Varun Sahni has focused on building, managing and investing in businesses for low income communities for the past twelve years. As Director, India Operations, Acumen Fund, Varun is responsible for all India-related investments, operations and business development activities. Additionally, as part of the portfolio management team, Varun is jointly responsible for the global portfolio of Acumen Fund.
Acumen Fund is a non-profit global venture fund. Its investment focus is on delivering affordable, critical goods and services—like health, water, housing and energy—through innovative, market-oriented approaches. Acumen Fund’s work in India focuses on supporting enterprises that are providing access to affordable, essential healthcare services, safe water and clean energy to the rural and urban poor. DARE speaks to Varun Sahni about the fund, the company and his role in Acumen Fund.
Acumen Fund is a “non-profit” venture fund. Why non-profit? How is it different from an NGO?
Acumen Fund’s primary aim has been to see how patient capital can be used to invest in enterprises that provide goodwill services for low-income communities. Traditionally, if one looks at issues of economic growth or development or poverty, there have been two forms of capital. One has been the not-for-profit, pure philanthropy, where one gives grants and there are no returns. On the other end of the spectrum, there is commercial capital, where the return expectations are typically above 20% IRR. For the last seven years, Acumen has been building a kind of a hybrid model where we are seeing that in order to address issues of poverty, we believe that whether it is the profit sector or the not-for-profit sector or the government sector, there is no one solution. So we have looked at a hybrid model, where we said that we will increase philanthropy, and by doing so, our appetite for risk is far higher than that of a commercial fund.
With this capital, we don’t want to give grants. We want to invest in sustainable enterprises that have a social impact. So for us, social impact is more important than the financial return. We want to see how each of our investments, over a period of five to seven years, can directly impact a million people. Over that time-frame, if we receive our capital back and make a small return, like a 6% return or so, we see that as proof of the model.
Since our inception, out of about $80 million, we have invested about $40 million, half of that in India in the last three years. But I would say that 95% of all the companies we have invested in would not have had access to any form of commercial capital. In traditional philanthropy, you give grants and it is gone. While over here, there is a lot of emphasis on matrix. Now the donor is giving money to us because they want to see how a new market is created and social impact is created, plus if the capital comes back to Acumen, it is reinvested again. In many ways, for a donor there is a multiplier effect for their own capital.
Who are the donors here that are putting their money into this fund?
There are over a 100 individuals and institutions that have invested in Acumen globally. In India, we have started a trust to raise donations for it. We offer both equity and debt funds. Equity is pretty straightforward—you get it from the US into India. But a lot of these enterprises are too small to be able to afford an 18% interest rate from a bank in India who lends capital. Working capital for these enterprises is a big issue. These are mostly product and services kind of businesses. There are a number of investors outside India who would be more than happy to provide working capital loans to social entrepreneurs in India. But unfortunately, RBI regulations don’t allow money to come in. So we have started a trust. We accept donations into the trust and use those donations for offering low-cost working capital loans.
How much money have you invested and in how many companies?
We invest across healthcare, energy, water, housing and agriculture sectors. Most of our investments (around 50%) are in the healthcare space, and then in clean energy and water. We have given out about Rs 100 crore in the last two-and-a-half years in 12 companies. We will be giving out about Rs 30-40 crore a year, may be up to Rs 50 crore a year. That is the kind of appetite we have. These are all early-stage ventures. So the average deal size is usually Rs 4-8 crore. It’s not as if everyone gets Rs 4 crore in one go. Recapitalization keeps happening from time to time.
Do you have a dedicated India fund or are you investing from a global fund?
We are investing from a global fund. We are thinking about an India fund right now.
What is the minimum ticket size of the investments that you make?
We started investments even at a crore, up to Rs 10 crore. We have some investments that are Rs 20 crore. It varies.
You talked of a 6% return. Isn’t it too low for a VC-type investment?
We are interested in the social impact. If these companies give a greater return, we will be more than happy but I think it is going to take time. I don’t actually see a 20-25% return in a three-year time horizon. That is why we are saying it is patient capital. The return expectation is over a five-year, seven-year or sometimes a ten-year time frame. That is why we have raised the funds through philanthropy. If it was purely commercial, investors would not want that. Investors would essentially want 15-20% return, but then investors would not be interested in social impact either.
Once you withdraw from these businesses, do you think these businesses will be able to run on their own without your help?
A number of these businesses, even before five to seven years, are getting other funding rounds. In those funding rounds, other investors are coming on board. If you look at the trajectory of a company’s growth, right from idea to early-stage to maturity and growth and scale, I think in the space we are in, there will be different forms of capital coming in. Initially you may see this patient capital coming in, which is philanthropy converted into equity. It is not cheap capital. We are not doing anyone any favors. But it is patient capital because we want to see the impact. After a period of time, there would be quasi-commercial capital coming in. You will see investors coming in who would want 10% return, and eventually as these businesses scale, one would see commercial capital coming in. Once commercial capital comes in, Acumen would have done its job because that’s when businesses are highly scalable.
You must be getting so many proposals seeking investments. How do you measure which businesses would have social impact?
Last year, we got 150 plans that wanted investments. What Acumen looks at is who the entrepreneurs are—the persons, their background, their capability to execute. Then we want to understand the team, and its business model. In the business model, we look at everything, from commercial, financial, operational, legal, to
the social impact. Once we have met them, we put a lot of emphasis on the matrix. So on a quarterly basis, we get financial, operational and social matrix. On the social front, what we look at is both the output and the outcome of our investments.
Four years ago, we also started thinking about how to get more and more young people interested in the social entrepreneurship space. So we wanted to build a bench of entrepreneurs and that’s when we started the Acumen Fund Fellows Program. It’s a one-year fellowship and every year we get about 600-700 applications. For these positions, the individuals spend two months with us in New York and then they spend nine months actually working on a problem with the investee company.
What is the best way to approach you if one were to seek funds for business?
One can send an e-mail to Acumen Fund. There are so many different ways. A lot of times, we as investors need to create investment opportunities. Very rarely do we get an entrepreneur coming to us and we say ‘wow! This guy is credible and let’s invest in him’. Most of the times we are putting pieces together to create opportunities.
Is the slowdown affecting your portfolio companies?
Liquidity was clearly an issue several months ago. I think now there is more liquidity coming into the market and investors are again looking at the space. Some of our investments that had retail-facing operations were clearly hit. For example, look at the way real estate prices have gone up in the last two years. Prior to the slowdown, that was what really impacted us. But otherwise, across the portfolio, a lot of these companies are growing at anywhere between 20-30% annually. We are seeing significant growth as well.
What kind of involvement do you have with your investee companies?
We look at helping recruit key functions, mentoring CEOs. We are very hands-on as investors.
Have most of the businesses where you have put in money been started by people who want to do it but don’t have a good understanding of running the business, or they are very business savvy, and all they need is money?
Most of the businesses that we have put capital into have been started off by promoters or a group of promoters or institutions that know what they are talking about. They understand how capital functions, they have a sense of challenges in their businesses; they know what they want to address. They are very passionate about addressing those social issues and looking for profitability.
Subscribe to this comment's feed
| < Prev | Next > |
|---|
