10 lessons from impact investing in India

10 lessons from impact investing in India

As an impact investor, the foundation catalyses market shifts through pioneering investments, which bridge gaps that have not yet been addressed by the market for a low-income population. Our objective is to create positive impact through market-sustainable models.

Geeta Goel is Director, Mission Investing at Michael & Susan Dell Foundation.
10 years, US$ 50 million, over 50 investments.

Those numbers don't tell the whole story of Michael & Susan Dell Foundation's journey in India. Since the foundation began its work in India in 2006, with the goal of eradicating urban poverty through its focus on education and family economic stability, it has focused on scalable solutions supported by a combination of grants and impact investments. Our impact investing evolution is reflected in both the organisations and projects that have scaled up as well as our learnings along the way.

As an impact investor, the foundation catalyses market shifts through pioneering investments, which bridge gaps that have not yet been addressed by the market for a low-income population. Our objective is to create positive impact through market-sustainable models.

We have learned many lessons in the last 10 years as an impact investor:
1.    Sector knowledge is critical:
Pioneering institutions will be first in their space and are expected to break new ground. We need to support them as they pilot, pivot and scale. For instance, in 2006, we made our first impact investment in Ujjivan Financial Services. At that time, urban microfinance in India was considered a non-starter. However, the foundation combined our knowledge of the sector with on-the-ground surveys and pilots in urban slums, and was convinced that urban microfinance in India was as scalable as rural microfinance. Today, as Ujjivan reaches a client base of over 3.7 million, this experience shows us that it is crucial to stay close to the ground and understand the challenges in a sector. One way of achieving this is to focus on a specific sector.

2.    Execution comes first: Social enterprises typically have low margins as they cater to a market segment where prices are practically capped. This makes it critical for them to scale up and become sustainable. To do this, systems and processes need to be an integral part of the growth story. We have seen many ventures fail due to execution challenges and several others have made strong execution a key differentiator for their success. Even in its early years, Janalakshmi Financial Services invested a significant part of its resources on strong processes and backend solutions and today they are amongst the leading microfinance institutions in the country within a short span of 10 years. So, while business concepts matter, execution capability comes first.

3.    Talent is important: Most start-up entrepreneurs begin with minimal financial resources and do not always attract the best talent. However, social ventures deal with some of the most complex challenges and good talent can help find viable solutions. That's why successful businesses invest in hiring the right team at the start. For instance, in our work in the education sector, test preparation start-up Avanti is delivering coaching for competitive exams to low-income students. These students have been excluded from the world of personalised tutors and typically start at a much lower level of preparation and learning compared with their elite peers. At one end, Avanti is trying to bridge this gap, and at the other end, its price points are very affordable for low-income households. This can be made viable only if they have the best minds working with them to develop high quality, scalable solutions. Currently, Avanti provides high-quality entrance exam coaching to over 4,000 students in 24 cities in India.

4.    Technology is an enabler, not a solution in itself: Technology is important and can reduce the costs of delivery significantly. However, it is, at best, a facilitator. Take the example of a distance learning start-up, Edutel, that uses technology to offer high-quality education across government and private schools. In this case, the introduction of a new technology solution by itself did not change learning levels significantly. It was Edutel's investment and focus on content creation, curriculum and faculty, which led to significant improvements in learning outcomes. Low cost technology, in this case, was only an enabler.

5.    Customer protection plays a central role: In this sector, businesses do not cater to well informed high income or middle income customers. Therefore, it is necessary to clearly articulate the terms of business agreements. Whether it is the documentation of the quality standard that a customer is purchasing, or the exact interest rate on his micro-loan, the customer needs to know what they are paying for. Simple and transparent communication allows a customer to differentiate a product against competition, and protects the seller from any allegations of misrepresentation. While customer protection and transparency requires upfront investment, it is an important risk mitigant and critical for long-term success. All our micro-finance investees have been recognised for their focus on customer protection, which was a key factor that allowed them to weather the industry crisis in 2010 and emerge amongst the leading, most respected institutions in the country.

6.    Need does not drive demand: Businesses must be conscious of real demand versus customers' needs. For instance, in the past, our interactions with customers in slums indicated the need for toilets among low-income groups. However, this need was not always accompanied by real "demand," backed by money. In most cases, customers preferred to invest in a smartphone as compared with a toilet. Similarly, in financial services, there was a great demand for credit, but no demand for savings. Of course, there was a felt need for savings. But would customers pay adequate fee to access savings products? Market experience has shown that there was limited appetite for it. It is important for businesses to know their customers well, and understand their true needs.

7.    Surveys are not always reliable: Surveys do not always give businesses a complete picture of the business landscape. During our survey that studied a low-income group's approach to financing medical emergencies, most respondents indicated that they relied on personal resources or borrowed money from friends and family. However, in reality, most respondents had taken loans from money lenders. But they were just not ready to talk about their real debt situation. So, while surveys have their place, a complete solution cannot be based on these findings alone. Businesses must always pilot products and solutions first.

8.    Great promoters demonstrate the 3 Ps: Finally, it's all about the 3 Ps - passion, performance and patience of the promoters. As most business plans in this sector aim for long-term social change, they rarely meet with immediate success. Promoters need to have the commitment to persevere with an idea and back this up with execution.

9.    Know when to stop: Social entrepreneurs are trying to solve complex problems that do not have simple solutions. So, it is important to recognise when a solution is not working. Sometimes, it could just be that the timing or context for a business idea is misplaced. But it is necessary to accept failure and learn from it. For example, in our work in livelihoods, we stepped back from a skill training program (even after the initial investments were made) when we realized that new subsidies were creating market distortions, making the fee based model unviable in the emerging market scenario.

10.    Everything is a part of a larger ecosystem and we are interconnected: Creating new market sub-segments or shifts isn't an easy task. Often we are up against culture, traditions and the practice of business. Success requires alignment amongst different stakeholders. These include donors, investors, distribution channels and the government. In this environment, no individual or system can function in isolation. It is imperative to adopt a collaborative and participative approach to drive social change.

Investing in organisations that have the capacity to radically move the needle on social progress is at the core of our approach to mission-related impact investing. To be a good impact investor, one must constantly learn from both successes and mistakes. While there are no shortages of challenges in this work, we know we are just getting started.  

Geeta Goel is Director, Mission Investing at Michael & Susan Dell Foundation. Views expressed by the author are personal.

Published on: Dec 16, 2016, 7:51 PM IST
Posted by: Saurabh Sharma, Dec 16, 2016, 7:51 PM IST