Aavishkaar Capital’s ₹1,500 crore bet: Driving profitable impact through startups

The startups Aavishkaar wants to back are typically those that hire skilled workers in small cities and towns while selling their products in the big cities. This generates a double bottom line, creating social impact by providing steady employment opportunities in underserved areas while also ensuring profits.

“In such investments, the gross margin is higher, so it becomes an attractive proposition from a purely commercial point. Our thought process is to connect through an impact and make the impact profitable at the same time," Aavishkaar Group’s founder Vineet Rai told Mint in an interview.

“India’s rural economy has changed dramatically so we also must shift our investing philosophy. We call it systematic impact as it directly influences what is happening on the ground," he added.

Rai’s belief in India’s rural economy is validated by recent data that show a revival in rural consumption as a main factor in India’s private consumption outpacing the country’s economic growth.

Aavishkaar Capital has raised about ₹4,000 crore across six India-focused funds over 17 years. Its sixth fund, which was raised about 2.5 years ago, was ₹1,200 crore in size. 

So far, the impact investment firm has fully returned money made from its first three funds to its investors, and partially from its subsequent funds.

Aavishkaar Capital, which also has operations in other parts of Asia and sub-Saharan Africa, typically invests in three main categories—food and agriculture, essential services, and financial inclusion.

With typical investment sizes of $5-25 million, each fund targets 12-18 companies across early to series A/B stages—the initial rounds of institutional funding for a startup. “We also keep some amount of money for zero-revenue companies," Rai said, referring to investments in startups while factoring in the risk that they may not survive.

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A rural opportunity

Last month, Aavishkaar Capital led a $10 million funding round in direct-to-consumer luggage brand Zouk. The startup employs semi-skilled workers from tier 2 and 3 areas to manufacture its products, which are then sold in metro cities. Aavishkaar has also backed Go Desi, AgroStar, and Milk Mantra.

“You will see more assortment in our portfolio as India’s capability to participate in local ideas has significantly gone up over the years. This has given us an opportunity to step back and evaluate the new ideas that are bubbling up," Rai said. “We are looking at business ideas that have the potential to scale and deliver commercial returns in a short span of time to balance our overall portfolio, which also invests in high-risk companies."

Outside of its equity financing business, Aavishkaar also does on-ground work in several parts of Uttar Pradesh and West Bengal through its foundation, which is funded through various corporate social responsibility initiatives. 

“The aim is to create jobs and provide livelihood to the rural economy without displacing them to the metros. Today, there is a significant desire among people to go back to their towns because the cost of operation is low, which is a critical determination of success and failure," Rai said.

Rai, a strong proponent of reverse migration, expects to create more local jobs for people in tier 2 and 3 cities to grow and build the rural economy over moving to metros and tier 1 cities. He anticipates tier 2 and 3 cities to play a significant role in India’s next phase of growth.

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Creating quality jobs

When top talent migrates to suburban and rural areas, capital will also shift beyond the metros, Rai explained, adding that the bulk of the demand will come from these areas going forward and may see more participation from other mainstream investors.

However, there may also be challenges in building businesses in tier 2 areas and beyond owing to factors such as lack of exposure to the affluent class and limited access to capital, which could delay the time taken to monetize a startup.

The government’s latest Periodic Labour Force Survey showed that while availability of jobs had improved the quality of employment hadn’t. India’s rural labour market is still dominated by agriculture, whereas rural youth overwhelmingly hope for a salaried job, the survey found.

Through various initiatives, Aavishkaar’s foundation has educated children in several low-income districts on how to build a business sustainably and come up with ideas that solve a problem locally. 

Rai also noted the importance of technology and tools like artificial intelligence that have democratized access. “AI has taken intelligence down to every average common person, which means even a person sitting in a village with some level of understanding can instruct an AI program," he concluded.

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