fee of Rs300 to enrol Singh for the "Gift a Pension" initiative of Invest India Micro Pension Services (IIMPS), a social enterprise that helps low-income informal sector workers to save for old age through pension and insurance products.
IIMPS was set up in late 2006. It offers two government-notified pension schemes - UTI's Retirement Benefit Pension Fund and NPS Lite, a variant of the New Pension System for low-income people. It launched the Gift a Pension scheme in September 2014, to enable individuals and organisations to provide pension to their office or domestic helps. It has mobilised 450 customers so far. Overall, the company has roped in almost a million customers since inception. That may look like a sizeable number but is actually tiny given that India has more than 400 million informal sector workers without social security and the number of old people who do not draw pension may double to 200 million by 2030.
Gautam Bhardwaj, Co-founder and MD, IIMPS, says that with less than 10 per cent of the population paying taxes, the government cannot provide adequate pension to everyone. "Self provision would be the way forward, at least for those who earn a regular income and can invest small amounts today for their old age," he says. To reach out to customers, IIMPS ties up with microlenders and regional rural banks such as SEWA Bank. To customers who don't have bank accounts, it issues Ratnakar Bank prepaid cards on the VISA network.
It has also tied up with business correspondents like Itzcash and PayWorld to enable customers to recharge their prepaid cards at over 2.2 lakh outlets across India. IIMPS gets a commission on every enrolment from the financial institutions whose products it offers and an annual commission for all customers who renew their policies. It charges an annual fee to each customer both at the time of enrolment and renewal.
While the enrolment fee covers all education and enrolment-related expenses, the trail fee from customers who renew their policies provides long-term annuity income. "The model is interesting because the social outcome and business outcome are deeply intertwined. Only if the customers save regularly, we get trail fee from the product providers and annual fee from the customers," says Bhardwaj. The main challenge is to ensure that the customers save month after month, he adds.
A majority of IIMPS customers are in Maharashtra, Karnataka, Tamil Nadu, Gujarat, and Madhya Pradesh, and it plans to have a pan-India presence by enrolling five million people by 2018. IIMPS, set up with five individuals, putting in a sum of Rs1 lakh, has raised Rs40 crore from institutions, including UTI and Michael and Susan Dell Foundation. Geeta Goel, Director, Mission Investing, Michael and Susan Dell Foundation, says businesses that provide positively impacting services to the poor at affordable rates often do not meet the risk-return expectations of many mainstream investors. "We see our capital as playing a role that mainstream investors cannot."
RuralShores Business Services
INVESTMENT ($ mn):
2009: HDFC, Lok Capital I LLC 0.26
2010: HDFC, Lok Capital I LLC 0.43
2011: Lok Capital II LLC 2.85
Total Income (Rs mn):
2011/12 - 36.27
2012/13 - 185.49
2013/14 - 315.23
(Source: VCCEdge)
Ritu Raghav is an employee of business process outsourcing (BPO) company RuralShores at Babrala, a sleepy town in the Sambhal district of Uttar Pradesh. The job is a godsend for Raghav, a postgraduate in political science from Meerut University, who lost her father three years ago. It gives the 24-year-old financial independence and much more. She is paid Rs6,500 a month, which not only takes care of her household expenses and rent but also allows her to save a small amount. "I speak in English, have learned new things and don't have to ask anyone for financial help," says Raghav, who hails from Bundelkhand.
Raghav is one among the 2,600 employed by RuralShores. The company started commercial operations in February 2009 and has steadily built a pan-India network of 18 centres in 10 states -Karnataka, Tamil Nadu, Uttar Pradesh, Maharashtra and Madhya Pradesh have more than one centre. The company engages with youth from smaller towns and cities who have talent but either cannot migrate to bigger cities or the remuneration they get in urban centres is not enough for them to eke out a living. "Despite frequent job changes, BPO employees rarely receive the income or quality of life they desire. The way to break out of this scenario is to move jobs to villages rather than compelling rural youth to migrate to urban centres," says Maharaja Gokulavasan, Senior Vice President and Head of Service Excellence, RuralShores.
