Impact measurement will be part of industry lexicon: Omidyar Network MD

ROOPA KUDVA speaks to Anjuli Bhargava about how the impact sector has coped with the pandemic and how companies in Omidyar's own portfolio have fared

The impact sector globally has come into being only since the early 2000s. In India, a total of US $ 10.8 billion has flown into the sector between 2010 and 2019, of which US $ 2.7 billion was in 2019 alone. The CAGR for impact capital has been roughly 14 per cent and it is estimated that investments in the sector have assisted 60-80 million beneficiaries annually.

But what happens in a world that’s increasingly conscious of making sustainable and right choices, one that keeps a track of its carbon footprint and tries to minimise the damage it does to the world it finds itself in ? What happens to the impact sector post COVID ? If everyone and everything going ahead becomes more circumspect and thoughtful, does that mean a death knell for the impact space, one that was emerging in the two decades or does it mean a sharper defined, more resilient and robust ?

Roopa Kudva, CEO of Omidyar Network - which has a total of US $ 330 million in around 95 impact enterprises (for profit and not for profit) in India - speaks to Anjuli Bhargava on how the sector has coped with the pandemic, the changes she sees as the world emerges out of this crisis and how companies in Omidyar’s own portfolio have fared. Excerpts from a chat :

How have companies in the impact sector fares through the pandemic in your view ?

Let me begin with what has happened during the pandemic. I’d divide them into three categories. One is the companies and start-ups that have seen a perceptible increase in demand and in some cases a massive uptick through this. These fall into four segments : edtech, digital health, digital content and essential retail trade. Vedantu, Doubtnut, MyUpchar, 1mg, Prastuti, IndusOs, Dealshare to name a few in our portfolio.

There’s a second segment that has been adversely impacted and this is mainly the fin-tech and inclusion sector. In particular, lending companies face a lot of uncertainty with regard to their exposures going forward since it is unclear how many borrowers will be in a position to pay back loans after the moratorium ends and so on.

A third category is companies that have remained so to speak in idling position. Their businesses have temporarily halted due to the lockdown and are now slowly restarting. For instance we have a mobility firm - a scooter sharing ride company - Bounce - in Bengaluru. They simply had to stop operations during lockdown. They have seen a hiatus in revenues and operations but no major shift in their trajectory.

I think impact investing will change in two ways. It will become far more technology led. If you look at it traditionally, most of the impact companies have been brick and mortar but the pandemic has made India far more comfortable with digital use and technology. The acceptance has come much faster than anticipated and has been far more widespread.

Two, with regard to what you said about death knell, I would put it as the sector will be far more mainstreamed.  Already, a lot of venture capital money had started flowing into the mass market. In the early years, VC funds only targeted businesses that focussed on the top 40-50 million of the customers but even before the pandemic, VC funds had started flowing into businesses focussed on the middle income populations.

As I see it now, more and more funds will flow into building resilience in the middle and lower income segments and catering to their needs. So in a sense it will be far more mainstreamed. I also think there will be a renewed thrust to measure impact beyond only financial returns. This is one area where the sector had taken only baby steps but this should now accelerate. 

That’s the point. If impact becomes more mainstreamed, what’s the difference between the regular corporate sector and impact sector. Won’t the lines get blurry ?

No and let me explain this in some detail. When you say everyone is more socially conscious, there is still a distinction to be noted. Yes, almost all corporates are discussing and talking about ESG (environment, social and governance) but the actual purpose of their ESG analysis (how much I have reduced my emissions, how low is my carbon footprint) is aimed at assessing how it would detract or contribute to their overall valuation. It’s good they are looking at this but it’s more inward looking in a sense.

Then there’s this whole genre of socially responsible investing (SRI). These are  investors who care about where they invest so they may avoid a business that harms the environment or say a tobacco or an asbestos related enterprise. Basically, these investors are taking a call on what they wish or do not wish to be associated with.

Both ESG and SRI are based on an input based approach. Impact investing focuses on making a difference to the life of a beneficiary. Therefore, the success of impact investing is not inputs - how many schools did you build- but output based - did learning outcomes improve or did a student’s employability increase. One is trying to assess how the intervention impacted the beneficiary’s life. 

There are no value judgments here. It’s good that everyone is becoming more socially conscious, it’s good that more money is flowing into ESG and more investors are socially responsible but impact investing is an important subset and cannot be treated like the rest. 

And this is where I think the impact sector needs to make its next leap. It needs to do a better job of measuring the impact on the customer’s life. Many frameworks have come up to measure impact and a lot more needs to be done to sharpen these. Parameters already do exist but need to become more robust.

Many still view this sector with suspicion arguing that impact investors and businesses are just wolves in sheepskin. What do you think of this accusation ?

There may be the occasional insincere investor or business but if you look at it realistically, it is very difficult to attract real capital based on eye washing. I find with most investors the very first screen is the impact screen. Only after a venture clears this screen, do they look at viability, sustainability or returns. Investors do their homework quite carefully.

Omidyar may be more ethical or diligent in this aspect but that doesn’t mean everyone is…

There are many checks and balances and I think these will only increase after the pandemic. We are coming to a stage where the people who are deploying their capital are getting far more demanding. It’s a bit like the credit rating industry in the earlier years, for many years we gave ratings and the idea was that if you had a higher rating, you were lower risk but it took the industry almost 20 years before we had robust data to be able to establish that indeed a higher rating means a lower risk. It took that time to build that data. 

Similarly in our sector - it is just around 10-15 years old - the time has now come to define what we expect in terms of impact and to set benchmarks. Impact measurement will be the next critical lens for this sector and a far more significant part of the lexicon of the industry going forward. It will be slow as it’s not an easy subject : measurement of how one is making a difference but the journey has begun and the pandemic will hasten this.

GAUGING THE IMPACT

The impact sector globally came into being in the early 2000s. In India, a total of $10.8 billion has flown into the sector between 2010 and 2019, of which $2.7 billion was in 2019 alone. The compound annual growth rate for impact capital has been roughly 14 per cent and it is estimated that investments in the sector have assisted 60-80 million beneficiaries annually.

Can you pick a winner and loser from your portfolio ? Of course, loser doesn’t mean loser forever but someone who realises that they may need to redefine themselves to survive ?

Take for instance Vedantu that started on a one-to-one tutoring model. Even before the pandemic, they had started moving towards one to many teaching business model. This accelerated hugely thanks to the pandemic. Also, what has been heartening that results have not suffered despite the one to many approach.

DealShare is another company that has seen huge traction that is focussed on the next version of e-commerce. E-commerce not for the top 40-50 million but for the next rung (income groups that earn Rs 50,000 and below a month) and sell many low priced unbranded items to them - like say garments, atta or apples and done differently from a Flipkart or an Amazon.

As far as companies badly hit, I would be very watchful with the lending companies. What has happened is that 2019 was a very good year for fundraising for them and so they had a cushion. Plus, they were quick to downsize or cut costs as soon as the pandemic hit so we are yet to see serious distress. The financial services companies may take the sharpest knock and is definitely one sector that is not yet out of the woods.

Another worry as I see it is what happens if this situation prolongs. We made two investments this year and have another 2-3 in the pipeline but these are based on homework completed with a lot of time spent with the entrepreneur on the field and a thorough understanding of what the enterprises were attempting were done before the lockdown. When one invests in an early stage start-up, there is very little to go upon so such intense interaction is critical to assessment. If the situation persists, doing such thorough analysis which requires many in person meetings may be adversely impacted. That may lead to drop in future investments.