Social venture capital

Social Venture Capital (SVC) is a comparatively new concept in India. This is a new and innovative form of investment where you take into account the social impact of your investment in addition to its financial returns. Your investment in a company will be regarded as SVC if it aims to bring in positive social change in addition to financial profit.

Traditionally, venture capital’s main objective is to invest in companies that would give good financial returns in the future. However, in the case of social impact venture capital, the investors take into account their investment’s social and environmental impact in addition to financial returns.

Importance of Social Venture Capital

SVC supports early-stage social enterprises with adequate funding so that they can grow. The basic difference of social venture capital with government aid and traditional philanthropy is that the former provides funds, expertise, networks, and mentorship to growth-stage start-ups to generate social impact and financial return.

In recent times, the total number of SVC firms and individual investors has grown significantly in India. It has given rise to an innovative and effective way of addressing environmental and social problems.

The importance of social venture capitalists is manifold. They provide social entrepreneurs with:

• Access to required capital for scaling operations of growing social startups.

• Their existing networks and expertise so that the entrepreneurs can make their startups succeed.

• Adequate help in other ways so that social entrepreneurs can find and implement effective and sustainable solutions to both environmental and social problems.

Also read: What are Fund of Funds

Role of Social Venture Capital

Social Venture Capital plays a major role in bringing a paradigm shift in the surrounding environment and society. But how do they help the social enterprises? Here are the 4 main roles played by SVCs:

1. Better funding source access

The social impact investment has been incentivised by the Government of India and other agencies. It has made it easier for investors from all over the world to participate in India. It has been seen that a startup with a mission to make a meaningful social and environmental impact gets investments from SVCs more easily.

2. Enhanced community service

It has been seen that the services developed through social impact finance offer more effective solutions to community needs and social or environmental problems.

3. Buying in is easier

The venture capital firms operating in the Environmental, Social, and Governance (ESG) domain have clear missions. This makes it easier for stakeholders to support ventures having a well-defined purpose to achieve environmental, social, and governance-related causes.

4. More diversification

Social venture capital encourages diversity in a natural way. It has been witnessed in real life that more and more Indian consumers tend to choose brands or buy products from those brands that support important missions related to social and environmental responsibilities.

Also read: What Is Venture Capital

Top 5 Benefits of Social Venture Capital

In India, social venture capital funds usually invest in thematic stocks that have a positive effect on the environment and society. Let us explore the benefits of SVC:

Financial Inclusion

Social impact venture capital invests in startups working to provide financial services to unreached or underserved populations.

Affordable Healthcare

SVC helps to provide healthcare solutions to families with low incomes.

Clean Energy

Social venture capital funds working in the clean energy category invest in companies that work in developing technologies that promote renewable energy and sustainability of the environment.

Education

Many SVCs support innovations in the field of skill development and education, which helps families get meaningful income and sustain themselves.

Agriculture

Social venture capital funds startups that help find solutions to solve agricultural challenges. Suppose, a company has innovated a water sprinkler that increases per acreage productivity of land. If you invest in such a company, it will be regarded as social venture capital because it will help India grow more food for the populace without using more land for agriculture. This will help India use each acreage of land for increased productivity.

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What are the different types of social impact venture capital?

The startup ecosystem in India has undergone a significant change in the last few years. Innovation, sustainability, and social impact have converged to bring in the next level of growth. To fuel growth, the venture capitals in India are playing an important role. They are investing in promising startups and entrepreneurs that are not only disrupting industries but also bringing positive changes in the society and environment. This social impact venture capital can be categorised into 5 major types. Let us explore them in the following sections.

1. Ventures that address a social or environmental problem

SVCs with a special focus on social or environmental problems can be of 3 types:

Social impact venture capital (SVC) has shown tremendous promise by investing in startups that are creating a positive impact and consequently ushering in new hopes among low-income or underserved segments. These SVCs are trying to solve major challenges, especially in the social or environmental sectors.

Here are three examples:

1. EcoTech Innovations

Many startups in India are working in the eco-tech sector to reduce carbon footprints and consequently contribute to the efforts of sustainability. They are implementing innovative solutions in:

• Environmental conservation

• Renewable energy

• Carbon capture

These efforts are helping India get closer to achieving the targets of the Paris Agreement 2021. That is the reason why more and more social venture capitalists are investing in this sector, which is still in its nascent stage.

