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Challenges lying ahead for impact investing

Having started as an impetus for microfinance nearly a decade ago, impact investing today influences a wide array of sectors and supports innovative business models. Over 220 ventures have raised close to $ 1 billion from impact investors, with the number of deals having gone up nearly four times from 22 in 2007 to 82 in 2013. But what makes this noteworthy is the diversity in investments, as only 12 of the 82 deals were in the MFI space in 2013. What does this signify? Definitely, better clarity and a broader outlook on what constitutes impact ventures.
Impact investors have primarily focused on investing in early stage companies that have a strong low income segment focus. Over half the impact investments last year have been under $ 2 million, across seed to series A rounds (Unitus Capital India Impact Equity Investment Report 2013). However, a few investors are now investing in companies that are effectively bridging the quality or access gap apart from just an affordability and income focus.

Take Lok's portfolio company, Everest Edusys for instance, it is not exclusively focused on the public schools or the low income segment, but also works with private schools in a bid to impact learning outcomes across the entire school education spectrum. This stems from a deeper sector analysis where we find that in India, "quality" in education can no longer be compromised especially in the name of "larger enrolment and universal coverage".

As impact investing the outlook towards impact will become more contextual and sector specific, with focus towards measuring and monitoring impact data.

Beyond the ongoing challenge of defining impact, investors have to also play a key role in scaling up their portfolio companies and secure exits. Most impact investment funds will soon see the end of their ten year life and it is high time to demonstrate profitable exits. Lok has exited from six out its ten investments from the first fund, returning 100% of the fund's invested capital and generating an average return of three times in cash across these exits.

The other challenge and a more fundamental one lies in innovation in fund structures. Impact focussed venture funds, did the right thing to just imitate the conventional VC models, to begin with. But with better understanding of the business models of social enterprises and to maintain a clear focus on the high impact businesses, there is a need to imagine and implement new fund structures. It has been more than a decade since the first impact investments were made, and the focus largely rested on financial services for the best part of this time.

In recent years, however, there is a spurt of ventures focused on social infrastructure like education, healthcare and livelihood creation. We believe the agriculture and energy sectors will see innovative impact business models in coming years. Lok is affirmative that the impact investment space will continue to see significant growth and make substantial contribution towards creating an inclusive economy.