GIIN: Describe the impact investing landscape in India and how Aavishkaar fits in.
VR: Impact investing landscape in India, like anywhere in the world, is still evolving. Unfortunately, there are very few funds that operate close to the ground. Long distance investors are not effective and rightly so. How far do Silicon Valley investors sit from their companies? 30 kilometers. In case of social investing it seems they believe things can be done from 30,000 kilometers.
It's very uncomfortable to remind people that investing is not about flying in a jet and dropping some money. To us, impact investing is not just about capital but also your contribution to the business from inside, standing shoulder to shoulder with the entrepreneur, helping him plough through his efforts.
Aavishkaar is sometimes called an adventure capital firm by people more accustomed to a conventional venture capital model. We are make early stage impact investments, and sometimes we make our investment decisions even before the entrepreneur has registered his company. Today, even the social investment funds are looking to invest in companies that have a track record and a business not realizing that mainstream commercial investors are equally keen to invest in such businesses. This may be a reality they have to live with because they have fewer people on their teams and can't take the risk of investing in a very early stage venture. The question we need to ask is whether it is right to be called an impact investor if we are unable to invest where others won't?
GIIN: How do social and environmental impact fit into the Aavishkaar business model?
VR: Social or environmental impact is an outcome of investments we make, though every investment that you make in a country like India has a social or environmental impact. If you are not investing in tobacco or alcohol or nuclear arms, you are creating social impact. Some create a little more, some create a little less. But the impact is already there. The difference boils down to how much risk you are willing to take, and at what stage of the business lifecycle.
As an example to illustrate this point: if one entrepreneur is in the business of developing land and in the process creates opportunities for job creation for poor people, he may create social impact, but possibly not enough to attract capital from us., However, if another entrepreneur develops the land for housing poor people, there are two opportunities for impact. First, there will be job creation, and second, there will be a useable product, which creates more long-term impact. This makes him attractive for any impact investor, including us.
At Aavishkaar, the stage of business development, which is equivalent to the risk profile, is a key factor. We prefer to invest with entrepreneurs who have risk taking ability, have a desire to work in difficult areas, have clarity of business vision, and are seeking money in early stages of their evolution. A key premise of our impact decision is that the company has low access to capital other than ours, which is really a key association with the risk profile of the company. Due to a competitive investing landscape, any business (social or otherwise) that makes money, attracts capital in India. To be a true impact investor, you have to invest when the risk profile does not permit mainstream investors to participate in the business.
GIIN: So, you equate impact with risk?
VR: I am saying that impact has no meaning if it doesn't involve a much higher risk. Otherwise, everybody is making an impact in India. The reality is that the telecom revolution in India has a far more mindboggling outreach than Vineet Rai has in the last ten years.
GIIN: What attracted you to invest using the venture capital model?
VR: Early stage investing is difficult even in mainstream investing. In India, you can count on your fingers the funds that invest in early stage. It was obvious when we started that venture capital has the potential to create long-term assets and rural India needs that kind of investment. What was difficult to assess was how we could do so within the guidelines of commercial venture capital. We changed two parameters to adjust ourselves. The first was greed - we invest to create impact and returns, but focus on optimized returns rather than maximized returns. Second, we do not accept grants or give grants, and instead we hire management who are driven by the model of high risk, low financial return, and big impact.
The more important departure from conventional venture capital is our ability to stay commercial and sustainable, and yet manage a very large portfolio of companies.
GIIN: What is the normal timeline for Aavishkaar's investments?
VR: It takes a reasonable amount of time. We do not have the misplaced expectation that we can build a world class company in two years. The average time to build a good company operating at the bottom of the pyramid is about 10 years, with lot of hard work and ability to support growth through different stages.
GIIN: Where do you find investable entrepreneurs and projects?
VR: My colleagues and I make road trips across the country, driving as much as 50,000 kilometers every year. We find investments on the road, while talking, travelling, and meeting people. We have made investments at 9,000 feet above the sea level and right at the sea level, in path-breaking ATM technology, and in companies that make mobile toilets sold in a local slum. Our range of investments and our spread is extremely unique and wide. We have received generous coverage in the Indian media, which has allowed a wide range of people to know about us. So, the communication goes both ways, between us and the entrepreneurs. We reach out to them and they reach out to us.
GIIN: When evaluating whether to invest in a project, what criteria are you looking for?
VR: We only invest in entrepreneurs who seem to have the capability to build institutions, have a genuine desire to work in rural India, and are accepting of the challenges that come with it. We basically ask the question, "What are you trying to do?" Some people communicate, "I want to become rich," and if that is the sole motive, it may not be an investment we make, even if the plan is very social and impactful. I make it sound simple, but we believe in understanding the motivation of the entrepreneur while making our investing decision. For example, if the person communicates, "I want to become rich and do the same for a lot of other people otherwise excluded from participating in wealth creation, or by serving the people at the bottom of the pyramid who are excluded," then it does becomes an interesting proposition for us.
If somebody wants to make a hospital that will allow people to get world class healthcare at very low cost, we may want to see him put in his savings into his own conviction and take risks. If he does, that's an interesting investment for us. We want to see what he can do without Aavishkaar money first.
GIIN: What types of financial and social or environmental outcomes are your investors are looking for?
VR: We align our interest and investor interest very early. Our investments are high risk and may not have the high returns associated with such risks. We do not rule out making high returns, we just do not know if the types of businesses we invest in would yield those returns. Some of our businesses are giving us returns now 30 times our original investment, but this has been after 7-8 years of investing. We believe our returns may be between 14 percent and 18 percent, depending on how our companies perform.
We will continue to focus most of our investments in rural India in water, sanitation, energy, education, health, agriculture innovations, and technology for development. While making an investment, we might build ownership among people who may otherwise never own a company, or we may include a community in economic activity which would otherwise remain excluded.
Our investors accept the basic premise that we are a commercial fund that invests differently, and most of their motivations are aligned with ours. We believe they are participating in a pioneering experiment that has the potential to impact millions of people.
GIIN: Is it more challenging to attract investors or to find investable projects?
VR: Money remains a challenge, though things have eased since 2007. In a country like India, finding investible projects is not a big challenge. Investing and nurturing are challenging, and building and extracting value are even bigger challenges.
Our dream is to have large number of enterprises that have received investment from us collectively serving all the needs of people residing in rural India and in every Indian village. We know we have just started our journey.
GIIN: You've been doing this longer than many people. How has the sector changed?
VR: I started in 2000-2001. Around 2007, the excitement about social investing really took root. Around 2008, just before the economic downturn, every MBA graduate was starting a social investment fund. Most people fizzled out within the first six months, as they realized that life in this space is not as romantic as it may seem.
Hopefully, some of these people may want to come back when they have matured a bit. More people now want to partner with us in reaching out to these investee companies. But, we have still not seen other people copy our investing style.