As an insider to India’s impact investing scenario for over a decade now, I have developed my own beliefs on the sector. McKinsey India’s recent report titled ‘Impact investing: Purpose-driven finance finds its place in India’ offered a great opportunity for me to reflect and see how impact investing has evolved over the past few years in India. Some of the findings reinforced my beliefs, while others gave me food for thought in terms of what more needs to be/can be done.
Beliefs that were reinforced
Social enterprises and impact investing in India are well poised for exponential growth. India’s half a billion low -income population with large unmet social needs but strong aspirations of breaking out of the cycle of poverty, complemented by stable financial markets and a strong grassroot entrepreneurial spirit, seems well poised to take us to the projected annual market size of US$6-8 bn of impact investments by 2025 (from the current $ 1.1 bn).
Another belief that has been established through the work we have done at the foundation and following the journey of others is that diversity in sectoral, regional and target beneficiaries is becoming a key trend of this industry in India. Though microfinance and clean energy occupied a large slice of impact investments in early years, today we are seeing the impact investing ecosystem providing capital to address some of India’s most significant developmental and infrastructural challenges across a variety of sectors including healthcare, education and agriculture. Emergence of new multi sector social funds, and some of the early microfinance investors, such as Caspian, Elevar, Lok Capital, Aavishkaar, adding new investment sectors, in the recent past has helped fuel the sector diversification.
“Impact investors go where few others dare to tread” also came out strongly in the report. In my view, the field of impact investing was created because mainstream capital wasn’t flowing into certain market segments, and rightly so, because there were perceptions of low margins, high risks and uncertainties around market size and adoption. Impact investors, backed by their knowledge of the customer base and/or such market segments, provided philanthropic seed capital to correct the distortions in the market and helped showcase that large scale, financially viable markets were indeed possible. Today, impact investors are known for investing early, de-risking, and catalyzing growth of social enterprises in India.
Though impact investing in India is growing rapidly, there are miles to go before we sleep!
Food for thought!
What came as a surprise to me was the average number of social enterprises funded by impact investors in the past few years has remained constant! This was both surprising and concerning to me, as I believe that innovations and social enterprises can disappear — not because of a bad idea or lack of effort, but due to insufficient seed capital to grow and scale. This reinforces the fact that we need several innovative and scalable models to be seeded each year if we want to deliver the large-scale impact that we desire. We need to do much more to make India the hotbed for disruptive innovations that can create positive social impact in terms of delivering high quality services to the excluded, which also aligns with the intent behind the Prime Minister’s ‘Startup India,’ ‘Skill India,’ ‘Digital India’ and ‘Make in India’ initiatives.
Another thing that gave me food for thought was the fact that average holding periods of impact investors across organizations is less than five years. According to my experience, most of the organizations continue to make mid-course corrections in product, pricing, delivery channels etc. until 2-4 years of setting up. Several impact enterprises are in new market segments, or new products and services, or new delivery channels. In the first few years, there is a high level of experimentation and mid-course correction, unless companies have adopted proven business models, such as microfinance, that leveraged over two decades of product development in different parts of the world.
During the launch event of the report, I also heard stakeholders talking about how collecting even basic information from the impact investing community is a challenge. This leads me to be concerned about the fact that we have a long way to go as far as measuring ‘impact’ of ‘impact investing’ goes. The industry is still working on identifying clear and well-defined metrics for impact measurement and sooner than later, we will need to establish robust impact standards to maximize impact!
In a nutshell, though impact investing in India is growing rapidly, there are miles to go before we sleep! The industry is now using a dynamic mix of capital, innovation and technology to create differentiated business models that are creating new market opportunities for investments and collaborations, while at the same time, focusing on fostering inclusive growth. We just need to ensure that we do not relegate impact from ‘impact investing’ into the background. It comes first, and that is the way it should continue to be!