Risk capital for small businesses at the Base of the Pyramid

Competition Finalist

This entry has been selected as a finalist in the
The G-20 SME Finance Challenge competition.

Aavishkaar pioneered social risk investing with a view to attract mainstream capital to early stage social enterprises that create social impact and generate wealth. These enterprises source products/services from the poor, provide effective products to the poor, and/or allow the poor to share in the ownership of the businesses.

About You

Organization: Aavishkaar India Micro Venture Capital Fund Visit websitemore ↓↑ hide↑ hide

About You

First Name

Vineet

Last Name

Rai

Your Organization

Aavishkaar Venture Management Services

Country

India

About Your Organization

Organization Name

Aavishkaar India Micro Venture Capital Fund

Organization Website

Organization Phone

91-22-42005757

Organization Address

516, Palm Spring, Link Road, Malad (W), Mumbai 400064, India

Organization Country

India, MM

Organization Type

Private Institution

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Your solution

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Name Your solution

Risk capital for small businesses at the Base of the Pyramid

Describe Your Solution

Aavishkaar pioneered social risk investing with a view to attract mainstream capital to early stage social enterprises that create social impact and generate wealth. These enterprises source products/services from the poor, provide effective products to the poor, and/or allow the poor to share in the ownership of the businesses.

Country your work focuses on

India, XX

If multiple countries, please list them here. If your solution targets an entire region, please select it below

Region(s) your solution focuses on:

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

500000

Number of employees in your target firms

25-49.

Average number of employees of your target firm

25

Specify the size, average and range of expected loans or investments in each target firm

• Aavishkaar uses equity as an instrument for investments in its portfolio companies

• The average investment size is $ 350,000 after 20 investments.

• The investment size has ranged from USD $ 25,000 to $ 1 Million.

• In addition Aavishkaar provides bridge loans of short tenure to its portfolio companies to tide over working capital shortfalls. These range from USD $20,000 to $100,000.

What stage is your solution in?

Operating for more than 5 years

Innovation

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What makes your innovative solution unique?

Aavishkaar pioneered the concept Social Venture Capital in the year 2001, when, the words ‘social’ and ‘venture capital’ were asynchronous.

Aavishkaar is unique because the fund:.

a) Provides equity investments to entrepreneurs in Rural and Social businesses at a very early stage when other financing is not available.
b) Provides a very small amount of equity capital and manages to do so profitably for a large number of enterprises without using grant aid
c) Uses flexible investment structuring to ensure that businesses have adequate capital to scale while also enabling the entrepreneurs to retain significant value for themselves and others who are involved in the company for long term
d) Follows a unique engaged hands-on approach to investing not usually followed by funds with a geographically dispersed portfolio
e) Installs monitoring and evaluation processes to ensure that portfolio companies achieve both commercial and social returns
f) Has invested in more than 20 businesses and has a success rate of above 80% over 10 years
g) Has attracted mainstream capital to its investee companies
h) Has demonstrated successful exits from its investments
i) Is scalable and replicable across sectors and geographies due to its simplicity and ability to appeal to a mainstream audience
j) Has established a social impact investing model which is a true for-profit model and has never used grants to achieve its aim. This sustainable model reduces the demand on philanthropic capital which can instead support charity causes that do not have business solutions.

How does your proposed innovation leverage public intervention in catalyzing private SME finance?

Aavishkaar invests in Rural India in sectors such as Health, Water, Energy, Education, Agriculture and Technology for Development. The overlap with public intervention in this space cannot be overemphasized. All these sectors are key areas of government intervention, but these interventions have often failed to deliver the desired results and have not been effective for many reasons, including the lack of ownership at a local level. The most important intervention by the public sector is in creating much needed infrastructure and the real opportunity for Aavishkaar lies in leveraging that infrastructure to create value that makes the public sector effective, the recipient population happy and the social enterprises profitable and less capital intensive.

As a strategy, Aavishkaar makes small investments in entrepreneurs who have business ideas that can leverage the infrastructure investments of the public sector, or help to provide cheaper solutions to some of the infrastructure constraints. One of the key criterions we evaluate when making an investment is the ability of the entrepreneur to co-opt or further support the work being done by the government or other public institutions.

