Lately, there has been a lot of excitement about a bunch of new initiatives across the world which aims at tackling issues of poverty with the help of market-based solutions. The entrepreneurs embarking upon such initiatives are popularly called social entrepreneurs. Their intention is to find ways of improving affordable access to products and services for people who have historically found it difficult to have access to them either because they reside at some remote location or just because the cost of making the product or service available to them is too high for them to afford themselves.
In most cases, the social entrepreneurs are people who are well-educated, well-connected, and sometimes tech-savvy. These are people who are known as those who are not focused entirely around increasing their own wealth but have a passion to have a positive impact in the lives of other people. A bunch of social investment funds are focusing on these highly talented, well-intentioned people and making sure that they are not deprived of any financial support which they might require to achieve their aim. In fact, the social investors are even fine with a lower rate of return because they consider social impact more important than financial returns. There are no two opinions about the fact that we need more such well-intentioned entrepreneurs and investors.
However, two questions arise at this juncture, how many people in this world do not have access to the products or services that we are talking about? The answer is innumerable! And, how many social entrepreneurs or social investment funds will this world be able to create? The answer, unfortunately, is a handful.
Interestingly, at the same time, there are millions and millions of less educated, less resourceful people who are natural residents of a place, who try to earn a living out of producing or selling possibly the same kind of products/services that the social entrepreneurs intends to bring to the people of his/her community. Let us call him/her the desi-entrepreneur. The desi-entrepreneur’s life is dependent on being able to able to produce and supply these products and services. However, the difference is that this less resourceful desi-entrepreneur either does not have know-how, the sophisticated technology, the business linkages or the training which the social entrepreneur possesses. In fact, the biggest pain point is that even if he knows where the technology and the linkages exist, he does not have the money to invest in capacities or meet his working capital requirements just because the local financial institutions (LFI) think that his “enterprise” is highly risky. This means that this desi-entrepreneur continues to perform at sub-optimal levels, the products and services that he delivers are either not of very good quality or not available at an affordable price. This results in situation that the people in his community do not have access to them or what he produces does not give him adequate returns to support his living.
Interestingly, if he could have access to finance from the LFI, he could possibly have the same positive impact on the lives of the people in his community without having required any social entrepreneur to come in.
A very simple theoretical solution is to have the social venture capital investors invest directly in these so called desi-entrepreneurs! And that is where the problem begins.
The amount of money required to fund all such desi-entrepreneurs is huge and unfortunately there is a limit to the amount of social investor money that the world has! Moreover, these entrepreneurs are too scattered and the size of investment in each enterprise is too small to justify a team to professionals in the social investment fund to do due diligence and make equity investments in them. The volume of work required simply complicates the whole picture. LFIs are however located geographically closer to these enterprises and are better suited to assess and finance them. However, given that equity is certainly not a business of the banks or the LFI, the perceived level of risk of the desi-enterprise is too high and hence the LFI ends up not lending to them at all.
The source of the risk in most cases are as discussed above, uncertainty of supply and price of raw material, lack of advanced skills and lack of affordable access to advanced technology necessary for enterprise viability, with all of this leading to an uncertainty of demand owing to the uncertainty of prices for products or service offered by the enterprise.
Incidentally, if we categorise the enterprises into sectors, we would realise that there are a few key missing links specific to a sector that contribute to the risks for most enterprises in that particular sector. If a solution is devised to address one or two such key risks per sector and such a solution is made available to the all the enterprises in that sector, we may end up unlocking growth potential of hundreds and thousands of enterprises by making them less risky and thus making them attractive for the local financial institution to directly provide debt financing.
For example, a rural tourism company that aggregates and distributes information about rural home stays, provides a payment gateway to potential travellers via an online web platform and provides accreditation facility to the home stays, can provide a steady base of travellers to qualified properties and ensure their revenue certainty. Once this happens, the ability of the home stay owner (desi-enterprise) to leverage debt goes up for every single rural home stay in the country.
An equity investment into one rural tourism supply chain company can thus potentially unlock growth of millions of rural home stay properties, agents and other members of the rural tourism supply chain.
[Disclaimer: This line of thinking is borne out of the work that I did in the past but the views are personal. ]