Despite the global health pandemic and its accompanying effects on the business and economic environment in 2020, impact enterprises received US $2.6 billion in investments across 243 equity deals and saw 13 successful exits. And while overall investments fell by 25 percent
vis-à-vis 2019, impact investors continued to pledge their support to solving critical social and environmental challenges through investments in scalable, tech-based, innovative social enterprises.
According to the annual impact investment research report ‘
2020 in Retrospect: India Impact Investment Trends’, the Indian impact sector will be more tech-led in future. The COVID-19 pandemic has been a game changer for the sector, with the lockdown and physical distancing norms rapidly increasing the adoption of internet and digital devices across all classes of society.
The sector witnessed a 16 percent rise in seed-stage investment volume; investors were most keen to back early-stage tech enterprises in the agriculture, livelihoods, and healthcare sectors. The decline in overall impact investment was, in fact, led by the fall in late-stage investments in financial access and healthcare enterprises.
Figure 1: Represents Volume (in percent) of Investments across sectors for 2019 & 2020. S
Source: IIC
Agriculture stayed the course during the year
The pandemic and strict lockdowns caused widespread disruptions across the agriculture-supply chain, including closing of markets, and a halt in several
on-ground operations. Despite this, enterprises in the agriculture sector attracted approximately US $440 million across 52 deals in 2020. The sector continued to see active investor interest, and the number of deals in 2020 remained almost unchanged from 2019.
Figure 2: Volume of Investment (US$ million in percent) across agriculture sub-sectors for 2020 & 2019.
Source: IIC
The expectation is that enterprises focused on enhancing market linkages in the agricultural value chain, will continue to see investor interest. This is because farmers are increasingly relying on technology to eliminate middlemen, improve transparency, and ensure they earn a bigger chunk of sale proceeds. Agri-inputs start-ups in pre-harvesting will also see
greater investor attention as farmers adopts innovative solutions for productivity improvements.
Education witnessed a record level of investment
With the national lockdown impacting traditional modes of education, there was a dire and urgent need for remote tech-based solutions to ensure that
335 million students enrolled in schools across the country could continue to learn.
As investors realised the opportunity that the crisis provided to EdTech companies, investment volumes in education rose by 65 percent to US $660 million, while the number of deals increased to 47, a jump of 20 percent from the 2019 levels. Most of it was due to a rise in Series B and later-stage deals.
Figure 3: Volume of Investment (US$ million in percent) across education sub-sectors for 2020 & 2019.
Source: IIC
Investors largely backed later-stage enterprises with proven success models, such as Unacademy, Vedantu, Cuemath, and Lead School. With government polices becoming more ed-tech friendly, this investment momentum is likely to continue.
Healthcare sector showed promise only in seed-stage investments
Despite the enhanced focus on health-related agendas during the pandemic, healthcare impact enterprises attracted the least volume of investments in 2020 totalling at US $200 million across 29 deals. This was a stark fall of 70 percent in investment volume, and 20 percent in the number of deals
vis-à-vis 2019.
The fall also appears to be substantial because multiple large-ticket deals took place in the late-stage online pharmacy segment the year before in 2019.
Figure 4: Volume of Investment (US$ million in percent) across healthcare sub-sectors for 2020 & 2019.
Source: IIC
In spite of the overall fall in investments, there was an approximately 85 percent rise in the number of seed-stage deals across healthcare segments in 2020. The pandemic, subsequent lockdowns, and the perceived risks of physically visiting healthcare clinics or hospitals led to telemedicine and cloud-enabled diagnostic tests gaining prominence in 2020. Diagnostics and decisions support, medical devices, and primary healthcare segments also saw a collective 30 percent rise in investment volumes.
Absence of late-stage follow-on deals led to a significant decline in financial access investments
While the financial access sector received the maximum volume of investments in 2020—as it does every year—the pandemic adversely impacted its core market segments, namely late-stage enterprises across microfinance, housing finance, and commercial vehicle finance.
This resulted in a 50 percent fall in investment volume and 35 percent decrease in the number of deals vis-à-vis 2019.
Figure 5: Volume of Investment (US $ million in percent) across financial access sub-sectors for 2020 & 2019.
Source: IIC
In contrast to the more established financial access sub-segments, fintech did well in 2020. This was primarily because
digital payments and transactions recorded remarkable growth given the strict norms around physical distancing. The country quickly turned to tech-based financial products for day-to-day transactions.
Technology for development showed promise, especially in the Small to Medium Enterprise (SME) space
This segment essentially covers cross-cutting use cases of technology for social impact by providing (i) access to new markets and new products (utilitarian products), (ii) access to new sources of income (future of work), (iii) access to connectivity (eg, SME tech) and/or (iv) access to content (media/ vernacular). This does not cover the tech-enabled solutions covered in the other sectors.
As mentioned earlier, technology adoption leapfrogged years in 2020. The sector attracted US $331 million up 76 percent over 2019 levels. However, a large part of this was on account of a single enterprise, Daily Hunt, which alone received US $214 million in 2020. The overall number of deals fell from 43 in 2019 to 34 in 2020.
Figure 6: Volume of Investment (US$ million in percent) across technology for development sub-sectors for 2020 & 2019.
Source: IIC
Conclusion
Notwithstanding the pandemic, Indian impact enterprises have proved to be resilient: Entrepreneurs were quick to re-orient businesses, and leverage tech support to meet the needs of the masses.
But to meaningfully tackle India’s socio-economic challenges, exacerbated by the dramatic headwinds unleashed by COVID-19, the following steps could be taken to scale impact through a more intentional and proactive partnership between the government and private sector.
- Proactive government support: The government has already taken several laudable initiatives in this area including the launch of the Social Stock Exchange platform, credit guarantee scheme for MSMEs and so on. A stronger partnership with the government could provide an excellent opportunity for the sector to achieve even greater impact.
- Private capital for public good: Impact investors need to attract greater amounts of private capital, expanding the global and domestic investor base, and further build the market for early stage as well as patient equity, and debt risk capital. There is an urgent need for us to continue to communicate the narrative of India as a high-quality impact investing destination with the capacity to provide affordable and innovative solutions for India’s poor.
- Innovative financing models: There is much greater potential for use of outcome-based or pay for success funding instruments like impact bonds and guarantee structures to improve the effectiveness of public and philanthropic spending and unlock additional private risk capital.
- Nurturing and scaling impact enterprises: Impact investors need to continue identifying and scaling the best bottom-of-pyramid focused innovations across key social sectors, helping them with follow-on capital and strategic support to create impact at a national level, and make responsible and regular exits. At the same time, we would urge central and state governments to leverage the unique product innovations from the sector to aid in their own developmental efforts.
About Impact Investors Council
The Impact Investors Council (IIC) is India's preeminent member-based not for profit industry body set up to strengthen Impact Investing in the country. IIC's key areas of activity and effort include advocacy and policy support, research, and publications in addition to a strong focus on impact measurement and management. We are supported by 40+ investors, asset managers as well as development sector organisations primarily focused on creating market-based models for India’s low-income customers.
www.iiic.in
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