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JUNE 17, 2007
 Cover Story
 BT Special
 Back of the Book

Rupee Rise
Though an appreciating rupee is a cause for concern for many industries, it is proving to be a boon for some, particularly those that have large foreign currency borrowings. A weaker dollar is making repayments cheaper. Also, state-run refineries and those in the aviation sector are well-positioned to benefit from the stronger rupee. The Indian currency is up 8 per cent this year and is Asia's strongest currency against the dollar in 2007.

The ECB Route
The cap on maximum external commercial borrowings (ECBs), an annual ritual for the government, is fast losing its significance. Since the bulk of the foreign borrowings is raised under the automatic route by companies, it is becoming difficult to enforce the cap. The government had raised the annual limit of ECBs last year from $18 billion (Rs 81,000 crore) to $22 billion (Rs 99,000 crore). Now, it seems that total inflows will cross the $22-billion mark.
More Net Specials

Business Today,  June 3, 2007

Here Comes 'Good' Money
Venture capitalists are beginning to chase unconventional industries such as clean energy and social sector projects. Why? It's not just socially responsible, but also profitable.
East meets West: Acumen Fund's Novogratz (R), seen here with a villager, makes investments that yield social benefits

Seeking to expand the operations of their ambulance service 1298, Ziqitza co-founders Shaffi Matther and Ravi Krishna were scouting for donations when Vinay Shah of Mosaic Capital, an investment firm, put them through to Jacqueline Novogratz, Founder of Acumen Fund. Novogratz, who was looking to invest in India's health sector, was impressed by Ziqitza's business model based on differential pricing, which meant poor patients paid little and rich more.

More importantly, in a country where revenues of ambulance service providers dependent on carrying the dead, Ziqitza was making a difference to the lives of not just the rich, but also the poor. "We found that in Mumbai, only 6 per cent of emergency patients were being brought to hospital by ambulance," says Matther. So, in March this year, Acumen invested $1.5 million in Ziqitza. "We see India as a laboratory of sorts-it's a market that offers great value in terms of the social equity such businesses, inherently low on margins, generate," says Novogratz.

The New York-based Novogratz, who manages a $20-million non-profit fund, is a classic example of what's happening to venture investing globally. Long confined to investing in mainstream businesses, venture capitalists (VCs)-they come in all shapes and sizes-are looking outside to sectors where the seemingly conflicting objectives of profits and social benefits meet. Sectors such as clean energy (ranging from fuels to equipment to devices), healthcare, housing, farming, and it that is aimed at bridging the digital divide.

"The economics of the trade do not favour artisans, hence venture funding is a good option"
Sumita Ghose

Globally, the money flowing into green and 'social spaces' is estimated at around $1.7 trillion (compared to India's GDP of $1 trillion), with the majority of the investments happening in Europe and the US. These two regions hog 'clean' investments, while the developing economies across Asia and Africa are getting investments aimed at tapping the bottom of the consumer pyramid. According to a study by Clean Edge, a US-based research and consultancy firm that tracks and analyses global trends in clean tech, the four benchmark technologies-solar photovoltaic, wind power, bio-fuels and fuel cells-recorded a growth of 38 per cent in revenues in one year, growing from $40 billion in 2005 to $55 billion in 2006. The next 10 years could see the figure touching $226 billion, says Clean Edge.

As far as social ventures are concerned, the focus is on emerging markets like India, where there are millions of poor people who are not served by big companies, leaving the field wide open for small, but innovative, entrepreneurs. "It's becoming a viable proposition because there is a huge market opportunity," says Vineet Rai, founder & CEO, Aavishkaar India Micro Venture Capital Fund, which makes for-profit investments in social sectors. "While some estimates put the market at $5 billion, others peg it at $2-3 billion," adds Rai.

The thing about such investments is that you don't need millions of dollars. Often, the investments are less than $1 million each, and meant to get the entrepreneur started on a viable plan. Therefore, the 'good' money invested in India so far is estimated to be around $500 million-compared to $3.37 billion in VC/private equity inflow in 2006. There's more money coming into this area. ICICI Bank has established a Rs 100-crore credit line to support innovation and development of green businesses through short- and medium-term loans of Rs 5 lakh to Rs 40 lakh. Then, there are others like Canada's care Enterprise Partners (CEP), which intends to invest at least a million dollars in India this year and $3-5 million over the next three years.