RuralShores provides a wide range of services, from simple data entry to knowledge process outsourcing and local language voice support to a variety of industries such as telecom, financial services, insurance, retail, and consumer goods. Its voice portfolio alone contributes 68 per cent of its business. The company has worked with 42 organisations so far.
RuralShores recruits staff from villages within a 10 to 15 km radius from its centres. More than 50 per cent employees are graduates, while the rest are Class XII pass outs. Its centres have an average of 100 seats. "Jobs are offered in accordance with education levels and profile. Preference is given to people from low-income families. The consistent performers are exposed to intellectually stimulating environment," says Gokulavasan.
"It is the reason why our annual attrition is below 10 per cent, leading to higher productivity and quality results." Urban BPOs have much higher attrition rates of 40 to 60 per cent. Lower rentals and attrition rates, along with lower recruitment and retention costs, make RuralShores cost-effective compared with urban BPOs, asserts Gokulavasan. "We are about 25 per cent more cost-effective than urban BPOs," he says.
RuralShores has raised multiple rounds of funding from its investors and continues to enjoy their trust. Lok Capital LLC, a Mauritius-based venture capital fund, invested in RuralShores in 2009 and late 2011. "The company has proved it is possible to scale the business and has continued to attract capital. It is the largest operator in this space and the team and shareholder quality is top notch," says Vishal Mehta, Co-founder and Managing Director of Lok Capital." Lok made a complete exit from its initial investment in RuralShores in April 2014, but Mehta says the fund is still deeply engaged with the company on the strategic aspects of business.
The goal of RuralShores is to open one centre in each of the 500 rural districts of India, providing sustained employment to more than 100,000 rural youth. However, infrastructural bottlenecks, like power shortage and poor telecommunication links in remote locations, remain a big hurdle in its plans to scale up.
Anudip Foundation for Social Welfare
INVESTMENT ($ mn):
2011/12: Omidyar Network 0.65 India Advisors
TOTAL INCOME (Rs mn):
2011/12 - 6.06
2012/13 - 12.43
2013/14 - 16.74
(Source: VCCEdge)
Khirki village in South Delhi is a maze of buildings and narrow, dirty bylanes. In an obscure corner of the area is a centre where a group of youngsters - political refugees from Afghanistan - is learning computer skills. Armed with good English-speaking skills, these trainees aspire to get a job after the completion of the course. It is an initiative by Anudip Foundation, an entity which teaches vocational skills to educated and unemployed youth with a focus on the IT sector.
Training political refugees in Delhi is part of Anudip's initiative to expand its reach beyond its hub in eastern India - most of its 152 centres are located in West Bengal, Odisha and Jharkhand. Since its inception in 2007, Anudip has trained 33,000 students in IT skills, spoken English, financial accounting, and image processing, among other courses.
Anudip mobilises students through NGOs, gram panchayats and advertising in newspapers and TV. "We try to mitigate students' and parents' initial hesitation and doubt towards the programme through free counselling," says Dipak Basu, CEO, Anudip. Students pay Rs1,000 for a three-month course. The balance is funded through grants, government, or CSR income.
Anudip's flagship programme, Market Aligned Skills Training (MAST), is a two to three months full-time course and is based on an ethnographic study of the region and continuous student and employer feedback. Basu says Anudip averages 80 per cent success in securing jobs for its students and has signed letters of intent with 300 employers for placement.
Its students have been placed in companies such as Tech Mahindra, Big Bazaar, Aegis, and TCS among others. Also, specially trained Anudip graduates are employed by its sister company iMerit to execute IT projects involving technical support, e-publishing and web services. About 95 per cent of iMerit's 500 employees are trained by Anudip.
Anudip has received support from institutional donors and impact funds like Omidyar Network, American India Foundation, Accenture, Michael and Susan Dell Foundation and Bank of America. Omidyar invested $650,000 in Anudip in 2011. "The number of students trained each year has risen more than five times to nearly 12,000 this year. They have maintained a high placement ratio and also help students pursue entrepreneurship, which helps spur the local local economy," says Shreya Deb, Principal, Omidyar.
