Editorial

Where are the Jobs? Findings and Insights from Upaya’s Accelerator Application Process

Where are the Jobs? Findings and Insights from Upaya’s Accelerator Application Process

What can the applications for Upaya’s accelerator program tell us about the early-stage companies that are creating jobs for people in extreme poverty? Upaya’s India Country Director, Amit Alex, takes a closer look at the pool of applicants to answer a pressing question in India today: Where are the jobs?

The Need of the Hour: Agri-Business Innovation

The Need of the Hour: Agri-Business Innovation

Farmers around the world face intense pressure. Steadily rising cost of inputs, combined with downward pressure on prices, and price volatility in general, make it difficult to predict how much income one can earn in any given season. Despite the grim trends, I am optimistic that dedicated entrepreneurs and creative business models can usher in the operational and technological innovations that are needed.

Pioneering Capital: Opportunities for Impact Investors

Pioneering Capital: Opportunities for Impact Investors

In a piece written for NextBillion.net, Upaya's CEO, Sachi Shenoy, and board member, Nathan Byrd, discuss the challenges and opportunities around pioneering capital, and how impact investors can do so much more with much less. 

Scaling Mountains to Get to Scale

Letter from Executive Director, Sachi Shenoy

I’m not a marathon runner. Or a triathlete. Or a mountain climber. In fact, you could say that my only “extreme” passion is my obsession with fighting poverty at Upaya. 

That being said, 2015 was my Everest.

When we started Upaya nearly 5 years ago, I knew this would be the hardest work I'd ever done. What I didn’t know was that in 2015, earthquakes, floods and fires would threaten our own offices and our partners', and that our team would be challenged by life-threatening illnesses and staff transitions.

Even in the face of all this adversity, even with this mountain to climb, 2015 has also been our greatest success. Thanks to our team’s dedication and tenacity, we:

  • Doubled Upaya’s investment portfolio! (10 partners and counting...)
  • Attracted 5x in follow-on investment capital
  • Had our 1st exit (and capital reinvestment)
  • Doubled our job numbers: Upaya’s partners are now employing 2,329 individuals

The tough stuff is not often featured in year-end letters from small non-profits, but I think it’s an important story to tell. It is not only authentic, it exemplifies our spirit of resilience and teamwork. These are also the same traits we admire in our portfolio partners and their employees. Our newsletter includes profiles of two other fearless individuals: Jamuna and Wilma. I hope you read their stories. Their struggles and successes continue to fuel my commitment to this work, and have helped me raise the bar for 2016.

Next year, our goal is to double our outreach once again, and create over 5,000 jobs in 2016 for families like Jamuna’s. As I share these aspirations, I also extend my deepest gratitude. This work wouldn’t be possible without our very dedicated “base camp” team: You! I thank you sincerely for making this rocky year one that ended with such celebration and victory.

So, I take back what I said. I AM a mountain climber. At Upaya, we all are. We are the risk takers. The do-ers. The believers that it can be done.

Thank you for being a part of this hard, beautiful, life-changing work.

Sincerely,

Sachi Shenoy
Executive Director

 

Thoughts on GIIN's "Impact Measurement (IM) and Performance Management Training"

At Upaya, the process of collecting and assessing beneficiary data to track outcomes and measure impact is fundamental to our work. After all, four years ago the organization was founded with a hypothesis that providing jobs -- and not handouts -- is the most efficient and effective way for the “ultra poor” to progress out of poverty. To date, we have sought to prove or disprove this hypothesis through social performance measurement (what we internally refer to as “SPM”), the systematic collection and analysis of beneficiary level information.

 

I recently had the wonderful opportunity of attending the “Impact Measurement (IM) and Performance Management Training” in Bangalore organized by the Global Impact Investing Network (GIIN) in collaboration with international consultancy Steward Redqueen and Social Value International, to reflect on Upaya’s methodology and revisit some of these ideas. The purpose of the training was to introduce practitioners to different IM frameworks and ways in which these frameworks could be used to suit the context of an individual organization and its mission.


Some of my key takeaways from the training were:

  • Don’t overstress the rigour; it should be “good enough”
  • Data is not just for reporting but also for decision making
  • Consider establishing a counterfactual in the setting

Financial and business decisions are made everyday on the basis of imperfect information provided by financial accounting frameworks. Yet when it comes to evaluating impact, we tend to hold ourselves to a higher standard or rigour --where randomized control trials are considered to be the gold standard. However, sometimes the fear of publishing imperfect impact data gets in the way of doing any IM activity. If the data is ”good enough” to spot trends, aid in decision-making and undertake some course correction, and not overly tax human or financial resources, then it is worth undertaking.