Global Environment Fund
Corpus size: $1 billion of capital commitment
Focus area: Clean energy & technology, forestry and forest products, waste water management and efficient transport
Good investment: GEF's only current Indian investment is in Bangalore-based Reva Electric Company, where GEF, along with Draper Fisher Jurvetson, has invested $20 million

Clearstone Ventures
Corpus size: $650-700 million*
Focus area: Technology and media and is eyeing the green technology and bottom-of-the-pyramid (BoP) markets
Good investment: DigiBee Microsystems

Corpus size: Raising $139 million for India
Focus area: Clean energy, bio-diesel and energy efficiency
Good investment: None so far in India

Globally Managed Services
Corpus size: About Rs 800 crore, plus another Rs 400 crore for the North East-mainly for agriculture and tourism
Focus area: BoP, social sector, nature projects in North East
Good investments: Amalgamated Plantation; Baliapara Foundation in the North East, a non-profit aimed at creating social and agri-entrepreneurs; AgriQuest, which aggregates and markets agriculture produce in the North East

CARE Enterprise Partners (CEP)
Corpus size: $5 million
Focus area: Bottom-of-the-pyramid ventures
Good investments: Suminter India Organics, which exports organic produce to the US and Europe; Conserve India, a solid waste management firm that is currently in talks with CEP for equity participation

Corpus size: $15 million
Focus area: Photovoltaic energy and solar home systems
Good investments: Shell Solar India ($3.5 million), Shakti Alternate Energy ($2.21 million), SREI Infrastructure ($3.5 million)

Acumen Fund
Corpus size: $8 million
Focus area: Health, water, housing and energy
Good investments: Drishtee ($1 million), which manages more than 1,500 internet kiosks in villages; Scojo Foundation India, which provides affordable reading glasses in rural and semi-urban areas of Andhra Pradesh

*Global corpus, no India-specific fund

Aavishkaar India Micro Venture Capital Fund
Corpus size: $1.4 million
Focus area: SMEs, investments of Rs 5 lakh to Rs 1 crore
Good investments: Rangsutra (Rs 21 lakh), which works with over a 1,000 artisans across India; Sri Kamdhenu Electronics (Rs 12 lakh): Develops new-age milk collection technologies; Vortex: Offers enterprise level, project management and business intelligence services. Aavishkaar invested Rs 50 lakh as equity

BlueRun Ventures
Corpus size: $20 million
Focus area: Early stage clean energy businesses
Good investments: Deeya Energy ($7.5 million): A technology start-up developing and manufacturing green batteries

What sorts of projects are getting funded? A wide variety of them, although alternative and clean energy seem to be the staple. "The de-regulation of the power sector, a fairly healthy financial sector that can lend to such projects, and oil touching $70 a barrel have propelled players to look for alternative low-cost options," points out Sandeep Kohli, a Senior Project Officer with IFC in Washington that has invested $15 million in this area through its local partner it Power India. "Another major factor for investments in this sector is the booming software industry, which requires reliable power," he adds.

"The revenue model of most ambulance services in India is dependent on transporting dead bodies"
Shaffi Matther

IT Power India is looking at markets in the hinterland that are not on the grid. "It is a myth that the rural customer cannot pay. The rural population certainly has purchasing power-what is needed is a financial system structured for their needs," says Devyani Hari, Manager (Financial Solutions), it Power India, which has invested $11 million under the Photovoltaic Market Transformation Initiative (PVMTI) and another Rs 70 lakh under the Triodos Renewable Energy for Development Fund (TREDF). PVMTI has converted the monthly expense of a rural household on kerosene lamps into equated monthly installments (EMIs) for the solar home systems that have been installed under the programme. Similar to what it Power is doing, Chennai-based Servals Automation, funded by Aavishkaar, has launched kerosene burner stoves in rural markets that are 27 per cent more fuel efficient than other stoves.

