Investing in a social enterprise in India has become quite the in-thing and the definition of who is a social entrepreneur seems to be changing as well. Rajiv Lall, Vishal Mehta and Venky Natarajan, founder of ‘Lok Capital’ who started their journey in 2004 explains the opportunities and challenges of making investments in the Indian social entrepreneurial space.
It was the proverbial urge to do something more that bought the team at Lok Capital together. Then a Managing Director with Warburg Pincus in New York Rajiv Lal and Donald Peck of the Commonwealth Development Corporation and Actis setup Lok Capital in late 2000 with a grant from the Rockefeller Foundation. The idea was simply to find a way to facilitate entrepreneurs who wanted to address the inclusion challenge in India.
“Because I was in the private equity business, the idea of creating a fund that focused on making investments that didn't seek necessarily to maximise profits but rather to satisfy his profits and when I say satisfy his profits its an economist term which basically means, it is an optimisation of the profit motive. So, it is the profit motive tempered with wider objectives and the wider objectives being objectives that go beyond the simple bottom-line but seek to have an impact and make a difference in other measurable terms to the people that you are serving,” Rajiv Lall, Founder, Lok Capital said.
Today Lok Capital manages two funds and has over USD 85 million under management. While Fund one was focused only on the microfinance sector and counts amongst its investments some of the best performing microfinance institutions (MFIs) in India like Janalakshmi Financial Services (JFS), Ujjivan, IFMR Capital, Satin Creditcare Network (SCNL) and BASIX.
The second fund worth USD 65 million raised in 2011 has taken a broader view of inclusion - investing in education, livelihood and healthcare as well. With four successful exits so far from fund one, with internal rate of return (IRR) between 15-35 percent and only one major write-off the learning's from the hits and misses have been important for the team at Lok Capital.
“Social Enterprises does invoke kind of a Robin Hood image and it is very easy in this space for people to get into a premature celebration mode and that can sometimes take the focus away from the business, these are very tough businesses. Working in rural areas, working in that kind of infrastructure and then policy and regulatory hurdles add all of that, this is a very tough space. So, focus as I said is one challenge that we see. Also, we have seen premature scaling as one of the other challenges where before establishing your proof of concept in one particular geography there is a tendency to go and scale it up prematurely,” Vishal Mehta, Co-Founder, Lok Capital said.
Lok Capital has learned it lesson from the crisis. With their second fund the team has revised some of its investment parameters like the ticket size and the stake taken in a company to guard against conflicting ideas of growth that might creep in.
“Initially in our first fund we used to take 5-10 percent stakes. What we realised is in order to maintain the social fabric of the investment and until the business model is stablised we need to have liked minded, aligned investors being part of the company. So, in the second fund our biggest learning has been take 25-30 percent stakes to begin with and as the company evolves as a business model matures, as they become more and more profitable we also have the capability to bring in some of our limited partners as co-investors who are completely aligned with us,” Venky Natarajan, Managing Partner, Lok Capital said.