Secondly, these days it appears that impact data is mostly used for reporting outwardly to stakeholders, such as philanthropists and investors. In doing this, we overlook the critical role data can play in helping an entrepreneur and/or management team make decisions about the business itself. The challenge most often cited among practitioners is one of constrained resources - the buy-in needed to undertake the exercise of data collection and the need for doing it all. For an early stage enterprise that is working to expand the business, build the team, formulate marketing strategy, and raise funding, IM is a weighty commitment.

Data collected through impact measurement, however, should not be seen separate and distinct from business data. Instead, if an IM framework were designed to provide useful insights for the business about its beneficiaries, that could then inform refinements to the core product or service, then there exists a higher probability of entrepreneur’s buy-in and also better quality data.

Last, but certainly not least, is the need to accommodate the counterfactual in the actual impact assessment. A counterfactual simply put means “what would have happened anyways, without the intervention in question.”  A counterfactual could be in the form of state and national averages based on government data. Or it could be a more statistically rigorous “control group” or “non- intervention group.” The counterfactual, when compared with data that depicts the outcomes of the intervention, can give us a clearer indication of impact, or what positive effects can be attributed to the intervention. In essence, it can provide the necessary context and help us paint a picture of the impact that has occurred.

In the coming months, we will integrate some of these learnings into our SPM framework. We hope to make our system of impact assessment more robust so as to provide high quality information on the progress made out of poverty by our beneficiaries. Our goal is to simultaneously provide valuable insights and learnings to our entrepreneurs, to support the continued growth of their businesses and the creation of hundreds more jobs.

Four interesting takeaways from the GIIN/ Dalberg “Landscape for Impact Investing in South Asia” report

On 18 December 2014, the Global Impact Investing Network (GIIN), in partnership with Dalberg Global Development Advisors, released a report that provides a “state of the market” landscape analysis of the impact investing industry in South Asia. The Landscape for Impact Investing in South Asia looks at the $8.9 billion in deployed impact investment capital in six countries – India, Bangladesh, Pakistan, Myanmar, Nepal, and Sri Lanka – and paints a picture of a “diverse but growing impact investing market across South Asia.”

As the report has circulated amongst the Upaya team, four main points have jumped off the page. Some of them mirror observations we’ve seen through our own experience investing in India, and others shed light on issues we are wrestling with. In no particular order:

Two of the top five areas for impact investment in South Asia – Manufacturing and Agriculture/ Food Processing - are directly contributing to livelihood enhancement. That said, they are still only 17% of the identified market.

Broadly speaking, manufacturing and agri-processing are two broad areas under which our team has focused its livelihood development efforts and we are excited to see them crack the top five areas for impact investment. 

However, the fact that the two segments combined are still a smaller percentage of the impact investment market than each of the top two categories - Financial Services and Energy – shows that we still need to expand the conversation about job creation and its social benefits in the impact investment community.  

“There is also a need to bring less-exposed enterprises into the fold in a number of countries. Even in India, where formal networks of entrepreneurs exist, it is difficult to find enterprises that are not part of these networks.”

This point really hits the heart of one of the biggest challenges in the impact investment space – pipeline. Right now, too many impact funds are only looking at the businesses that self-identify as social enterprises, and are only doing due diligence in that limited pool. The result is a sort of “social venture ghetto” where a subset of entrepreneurs are continually showcased together at business school competitions and conference panels, thus creating the impression that they represent the full scope of social ventures in the space.

Not coincidentally, the investors who have been successful are the ones who have not limited their purview to that ghetto. For Upaya, the majority of entrepreneurs we support do not necessarily self-identify as social enterprises, but simply as businesses operating in poor communities. Friend of Upaya Artha Initiative has taken a similar view of the issue with their Artha Venture Challenge, a competition that has uncovered several great companies outside of the mainstream social enterprise conversation. In both cases, Upaya and Artha have had success in finding the types of investment opportunities that were sitting outside the standard impact investor conversation but are having a positive impact through their work.

