Social entrepreneurs are reinventing the wheel

Having studied rural management and community management during her B-school days, perhaps it is natural that Aparajita Agrawal gravitated towards working with social enterprises and microfinance institutions on graduation. Twelve years on, she is the director of Sankalp Forum, Asia’s largest social enterprise and investing platform, bringing together investible development-focused companies with potential investors. What was one of eight projects at development advisory Intellecap has now become Agrawal’s full-time focus, with preparation for the annual flagship Sankalp Unconvention Summit, where entrepreneurs, investors, consultants, service providers and academics related to the social sector get together, taking up six months of time for her and her eight-member team. With Sankalp expanding its operations to Africa last year, Agrawal is now evangelising social enterprises across two continents. In an interview with Meenakshi Radhakrishnan-Swami, Agrawal spoke on what’s hot in the sector and why lack of originality is not necessarily a bad thing.

It’s been five years since Sankalp Forum was launched. What do you count as your biggest successes?

Sankalp Forum started initially as a platform that can bring entrepreneurs and investors together. What we wanted to establish was the viability of social enterprises as an asset class. Back in 2008-2009, the premise was that development can only be done in a non-profit mode. Microfinance was emerging as a sector and was doing well and that was the only for-profit approach people knew of. Around that time, many Indians were returning from studying and working abroad because India was ‘shining’. Many of them were bored with their 9-5 job and also worried about the state of development in India. We decided to create a support framework to make investors and entrepreneurs speak to each other.

Since then, 145-odd enterprises have raised close to $50 million cumulatively in the past five years. This is all equity investment. Apart from this, there will be grants and other forms of funding. From engaging with about 15 enterprises each year, we’ve gone up to 124. The most visible sign of our growth is the Sankalp Unconvention Summit, which started off in 2009 planned as a day-long 300-person conference. It is now a three-day event with over 1,000 people each day. 

What’s changed in social entrepreneurship in India in these past years?

I wouldn’t call it a trend, but we did see a fad in the past couple of years where every start-up wanted to raise equity. It was so difficult to tell them this is not the only route to scale. In the past year, one of our biggest focus points has been to tell entrepreneurs that, one, bootstrap your company and grow it, and two, do not give away equity or ownership till the time you know what to do with it. There are other routes such as debt, angel investing. So, there’s been a lot of work on demystifying equity, managing finance and looking at routes other than equity.

There is also a lot of focus right now on under-served markets. We are looking at more and more businesses coming up in areas and states that are technically not considered very business friendly. There is an influx of new organisations in Jharkhand and Odisha and the so-called Bimaru states. Many times, the companies are headquartered elsewhere but they market or create products for these areas, which is a very positive trend. It’s also a significant change. In 2009, when we started Sankalp Forum, the companies we came were in Mumbai, Delhi, Chennai and Bengaluru. Now, close to 35% of the companies in our applicant pool service low-income states. 

What sectors are these companies targeting?

We see more companies coming up in the agri space, especially the supply chain relating to post-production marketing of agri produce. Then, technology companies are focusing on different areas such as innovations for agriculture, for healthcare, non-invasive devices for diagnostics, web-based technology platforms to improve service delivery. The idea of using technology to bring innovations for social problems is very interesting. 

There’s a lot happening in healthcare, be it healthcare delivery, preventive care, diagnostics or creation of specialty hospitals for rural and semi-rural areas. There are very interesting models coming up here because it is a very vacant space. We’ve also seen many more companies coming up in the vocational training space in the past two years but almost all are struggling. I haven’t seen many promising models there.  

Why is that?

There is too much capital chasing the sector. NSDC has been pumping in a lot of money, as has the government. But the backbone is missing. There is no country-wide employment or skills training registry. It is very difficult to figure out if a person who trains in one institute is not going to train in another three. Often times you see the same candidate being trained in three or four different institutes, all of which would claim to have changed that person’s life — and then the person actually goes and does something unrelated, such as working in a mobile repair shop. This is one area where we saw a lot of activity but nothing promising. 

Are you also seeing the rise of accelerators and incubators for social sector start-ups, as we see for regular businesses? 

With each batch at Sankalp, we’re seeing more applicants with at least some level of support from either a tech incubator or a space incubator. But, overall, most incubators don’t have a huge social enterprise focus. Almost all incubators in India are supported financially by the government. Their success and their fees depend upon the number of incubates they have, so there is no incentive for them to let an incubatee get to a point where it can actually be out of an incubator. Close to 80% of the incubators are space incubators, providing a subsidised place to work. Sometimes, they are technology incubator and since they are located in a technology institute, they automatically have the wherewithal or the faculty who understand certain technology. But once the start-up leaves the incubator, it struggles because very few incubators can actually equip an incubate company to get to a point where it can go to market. Even when it goes to market, if the incubator hasn’t taken an equity stake — which they don’t many times because they don’t understand how to go about it — the lack of support can be frustrating. The entrepreneur feels the incubator is sitting on pots of money that they should have invested as equity but they won’t for whatever reason, and the start-up is still too young to get investment from outside. Some of the accelerators are doing a much better job. But, then, accelerators are not meant for early-stage companies. 

