Microfinance Horizon

30 December 2010 [iStockAnalyst]

The crisis that’s gripped the microfinance institutions (MFIs) may have wider implications for social for-profit business models. While the government is aiming to establish a framework for the MFI industry, investors are now carefully checking how “social” such ventures really are and whether a promoter is committed enough to differentiate between profit-making and profiteering.

Initially, social entrepreneurship had a substantial correlation to not-for-profit work. Being a social entrepreneur was a trade-off between making money and social impact, said Alok Mittal, managing director, Canaan Partners India.

“Now the term is being used without social impact. If you aim to maximize profit, you are not social. This was the issue with MFIs,” he said, adding that for him any business would have a social impact. Over the last three years, Canaan’s portfolio companies have created 13,000 jobs. “This is social impact for me,” he said.

Investors say over the last two years there has been an increase in the number of people attracted to social businesses, both entrepreneurs and investors. A huge pool of social capital is available not only from government bodies, in terms of grants, but also domestic and global investors. The capital has facilitated shaping up of a lot of social ventures, but profit-making has, at times, taken over as the key purpose. “The intention is not to bring change; the intention is profiteering so much so that the space has got confused. It will continue to be confused for some time,” said a social investor, who has backed several MFIs in the country, on condition of anonymity.

A social tag brings its own advantages, besides tapping into people’s sentiment of wanting to positively change the lives of others. Being a social entrepreneur opens the gates for partnership with global entities or government bodies, or grants where commercial capital is difficult to raise. The difficulties start when the line between profit-making and profiteering is crossed.

“A social tag is a liability. It brings punishment if one succeeds,” said Vineet Rai, chief executive, Aavishkaar, a social venture capital (VC) fund, adding that they are closely scrutinizing business models and are being more careful.

Investors say not-for-profit models are needed in sectors where markets are under-developed or have failed. If the market already exists, profit-making models could be considered, say investors. Also, in the light of the MFI crisis, it has become apparent that the social sector is vulnerable to government regulations, which affects not only the future but the past as well. “It’s a big dampener.

As investors, we seek that for vindictive reasons things shouldn’t change,” said Mittal.

When it comes to not-for-profit firms, transparency and governance are key issues.

It’s critical to have strong “customer-focused” voices at the board, in addition to the “financial” or “business” voices, said Sandeep Farias, founder and managing director, Elevar Equity, which is focused on businesses catering to the under-served. “We are not motivated by labels and definitions and neither do we feel that the ‘social’ tag is necessary to successfully and positively impact people’s lives.”

Experts say entrepreneurs need to be sure of how they want to position their start-ups. “The social tag can be helpful, but one needs to ensure that they don’t oversell it. Also, one needs to realize that they will outgrow social investors,” said Eric Savage, managing director, Unitus Capital, a financial advisory firm specializing in arranging capital for MFIs and other social enterprises, at a conference last week.

Investors say a strong business opportunity, which also caters to a large social cause, is in the same category of investments as commercial models. It is as much a criterion for evaluating a team and ensuring they are doing the right things, said Kanwaljit Singh, managing director, Helion Venture Partners. “We are looking for a specialized framework of defined leadership model. Not only are we trying to see how a business can be scaled, we are also seeing what is the commitment for social impact. This is an additional component to the assessment criterion,” he said.

Entrepreneurs, on the other hand, say the questions are increasingly getting pointed towards sustainability of each entity of a business. “We are in the process of raising our next round of funding. While in the first round the questions were more about vision and model of the business, now the questions are on how will we scale up and ensure sustainability and profitability of each unit in itself,” said Prakash Prabhu, chief executive, Atyati Technologies, which offers a mobility based, multi-application platform for financial inclusion solutions for the rural sector. It is in the process of raising $4-5 million (’18.3-22.9 crore) in its second round.