Impact Investing | August 17, 2023

In India, ‘zebra’ companies deliver impact at scale and exits for investors

Mahesh Yagnaraman

Get a weekly pulse on news and trends in impact investing with our free newsletter.

*I agree to receive marketing emails from ImpactAlpha, its affiliates, and accept our terms of use and privacy policy.
By signing up you agree to receive marketing emails from ImpactAlpha Inc. and accept our Terms of Service and Privacy Policy.
Guest Author

Mahesh Yagnaraman

Recent research suggests that India has become increasingly appealing to impact investors. The industry has grown to $27.1 billion at a rate of 28% since 2010, giving stakeholders a lot to be optimistic about.

But a closer look at the numbers reveals that impact investors in India have embraced the Silicon Valley venture capital (VC) narrative of high, quick returns. This runs contrary to the very purpose impact investing set out to achieve. 

Many investors in India focus on companies in low-risk sectors like financial services. According to recent estimates, 47% of investments and around two-thirds of exits in India are in financial inclusion and social commerce, underscoring the risk aversion that directs capital away from the most pressing problems. Furthermore, the secondary markets for early-stage investors have not evolved at the same pace across sectors. 

An overall reluctance on behalf of later-stage investors to provide exits to earlier investors results in a lack of liquidity for earlier-stage, riskier deals. Unless this changes, there will continue to be a capital gap where the need is greatest: impact-first companies that have immense potential to solve problems of poverty, but require more time and a greater tolerance to risk.  

To achieve more meaningful impact, impact investors should not only focus on finding the next unicorn. We need to also invest in  zebras, which “are real … are both black and white, striving for both profit AND purpose … are collaborative and feisty as they build businesses that are better for the world.”

VC narrative

Since 2004, Acumen India has invested over $35 million in equity capital to 33 different organizations, addressing problems of poverty ranging from unsafe water to low-quality housing to exploitative value chains. Most of these problems are in sectors that traditional impact investing has overlooked such as  agriculture for smallholder farmers  or workforce development.

In 2022, we began to see our efforts bear fruit when we  negotiated profitable exits  from three of our most impactful investments, which have also scaled and become financially sustainable as organizations. The success of these companies challenges three key assumptions of the VC narrative commonly adopted by impact investors in India. 

Assumption One: Serious impact investors get market-rate returns, and fast. On the contrary, two of Acumen India’s three successful exits last year were in moderate-growth, high-impact companies that were financially sound. These companies knew how to grow with critical collaborations and became sustainable without needing a constant infusion of capital. Not every company needs to work on a “feed the pig” model of perpetual capital raises in order to be financially sustainable. 

An investor who only looks for 10x returns in five to seven years might have ignored Ziqitza Healthcare Limited. Ziqitza pioneered the first for-profit ambulance company in India, and built public-private partnerships that have brought ambulance care to tens of millions. The company was (and is) asset-heavy, and took a decade to achieve widespread scale. However, it has now served 48 million people, and created an industry of emergency services that did not exist before. 

Assumption Two: It’s not worth the risk to invest in sectors where customers are difficult to reach and cannot fully afford the solutions. Today, microfinance is considered a success, but it wasn’t always that way. Early investors provided risk-tolerant, patient capital that allowed the sector to develop over time. Other sectors can only become less risky if companies have the runway capital necessary to prove their models and investors are willing to build capital markets that support impactful businesses. 

The clean cooking sector serves as a prime example. Between 2015 and 2016, Acumen invested in four clean cookstove companies globally, including Greenway Grameen in India. We were the first and largest institutional investor into the company. It took time to bring costs down and find the right distribution model. The risk was significant, and the returns were modest. But the impact has been tremendous: Greenway sold over two million stoves, mitigating 10 million tonnes in carbon dioxide emissions. Today, they are one of the leading cookstove companies in the world. 

Assumption Three: Philanthropy and investing don’t mix. In fact, I would argue impact-first investing can be one of the most efficient uses of philanthropic capital that exists. Philanthropic capital can tolerate riskier investments and slower returns. In short, it can go where other impact investing dollars can’t or won’t. It can also catalyze other investors, bringing immense potential for scale and growth. When Acumen decided to invest in Sitara, we worked with the National Housing Bank to crowd-in four other leading banks and funds for a total of $2.5 million for the first round, showing how philanthropic capital can help to catalyze an impact-focused enterprise.  

Acumen invested in three zebras in India: Ziqitza, Greenway, and Sitara. These companies are delivering tangible impact for tens of millions of people in poverty  and will return more than 3x Acumen’s initial investment (in dollar terms). They were great investments; while risky and contrary to the VC narrative, the exits we achieved demonstrate that impact-first investing is a viable, replicable, and deeply impactful model for addressing the complex and urgent problems of poverty.

Mahesh Yagnaraman is Acumen’s country director in India, based in Mumbai.