Growing Early Stage Social Businesses in India

An increasing number of investors are interested in funding businesses that yield both, financial and social returns. However, currently there is a disconnect between the supply of impact investment capital from investors and demand for capital from social businesses. Dasra’s report, Investing in Readiness: Growing Early-Stage Social Businesses, highlights what makes an early-stage social business investable and identifies the major gaps between entrepreneurs and investors.

Why is it Important ?

With the idea of social businesses gaining traction in recent years, more funding has become available to them. In 2010, JP Morgan released a report that estimated that the impact investing industry presents an investment opportunity of between USD 400 billion and USD 1 trillion.
At the same time, according to Beyond Profit Social Enterprise Magazine (2010), 50% of social businesses do not find funding due to lack of a firmly established business model, lack of knowledge on how to fundraise, inability to find like-minded investors, or a lack of investors willing to fund startups.
This highlights the need for intermediaries who can bridge the gap between social entrepreneurs and investors. If intermediaries can effectively build the capacity of entrepreneurs to become investment-ready, then the large potential pool of funds that is available for impact investment can be utilized.

What are the priority areas for action?

Dasra has identified the following five key approaches for strengthening early-stage social businesses to make them more investment-ready:
  • Recognize the capital needs of early-stage entrepreneurs as distinct, and providing access to risk and capital in the form of grants, equity or debt.
 
  • Support intermediaries such as incubation and accelerator programs to build the capacity of entrepreneurs to pitch their models effectively to investors.
 
  • Share Chief Operating Officer and Chief Financial Officer roles among enterprises at an early stage to mitigate high costs associated with human resources.
 
  • Standardize impact measurement through third party audits.
 
  • Create regulation specific to taxation and access to capital for social enterprises under Section 25 of the Companies Act to avoid confusing governance structures.