Our investee company Servals, for example, uses public infrastructure created for local level village industrialization to produce its energy efficient stoves. The company benefits as it does not need to make capital investments and produces the product at much smaller cost. This allows them to maintain an affordable price for consumers and ensures that there is a return for investors. The strategy also creates significant economic activity for people in the villages, which helps to ease migration to the cities.

Vortex, another Aavishkaar investee company, has built an ATM machine that allows the public sector to disburse payments and subsidies to poor people in remote areas at a fraction of the cost. Vortex is thus an application that provides the public sector access to the people it wants to serve, but does not know how to reach effectively.

Vaatsalya, a health care company, works with State Governments and SMEs to provide treatment utilizing the state sponsored micro insurance scheme. This allows the public sector to make affordable and high-quality health care available in a scaleable manner.

Water Life, a community water plant company, works directly with the government to provide clean drinking water in far flung rural areas and keeps the plants running under all conditions. The provision of clean drinking water is one of the key development indexes for the public sector.

Similarly, a proposed investment being made by Aavishkaar in an education company would work with thousands of public schools to improve the learning capability of the children through the provision of educational toys and tools.

What barriers does your proposed solution address?

Asymmetry of information, Informality, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate, Lack of financing to women entrepreneurs, Specific barriers to fragile and weak states.

If you checked any of these barriers, describe how your solution addresses them

Aavishkaar adopts an ecosystem approach to creating value for SMEs and addresses a broad set of challenges. They can be divided into four key areas, with a particular focus on addressing the challenge of Access to Finance

Access to Finance

Providing access to finance to Social SMEs is Aavishkaar’s mission. The fund provides risk capital to businesses that have the potential to make a difference to the base of the pyramid and scale up profitably. The ability to provide this capital very early and help the company to use this capital effectively is the key value proposition from Aavishkaar. In addition to equity, Aavishkaar provides short term working capital support to help companies tide over difficult times.
In addition, Aavishkaar helps its entrepreneurs to raise debt and further rounds of equity capital from mainstream and social investors. Aavishkaar provides a network or potential investors to the investee companies, and advice in making the right choices when raising funds.

Outreach, Information and Preparation

Aavishkaar has built an effective outreach approach to reach out to entrepreneurs and share information with them. Aavishkaar partners with institutions such as Ashoka, www.Villagro.org www.Intellecap.com www.dasra.org to create a strong network. The fund works with platforms such as www.beyondprofit.com and www.sankalpforum.com to support and mentor entrepreneurs. Aavishkaar employees volunteer their time in training programs organized by these organizations and look at the participants as potential investees.

Business Preparation for Access and Network to Market, Talent, formal business processes structure

One of Aavishkaar’s key differentiators is its ability post-investment to work with entrepreneurs and help them transition from early stage to a scaleable growth business. In particular Aavishkaar provides intervention in building linkages with the market, attracting the best talent and support services (e.g. selecting and hiring a strong auditor), and thinking through key operational and strategic issues.

Aavishkaar employees are a motivated group of qualified people from the investment and consulting world who effectively use their network to make such services available to the investee companies. In addition, Aavishkaar works with a network of highly successful entrepreneurs through TIE (a global organization for successful entrepreneurs from India) to create mentorship networks that help entrepreneurs deal with the challenges of scale.

SME Investment climate, Gender issues and remote and difficult state interventions

Aavishkaar initially invested primarily in the south and west of India where the investment climate is more positive. After gaining experience and demonstrating success Aavishkaar branched out and has now made significant investments in the northern states of UP and Bihar, providing equity finance and creating markets where none existed.

Aavishkaar has been very keen on promoting woman entrepreneurs and has supported some very successful woman entrepreneurs. 20% of our companies’ CEOs and Founders are woman.

Impact

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Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

Attracting Funds to the sector
Aavishkaar started as an experiment with a group of HNIs pooling small amounts of money to invest in rural India. In the first five years we were able to raise only USD 1 million. In the next two years we reached USD 6 million and subsequently in 2008 we reached a total of USD 14 million. After almost a decade of hard work and demonstration of success, raising funds has become progressively easier for Aavishkaar. Today we have a gamut of investors ranging from Foundations, Development Finance Institutions and Mainstream Commercial institutions. Today, several investors have evinced interest in partnering with Aavishkaar in the BOP space due to our pioneering efforts of the last years. We are currently planning to raise a USD 150 million BOP fund to further our mission.

