Start-ups turn to social investors in the country
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Bangalore: Venture capital (VC) firms have found that early VC investors have competition from new league of investors like social funds. Start-ups are increasingly turning to active social investors in the country. Because such funds have lower expectations on returns and tend to stay invested for longer periods than VC firms. In social investments like healthcare, water purification, education, microfinance institutions and other firms working for financial inclusion of the poor, returns are measured on the basis of the impact the offering has on the life of the targeted clientele. These funds seek returns of 8-15 percent over 7-9 years, while conventional VC firms expect 20-30 percent in 5-7 years. VC firms back companies with strong, financially viable business ideas and outlook, with expectations of high returns as reported by Deepti Chaudhari of Live Mint. Among social sector investors, Aavishkaar India Micro Venture Capital Fund with 11 investments had the highest number of deals in 2009. In the VC space, Nexus with seven deals was the most active investor. "These social funds would make capital cheaper. If you can show some social benefits, you can get cheap capital, the desire to raise cheaper capital could prompt start-ups to overstate the potential social benefits they are capable of creating" said Sandeep Singhal, Managing Partner at Nexus India Capital, an early stage VC investor. Investor firms that cater to the poor say their return expectations are based on what a promoter offers on the basis of the firm's business idea. Investment bankers point to another reason for the increasing preference for social funds. Bangalore-based Viedea Capital Advisors has mandates from an education firm and a clean technology firm for raising funds from social investors. Deepak Srinath, Co-founder of Viedea said "Promoters believe it is easy to convince social investors. For promoters looking to raise small sums, social investors are a handy alternative." Some other investors say start-ups turn to social funds for their understanding of the business model rather than just cheap capital. It depends on what a company is offering. There is vast disparity between the capital requirements of early stage firms and funding supply in India.

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