“[In India] funds are shifting toward a less opportunistic and more hypothesis-driven approach to selection; in this new approach, these funds start with the identification of a problem in a given sector, then identify a potential solution (hypothesis), and subsequently seek organizations that contribute to this solution.”

Among the team we’ve long been wary of the proliferation of impact investing funds whose portfolio companies are united only by a broad notion of “positive impact” rather than a specific type of change they are working toward.  Our concern is that, without a unifying objective, funds will scatter investments across a variety of issue areas and miss the opportunity to aim significant resources at a specific problem.

Of course, Upaya has developed its own hypothesis – support Small & Growing Businesses that can be large scale employers in ultra poor communities – and are pleased to see that others are starting to bring their own theses into sharp relief. I would certainly point to our friends at Omnivore Partners as a great example of what can happen when a fund pursues clear and measurable outcomes in a specific area (in their case, agricultural supply chains).

In India, “foreign funds are prohibited from investing in debt and, as a result, most of the capital from [foreign] impact funds is deployed through equity instruments. Consequently, small domestic funds are emerging to fulfill the need for early stage debt.”

Accessing affordable working capital debts is a continual challenge for many SGBs in India, including some of Upaya’s partners at various points in their early lifecycle.

For much of the past year, our team has worked with domestic lenders to find creative and effective working capital solutions for our partners. What they are now coming to see that, while smaller domestic lenders are playing a role, these funds still have a big gap to bridge if they are to fulfill the credit needs of SGBs. It is an issue that Sreejith, Tanya, and the team are working hard on, and we are all glad to see this observation in the report.

Celebrating Women Leaders

Representing Upaya at the Clinton Global Initiative for a second year in a row, I was honored to meet Secretary of State Hillary Clinton and share with her Upaya’s successful completion of its Commitment to Action — to double the number of jobs in our portfolio over the past year! The timing could not have been better, either, as Secretary Clinton told the assembled members earlier that day that “We need to provide the support systems that enable … the array of opportunities that women at all ages should have.” I was heartened by this statement, and could not agree more when she followed it up by asserting “work is an essential part of one’s purpose in life.”

A common theme during the meeting was the empowerment of women and girls all over the world, and the discussions made me reflect on our own experience as an organization that has now promoted entrepreneurship for over three years in India’s poorest districts.

We’ve seen with our own eyes the power of women in the workforce. A woman who earns is far more likely to provide nutritious food for her family, send her children to school and save for the future.

We have seen the effect that a woman’s job has on her daughters — they start to believe that they too can be productive and more independent when they are older. They aspire to stay in school, reject the notion of early-teen marriage, and collectively perpetuate a virtuous cycle that will lift their communities out of poverty.

Women entrepreneurs are an especially powerful breed — they are fearless, have overcome seemingly insurmountable societal obstacles to pursue their dreams, and run their companies with a devotion and purpose that is infectious. These entrepreneurs are committed to hiring other women, counseling them through their own challenges at home, and providing a safe haven for them in the workplace. Women helping women, women helping girls … it’s a natural rhythm we kick off when we equip just one in a community with the funds and the right tools to start a business. 

Upaya is more determined than ever to identify the women leaders of tomorrow in India and nurture their incredible potential. And after my recent experience, I know we’re not in this alone.

New Frontiers: Measuring Progress Beyond the Pay Packet

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Authored by Upaya's own Jyotsna Taparia, this article was submitted in June to the Devex/ USAID "Frontiers in Development" Essay Competition.  The competition prompted writes to submit their thoughts on a variety of questions under the heading How would you Eradicate Extreme Poverty by 2030? 

 

Q: Aside from income, how might we define and measure other dimensions of extreme poverty?

Development requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as intolerance or overactivity of repressive states.
-Amartya Sen (1999), Development as Freedom

For far too long the discourse on poverty has been limited to income or lack of it thereof. The discourse on extreme poverty or absolute poverty has been taking its shape and form since early 80’s. In 1990, the World Bank proposed that global poverty should be measured through the standards of the poorest countries and arrived at a $1 a day poverty threshold, a figure that was last updated to $1.25 a day (based on 2005 PPP)[1]. This definition also became the basis for Millennium Development Goal #1: reduce by half the proportion of extreme poor (those living under $1.25 a day) by 2015.

However, income measures can only go so far as to capture the consumption capacity of an individual, calculated either in monetary terms or nutritional count. They are grossly insufficient in capturing extreme poverty as they do not exhibit any sensitivity towards the depth[2], duration and direction[3] of poverty.