Apart from attracting capital in Aavishkaar, our success has helped to attract several other investors to the social investing space. When Aavishkaar began there were no social investors in India, today there are 6-8 funds (and counting) that are solely dedicated to impact investing. We like to believe that we have been able to demonstrate the success of social investing to the world and that had led to a mushrooming of other funds.

Sector / Geography Presence – Replicable Solution
Aavishkaar today has presence in sectors such as Healthcare, Agriculture, Energy, Education, Water, Sanitation and Technology through its 20 portfolio companies. However, our investment rate has too gone up. Our first five investments took five years, the next seven took three years and the last seven took one year. We were rated as one of the most prolific investor in India (http://aavishkaar.in/news14.html) in 2009.

Additionally, Aavishkaar’s investments are spread across India. This has demonstrated that our solution is replicable in a range of sectors and varied geographies. Aavishkaar has received invitations from the Governments of African, South American and Eastern European countries to replicate our model in the respective countries. We believe that the problems of developing countries are similar and we would eventually look to benefit entrepreneurs and society in other developing countries through our understanding of BOP investing.

Successful Investments and Exits
Four of Aavishkaar’s portfolio companies that were startups when we backed them have raised their Series B and Series C rounds from mainstream venture funds at a substantially higher valuation than that at which Aavishkaar invested in them. This has been a validation of the companies’ business models and Aavishkaar’s investment approach. Furthermore, Aavishkaar has made exits from its first two investments fetching a 45% and 65% IRR respectively. Several other investors have expressed interest in investing in several of our portfolio companies so we expect this trend to continue.

How many firms do you expect to reach?

Aavishkaar has so far invested in 20 companies. It intends to raise US $ 1 Billion over the next 10 years, invest in 400 firms across India, and include 600,000 villages either supplying to Aavishkaar companies, buying products made by Aavishkaar companies, or as share holders of Aavishkaar companies.

What is the volume of private SME finance you aim to catalyze?

Aavishkaar aims to directly invest US $ 1 Billion over the next 10 years and intends to catalyze a further US $ 4 Billion by attracting debt and equity capital to the businesses that Aavishkaar incubates.

What time frame will be required to reach these targets?

We are reasonably confident about our ability to reach the direct investment of US $ 1 Billion over the next 10 year. The indirect catalytic effort may take 15 years to materialize.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

Aavishkaar is using an innovation that does not need any significant change in the external environment. Adverse public policy changes or negative economic changes (such as the financial meltdown in 2008) may delay the innovation to demonstrate its full effect; however we don’t believe that anything would actually prevent the vision from coming true.

Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact

Aavishkaar’s portfolio companies work in a variety of sectors. Some help to eliminate rampant inefficiencies that afflict rural populations; some provide products / services which improve the standard of living of people at the BOP and some empower women and disadvantaged communities by providing livelihood opportunities.

The following statistics illustrate the social impact Aavishkaar has delivered thus far:
• Outreach of portfolio companies: >1 million rural people in India
• Economically disadvantaged owners of shares in portfolio companies: 3,376
• Women beneficiaries: 660,000
• Women in leadership positions: 20
• Carbon Emission Reduction:100MT
• Number of certified Emission Reductions generated: 5,026,050

Some examples of social impact from a few of our investee companies:

Servals Automation: A rural technology company that manufactures and markets high efficiency kerosene stove burners which reduce kerosene consumption by 27%. That translates to almost 15% of a poor family’s monthly income. The potential impact of the burners can be assessed by looking at the Indian burner market, which has estimated annual sales of 20 million burners. If Servals were to reach 10% of the market it would create savings of USD 65 million in fuel costs per year. Servals’ entire production is carried out by women, 45% of whom have never worked previously.