Does Sankalp have any plans to work in the accelerator/incubator space?

We don’t see Sankalp as either an incubator or accelerator. We are more of an incubation platform — we maintain a list of incubators and accelerators that we constantly recommend to many ideation-stage businesses that come to us. 

For the past two years, we’ve been studying this space and one of the challenges we’ve heard from incubators is that they don’t find incubator-ready ideas. For every 1,000-odd applicants, there are hardly five or 10 they can take on board. That tells you that pre-incubation basic business knowledge or knowledge to even develop an idea into a potential business plan is still lacking. 

That, for us, became a new product. We recently started the Product Wave Platform, which is a pre-incubation platform for anyone with an idea. You can take courses, learn at your own pace and even apply to an incubator through it. Currently, the services are free since it’s just in start-up mode but the model will evolve into a paid mentoring network. Quite a few incubators have promised that once we roll it out fully, they will start looking at it for a pipeline of applicants. 

Microfinance institutions (MFIs) were the buzzword in the social enterprise space until the Andhra crisis a couple of years ago. Is there now a similar craze for crowdfunding? 

Crowdfunding is still very nascent. Thanks to Reserve Bank regulations, it has been extremely difficult for most of these companies to actually do anything to actually scale up at any significant level. Almost all crowdfunding platforms that are working in India have an MFI partner. So eventually, all the money they raise from the crowd goes to a client via an MFI because that is the RBI mandated route. Ketto-like platforms are slightly different and that is one place where we are seeing a good match of non-profit and for-profit models. But again they are more cause and non-profit focused.  

Meanwhile, MFIs are trying to make a comeback…

For our part, we are definitely looking at the resurgence of microfinance in a very positive light. In the early years, close to 80% of our businesses were microfinance focused. It’s only when the crisis happened that we started being more active in other areas. But even during the crisis, we actually backed several MFIs. 

Most of it came about naturally as we expanded our talent base to get more people from a non-microfinance background. We have actually backed a lot of MFIs during the crisis stage. Sankalp brought out a series of white papers analysing the Andhra crisis. It takes a fairly strong stand that while there were definitely problematic factors at the MFI level, a large part of it was due to governance issues and was a political game rather than an actual MFI industry issue. 

We are also happy that several MFIs are now far more conscious on how they are establishing their practices, being more conscious around compliance-related norms, governance-related practices etc. It was a trial by fire but overall, the industry is much more robust. 

In fact, we have a subsidiary company in the MFI space called Arohan that we acquired in 2012. It operates primarily in east and northeast India. At this point, it is the fastest growing MFI in India in terms of pure portfolio numbers. It has a 200,000-strong customer base that is a mix of women groups, individual clients and small business loans.

Since last year, you’ve also become active in Africa. What differences do you see between India and African countries when it comes to social entrepreneurship?

The biggest differentiator is that almost all the social enterprise work here is homegrown, from Indians wanting to change something in India. In Africa, the movement is still expat-driven. Sure, there is local entrepreneurship but the more visible entrepreneurship is the one where expats have a bigger voice.

Then, the culture of entrepreneurship is very strong in India, despite the country ranking quite miserably on the doing business index. A majority of people understand how business is done. The market is there. A large population means that meeting the volumes for meeting your business targets gets easier. That is something we have seen people in many African and Southeast Asian countries struggle with, so if there is a developmental issue that needs to be solved, you will see people working in non-profit mode rather than tackling it as a business.

Third is the availability of capital and the kind of capital. The financing ecosystem is more evolved here, so entrepreneurs have more access to different kinds of finance and capital in India compared with countries in Africa or South East Asia. 

The talent pool in India is also much bigger. Finding high quality talent is easier just by virtue of the fact that you have people coming out of good educational institutes, so it is easier to build a team here. There is a serious dearth of talent in many African countries. It is really difficult finding people who have applied knowledge skills or business experience.  

What are the similarities?

We see a lot of really interesting things happening in Africa. It is probably at a phase where the Indian social enterprise ecosystem was in 2006-2007. Some trends are uncannily similar, which makes you think you would be able to help them leapfrog four to five years. There are very few support institutions — companies or organisations that can actually help an early stage business and of the total start-up population, just 2-3% would be socially relevant. 

This is very similar to India some eight years ago. The chasing of equity that we still see in India as the first mode for accessing finance by start-ups is also present in Africa, as is the near-absence of angel investing — although that’s changed in India in the past three or four years.  

