The word 'scale' is changing social entrepreneurship

Change is good. More so if brought out by choice than force. Also, it should be progressive. But social entrepreneurs in India dread change. Why? Because a severe scarcity of funds is forcing it on them.

Take for instance, Anup Akkihal, an MIT graduate who designed the supply chain model for the US Army and returned to India in 2009 to start Logistimo engaged in developing basic software for inventory and supply chain management for low-end phones.

Logistimo’s successful pilot programme in rural Karnataka among local pharmacy stores had Akkihal convinced that it was exactly what he wanted to do: Arm the rural populace with simple technology to solve problems.

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[caption id=“attachment_403478” align=“alignleft” width=“380”]  In the rural market, the acquisition cost of customers is high. GettyImages[/caption]

But after failed negotiations with venture capitalists he realised that his dream wasn’t so easy to come by. So, Akkihal put his social plans on hold and started scouting for MNC clients.

“In the rural market, the acquisition cost of customers is high. The cost of retaining them is even higher. I figured it was smart to catch one big client, which would help us scale better,” said Akkihal whose three-year-old company received more than a crore from Bill & Melinda Gates Foundation to apply their technology for vaccines and other health systems.

Logistimo now works with large steel producers and pharmacy companies for their facilities across the country. But that’s not the audience Akkihal had planned to serve when he started the company.

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“We lost our path. We would have stuck with our initial plan and focused more on the rural market if we had the money,” said Akkihal.

Speaking about the VC mentality in India and the lack of social investing, Akkihal said that with the exception of some angel investors, there is no temperament among VCs to invest in social ventures.

“Everyone is chasing the same kind of business. They don’t want to make mistakes. Very few original business models get funded as it has no history of success,” said Akkihal who plans to revive his model for the rural areas once he scales his company better.

Venture capitalists also agree with Akkihal on this. Badri Pillapakkam of Omidyar Network, a firm which invests in social businesses, thinks the herd mentality among VCs is because of the exploratory process where they are still trying to figure out what kind of business models are sustainable.

“Adapting models you see outside in India like e-commerce tends to attract VCs more because they understand those business models better. There will always be a herd mentality. It is a risk mitigation strategy,” he noted.

But this concern could be an acceptable one in case of start-ups, but when it comes to companies with a significant track record.

Shivrai Technologies, founded in 1996 by Sanjay Borkar and Santosh Shinde, both software engineers from Pune, designs low-end phone compatible software that helps farmers manage their produce from irrigation cycles, manure needs and harvest schedule called FarmERP.

They made several changes to the product to evolve with farmer needs. But, now when the business is at the cusp of taking off to the next level, they are looking away from Indian farmers to seek out more lucrative counterparts in the UK and Africa hoping it makes them more attractive for VCs in India.

“Small farmers are not that lucrative and getting VC funds for this kind of enterprise is difficult compared to mobile apps etc. Hence, we are now focusing on the US, Africa and Middle East for growth as it will help the company and product grow,” said Sanjay Borkar.

For Shivrai, the first-mover advantage holds no good. In fact, it is what prevents them from being attractive for investments from the point of a VC, as there are no standards for comparison. “Since we are one of the early starters in this niche field, it is difficult for VCs to take a decision about funding us because they are always used to comparing companies with similar models,” said Sanjay Borkar.

Why is it so difficult for these firms to raise money compared with any e-commerce firm, you ask?

That’s because their costs are very high and their problems are dynamic.

Very often they need to ready the market for the products they design. Customer acquisition costs, or the money one needs to spend to get a customer burns most of their cash as it is a constant struggle to convince the rural populace how a particular product will help them solve problems.

Companies such as Logistimo and Shivrai Technologies often find themselves in a flux when it comes to retaining the customers as the market they serve is not conversant with technology. For Logistimo, the major challenges include sales, marketing, training and human resources. “Since the rural market is so fragmented, training and implementation of projects becomes very difficult,” quips Akkihal.

One key aspect that requires a lot of money is human resources-when it comes to the rural market, one requires a lot of feet on the street, people who reach out to customers personally. Another one is promotional activities-an entrepreneur needs to educate the people about the product as well as its utility.

Another concern that experts flag off is that entrepreneurs should learn to detach themselves and review situations objectively.

“Some of these ventures have created needs that may not exist. In that case, they have to prepare the market. Also, people are generally optimistic when they start out, they have big plans and they believe that they will be cash positive in a few years but then the funds dry out,” said Akhilesh Tuteja, Executive Director, KPMG.

From a VC’s perspective, most of them thinks impact investing means that it should be scalable enough to crowd in commercial capital at a later stage of growth. Badri Pillapakkam of Omidyar Network, an investment firm which invests in social businesses, believes that sustainable for-profit businesses can impact society.

“We don’t believe that social business exists, it means that you have not been able to scale, you are not going to receive that subsequent rounds of funding required to catalyse the sector. If you don’t expect returns, you are destroying the organization. Soft capital destroys innovation. Maximising returns is maximising social impact,” he said.

Professor Anil Gupta, who is a member of the National Innovation Council and faculty member at Indian Institute of Management, Ahmedabad is of the opinion that it’s the responsibility of the government to support these ventures and nurture them. He believes that the government should set aside funds as risk capital to invest in these innovation projects.

The government’s District Innovation fund where every district is given to Rs 1 crore to promote innovative business ideas is definitely a step in that direction but might be too little and too late. “Even if the government spends Rs 3,500 crore on this project, it would be the most valuable money it would ever spend. It’s like loose change for the government but it has failed to give that and failed at achieving the inclusive growth that they talk about,” said Gupta.

Entrepreneurs are learning to circumvent the funding failure and are on a constant evolution and agility mode. It goes without saying that they are hanging on the fragile thread of hope. “We are constantly trying to see how we can change to be more attractive to the VCs, and we are more aggressive this time. We have not lost hope,” prayed Borkar.