In his seminal work Development as Freedom (1999), Nobel laureate Amartya Sen outlines how the development debate should be structured. Sen postulates that development is closely linked to three sets of freedom: economic, social and political. Poverty in this framework is described as absence of at least one freedom. According to Joseph Wrensinski, a lifelong activist and founder of the ATD Fourth World, extreme poverty is a “... lack of basic security [that] simultaneously affects several aspects of people’s lives, when it is prolonged and when it severely compromises people’s chances of regaining their rights and of reassuming their responsibilities in the foreseeable future.” The underpinnings of this approach are largely similar to what Sen proposes - poverty is deeper than just the state of material deprivation and is not static in time.

From the postulations of Sen and Wrensinski, it’s clear that extreme poverty is a result of three crucial factors:

a. Availability and efficiency of human, financial and physical assets

b. Inequality in the availability of opportunities and ability to exercise agency

c. Interaction with measurable deprivations that reinforce the impact of others

Despite the longstanding focus on income as the sole indication, a significant body of work has emerged establishing the multidimensional nature of poverty both at the household and at the community level. However, identification of the extremely poor based on this multidimensionality poses its own set of unique challenges. For example, if the indicators being used are income, school attendance, nutritional status and health status, then there are some scholars who argue that a household falling below the minimum threshold on any one of the indicators should be considered poor. There are still others who contend that households should score low on all indicators in order to qualify as poor. With these conflicting approaches to poverty identification, one runs the risk of erroneously including or excluding a fraction of the poor population when developing programme interventions (also known as an error of commission or omission.)

Extreme poverty measurement is much more complex than a simple error of omission or commission. It has been observed that deprivation of one indicator actually has negative impact on other indicators, resulting in a self-perpetuating cycle of poverty that is often referred to as the “vicious cycle of poverty.” Thus any discussion of alternative measures must look at these trailing indicators as well as leading ones. These additional indicators can not only capture the effect of extreme poverty, but also show us the progress being made by a household. For example, a household that cannot afford to send its children to school will see them working either with their parents or elsewhere. The lack of formal education and skills won’t allow them to compete in the more remunerative skilled job market and will often result in a lower household income.

Following this logic, it is useful to look deeper at some of the trailing indicators of extreme poverty that are common to all contexts and benchmark them against established trends, such as:

      Households that typically spend more than 50% of their income on food expenditure are more sensitive to income shocks and less likely to avail of services like health and education. Deprivation for these households would be on multiple counts - lack of food, education, quality health care and other services.  Therefore an increase in income should result in a decline in the food expenditure to income ratio[4] but also a concurrent increase in the uptake of the other services.

      Households relying on manual labour (informal and unorganized) as their primary source of income are more likely to be in the extreme poor category as the availability of work is not only infrequent and erratic in nature but also low paying. Therefore, tracking changes in the nature of the work that generates income for the family can provide valuable insights.

      The presence or absence of certain classes of assets is also an indicator of the extent of poverty in the household. A low percentage ownership of productive assets (land, livestock, simple machinery and tools etc.) is a likely trailing indicator of extreme poverty. 

      Households rate of electrification against local and regional statistics. Electrification has a direct impact on trailing indicators - household assets, cooking and refrigeration, educational success - and therefore is often prioritized by households as income stabilizes or increases. Admittedly, the legality of such connections is often murky at best, but it is nonetheless an indicator of a household’s day-to-day income situation.

Because extreme poverty is relative, we must look at each case in the context of a larger community. Geography and surroundings play an important role in determining the common minimum threshold for a poverty measure or even if the measure will prove to be valuable in providing insights into the extent of deprivation. Therefore, the goal of poverty measurement should not be to create a one-size-fits-all multidimensional index but rather a set of robust indicators that is most relevant to the local context. While this route may not allow for seamless cross comparison, it is successful in achieving a high degree of universality.

---

[1]Ravillion et. al (2008). Dollar a Day revisited, http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2008/09/02/000158349_20080902095754/Rendered/PDF/wps4620.pdf

[2]Depth of poverty is related to the extent by which a household falls below the poverty line threshold.

[3]Households also show movement out of poverty to fall back again due to external shocks (for example, detection of an ailment with prolonged treatment, natural calamities etc.)

