An Economic Times article recently discussed the state of social venture capital in India over the past year. The article explains how there had been a dip in social venture deals in 2011, likely due to the industry’s perceived association with microfinance. However, social investors are looking optimistically at 2012 and expect both fund corpus’ and deal sizes to grow. Aavishkaar India Micro Venture Capital Fund for instance, plans to increase funds under management from its current amount of $140-$150 million to $200 million by year-end. Other funds such as healthcare-focused fund Impact Investments, and healthcare and education focused-fund Lok Capital, also expect to invest $5 million to $7 million, and between $1 million and $7 million, respectively.

BANGALORE: The year 2011 was a generally good year for venture capital investing, but social enterprises were the exception because of their perceived connection to microfinance, an industry whose reputation has suffered severe damage in the past few months.

“There is no doubt the microfinance slowdown has had a bearing on investments in social enterprises,” said Vishal Mehta, co-founder of Lok Capital, which runs two funds with about $85 million under management.

This dip in social venture deals is a sharp contrast to the marked increase in investments for 2011 across the venture capital industry in India. Investors closed 209 venture deals worth $1.09 billion compared to $699 million invested across 132 deals in early-stage companies in 2010.

However, in the social venture space, eight funds, including Lok Capital, Aavishkaar India Micro Venture Capital Fund and Acumen Fund, invested only $48 million in 2011, $2 million less than in the previous year, data from research firm Venture Intelligence show.

The Rs 30,000-crore Indian microfinance industry, which has been fighting allegations of charging usurious rates and using coercive recovery methods, has been under intense scrutiny since 2010 following a spate in farmer suicides. Emboldened by government intervention, many clients stopped repayments, pushing the industry to the brink of collapse.

Sandeep Farias, founder and managing director of Elevar Equity, the most active social venture fund last year, said 2011 was interesting not because the amount of money invested was lower, but because there were some interesting deals.

“Microfinance was the space where the social venture capital players moved into in the beginning, but the divergence between microfinance and social venture funds took place before the crisis hit the former,” he said.

Governance worries

In addition to the crisis in microfinance, high valuations are also playing a role in the venture capital funds’ cautious approach, with a number of fund managers also pointing to governance issues.

“Corporate governance is a huge issue, especially in the social enterprise space. Some of the key points are related to aligning the incentives between the promoter, investor and shareholder. When it comes to growth, unless everyone is on the same page, these question marks will remain,” Varun Sahni, managing director at Impact Investment, told ET.

Social venture capital funds typically have longer horizons and lower return expectations than venture capital funds that invest in more commercially oriented sectors. Internal rate of returns generally hover between 10% and 15%, as against the 20-25% for mainstream funds.

Investors are also bemoaning the small pool of what they call ‘investible companies’ in the space, pointing out that the companies’ ability for capacity-building are quite limited.

The investment-worthy social enterprises are few in India, and a lot of us are chasing the same targets. The valuations of the ones getting chased are huge, and they have multiple term sheets. “But, there are very few companies, which not only have a great business story, but are also scalable,” observes Digbijoy Shukla, a director at social venture capital firm Ennovent.

2012 Prospects

Fund corpus and deal sizes are both expected to grow in the current year. Vineet Rai, chief executive of Aavishkaar India Micro Venture Capital, India’s largest early-stage commercial fund expects 2012 to be a blockbuster year. “It is going to be a real path-breaker,” he said.
Aavishkaar’s target is to increase its funds under management to $200 million by the end of the year from $140 million-$150 million now.

Rai said Aavishkaar is committed to making between six and nine investments in 2012, deploying between $10 million and $20 million in each venture through its new $120-million fund, Aavishkaar II.

“We are hoping that 2012 will see larger transaction volumes, especially when it comes to co-investments. Early-stage investments need to happen as well,” said Puneet Jhajharia, investment manager with the US-based Grassroots Business Fund.

Varun Sahni’s Impact Investments is currently raising its healthcare-focused fund, which is aimed at the low- to middle-income segment. It is looking to invest $5 million-$7 million and should make its first investment by mid-2012. The emergency medical services segment is of special interest. “We must have looked at more than 100 potential investments,” Sahni said.

Mehta’s Lok Capital, too, also just closed its $66-million fund Lok Capital II, which has an investment focus on healthcare and education. “Investments will range between $1 million and $ 7 million, and will be invested over the next four to five years. We don’t want our fund size dictating our investment mantra. We are looking at 10 to 15 portfolio companies emerging out of Lok Capital II,” he said.