2. Healthcare for All

Indian startups are revolutionising the accessibility of healthcare for the Indians, especially in the rural sector and the lower middle economic section of the urban populace. They are focusing on:

• Affordable telemedicine services

• Rural healthcare

• Improving health outcomes for marginalised communities

3. Agricultural Transformation

Agri-focused startups are providing farmers with

• Advanced technology

• Data analytics

• Market access

These initiatives enhance agricultural productivity in a sustainable manner.

2. Ventures with a business model that is sustainable and scalable

More and more SVCs are investing in startups that follow sustainable practices and environmentally conscious business models. They aim to invest in early-stage companies that are trying to solve environmental and sustainability challenges like:

• Social inequality

• Depletion of resources

• Change in climatic conditions

With their network, mentoring, and other important activities, these social venture capitalists guide the startups on how to increase profitability and also become scalable. With increased scalability, new businesses in the social and environmental sectors can impact a larger target audience while remaining profitable.

3. Ventures with a talented and committed team

One of the reasons why India’s startup ecosystem in the social and environmental sector has grown remarkably in the last 10 years is because of its talented and committed teams.

Most of the social startups where SVCs have invested show three basic traits and all of them are related to the capabilities and commitment of their founding team. These dedicated teams have diverse skill sets, complementary strengths for tackling challenges effectively, and resilience.

If you want to create a successful social impact venture, you will need a dedicated and passionate team. This is because social venture capital looks for startups that are led by individuals who remain committed to their mission.

4. Ventures with a clear plan for how to use the capital

If you are a social sector startup that is looking for social impact venture capital, you should have a well-defined plan of:

• What you want to deliver

• Its cost

• Its benefits for the society or environment

• The projected financial returns

You should prepare a presentation showing how you want to utilise the capital you are seeking from an SVC.

5. Ventures that are ready for investment

If you are a startup owner who is looking for funds for growth, you should have a clear vision of your goals, a viable business model, and a steadfast commitment towards making a positive change to the society and environment. The ventures that social venture capital is ready to invest in are:

• Ecommerce platforms

• Renewable energy

• AgriTech

• EdTech

• Real estate technology

• Inclusive banking

• AI startups

• Clean water solutions

• Microfinance

If you want to get a more customised solution for your problems, you may consult a financial advisor for customising your strategy of investment as per your risk tolerance level and specific goals.

Also read: What are Liquid Funds

Can you explain social venture capital with an example?

There are many social impact venture capital funds operating in India. So, let us consider the real-life examples to elucidate:

Social Venture Partners (SVP) India

This is a prominent collaborative philanthropical organisation that connects NGOs with philanthropists. With the help of, SVP India is working towards strengthening NGOs by investing and channelling funds for them. This makes it easier for NGOs to receive funds and access knowledge and markets.

Other SVC Funds

There are various venture capital funds that invest in startups working to achieve certain social and environmental goals.

How to measure the social impact of social venture capital?

You can measure the social impact of a social venture capital investment by checking the positive changes brought by the companies where SVC is invested. Some of the social impact factors that are considered important metrics for evaluating both financial performance and social impact are:

• Livelihood improvement

• Poverty reduction

• Promotion of environmental sustainability

• Enhancement in the well-being of a community

Returns on investment from social venture capital

India has a huge demand for societal and environmental improvement, making it a major hub for startups to bring in the coveted change. To enable these startups to grow, India needs huge funding from social venture capitalists. The effectiveness of SVCs in aligning social transformation with financial returns has been demonstrated in a study. The research showed that there were 48 SVCs in India during the 5 years from 2010 to 2015. When calculated, the study found that the median internal rate of return (IRR) was around 10%.

This research indicates that the impact of investments in the social and environmental sectors in India was both sustainable and financially rewarding for social venture capital. Reports show that most of the investments by the SVCs are concentrated in poverty alleviation, healthcare improvement, and expansion of access to education for underprivileged and rural populace.

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How to access social venture capital?

Startups and enterprises can access social venture capital in India to create a positive impact in improving the environment, lowering carbon imprint, and creating positive social changes. But how can you access SVCs? Let us explore the steps to get access and transform your social startup into a success story.