[4]For a richer discussion on this refer to http://www.ers.usda.gov/publications/err-economic-research-report/err89.aspx

Do You Want More Upaya? Well You're in Luck!

The re-launch of upayasv.org is more than just new layouts, photos and fonts. It also is an opportunity for us to bring a new voice into the global conversation about ultra poverty, employment, and entrepreneurship. 

The people who make up the Upaya team each bring a unique set of experiences and perspectives to the organization. I would say twice a week I wake up to an email with some article, video, or podcast that one of my colleagues is struck by, and it usually sparks a fascinating dialog among people looking at a single issue from a variety of different angles. Think of it as a cross between Squawk Box, Stanford Social Innovation Review, and Guy Kawasaki’s How to Change the World blog, with a dash of boringdevelopment.com thrown in for a bit of pragmatism and humor. We always thought that one fine day we would  start sharing these conversations with the world, and that day has now come.

So what can you expect from this blog? More than anything, it will be a candid look at the conversation around a new approach to extreme poverty alleviation. Sometimes the conversation will be more academic, other times it will be more casual, but it will always give you an opportunity to learn something new. We will write for entrepreneurs and investors, students and social innovators, philanthropists and philosophers alike, and welcome all readers to share their thoughts in the comments section.

As we set out, we have four types of posts in mind:

  1. “What We’re Seeing” - a list of three interesting articles, multimedia pieces, and events that caught our attention, along with a few lines about what makes them interesting. 
  2. “New Frontiers” - As an organization we’re committed to getting beyond the metros and into communities to learn about new opportunities, and we’re happy to bring readers along on that journey. A member of the Upaya team will profile an industry or geography where we feel there is potential for job creation and explain why. 
  3. “Best Practices” - from our work with our current partners and conversations with peers, we’re constantly learning about the issues entrepreneurs face and new tools to help them be successful.  
  4. “Counterpoint” - Real change requires challenging current assumptions, and as an organization Upaya is not afraid to do just that. If we read or hear something we disagree with in the fields of development, entrepreneurship, or philanthropy, we’ll talk about it. We’re not afraid to take an unpopular opinion, but are always considerate of differing opinions.

One last promise - you have my word that this will not just be a megaphone for updates about Upaya. That what our News page is for. This blog is a place where we can stretch our legs, talk about critical issues, and hear from those who are interested in the same issues we are.

So there you have it. We’ll try to post a few times a month to start, and more frequently as we continue to grow. Questions and comments are always welcome - just give us a shout.

- Steve

Editorial for moneyspentwell.org: Strengthening the silk industry and its workers

This article was originally published 7 April 2014 on moneyspentwell.org.

The sleepy town of Bhagalpur, India, is famous for two things – fertile lands and fine silks. The second largest city in Bihar, Bhagalpur has earned the title of ‘Silk City’ for the high quality of Tussar Silk – a high-luster, strong, lightweight copper silk that wears very well in tropical heat, most valuable when woven by hand. Weaving in Bhagalpur is an art that has been passed on for generations. Working on large wooden pit-style looms found across the city that have been with families for decades, parents share the secrets of crafting fine Tussar Silk scarves and sarees. In fact, there are an estimated 30,000 handloom weavers and about 25,000 handlooms in Bhagalpur.

A silk weaver at his loom in Bhagalpur, Bihar, India. Courtesy: Upaya SV.

A silk weaver at his loom in Bhagalpur, Bihar, India. Courtesy: Upaya SV.

However, Tussar Silk weaving is also a dying trade in Bhagalpur as the majority of those 25,000 looms sit idle, unable to provide a livelihood for their owners. It is estimated that that market for sarees in the country stands at $2 billion and poised to grow, but the move to less delicate power looms and an influx of cheap imported chinese silks have flooded the domestic saree market.

Even in the face of this competition, a niche market that values handcrafted products remains. However, exploitative supply chains and a lack of market linkages to wholesale buyers have made it impossible for weavers to earn a viable and dependable living from their work. As such, the average weaver earns less than 25% of the final sale price of a saree that takes weeks to create. Furthermore, without continual skill-building and access to new materials, there is no way for the weavers to build skills needed to meet changing consumer trends and preferences.

