NEW DELHI: A new breed of early-stage investors is choosing to launch companies rather than wait for an entrepreneur to come along with a great idea.
Once these fledgling ventures attain a certain scale, they will be sold off to the highest bidder allowing the incubators to begin the process anew.
MUMBAI: Traditionally, a not-for-profit entity or non-government organization (NGO) got grants for various socially relevant projects and implemented them. But, with grants drying up and an increasing tribe of social impact venture capitalists willing to invest in a for-profit corporate set up, a large number of NGOs are adopting the hybrid model. This also helps them to scale up the value chain and hire the right talent.
Corporate and tax laws necessitate setting up of two distinct distinct legal structures. Typically, the not-for-profit arm carries out its activities as a trust or society, whereas a private company is set up for carrying out business or profit-based activities.
“Transitions towards hybrid models are more visible when poor families are willing to pay a small fee for services – say agri inputs on phone for farmers or vocational skill training; or when there is a market for goods produced by people at the bottom of the pyramid,” says Parvathi Menon, MD, Innovation Alchemy Consulting, which nurtures entities undergoing such transformation.
“Opening a for-profit entity alongside a non-profit may often force the latter to look beyond the fast-drying government funding and philanthropic grants towards earned revenue opportunities,” adds Aparajita Agrawal, Director, Sankalp – a social enterprise forum.
Some NGOs envisage a hybrid model right from inception, as was the case with Under the Mango Tree (UTMT). It provides bee keeping training to tribal farmers and procures and sells honey and allied produce in cities.
Interestingly, at UTMT, the for-profit entity was set up first. “My past experience helped me realize that NGOs tend to search for market access after income generation activities have taken off – and this approach is often unsuccessful. Thus, I created the for-profit arm first to test whether there was a market for good quality single-origin organic honey. Now, honey collected from farmers trained by our not-forprofit entity just flows into our distribution network,” explains, Vijaya Pastala, CEO, UTMT.
Largely, the for-profit entity is created at a later stage. In this context, Vishnu Swaminathan, India Director of Ashoka, an international network of social entrepreneurs, says: “In such instances, founders of NGOs do find the transition a bit difficult. Most important is the need to have a different mindset. Only then can the economic and social benefits of a hybrid model be reaped.”
Kannan Lakshminaryan, an IIT alumnus, has set up Fractal Foundation as a trust and Microspin as a private company. The former introduces new technologies among target users. For instance, the micro-spinning technology was spread to rural pockets through this trust. Microspin provides comprehensive technologyaided solutions for widespread adoption of the means of converting raw cotton into yarn and then on to fabrics on a small scale.
“Fractal aims to provide limited financial assistance and infrastructure at an early stage. If an idea fails, it can be written off without regret. But, when the ‘business case’ can be articulated cogently enough to attract needed funding on acceptable terms – that’s when I incorporate it as a company,” explains Lakshminarayan. Another company engaged in vocational skills training has also been set up.
Technology Informatics Design Endeavour (Tide), a Bangalore-based NGO, is engaged in technological interventions in fields such as energy efficiency. “TIDE has a wide array of Intellectual Property (IP), which it was sharing unreservedly with others. But scaling up remained a challenge. When we were confident that the IP developed at TIDE was required by and relevant to users and that the community could be better served via a business rather than a charitable model, we set up a for-profit entity,” explains Svati Bhogle, an Ashoka fellow.
The IP for commercial energy efficient cookstoves, popular among street vendors, is exploited by the for-profit arm Sustaintech. In turn, Tide receives payments depending on the number of stoves installed and services provided. Sustaintech was also able to attract venture funding from a European consortium of clean-tech investors.
Bangalore-based Waste Wise Trust, founded by Anselm Rosario, has worked with the informal sector of waste (rag) pickers for over 20 years. Clients serviced include hotel chains and companies, especially those in the electronic city. It has begun to scale up by adopting a hybrid model.
Rosario explains: “People management, funding, standards of service and also scaling up were some challenges we faced. We had to develop a financial model that could sustain itself by finding customers who were willing to pay right price for proper service and find ways for people to work. The hybrid model has two functions – the not-for-profit will concentrate on identifying, mobilizing, training and building capacities of waste pickers. The for profit entity – Waste Wise Corporation – will garner revenues from recycling of waste and also technical consultancy, such as waste audit, or on-site site waste management services.”
Menon, who has advised WWT, Fractal and many others, says: “In a good hybrid model, the for-profit creates the market linkages for products and services that are created or provided by poor communities through the non-profit.”