Dasra and the Middlers

Social businesses are all the rage these days. Broadly defined, these enterprises seek to make a profit while simultaneously generating a positive impact on society. Many of them grew organically out of revenue-generating non-profit organizations, while others are simply for-profit businesses that have a positive societal side effect.

Defining “social impact” is, of course, contentious. Generally, social businesses that originated from non-profits have social impact built into their models. Examples include Apollo Hospitals, a hospital chain in south India that provides low-cost high-quality healthcare to underserved populations, and Earthy Goods, a product line featuring ethically-sourced handcrafted products made in villages across India.

On the other hand, evaluating positive societal side effects of for-profit companies is a more difficult task. Scrabble and Monopoly encourage children to think analytically. Are their parent companies social enterprises? Is Twitter, the website used by masses across the Middle East to spread information, a social enterprise? Are Walmart and McDonalds, companies that market products to customers at the “bottom of the [economic] pyramid (BOP),” also social enterprises?

While defining and quantifying this “impact” might not be a useful exercise for traditional investors, “impact investors” specifically look to invest in organizations that generate social as well as financial returns. These investors fall into two categories – “impact first” funds place a higher premium on generating a positive social impact on society than on profit-making. “Finance first” firms expect financial returns from organizations in their portfolios before evaluating social returns. “Impact first” funds are usually not-for-profit, as their primary goal is to provide working capital to fledgling social enterprises. Finance first funds are often for-profit and fall more closely in line with traditional investment funds.

Impact first funds operating in India tend to provide financing in the form of equity or blended capital under $100,000 early-stage social businesses. (“Blended capital” is a mix of equity/debt capital.) Impact first funding usually comes from angel investors or converted philanthropists who see the immense value in social business and are willing to take a risk on a (relatively) small amount of money. Finance first funds, on the other hand, typically offer investments at a minimum of $1-2 million in equity financing.
This top and bottom-heavy structure begs the question: where does that leave social businesses that require equity between $100,000 and $500,000? Equally importantly, where does that leave social businesses that only need working capital financing?

Social businesses that lie in this “missing middle,” as it has previously been called, share a number of characteristics – they tend to be financially sustainable grassroots organizations that are unlikely to grow quickly enough to justify equity investments, but also cannot afford to pay the high interest rates that accompany debt financing. Most are not seed-stage startups and therefore require more than $100,000 to scale their operations. At the same time they do not have the capacity to absorb $500,000 of capital – and they are perceived as “risky” by the investment community for operating in unknown markets among unknown classes for a murkily defined “double bottom line.” Little is known about this class of social businesses, and even less is known about how best to invest in them.

It is with these Middlers that Dasra has leveraged its expertise. Through its Social-Impact program, an executive education program for social entrepreneurs, Dasra has helped several social businesses become “investment-ready” while also playing the role of a syndicator between these organizations and potential investors. Dasra has especially advocated for low-cost or even interest-free convertible debt financing, as the Middlers have the most to gain from this type of capital. By way of example, Native Konbac Bamboo Products Pvt. Ltd., a former Dasra Social-Impact participant based on the Konkani coast in Maharashtra, was able to leverage debt capital from a combination of government/foundation financing to convert from a non-profit organization to a profit-generating company in under three years.

In providing capacity-building for non-profits, social businesses, and hybrid organizations, Dasra has been able to provide Middlers with customized as well as up-to-date guidance on scaling and financing. We hope to equip social businesses with the tools to maximize both their impact as well as their return on investment so that they will no longer have to choose one over the other. Stay tuned for further updates on Dasra’s role in this exciting and innovative field.

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