Bhagalpur itself has seen very little industrial development, resulting in widespread migration to other parts of the country. As a result many weavers have left the trade altogether, migrating to urban centers to find construction work or taking up farming far from Bhagalpur. In fact, in 2004 the Government of India named Bhagalpur in the list of country’s 250 most backward (note: poor) districts (of a total of 640).

Those who continue weaving do so part time, cobbling together manual labor jobs and other unskilled activities to earn a living. One recent survey has indicated that most weaving households live on less than Rs. 3000 ($50) each month.

Compounding this situation is the fact that payments received from middlemen – local traders intent on buying products as cheaply as possible, regardless of their quality – are opaque and erratic.  Many weavers complain that, not only do they not receive payment that they deserve, and are forced to make multiple visits to these middlemen to get their due. Facing the prospect of being seen as “troublesome” and losing their current source of livelihood, many do not pursue the matter and allow the cycle of exploitation to continue.

Eco Kargha weaver prepares bobbins of silk thread in Bhagalpur, Bihar, India. Courtesy: Upaya SV

Eco Kargha weaver prepares bobbins of silk thread in Bhagalpur, Bihar, India. Courtesy: Upaya SV

In November 2012, Upaya Social Ventures initiated a partnership with Bhagalpur based start-up Eco Kargha Marketing Private Limited headed by Dr. Ravi Chandra, a passionate Bihar native with a strong desire to see his state thrive. Hailing from the capital city of Patna, Ravi has worked tirelessly to create institutions in Bihar that can effect large scale economic growth and development in the state.

Eco Kargha was set up to improve the quality of life for rural weavers by providing the linkages and resources for the modernization of the ailing traditional handloom industry. The company trains marginalized Tussar Silk weavers on new skills, techniques, equipment and designs for producing high quality products for the modern retail marketplace. Eco Kargha also manages relationships with large national retailers such as Fab India and ANS Exports, bringing in bulk orders and ensuring that weavers can earn a full-time living from their work at the loom.

“Customers across India know the quality of Tussar Silks and are ready to pay handsomely for them. Weavers in Bhagalpur are extremely talented and ready to produce the garments. All we are doing is bringing those producers and consumers together in a beneficial way,” said Dr. Chandra.

The company is able to break the stranglehold that middlemen and traders have on the industry by directly working with the artisans. By forming formal weaver groups with a master weaver at helm, these groups in collective are ensured of a steady stream of work and greater bargaining power. Through normalizing payments and improving transparency, Eco Kargha is tilting the economics of weaving back in the favor of the weavers. It has also worked to provide additional services – opening bank accounts, obtaining medical insurance cards – to these weavers through partnerships with existing Central and State Government programs.

In one year of operations it has been successful in earning revenues of over Rs. 80 lakhs ($130,000) by selling fabric, sarees and scarves to large export houses and established retail chains throughout India. To increase its footprint Eco Kargha has spent considerable time and effort on a conscious blend of B2B and B2C sales. The company has also launched Eco Stree, its in house brand of saree and scarves. Through their work they have been able to provide steady and predictable source of employment for over 100 weavers and increase their income levels by almost 50%.

One of the biggest pain points for Eco Kargha and other businesses that work directly with weavers is the high requirement for working capital.  A big component of the raw materials costs is the cost of yarn and dyes. This upfront advance payment constitutes almost 50% of the value of the order processed, but puts a strain on the company’s cash reserves. Due to the early stage of the company, financial institutions and lenders are reluctant to extend a line of credit.

Eco Kargha also faces the challenge of breaking into a saree market that has been dominated by a handful big players for decades. India’s saree market is estimated to generate $2 billion per year in sales and is projected to grow at 8.5% per annum. Within that market, Bhagalpur-made Tussar Silks remain a specialty product despite their nationwide renown. To tap this behemoth industry with deep-rooted interests is a challenge. To overcome the obstacles, Eco Kargha is assembling a professional and dynamic sales team with the right blend of industry experience and fresh talent.

Eco Kargha is projecting a growth rate of over 100% over the next two years, however, it will require equity investment up to $200,000 and an additional $160,000 in working capital debt to meet its goals.  The investment will allow Eco Kargha not only to ramp up its production capacity, but also to build infrastructure like dying units and establish a retail brand presence that will further enhance its competitive edge. Best of all, if Eco Kargha’s growth continues as projected, the company will be able to provide dignified employment to over 500 weavers and provide their families with a real path out of extreme poverty.

