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Tech-led impact investing: Social impact, Scale and Financial Returns

28th September 2020
Tech-led impact investing: Social impact, Scale and Financial Returns
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Every business has an impact — what’s so special about impact investing? Does the impact investing model work? As impact investors are your returns “muted” (because good financial returns and social impact cannot go hand in hand)? Can you get commercial returns? Can tech-led models work given the target population of lower-income segments?

These are some of the questions we get all the time.

Looking back on our impact investing journey thus far, we are seeing proof points emerging for the tech-led impact investing model. Tech-led impact investing can drive measurable social impact at scale. And in doing so, it can support building large and valuable businesses that cater to the bottom 60% of India’s income distribution.

What is “impact”?

The lens through which we view “impact” is creating opportunities for a meaningful life for the bottom 60% of India’s income distribution – a segment we refer to as the Next Half Billion (NHB). These are the 500 million Indians coming online for the first time through their mobile phones by 2022. Traditionally they have been underserved, excluded and disempowered.

The elements of a meaningful life are: access to aspirational services, opportunities for employment and productivity, protection of individual agency and strong and responsive institutions.

Core beliefs driving our impact investing approach

At the core of our “for-profit” impact investments are two beliefs. First, entrepreneurship, which also combines the broader interests of people and society, is essential to solve India’s hardest challenges. That is why we invest in bold entrepreneurs.

And second, tech can be a force for good – it can create inclusivity for many instead of exclusivity for a few – and help create a meaningful life for every Indian. That is why we invest in tech-led models.

Approaching meaningful scale

Arising out of these beliefs, we have built a tech-led impact investment portfolio around some key elements of a meaningful life:

As an early-stage investor, it is encouraging to see so many examples of investees heading towards meaningful scale and valuations. In the above graphic, 15 early-stage startups (indicated in bold) have both a reach of 1 million+ lives and a valuation exceeding Rs. 5 billion (1)

Another 12 more have either touched 1 million+ lives or have valuations exceeding Rs. 5 billion

In several of these cases, our commitments were to ideas on paper, based on our belief in the motivations of the entrepreneurs and conviction in their unique approaches in improving access and inclusion for the NHB. In many others, we were the first institutional investors. In this context, a reach of over 1 million and a valuation of Rs. 5 billion represent the achievement of key maturity milestones in the journey of partnership with our investees: covering the initial rough terrain of finding product-market fit, building the core team, initial customer acquisition etc.

What about social impact?

As an impact investor, we are committed to measuring impact. Beyond reach, we evaluate the depth of impact our investees have on their customers and the inclusion of the NHB in the customer base. We also assess the indirect impact the investee has on the sector as a whole. Towards this end, we commission regular independent third-party survey of customers of our investees.

Our latest survey revealed that of the 3,426 customers of 16 investees interviewed

  • 69% report quality of life improvement due to an ONI investee’s product or service
  • 59% of respondents feel ONI investees are providing a unique product or service(2), which speaks to the access that our investees enable
  • 24% are women
  • 33% live on less than Rs.21,000 per household per month(3) – the NHB
  • 19% are new smartphone users (4)

    Our aspiration is to see 50% of our investees’ customers from the NHB in the next two years. In addition to direct impact, several investees have created sector level-impact by pioneering new business models and creating new categories, paving the way for other entrepreneurs to come in and sectors to flourish.

And……are exits possible?

Our exits in Whitehat Jr, Aspiring Minds, Nowfloats, U2opia and the partial exits in Dailyhunt, Neogrowth and Quikr are testimony to the fact that tech-led impact investments can provide healthy financial returns. We believe the momentum that impact investing has been gathering in recent years will accelerate, as far more attention is paid to building resilience and catering to the needs of lower-income populations and small businesses. The impact investing space will also become more tech-led as the Covid-19 situation increases the comfort of a larger population, including the NHB, with using digital channels. This will open up a large customer base in the traditionally underserved NHB segment, as tech augments the delivery of products and services for them. We hope our experience will help inform other investors on their own journeys.

Footnote:
1. As of March 2020
2. Respondents were asked if they “could easily find a good alternative”, and 59% responded “no”
3. This is in real 2018 terms. This is based on $3.2/person/day (in 2011 PPP $), which represents the ‘low income’ threshold as defined by the World Bank
4. We define new smartphone users as those who have come online in the last 2 years.