Why investing in “good” goes a long way

Angel investors are beginning to flock to impact investments as the social enterprise space grows in Asia. Rob John outlines the three different types of angel investors today and how they can make a social impact.

One of the most intriguing developments of the last 20 years is the rise of the “social enterprise” – a hybrid between a traditional private company and a charitable organisation that pursues a social objective through a business model.

One example is Tjacket, a Singapore-based company whose corporate partners include National University of Singapore, DBS, SE Hub and SE Association for Bridging Social Businesses. It provides wearable technology that simulates hugging to help calm adults and children with anxiety and related conditions so that they can function more effectively and independently.

Tjacket is among hundreds of social enterprises sprouting up in this region. Like their purely commercial cousins, social enterprises need access to finance and business advice along all stages of their growth towards sustained profitability. These usually come from angel investors.

Angels are typically high-net worth individuals with business acumen, often successful entrepreneurs or senior corporate executives. Perhaps more important than the equity they inject into a business is the practical advice they give an entrepreneur together with introductions to potential customers, suppliers and other funders.

Estimating the size of the angel investment market is notoriously difficult because many investments are undisclosed, individual deals. The US dominates the angel market – the University of New Hampshire estimates its size as US$24.1 billion in 2014 – with some 250,000 angels investing in 50,000 ventures.

The sector is growing throughout Asia, promoted by networks such as the Indian Angel Network (IAN) and Business Angel Network, a leading investment network in Southeast Asia set up in 2001 by Singapore-based angel investors.

Learning from commercial start-ups, (social enterprises) will articulate a clear sense of mission, understand their market, produce realistic financial projects and have a management team skilled at execution.

Traditionally, angel investors put their money in commercial firms that potentially offer healthy financial returns. But social enterprises, of late, have been giving commercial firms a run for their money when it comes to attracting angel investors. We observe a growing interest among angel investors in enterprises that have a sustainable or social impact to the community.

In particular, our study on the rise of angels investing in social enterprises in Asia shows there are various types of angel investors. These are migrating angels, impact angel networks and individual impact angels.

Migrating angels

Angel networks have traditionally sourced purely commercial opportunities for their members, but increasingly these networks are ‘migrating’ into the social space where new ventures aim to do good by doing well.

IAN is Asia’s largest angel network with over 400 members investing in India and beyond. During its 10 years, the network has helped angels source deals across a variety of sectors such as lifestyle, manufacturing or healthcare. 

In 2013, a group of its angels launched IAN Impact to migrate their funds by investing in start-up enterprises that could potentially yield commercial success as well as social impact. Almost 20 per cent of the 400 plus ventures screened by the network each month are deemed to have a social value that is as important as its commercial viability.

During its first full year, IAN Impact angels invested in seven social businesses, the first being Gram Vaani (“Village Voice”), a social media technology company that serves two million rural users cutting across the digital divide, like a Facebook giving equal access to a media platform so that rural residents can share farming knowledge and even complain about corrupt ration officials.

A group of 23 IAN angels clubbed together with a niche media investment fund to provide US$500,000 in equity funding for Gram Vaani, with one angel, a successful media entrepreneur, sitting on the company’s board. Its success has led to other angel networks in India migrating into this social space: Mumbai Angels – a platform that connects entrepreneurs and investors – showcases ventures with clear social objectives to potential investors. 

Impact angel networks

For mainstream angel networks, socially focused investments are a small, but growing minority of total deal flow. By contrast, a new breed of angel network is being formed to make impact investments exclusively. Such impact angel networks prioritise social businesses with the potential for commercial viability.

Invest2Innovate (i2i) is Pakistan’s first angel network and was launched to accelerate the social business opportunities for its community of impact angels.

In a market with little understanding or support for social enterprise start-ups, i2i has to take an ecosystem approach. It incubates enterprises, provides mentors, facilitates access to capital, helps mitigate risk for investors and supports players, therefore boosting the policy environment for social businesses. For instance, its 2016 accelerator class includes doctHER, a technology-enabled healthcare platform that connects female physicians with women and children in underserved communities.

Another is the Centre of Innovation, Incubation and Entrepreneurship (CIIE) which leverages the skills and research capacity of the Indian Institute of Management (IIM) in Ahmedabad to identify and suppot high-potential start-ups. It has sought businesses that combine “innovation with mass impact” and grown an angel network from amongst IIM alumni. Angels invest up to US$25,000 as individuals or in club deals, and provide hands-on mentoring to the ventures’ entrepreneurs.

Individual angels

Many angels also source their own investment opportunities in addition to those resulting from membership of networks. There is an increasing number of individual impact angels who after retiring from a long business career want to integrate their interest in philanthropy with angel investing activities.

An example is Patrick Cheung who grew up in Hong Kong, trained in engineering and built a multinational packaging company which he eventually sold. In retirement, he took time to understand the non-profit sector before becoming one of Hong Kong’s leading advocates for the social enterprise movement.

Cheung became one of the first investors in Dialogue in the Dark, (DiD) an event-based social enterprise that provides sighted people with the experience of being visually impaired and which provides unusual corporate training programmes, such as using deaf trainers to teach how to communicate without using conventional verbal means.

Cheung wanted DiD Hong Kong to be a sustainable business-like enterprise that would not need grant subsidy. With other angels, he provided start-up capital and business acumen and DiD Hong Kong was able to break even after two years. It now returns capped dividends to investors, and funds a foundation that serves the visually impaired.

These examples illustrate the interest angels have in investing in deals combining social impact and commercial viability. This is a nascent activity in Asia, and while we suspect it is growing, there is so far no research that quantifies the total number of angels in Asia or those seeking social impact deals.

The sector is likely to grow as social enterprises with sound business models will position themselves as credible opportunities for angel investors. Learning from commercial start-ups, they will articulate a clear sense of mission, understand their market, produce realistic financial projects and have a management team skilled at execution.

But angel investing is not for every entrepreneur. Angels bring engagement as well as finance, and an entrepreneur must have the appetite to take on board the advice offered by experienced angels.

If you are a business angel with a track record of helping SMEs to grow, why not consider investing in start-ups that aim to create social impact and give you a return on your investment?  Put your skills and passion to work by doing good and doing well.

 

Rob John is Visiting Senior Fellow at the Asia Centre for Social Entrepreneurship & Philanthropy, National University of Singapore (NUS) Business School.

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