Editorial for nextbillion.net: What's Next for Impact Investing - How to bridge the 'Pioneer Gap' and support entrepreneurs in the earliest stages

Co-authored with Upaya Advisor Brian Arbogast, this article was originally published on 30 March 2013 on nextbillion.net. In December 2013, nextbillion.net readers voted this post one of the year's most influential

By mid 2011, Naveen Krishna, founder of SMV Wheels in Varanasi, India, employed 443 impoverished rickshaw pullers. Speaking with him then, one would not see any trace of the trials he endured two years earlier when he was burning through his savings and struggling to line up funds to launch SMV. He was not alone - entrepreneurs throughout the world struggle to find support for their ideas in the early years. Most run out of cash and have to scrap their ideas. Fortunately for Krishna, he received angel funding from his mentor, Sumit Swaroop, saving him from having to give up on SMV. By 2011, Krishna had refined his model and attracted $250,000 from five different impact investors.

A worker with SMV Wheels maintains one of the many rickshaws in the fleet, which employs hundreds of rickshaw pullers. (Image credit: SMV)

A worker with SMV Wheels maintains one of the many rickshaws in the fleet, which employs hundreds of rickshaw pullers. (Image credit: SMV)

Announcements of impact-branded seed funds and investornetworks have become so commonplace they no longer seem novel. It is heartening to see so much capital being deployed to these funds. However, the fact is most are structured to onlyinvest in companies that are already succeeding and ready to scale. Their fund managers cannot afford not to reap a return, so it is extremely hard for these funds to take chances on novel ideas or unproven approaches. The resulting Pioneer Gap – best captured in the Monitor Group and Acumen Fund’s “From Blueprint to Scale” report – has been exposed, leaving many to ask what do we need to do to ensure that entrepreneurs like Krishna have the angel funding they need?

Seeing the Need for Pioneer Capital

We founded Upaya Social Ventures with a mission to alleviate extreme poverty through job creation. We attack the Pioneer Gap head on by investing in early-stage (often unproven) concepts and empowering entrepreneurs like Krishna, who can be large-scale employers of the ultra poor.

In its earliest incarnation, Upaya was a for-profit concept, ready to harness social investment capital to realize its vision. However, even the most socially minded investors could not justify our uncertain return expectations with the high risk of funding startups rooted in extremely poor regions of North India. Nor were they willing to accept the overhead needed to provide hands-on business development support to entrepreneurs in the launch phase. These discussions reinforced for us the economic infeasibility of constructing a venture fund composed of small seed investments (less than $100,000) that can cover the costs of intensive technical assistance while producing a risk-appropriate financial return in a short amount of time.

We knew we needed to build a “safety valve” for the traditional venture model that would allow us to quickly back nascent but promising ideas and work alongside the entrepreneur to build the company. After extensive due diligence, we came to see philanthropic funds as the ideal capital to fill this role, ready to take chances in areas where return capital feared to tread. Furthermore, housing both the investing and technical assistance functions within a nonprofit – instead of splitting them through a hybrid model - opened access to foundations and donor agencies to more easily underwrite the needed business development support. Internally we called this strategy “Pioneer Capital,” and saw it as the best fit for our partners’ needs.

Like traditional grants, Pioneer Capital can provide the necessary cushion for entrepreneurs in the launch phase. However, unlike traditional grants, Pioneer Capital has a chance of producing financial upside for the investor. We at Upaya do believe that a handful of our investments will attain exits that yield decent returns, but those returns are exclusively restricted for reinvestment in future Upaya partners. Upaya’s goal is not to get rich off our investees, but to create a virtuous cycle of investment that can continually launch socially beneficial businesses.

Casting off the direct profit requirement freed the Upaya team to make small, catalytic investments into a dairy supply chain, silk weaving business, and domestic service training and placement firm for slum-dwellers. Alongside our seed funding, we have worked closely with these entrepreneurs and helped them assemble investor-ready business plans, financial statements, operational plans, HR procedures, and social metrics collection systems.

We have watched these businesses evolve from ideas scribbled on a dinner napkin into tangible operations that collectively employ more than 500 ultra-poor individuals, many earning a stable income for the first time. Furthermore, eager impact investors have approached each of our partners about possible investments as soon as they see a working unit model and feasible plan for scale.

