Will Entrepreneurs get VC Funding?

Social sector emergence VC funding for entrepreneurs

Social innovations involve high investment and regular financial support. It has been seen that government grants and donations from philanthropic institutions are inadequate to support this kind of continuous innovation.

A new class of capital thus emerged, known as the social sector venture capital. This form of funding not only provided the much needed capital to social enterprises, but also backed it with non-financial help in the form of mentoring and guiding social entrepreneurs.

Social sector VC funding is known by a host of other names across the world, which include Impact Investing, Socially Responsible Investing, Triple-Bottom Line, Blended Value, Social Investing, Mission-Driven Investing, Values-Based Investing, Ethical Investing Mission-Related Investing, Program Related Investing, Responsible Investing, Environmental, Social, and Governance Screening, Patient Capital and Sustainable and Responsible Investing.

How different is social sector VC funding from traditional VC funding?

The social impact factor is the single biggest difference between social sector VCs and traditional VCs. The social impact created by the investee company is therefore an important criterion evaluated by social investors before they make an investment, in addition to other normal criteria.

Once the investment is made, investors also monitor the investment for the social impact created and check whether this impact is sustainable in nature. Investment ticket sizes are much smaller, duration is much longer and risk involved is much greater in investments in social enterprises as compared to mainstream ventures. Although the expectation of returns may be the same between the two classes of investments, invariably investments in social enterprises generate a lower return, as the social wellness also needs to be considered.

Benefits and Challenges of VC funding in social enterprises

VC funding helps the company grow fast, both because of the quantum of financing and the fact that it helps in further rounds of funding. As the equity base of the company grows, it helps in opening up debt lines as well, from banks and other financial institutions. Finally, as in the case of any other VC investment, social sector VC funding helps the company and the entrepreneur gain visibility, have better networking, improved business operations, better corporate governance and access to new markets.

Now, every good comes with bad. The long debatable issue in social sector VC funding is that it is not possible to create social impact and earn attractive commercial returns at the same time. As a result, sometimes, social entrepreneurs could compromise the impact factor just to safeguard their profits, as earning good financial returns is paramount for a VC fund.

Although this concern is not voiced openly by entrepreneurs, it could be a significant challenge to meet both financial and social benchmarks.

Trends in Social Sector VC funding

With close to a third of India’s population living below the poverty line, it is but logical that there is a huge need to provide basic services to the poor. This has led to many social sector funds to believe that the scene in India is very promising.

There are global social funds which have an India focused fund, with investments solely dedicated to the Indian sub-continent. The most prominent among them are Aavishkaar, Acumen Fund, Lok Capital, Bellwether, Grassroots Business Foundation, Omdiyar Networth, Gray Matters Capital, Oasis Fund and Unitus. There are also traditional funds like Ventureast which incidentally invest into social businesses in addition to mainstream investments. Other formats like the Dell Foundation also exist which although follow VC style of investing, are not structured like a VC fund.

New initiatives and innovations are hoped to address the concerns and challenges faced by both social entrepreneurs as well as the investor community.

Would you be interested in investing into a social venture? Do share your views.