Vaatsalya Healthcare Solutions: Vaatsalya provides first-in-town affordable healthcare to the semi-urban and rural population. For every Rs.10 spent on medicare in rural India Rs.30 is spent on availing that service; including cost of travel, loss of wages and cost due to improper diagnosis. Vaatsalya aims to reduce the healthcare delivery cost by bringing quality healthcare services closer to the rural populace. Currently Vaatsalya had 10 hospitals, 550 beds and caters to 400,000 people/year. The company has secured funding from mainstream venture funds and plans to open 50 hospitals serving approximately 2 million people.

Sustainability

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List all the funding sources that are required for the sustainability of this solution

The Aavishkaar model is already sustainable and will continue to be able to attract sustainable capital as long as it nurtures successful entrepreneurs and creates wealth from its investments.

Aavishkaar has attracted investors from High Net worth Individuals, Foundations such as Rockefeller & Cordaid, and Development Finance Institutions such as FMO. These investors will continue investing in Aavishkaar as long as the fund generates financial and social returns.

We believe that social investors and Development Finance Institutions will continue to be the mainstay of Aavishkaar investors and include (but are not limited to) the International Finance Corporation, KFW, CDC, FMO, Asia Development Bank, Pension Funds, National Bank for Agriculture and Rural Development, State Bank of India, ICICI Bank, LIC, and the private foundation such as MSDF, Gates Foundation, Google Foundation, David Weekly Foundation, Cordaid etc.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

Aavishkaar has never sought assistance from public finance. The fund has always followed the entrepreneurial spirit of using private finance to build ourselves and allow our companies to then work with the public sector as applicable to maximize their impact.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

Aavishkaar is not reliant on a single source for funding. The funds come from multiple organizations and if one or two investors were to drop out they could be replaced with others. No single investor in Aavishkaar has more than a 20% stake and Aavishkaar has raised money from over 12 institutional investors.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

Partnerships are crucial to support and complement the work Aavishkaar is undertaking. We have in the past partnered with, and would continue to partner with NGOs, innovation incubators, educational institutes, foundations, financial institutions and government bodies. These partnerships have benefitted Aavishkaar’s portfolio companies to further their mission.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

The Aavishkaar intervention is based on the premise that good investing practices will make it sustainable and patient capital will allow it to create value.

The only non financial issue that could threaten the Aavishkaar model would be Greed. If Aavishkaar behaved like some financial sector giants and over leveraged itself or sought out short-term rewards over long-term returns then it could wipe out the value it has created. Fortunately our business model is focused on long-term rewards and since Greed would negatively impact our long-term financials, the incentives are aligned to avoid such a disaster.

We do not see any other change in the external environment that could make the Aavishkaar model vulnerable. We do believe that the Aavishkaar investing model could become irrelevant to development if mainstream investors see enough value in doing what Aavishkaar does and replace Aavishkaar with commercial capital. While this would be the most desirous solution, the challenges of SME investing suggest that it is unlikely to happen anytime soon.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

Aavishkaar’s aim is to “reach 600,000 Indian villages through investee companies who procure, serve or sell to these villages or have share holders and owners from these villages”. Aavishkaar aims to manage USD 1 Billion under social assets across India and other developing countries and be recognized as a significant force in nation building. As our mechanism is to make investments in commercially viable ventures which are socially positive, the money multiplier impact will be far greater than the total assets mentioned.

We are targeting sectors such as healthcare, education, energy, agriculture, each of which have a large scope for rapid expansion and the potential to create a large social impact along with returns for the investors. The scale would appear from the large unmet demand that already exist in the social investing space in an economy where 70% of one billion people do not have any significant participation in the gross domestic product. We believe this latent demand provides significant opportunity for scale and our model has the ability to scale across geographies and across sectors, as it has already demonstrated over its last decade of growth.

202 weeks ago Matt Guttentag said: On October 27, 2010, the judges reviewed entries for the Changemakers G-20 SME Finance Challenge competition and would like to pass on ... about this Competition Entry. - read more >
204 weeks ago Risk capital for small businesses at the Base of the Pyramid has been chosen as a finalist in The G-20 SME Finance Challenge.
212 weeks ago Vineet Rai updated this Competition Entry.
213 weeks ago Vineet Rai submitted this idea.