I3N: amassing an army of angel investors to battle the Pioneer Gap in impact investing
Silicon Valley owes a huge debt to angel investors. These are individuals, who cut small checks, but in the process make bets on high-risk start-ups at the crucial early stage. Start-ups at this stage need the funds the most, and find that institutional credit is hard to come by. Most are successful entrepreneurs turned angels, who are creating a positive pay it forward system, which ensures that newbie entrepreneurs can reach out beyond family and friends for much needed capital. Social enterprises suffer from a dearth of angels. For one, the ecosystem isn’t as mature and evolved as the tech industry in Silicon Valley, and secondly, even the social entrepreneurs who emerge successful, don’t cash their chips for millions or billions of dollars. Luckily, both globally and in India, there are a small group of individual and institutional angel investor emerging, who are providing the much needed credit fillip for earlyy stage social enterprises. Intellecap Impact Investment Network (I3N or I-cube-N) is one of them.
Origins and the problem they are solving:
I3N, part of Intellecap – a 10-year old firm which works with for-profit business – came about with a goal of plugging the pre-VC funding gap for social enterprises, and providing a preselected set of investible companies for domestic investors who are interested in early stage deals. Impact investing in India may slowly be gaining popularity, but beyond the impact investing community, it is still a little known concept. Most of the capital is from overseas, with the bulk of the estimated $1 billion is in the Series A space, dominated by biggies like Aasvishkaar, Lok Capital and Omidyar Network. This large funding void can’t be filled by the occasional grant or money from founders, family and friends (according to Intellecap’s Beyond Profit 2012 report, majority of new enterprises don’t have access institutional credit). A 2012 report by Monitor Group corroborated this fact and referred to this as the Pioneer Gap. This gap in funding is for amounts of between $50,000 and $500,000, when most companies are in the pre-revenue and pre-profit stage working on perfecting their business models. “Given the nature and quantum of this gap, domestic HNI capital would be perfect to plug it. HNI capital is not restricted by mandates or instruments. They also have the local expertise and relationships to facilitate linkages across the value chain to help the enterprises grow,” says Aditi Shrivastava, head of I3N, an ex-Wall Street executive, who transitioned to impact investing. Since they started enrolling members in January 2012, they have over 50 investors and partners on board, that include service providers to help in services like legal and due diligence.
The pivot; profile of angels and their motivation:
When I3N first started reaching out to investors, their goal was to build a small group of ultra high net worth individuals (UHNIs) who could put aside a portion of their wealth each year for impact. But they pivoted soon after. “We realized that these individuals would not have enough time to be actively involved in mentoring or making investment decisions. The whole point of having a network as opposed to a fund structure is that you can harness the collective wisdom of 50 “partner” level senior investors. So it is important to have these folks actively participating. We also realized that some of the UHNIs that are in the public eye often feel that being associated with a very early enterprise could pose a potential risk depending on the future of the enterprise,” says Shrivastava. I3N shifted focus to senior corporate level executives and serial entrepreneurs who could provide the necessary investments and also spend time in mentoring them. Shrivastava opines that they are motivated to join I3N to back daring entrepreneurs working in difficult geographies on never-solved problems at the bottom of the social pyramid. “The main objective for investors to invest in these companies is to create impact on the ground in a sustainable manner, rather than but just doing charity. In terms of return expectations, we have investors across the spectrum of “finance first” to “impact first. We are quite clear in our screening of enterprises – once we’re convinced that there is a clear impact being created and that the impact will grow as the enterprise grows, then we just evaluate the company on the robustness and scalability of its business model. It is very important for us to be able to demonstrate exits for our investors in the future,” adds Shrivastava.
Investment philosophy and companies invested in:
At present they are focused on for-profit social enterprises that are financially sustainable and have a scalable business model. Shrivastava highlights many reasons for this. When it comes to for profit social enterprises: In addition to less dependence on constant fundraising, a for-profit structure has several other advantages including transparency and accountability of operations and use of funds. Also, a for-profit structure allows investors to contribute much more than just money by being active mentors and participating on the board. For-profit social enterprises are also catalyzing the evolution of the talent that comes into the development space – Shrivastava believes that there more mainstream professionals in this space than ever before. The six companies that they have invested in so far are iKure, Head Held High, Ketto, MeraCareerGuide, LabourNet and AgroStar.
The I3N advantage:
There are three main advantages of being a I3N investee. One, they support the enterprises throughout their life cycle through their group institutions, and also tap their relationships with other VC, PE, and DFI (development financial institution), and bank communities. “We have a venture debt arm called IntelleGrow for early stage debt, and we also have a full-fledged Investment Banking team that help raise larger rounds of capital. We also have strong relationships with large players in these sectors that could make for good strategic investors for many of our enterprises down the line,” adds Shrivastava. Secondly, besides angel funding, I3N also helps its investees with business model design, identifying and leveraging empanelled service providers to plug structural holes, advising on corporate governance, etc. are examples of the work we put to make an enterprise investible. Thirdly, I3N also help their enterprises derive maximum value from the various services offered by the entire Intellecap ecosystem. “Our vantage point of having a wide bird’s eye view of the sector along with in-depth domain knowledge allows us to connect enterprises to synergistic players in the field. We have facilitated relationships and data up and down the value chain such as vendor / supplier affiliations, last mile distributor links, detailed demographic surveys of hard-to reach areas, etc,” remarks Shrivastava.
Challenges and the future:
Given that I3N is a relatively new entity, they are still iterating and strengthening their model. Part of it has to do with the fact that investors are much more skeptical about impact investing, than usual angel investing since these sectors and business models are completely new, and unproven. I3N’s main challenge at this point is bridging the mindset gap between the investors and social entrepreneurs, who are often a different breed than tech entrepreneurs. Intellecap’s experience on the ground and a deep understanding of what the beneficiary wants helps them to provide insights to the investors that might not be familiar with the geographies or sectors in question. Communicating in a regular manner through their monthly newsletters, knowledge sharing and tele-seminars on sector deep dives also helps. I3N also shares examples of how past investments have performed. In 2014, I3N will expand the network and initiate more investors into impact investing, deepen sourcing to get the better quality deals, and enable more capital flow into these high-impact high-growth businesses via different and innovative products. They are also looking to grow their team by adding a high quality self-starter experienced professional to take the lead on deal execution.
Learn more about I3N here.