Anudip is striving to reduce reliance on institutional donors in the long run. "We are growing the top line by increasing course fee, taking on external training assignments mostly through CSR funding, reducing costs by increasing class sizes, consolidating training centres and deploying e-learning technology. These steps allow us to apply the economies of scale to reduce cost and make the business model sustainable," sums up Basu.
Asian Health Alliance
INVESTMENT: 2013: Acumen Fund 0.67 ($ mn)
(Source: VCCEdge)
TOTAL INCOME (Rs mn):
2010/11 - 3.5
2011/12 - 11.3
2012/13 - 11.7
(Source: Registrar of Companies Co)
Asian Health Alliance (AHA) was launched in 2010 to meet the growing need for good quality and affordable diagnostic services in smaller towns. It operates in north Karnataka under its brand Asian Health Meter (AHM).
"AHA provides diagnostic services in communities where most households earn less than Rs15,000 a month. Access to these cheap services reduces the total cost of treatment to patients, allows for critical conditions to be detected earlier and more accurately," says Ajit Mahadevan, India Country Director of global impact fund Acumen, which invested $670, 000 in the company in 2013.
Indeed, Acumen estimates that of the 50, 000 diagnostic labs in India, only about 10 per cent fall under the organised segment - this category comprises large diagnostic chains, but their services are unaffordable for the low-income population in smaller towns and cities. So, a majority in Tier-III and Tier-IV towns is forced to rely on local labs in the urorganised segment. These tend to be small, holein-the wall type set-ups. The quality of services at local labs varies drastically depending on the pathologist, and they often do not have the basic infrastructure in place.
AHA's services are up to 40 per cent cheaper than diagnostic labs in big towns. "Our operational costs are lower, including staff and rent. Our capex (capital expenditure), too, is lower. Also, our profit expectation is lower as we have to compete with smaller labs in the vicinity," says Tara Prasad Mohapatra, CEO, AHA. AHA has a hub-and-spoke model. Hub is a main centre typically located at a district headquarter. A spoke can be a collection centre for a hub or a processing centre with a very limited test menu. It currently has three hubs and six spokes. "In 2010, we started AHM with our first hub in Davangere. Thereafter we launched centres in Hubli and Gulbarga," says Mohapatra. AHA has provided services to nearly 300,000 patients since its inception. Mohapatra explains that diagnostics has four kinds of revenue streams. Patient walk-ins, driven by advertising campaigns and brand development; referrals by other doctors; lab-to-lab where AHM becomes big brother to small, technician-run labs; and hospital-to-lab (where hospital labs refer their cases to AHM centres). The company, though, refuses to divulge whether it has broken even yet.
AHM has introduced several service innovations to better serve its customers. Review of results by experts, a 24-hour turnaround time for tests, complete range of pathology tests at all spokes, additional radiology capabilities and outsourcing some technical capabilities to hubs without compromising on turnaround times. "Diagnostic business is scalable, but one has to be in for a long haul. The hubs have to be more and more productive through economies of scale and that leads to sustainability, " says Mohapatra.
Mohapatra says AHM is competing both with labs in metros and in smaller centres. "In test menu, we are not as exhaustive as big labs in metros but whatever tests we do, we have no difference in quality and we are also cheaper," he says. "On the other hand, no other lab in vicinity would practise such exhaustive quality control process." However, the big challenge before Mohapatra is finding trained manpower. "This is the company's biggest challenge. Quality and professional manpower is not available in Tier-III and IV cities," he says.
Mahadevan feels AHA's performance is on track despite high employee attrition rates in the past year. The fund expects the company to embark on its ramp-up plan in the coming year given the huge potential for growth. "India has seen significant interest from PE players in diagnostics with four major organised laboratory chains securing funding. Major global health care chains and specialised diagnostic chains are looking for market entry, consolidation or expansion of footprint," says Mahadevan. "We would look to exit through a later-stage financial or strategic investor who is aligned with AHM's overall business vision."
AHA, then, will have to contend with some serious competition as it prepares to scale up rapidly.