You are active mostly in east Africa. What trends in social enterprises do you see there?

For starters, they put healthcare pretty high on the priority list, since healthcare in Africa is in a sense even worse than India. There is a huge emergence of healthcare focused companies. That is why India becomes very exciting — there are affordable healthcare models here that actually work. 

Then there is education. Many African countries are hugely aspirational, making the shift from low income to middle income. The state of education has never been very good in Africa and there is a serious dearth of good quality educational institutes. Like in India, people aspire to an education in English.

Agriculture is the third big area. For many countries in this region, agriculture is the backbone of the economy and a country will have a single crop that is the staple food. It could be corn in Kenya, barley in Tanzania. If there is a slump due to bad rainfall, they have to import the crop. The link here involves mechanisation and financing. People don’t go for multiple crop cycles because it is expensive and the infrastructure — the whole supply chain of warehousing, transportation, security — is not there. At this point, there isn’t a lot happening in this space but we see a lot of latent demand here. 

Another similarity between India and Africa is the innovations happening in clean energy and technology. The mobile market is very strong in most parts of east Africa, so there are many innovations happening on the mobile front, taking off from M-Pesa. But we see these more as incremental changes, not something that is exponentially innovative.

Is the failure rate of social enterprises comparable with regular businesses? 

I don’t have a percentage but we don’t see it as being very different from other businesses. In terms of pure numbers, of the 1,000 companies we have come across in the past six years, about eight or 10 have disappeared. Quite a few now do what they didn’t start out to do, which is that they are serving a social cause but they might be looking at a completely different thing. A good example would be Under The Mango Tree, which started off as people who wanted to manufacture honey and turned out to make the most money out of training farmers on beekeeping. Quite a few are still struggling as they haven’t been able to meet the challenges of scale. They are working in a small boutique way but they are still working.  

What is the biggest challenge for a social enterprise? Is it access to capital, scaling up, getting legitimacy…?

Many entrepreneurs are so taken with their own ideas that they will often not be ready to look beyond themselves to see that somebody has already solved that challenge. There is a desire to be seen as something different and thus an automatic reluctance to believe anyone else has faced the same problems. It’s a psychological issue and can’t be solved with classroom training. It’s something you hope the entire industry matures about and you can document enough success and failure stories to make people look and accept, “This is already done”. This is what we see as the biggest contributor to people not being able to scale up as they want. 

Is it also an ego issue?

Not really. Most social entrepreneurs are extremely humble. The problem is that they are living, breathing and sleeping their venture. They are so close to the problem that there is a refusal to acknowledge there could be an existing solution, because that takes away the uniqueness of the business. Most of them come around to accepting this. When it comes to a question of their survival, they start looking at alternatives. But there is a huge initial reluctance.

Does this mean there are no original ideas? Are people trying to reinvent the wheel at every stage?

Some amount of reinvention is definitely happening and it’s not necessarily bad. Everything can’t be pure innovation all the time. The new thing we are seeing is where the innovation is not so much in the product itself but in how the service is delivered or how the market is tackled. Running a business in Mumbai is not the same as running a business in Bastar. A blueprint that ensures a business in Bastar will work in Bhubaneswar also is where maximum innovation is needed. That is also where see many businesses go bust and you end up serving a constituency that was not in your original plan. You see many cases where people set up companies to serve low-income or slum populations but eventually realised they won’t make money there. So now 70% of their revenue comes from high-end products and 30% from low-income products; and losses here are cross-subsidised by high income consumers. When you hear success stories of social enterprises, in many cases, the stories may be from the low income side but the business may not be surviving on that.  

Do social businesses find it hard to get the right team?

Talent is a huge problem and people haven’t been able to solve it very effectively yet. We struggle with it ourselves. When the overall job market is doing well, it is extremely difficult to find people. If you are working in smaller, rural areas and you require talent that has specialised skill sets, it is very difficult to find. Most social enterprises will say they can’t pay market salaries. But there is a whole school of thought that advocates that you should pay market salary so you know how to create a proper business. Even so, finding the right people is itself a challenge because you are always competing with banks and financial institutions that are always willing to pay a few thousand rupees more than what you are paying. This is why your mission statement becomes really important, because if you are patient eventually you will find people who will work with you as they believe in what you are trying to do. The more you start diluting that, you are going to lose more people
along the way than find new people. 

Is it a good idea to not make compromises at the early stage and struggle to get your business going or is it better to make those compromises, get the business started and then revisit your business’s mission statement?

We suggest not making compromises. Instead, cut your costs. Be sure of what you want to do. Keep it lean if you have to. Start with part-time workers, shared services. Don’t compromise because once you do, it’s never-ending. You will end up doing something completely different from what you started out doing.