The rise of impact investing in Southeast Asia

Almost a year ago, in November, I found myself at an entrepreneurship conference in Jakarta. The room was abuzz with familiar questions:

How do we support and mentor budding entrepreneurs? How do we source and manage funding? How do we build scalable businesses that last?

In some ways, it reminded me of Tech in Asia events.

Positive impact and monetary goals

I was at the Sankalp Forum – a conference on impact investing. The event series originated in India, and its second installment in Jakarta is coming up.

Simply put, impact investors are people who want to finance companies that pursue positive societal outcomes alongside monetary goals. It means that aside from growing into a profitable business, the company has to account for and report how it’s contributing to improving the livelihoods of the people it works with.

There was one big difference to Tech in Asia conferences. The business models discussed at Sankalp didn’t necessarily have tech at their core.

Impact investors look at sectors like agriculture, fisheries, and micro businesses; endeavors that affect the livelihoods of low-income people in emerging markets.

But more often than not, I found that tech did play a role in the discussions, especially when it came to achieving efficiency and scale.

Impact funds are taking root in the region

Another similarity lies in how impact funds are structured. They’re comparable to the tech VC funds we’re familiar with. They can write big checks and look for big opportunities. We’re not talking about petty cash.

As the interest in impact investing grows globally, impact funds dedicated to Southeast Asia have sprung up.

One example is Aavishkar from India. Its US$45 million early stage fund called Frontier Fund looks at businesses in South and Southeast Asia. It was started in June 2015.

Its major LPs are development banks like Germany’s KFW. It doles out deals between US$1 and $5 million. Aavishkar has made one investment in Indonesia so far: a seafood processing company called Bali Seafood. It plans an additional “five or more” investments in the archipelago over the next few years.

US-based Unitus Impact is another impact fund that’s become more active in this region. It also has a US$45 million fund to spend on Southeast Asia and India.

The Body Shop exemplifies a successful impact company.

Managing partner Beau Seil says Unitus plans to close deals between US$500,000 and US$2 million with 15 to 20 companies here in the coming years.

Some companies already in the firm’s regional portfolio are in agriculture, like Big Tree Farms and Vasham. Unitus also backs Indonesia’s Ruma, which has a range of apps and digital services that help poor communities, and Kalibrr, a jobs portal from the Phiippines.

Mixed boards

There are cases, like Kalibrr, in which business models are attractive to both impact investors and regular tech VCs.

They are holistic, long-term thinkers and want us to build sustainable and defendable businesses.

Kalibrr went through Y Combinator – the accelerator program that epitomizes Silicon Valley startup culture.

After Unitus’ investment, Kalibrr now has a mix of “regular” and impact investors on its board. This has worked out well, explains co-founder Paul Rivera.

“Our impact investors, Omidyar and Unitus, have been some of our most thoughtful and best investor partners. Their perspective isn’t just about growth at all costs,” Paul says. “They are much more holistic, long-term thinking and want us to build the sustainable and defendable business models that allow us to create the impact we want.”

Key Purpose Indicator

Stephanie Hermawan, an Indonesian impact investor I met at Sankalp that year, is an angel investor, which means she puts her own money directly into companies she believes are worth backing, and helps the founders by connecting them with her professional network. One of the local companies she supports is chocolate manufacturer Kakoa.

What she looks for in a company are two kinds of KPI: the financial return and a ‘key purpose indicator’ – a metric that measures the company’s positive impact. It should grow steadily with the company’s financial indicator.

For Stephanie, a successful impact company is best exemplified by cosmetics brand The Body Shop. Despite global scale, the company adhered to strict guidelines when working with local communities and maintained a company culture that was environmentally friendly.

According to Stephanie, The Body Shop founder Anita Roddick was able to pass on her company’s strict impact guidelines even after it got acquired by L’Oreal – a controversial deal Roddick had to defend.

Exits and returns

All the impact investors I’ve talked to so far stress that they believe in creating impact and profit at the same time, without sacrificing one over the other.

This philosophy is fairly new, and is a variation of the more established “social enterprise” concept. A social enterprise, Stephanie explained to me, would typically re-invest all profits into the business. It’s therefore not attractive from the perspective of a professional investor. Impact companies don’t have that limitation, which means its investors can profit when the company is successful.

Aavishkar partner Venkat Narayan explains that impact funds don’t fall behind regular VC funds when it comes to expected returns.

“Lower returns are not the case,” Venkat insists. While tech venture portfolios typically account for high failure rates, companies in impact portfolios are at a lower risk of going belly up.

“We tend to focus on sectors where the demand is already there and the needs are well known,” Venkat says.

Whereas tech startups typically build innovative products that aren’t even known to consumers, let alone regulators, and thus can be met with resistance, impact companies focus on what Venkat calls “execution innovation”: making proven businesses bigger and better.

Exits through IPO are less likely than for tech ventures, though they are possible. One of Aavishkar’s early investments from another fund, micro finance company Equitas, went public in 2016. It took 9 years.

The typical exit route for these businesses is a trade sale to a strategic or financial buyer, Venkat explains.

One example is Aavishkar’s portfolio company Milk Mantra, which the fund exited when the dairy company raised follow-on funding from Fidelity.

It’s a model Aavishkar and similar impact funds hope to be able to apply in Southeast Asia.

The impact mission, Venkat says, doesn’t get lost after a company sells to another giant.

“That’s the reason we go in early. The mission has to be embedded in the company deeply […] When you go in early and scale the impact along with the organization, people who come in later know the organization has been run this way all along.”

Illustrations by Tech in Asia’s Kathrinna Rakhmavika.

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from Tech in Asia https://www.techinasia.com/rise-of-impact-investing
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