What We’ve Learned Along the Way

There are countless others who are committed to catalyzing change in everything from clean energy to sanitation to health care that could benefit from our experience. We’ve learned plenty of lessons through our work and are happy to share them in the hope that they will help others fill the Pioneer Gap and create new impact investment opportunities in their areas of expertise. These lessons include:

Above: The son of a Samridhi employee milking a cow in front of the family home near Barabanki in Uttar Pradesh. (Image courtesy of Upaya Social Ventures)

Above: The son of a Samridhi employee milking a cow in front of the family home near Barabanki in Uttar Pradesh. (Image courtesy of Upaya Social Ventures)

Unique problems rarely have textbook solutions: As entrepreneurs experiment with their models, they need help from more experienced professionals. Some social business incubators provide technical support through required classroom-based training or off-site workshops. While they have value, this type of standardized instruction takes entrepreneurs out of the day-to-day management of their businesses and does not always equip them to adapt their models to their local realities. We find tremendous value in working with the entrepreneur on their turf, integrating the instruction into their reality. For example, when Upaya invested in Samridhi, a dairy company in Uttar Pradesh, it became clear that local cultural barriers made it hard for women to leave the home for several hours a day to work in a central dairy facility. Thus, it would be impossible to replicate dairy models that were successful in other geographies. By working alongside the entrepreneur in the field we were able to adapt the plan so that women could work from home. Without this onsite mentorship, we could not have helped the Samridhi team assemble a viable dairy model that, today, employs hundreds of local men and women.

Above: Traditional wooden looms have passed down for generations by weaving families in the poor communities in and around Bhagalpur, Bihar. An Eco Kargha employee follows a traditional method for spinning bobbins by hand.  (Image courtesy of Upaya Social Ventures)

Above: Traditional wooden looms have passed down for generations by weaving families in the poor communities in and around Bhagalpur, Bihar. An Eco Kargha employee follows a traditional method for spinning bobbins by hand.  (Image courtesy of Upaya Social Ventures)

Don’t make it a beauty pageant: Often the most effective solutions for a community don’t involve cutting-edge gadgetry or websites. Rather, expansion of commodity businesses, manufacturing, or service work may have a bigger impact - but investors must clearly understand their own goal to see the potential. This was the case with Upaya’s selection of Eco Kargha, a weaving company based in Bhagalpur, Bihar. Despite a centuries-old reputation for producing high quality silks, wools, and linens, the weaving industry in Bhagalpur was struggling to be a source of meaningful employment. The sole-proprietor and co-op based models that dominated the market lacked the sales and quality control capacity to take in and fill large domestic and international orders. Seeing an opportunity, Eco Kargha developed a concept that could market woven products, manage large wholesale orders, and in turn create steady, full-time employment in Bhagalpur. Of course, using wooden handloom technology to produce traditional sarees is hardly the type of “innovation” that captures the imagination of most social VCs. But because Upaya had oriented its selection process around a specific social goal – sustainable jobs – we backed a business with the potential to pay higher wages and make it possible for weaving to be a primary livelihood.

 

Don’t try to hit a grand slam if nobody is on base: Too often impact investors - even those trying to focus on the seed stage - are enamored with massive outreach numbers and pass up businesses that don’t immediately appear “scaleable.” As the “From Blueprint to Scale” report made clear, there is a lot of hard work that precedes scale, and impact investors should not expect entrepreneurs to reach this point with one single swing of the bat.  Instead, Upaya encourages all of its partners to first prove a financially viable unit model with a measurable level of social benefit before developing its scale plan. This approach can be seen in our partnership with Justrojgar, a company whose blend of training, placement, and employment support for service industry workers could help hundreds of thousands in the next few years. However, rather than trying to go for that scale immediately, we are working with the Justrojgar team to focus on one segment of its business - and only 50 pilot households – to refine its operational model and prove the unit economics. In turn, the company will be in a better position to showcase its social and financial potential to impact investors in successive funding rounds.

Looking Ahead

Impact investing is at an interesting crossroads. As Omidyar Network’s Matt Bannick and Paula Goldman articulated perfectly: “It is as if impact investors are lined up around the proverbial water pump waiting for the flood of deals, while no one is actually priming the pump!” If the goal is to encourage entrepreneurship and build a rich pipeline of novel solutions to age-old social problems, we must find creative strategies like the Pioneer Capital approach to give startups a better runway.

If we fall short, there's no telling how entrepreneurs like Krishna will ever have the chance to make a difference.