Agriculture is another sector that is attracting investors in not just core farming but in fisheries, tourism, water management and eco-infrastructure. For instance, former Orange CEO, Ranjit Barthakur, who runs Globally Managed Services (GMS), has ambitious plans of investing in nature-related projects in the North East. His principal co-investors: IL&FS, IFC and UK's Blenheim Chalcot. Fund size: Rs 1,200 crore.

Then, there are ventures such as Satyan Mishra's Drishtee, which sets up internet kiosks in villages to enable rural entrepreneurship, and Sumita Ghose's Rangsutra, a co-operative of artisans from Rajasthan, Uttaranchal, Assam, Sunderbans and Himachal Pradesh to collectively retail their products, and Vijay Balakrishnan's DigiBee Microsystems, which is developing low-cost, feature-rich handsets aimed at low end of the market (see Who's Getting Fund?). Says Ghosh: "The economics of the trade do not favour the artisan community. An artisan gets 12-15 per cent of the sale price of a product." At such low returns, no bank would be willing to risk a loan-necessitating the intervention of a VC like Aavishkaar, which has picked up a 23 per cent stake in Rangsutra for Rs 21 lakh.

Actually, a wide variety of ventures.

Reva's CTO Chetan Kumaar Maini: He's got $20 million in funding

Reva Electric Car Company: In December last year, Global Environment Fund and Draper Fisher Jurvetson invested $20 million in this Bangalore-based electric carmaker to help it boost capacity from 6,000 to 30,000 cars a year, and sell in global markets

DigiBee Microsystems: Clearstone Ventures and SIDBI pumped in $8 million in Bangalore-based DigiBee in January this year. Why? It's working on launching low-cost, feature-rich GSM and CDMA handsets aimed primarily at the poor consumer

Vatsalya Healthcare: Started in December 2004 to focus on non-metro healthcare, Vatsalya is likely to get its 2nd round of funding of $1 million from Aavishkaar India Micro Venture Capital Fund to set up 10 more of its 20-bed hospitals. Its customers: people in the middle and lower middle class households in semi-urban areas

Ziqitza (aka 1298): Started in 2004 with an initial corpus of Rs 1.8 crore, 1298 received $1.5 million from Acumen Fund to expand its ambulance fleet from 24 to 70 in Mumbai. 1298's USP: charges patients according to their income levels

Suminter India Organics: A trader turned contract organic farmer, Suminter focuses on the Akola belt of Maharashtra, where farmer suicides were rising due to failed crops and mounting loans. Today, Suminter owns about 20,000 acres of land and supplies non-perishable produce to Europe and the US. Started with a capital of Rs 1.25 crore, it's pitching to Care Enterprise Partners for funds (for $2-3 million) to launch its own cold storage and retail facilities

The Bottom Line

"Sometimes, the idea may be exciting, but there may be no definite time frame for its execution"
Rahul Khanna
Venture Advisors

Investing in socially responsible ventures doesn't, however, mean that VCs are simply giving away money. Most players opt for either debt or equity participation, and seek to exit either when the business becomes self-sustainable or at the term-closure of the fund, as in the case of IFC, which closes its fund in 2010. Some others, like Global Environment Fund (GEF), exclusively look for equity funding, since it gives them more say in the management of the company. Exit options could include an IPO-preferred by many-or a strategic sale, though that is more popular globally than in India. As for returns, GEF's President and CEO Jeffery Leonard says it depends on technology, country and size of the company, though his own fund targets a return of 25-30 per cent annualised, while others like Clearstone target for 10X over a period of approximately five years.

Is good money investing, then, all a bed of roses? "Not quite. There is a high failure rate in these kinds of projects," says Suneel Parasnis, Country Director, New Ventures India, who pegs it at 40 per cent. Explains Rahul Khanna, Director, Clearstone Venture Advisors: "Sometimes, the idea may be exciting, but there may be no definite time frame for its execution, in which case we need to ask ourselves: is it a scalable business model and can we do it in the time frame mandated to us?" He cites the case of a firm that was trying to create a new category of hybrid air-conditioners, which could take either a year or 10 years to develop. Clearstone decided not to invest.

Not that it's a miss anyone will mull over. With global funds developing a taste for green and bop projects, there will be many more ventures that queue up for funding. Perhaps, in another six or seven years, the VCs will figure out if their troubles were worth it.

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