First of all, you have to understand the social VC landscape and search for venture capitalists that support environmental and social causes such as:

• Financial inclusion

• Clean energy

• Education for all

• Affordable healthcare, and others

You may also search for VCs that support certified B-corps. Once you have identified the SVCs, create a comprehensive plan, explaining:

• Your startup’s mission for positive social and environmental changes

• How effectively and productively your company will use the capital

• How do you want to align your business with the social goals of the VC

• The impact of the startup in the short, medium, and long term

• The expected return the VC may expect in the medium to long-term

Now, start networking, reaching out to investors, collaborating with incubators and accelerators, and staying committed to the long-term vision of societal and environmental changes.

Risks involved in social venture capital

Social venture capital always comes with many inherent risk factors because it tries to strike a balance between philanthropy of social objectives with financial return on investment. Though studies have shown that a 10% return may be expected by the startups backed by the SVCs, the risks remain.

The social or environmental problem may not be solved

The main aim of SVCs is to address social or environmental issues. However, the objectives may not be solved. It can be due to various reasons. Some of the major reasons may be:

• Lack of market acceptance

• Regulatory hurdles

• Technological challenges

Let us try to understand this with the help of an example. Suppose, there is an SVC-backed startup that is trying to find a solution to reduce air pollution in Delhi. However, it might fail to achieve its goal if the technology is not effective enough or fails to make inroads among the general populace.

The enterprise may not be profitable

Making a startup profitable is itself a huge task. If that startup works on social and environmental issues, the tasks become more challenging. Making a profit in a social sector is very uncertain because the services are targeted mainly at low-income or underprivileged groups. These groups usually cannot afford to pay market rates. Let us consider an example. Suppose, there is a social startup backed by social venture capital. It tries to provide affordable healthcare in rural India. It may be able to provide services to its target audience but may not be able to make money from it as medical equipment is costly in India.

The enterprise may not be able to attract further investment

One of the major challenges of social ventures is that they need a significant infusion of capital to scale their operations and maximise their positive impact on the society or environment. This is where these ventures face problems, especially in getting adequate capital. Traditional investors shy away from investing in such ventures because they believe that these ventures have:

• Higher risk

• Longer gestation period

• Lower financial returns

Another big problem in India is the absence of a mature venture capital market for social and environmental causes. This makes it more difficult for social ventures to get further investments.

The social or environmental problem may worsen

There is a probability that the solutions implemented by a social venture worsen the prevailing social or environmental problems. Let us consider an example to understand it easily.

Suppose, a social startup promotes the use of biofuels so that people start decreasing the use of petroleum fuels such as petrol or diesel. If this effort is not handled properly, it may lead to increased deforestation.

So, any social venture must be managed responsibly by the social ventures.

The enterprise may not be sustainable in the long-term

One of the major risk factors associated with social ventures is its long-term sustainability issue. Whether it is a startup or enterprise, a social venture usually works:

• In challenging environments

• For marginalised communities

This usually leads them to face three basic problems. The first one is the longer gestation period. The second is lower profitability and the third is the lack of skilled and motivated workers in the social welfare arena. All these factors lead to the sustainability issue because they may struggle to keep their operations going over a longer period of time.

Suppose a social venture is working to provide villagers with clean water in a remote village in Chattisgarh. However, it may face multiple problems including a lack of availability of skilled manpower, high costs, law and order problems, local political threats, and many more. It may make the social venture abandon the issue. This long-term sustainability issue may jeopardise the entire project.

Social venture capital: What are the challenges and opportunities?

Now, let us explore the challenges and opportunities of SVCs:

Challenges

There are three major challenges:

• The way to balance financial returns with social impact is complex work.

• It is a big challenge for the market to measure the impact of social venture capital accurately.

• Another major challenge is to ensure sustainable growth for SVCs.

Opportunities

More and more investors have started to recognise the potential that SVCs have in ushering in positive change in the society and environment in addition to generating returns.

Final words

In India, Social Venture Capital (SVC) is helping to bridge the gap between financial investment and social impact. It supports startups that help in addressing critical challenges. An SVC helps to bring positive changes in society, the environment, education, agriculture, healthcare, and clean energy by combining profit with purpose.

Do you want to be part of this trend? If yes, you can start investing in thematic mutual funds, which are managed by qualified, experienced, and professional fund managers. You can check and compare thousands of such mutual fund schemes listed on the Bajaj Finserv Mutual Fund Platform. According to your convenience, you can make a lump sum investment, a SIP investment, or both. Before investing you may check financial returns on a SIP calculator and lumpsum calculator. To get maximum return on your social venture capital, try to invest for the long run.