Unitus Seed Fund is laser focused on making early-stage bets on for-profit startups, with potential to make an impact on the masses. In this chat with Dave Richards, co-founder and Managing Partner, we take a peek into the firm’s operations and investment approach
For long, development was considered the work of the government. But with improvement in the overall lifestyle and earning capacity of individuals, there is an interesting transformation being seen across the country. Several capable youngsters and professionals are coming forward to work in the development sector, initiating projects creating products and services that will improve the lives of the masses.
Unfortunately, post the surge of initial success, they are unable to scale due to paucity of funds. What they need is a seed fund and a patient investor who understands that the social sector investments are slow to return.
USF has brought together established players such as Pfizer, PATH, Narayana Health and Manipal Hospitals as partners in the StartHealth program, thus giving early-stage ventures in the healthcare space not only capital but also access to potential partners.
Realising the potential (both financial and impact) of social ventures and their need for seed capital, U.S.-based Unitus Group, which supports ventures that work on alleviating global poverty using sustainable and scalable models, set up Unitus Seed Fund, a US$20 million seed-stage investment fund, in 2008. But that was not its first port of entry into the Indian market.
Unitus Group was started in 2000 in the U.S., and in 2004, it invested in several countries, including India, using the microfinance route. Seeing the potential, it launched a series of venture funds as catalytic experiments to support and invest in social ventures such as Bandhan, Equitas and Ujjivan. But one of the limitations was that Unitus was investing on in the microfinance sector and to the tune of US$1 million-US $2 million. Several social venture startups started approaching them for funding with smaller ticket sizes and businesses in healthcare and education.
Thus, the company stepped up its focus and in 2008, spun out Unitus Seed Fund (USF) to focus on investments in India. Initially, USF experimented with investing in a few ventures. Based on its learnings, it established a base in India with two partners in 2012. Recently, the fund raised US $23 million to invest in disruptive ventures that offer affordable services that improve the quality of life of the masses while being profitable. The team too has grown to 10 members and 18 companies have been invested in across segments such as healthcare, education, mobile, technology, retail and more. In addition, it also offers support in formulating strategies, operations, providing critical connections and securing growth capital.
Step by step
The first startup USF invested in was Bengaluru-based Hippocampus, which focused on rural education. At the time, the Umesh Malhotra, the founder-CEO of Hippocampus, set out on a journey to offer high-quality, low-cost kindergarten education and after school support centers to children in rural India. By July 2014, this education firm operated 128 learning centers, serving 7500 children and employing 400 teachers. By 2016, it hopes to scale up to 700 centers across the country. The impact a seed fund could have was clear and Unitus set out to scale this up further and look at India as a long-term bet.
It decided to go deep into the education and healthcare sectors. To formalize this further it started two initiatives – StartEdu and StartHealth – focused on these sectors, which have tremendous potential for both profits and impact.
Dave Richards, managing partner, who joined USF in 2005 with the specific goal of developing the Indian market, explains, “There are a growing number of startups delivering on education for masses. Under StartEdu, we conduct a business competition for educational startups in the impact segment who match certain criteria and the winner gets prize money of Rs. 5 lakh. And this is just the beginning.”
To evaluate the startups, USF has signed up with six to seven education-venture incubators. This also enables USF access to the startups in the educational segment. Irrespective of a win or loss, startups can benefit from mentoring from the incubators. In June, USF invested in the winner of the competition, LabInApp, a real-time 3D virtual laboratory to help students and teachers perform or demonstrate science experiments online.
StartHealth, the other branded program from USF, started with a similar focus and nearly 100s of applications were reviewed. But USF realised that the ventures were too early stage and not ready for investment. What they needed was an ecosystem that would enable them to put together all the elements needed to kickstart a venture in the healthcare space. This was not as easy as the education sector, and structured partners were critical to help with pilots and early-stage experiments.
For this purpose, USF has brought together established players such as Pfizer, PATH, Narayana Health and Manipal Hospitals as partners. The StartHealth will focus mainly on ventures that plan to develop healthcare technologies, provide a grant for research and development, provide them with access to testing space in the partner hospitals, handhold them through the process and provide them with the seed fund once they are ready. “So, it’s like a package where they get a grant and the platform to test their technology, as well as access to a seed fund when they are ready to start off,” points out Richards.
The company also has key metrics in place to track the progress of the ventures thus funded and believes in organic growth for sustained impact.
Partnering with experts
One of the keys to USF’s operations is the community of partners, called Catapult Partners, which it setup help its portfolio companies. “We have partnered with various professional firms – legal, talent and financial – who want to help social ventures. And there are entrepreneurs who need this help but cannot afford the high fees. So the Catapult partners offer such services at a comparatively lower price,” explains Richards.
‘Speed to Seed’ is a programme aimed at improving the turnaround from incubators since less than five per cent of the ventures get funding after the students graduate. For this, USF has partnered with USAID (United States Agency for International Development) to help the incubators improve the results of their graduates by 20 per cent. It also aims to cull the best practices of success stories and to improve the funding scenario. USF mostly invests in ticket sizes of Rs. 75 lakh to a crore.
The other programme USF has launched is the ‘Speed to Series A’ programme to help companies prepare to grow enough, to get to a Series-A level. Right from recruitment, business operations, strategy, partnerships to preparing the investment pitch, through this program, USF works with the companies to help them take the best course of action.
Growing in numbers
Currently, USF is able to invest in eight to ten deals a year through these channels. But Richards admits that while there are many more ventures out there, finding them is a big challenge.
Since first-time entrepreneurs are not usually aware of the options they have USF is creating the various ways through which they can reach out to these ventures.
“There was a lot of effort involved in raising the first fund,” explains Richards, adding, “and also a lot of firsts.” Seed funds, even globally, are only a decade old and the economies of the fund houses work differently from venture funds. So USF has found other revenue paths related to the work it does. For instance, the way the investment partners are brought in. USAID funds the part-time venture partners USF has in the 10 cities of India. The company has also found people to work on part performance-based compensation.
Undoubtedly, seed funds like USF work amidst many challenges, with the foremost being government restrictions on foreign investments. “It is very entrepreneur-unfriendly,” says Richards candidly.
Another primary challenge is the need for a better exit ecosystem, but that is something he’s hopeful of in the coming years.
“We hope to invest in 10 to 12 companies a year. We see the potential and may soon launch a second fund,” he says, as we wrap up the conversation.
Unitus Seed Fund has introduced branded offerings such as StartEdu, StartHealth and Catapult Partners. Dave Richards explains that this helps create a unified communication for the offering under that brand.
So, for instance, StartEdu is laser-focused on educational services and ed-tech startups, and offers everything from business plan competitions, mentoring and access to seed-stage funding for this sector. StartHealth, offers the same for healthcare partners, but with additional access to its partners in the program, Manipal Hospitals, Narayana Health, PATH and Pfizer.