Interview – Vineet Rai

You couldn’t find a better person to talk to about the ecosystem of funding for social entrepreneurs in India than Vineet Rai: he has created an almost complete ecosystem himself. He started Aavishkaar in 2001 to provide early-stage private equity, followed by Intellecap in 2002 to identify and support promising entrepreneurs. In 2007, IntelleCash was set up to help incubate start-up microfinance institutions, and in 2010 it launched a unique SME lending facility with support from Shell Foundation. So what’s still missing, Caroline Hartnell asked him.

“This is the most critical question: how do we reach these investee companies? And is the entrepreneur capable enough to engage with us?”

It takes a long time between an innovator or entrepreneur having an idea and the moment when an enterprise is actually ready for someone to put serious money into it as a business. Building an ecosystem in which these entrepreneurs get spotted and mentored at an early stage is the biggest challenge. Greenlight Planet and Husk Power are among the few who got spotted and supported very early. We need to encourage entrepreneurs to come forward; support them so that they structure their business in the best way; then provide a platform where they can connect with people who can provide more money – either grant support like Shell Foundation or early-stage equity like Aavishkaar or debt like IntelleCash or the banks. In each of these areas there needs to be a lot of choice, and currently choices are still very limited.

At the moment we are among the few people who do equity at that early stage. Eighty per cent of Aavishkaar’s investments are first-time investments in companies with no revenues. We take a minority stake. We also provide capacity building. It’s a very demanding approach, which is why it takes several years, sometimes as many as 10 or 12 years.

So you’re like an angel investor?

With the difference that we are actually much larger and institutional. Angel investors mainly provide a very small amount of initial capital, but we do follow-up capital, and first, second and third rounds as well. We aim to capture high-quality entrepreneurs with a bright idea at a very early stage by taking a risk of loss ourselves. If they do well, we can keep investing in them as they grow.

In any case, angel funding is usually provided by a person who comes from the same space. He’s an angel and can help you because he understands the industry. In our case we are investing in a space (rural India) that is still evolving and does not have much history as a destination for investors.

After ten years of hard work, we have built up a significant number of companies. Some of them are owned by thousands of very poor people and they’ve gone from thousands of dollars in turnover to millions of dollars in two or three years. Their valuations have gone up. Nobody believed this would happen until we started showing that it could, around 2007. So we took seven years to basically demonstrate that these companies can do something. Our investors included lenders like FMO and National Bank for Agriculture and Rural Development on the one hand while on the other hand organizations like the Rockefeller Foundation and Cordaid were effectively giving us money and hoping that what we were doing would make some sense.

How easy is it to find companies to invest in?

This is the most critical question: how do we reach these investee companies? And is the entrepreneur capable enough to engage with us? The innovator may have a great idea but may not know how to raise money, or think about valuation, or even how to set up a company. So in 2002 we set up a company called Intellecap – to build intellectual capital. Basically, it brings together thinking professionals to help entrepreneurs doing innovative work and takes them through a process of mentoring and developing their business plans. Then it helps them to raise capital and advises them on how to build businesses in the bottom of the pyramid space.

One of Intellecap’s programmes, called Sankalp [English: pledge or determination], provides entrepreneurs with an opportunity to present themselves to global investors and helps the investors question the entrepreneurs. Finally, it identifies the best enterprises. Intellecap provides consulting and investment banking support as well as nurturing new ideas directly. It is currently setting up an impact investor angel network as well.

This is the ecosystem that we have put in place in the last 11 years. It is still not enough to take care of the needs of the country. There should be competition. New funds and new service providers should be coming up.

Are new funds coming up?

Yes, but we still don’t have home-grown funds. Apart from Aavishkaar most of them are outside India. We believe the National Innovation Council set up by the Prime Minister of India under the leadership of Sam Pitroda is working on setting up a base of the pyramid fund, which will either fund people like us or invest in companies like Husk Power directly.

How does IntelleCash relate to Intellecap and Aavishkaar?

As I mentioned, Intellecap incubates new ideas. Intellecap incubated IntelleCash in 2007 and spun it off as a separate NBFC [non-banking financial company] in early 2009. While IntelleCash works with microfinance start-ups and provides debt to them, it has worked on a novel idea of providing high-risk debt to SMEs in partnership with Shell Foundation.

It was recognized that providing services to enable start-ups to establish themselves and get equity is not enough; you need debt also. Shell Foundation has played a key role in allowing IntelleCash to build this SME debt product, and hopefully we will be able to scale it up.

Are the organizations that you support social enterprises?

We believe all businesses in emerging economies are social! But Aavishkaar invests only in rural businesses that aim to make a difference to people at the bottom of the pyramid. Intellecap and IntelleCash have a slightly broader definition. They might look at the rest of India, but still at more marginalized people.

Most of my investors have a social mission and they believe what we do qualifies as social investing. At Aavishkaar we see ourselves as investing in high-risk businesses with a focus on rural India. Because of this, and because we are focused not on profit maximization but on building value, the world may see us as social investors. We do not make any claims except that we invest in rural India and we are working with early-stage companies, but we are open for scrutiny for social impact.

Where’s the money needed most?

Aavishkaar certainly needs money, but actually more money might be needed in building the ecosystem (supporting projects like Sankalp) or supporting projects like IntelleCash. There is more of a demand for debt, and because of the shorter return horizon it is much easier to collect and to distribute. It took us five years to raise our first $1 million for Aavishkaar but now we hope to be managing $200 million by December 2011. It’ll be easier for IntelleCash once they have demonstrated credibility.

My impression is that lighting and energy companies are not going to be massive money spinners because the profit margins are so low. Is that right?

If you are going to sell 20 million lights, even on a very small margin, the overall amount is going to be a large sum of money. As an investor, the real risk for Aavishkaar it that we have only just started demonstrating that money can be made from such companies. It has taken 11 years to prove the point. The important thing is we have to learn from our experience and make sure that companies are able to scale up and help us exit in less than 11 years.

So far we have had three exits and we have made very good returns from them, but we have written off five companies also. This is out of 32 investments in all.

I haven’t actually heard of a social sector exit before.

Yes, we are unique in that sense, maybe because we are the oldest fund. Our salaries don’t come from charity, so we cannot sleep easily if our companies don’t make exits. As time goes on, I believe we will make more exits, and we will return money to investors.

Our initial commitment to our investors was to give them an 8 per cent return, but we believe we may give them a 15 per cent return on our first fund. And on our next fund, I believe we can give them 20 per cent. It is going to be tough to generate 20 per cent returns, but rural India is changing quite dramatically and we have a role to play in making those changes happen.

For more information
Contact Vineet Rai at

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