Kartik Desai (Asha Impact): VCs look for disruptive innovation that can be delivered profitably with reliable execution

Kartik Desai leads Asha Impact, an impact investment platform for Indian HNIs and family offices, and a not-profit trust to engage with the government on development finance. Prior to Asha, he was a Vice President at Lok Capital and Aavishkaar, the two largest impact funds in India, and before this an investment banker with Merrill Lynch. He has also done consulting work for organizations including the UNDP and the Rockefeller Foundation and launched a social enterprise providing a co-working and culture center for underprivileged youth in New Delhi. Kartik was born in Delhi and raised in Geneva and New York, studying at Wharton and Columbia, before he returned to India in 2005 to begin his career journey as a pioneer in impact investing.

What is your story of coming back to India and joining the venture investment business?

I was born in India and raised in Geneva and the United States. I grew up in the New York City. My father worked in the United Nations as a diplomat so I attend mostly international schools but maintained close connection to India with regular travel and visits to NGOs even as a child. 

I graduated from the Wharton School at the University of Pennsylvania with a BS in Economics and from the School of International and Public Affairs at Columbia University with a Master in International Affairs. After working in the US, in 2005 I returned to India and I worked for about three years in the financial servicing sector as an investment banker at Merrill Lynch, which at that time was the leading capital market franchise in the country. There I went through a major market boom and was involved in executing large IPO, M&A and private equity transactions. A little before the global crisis hit, I made the shift to impact investing. Since then till now, roughly for 14 years, I have been working in this space of venture capital for social good.

Can you elaborate on what is impact investing and your journey in this area?

It is basically venture capital investing in startups that are serving the mass market, companies that are selling products and services to the low-income or middle-income population but on a fully commercially sustainable basis. It’s not philanthropy; it’s not any kind of subsidy. We are able to make VC type returns in cases where the business models scale effectively and then attract commercial capital. This became my passion. In 2007-2008 there were only five impact funds acting in India. Now it’s more than 50, so the industry has grown rapidly over the last many years. 

In 2007 I joined one of the early five funds, which was Lok Capital, based in Delhi, where I worked as vice president of investments. Lok was an early investor in many of microfinances companies of India, which provide loans to low income people as per the Grameen model. The idea originated in Bangladesh and then it was adopted in other countries like India where it became extremely commercially successful. Several of the MFIs funded by Lok grew in scale to become some of the largest companies in financial inclusion, listing on the stock exchange and getting banking licenses.

My other experience was with Aavishkaar Capital, by far the largest impact fund in India and also having a global footprint in Africa and Southeast Asia. I worked here specifically to help Avishkaar set up a new fund for South and Southeast Asia, with my role focused on making start-up investments similar to what we’ve seen in India in our neighbouring countries of Bangladesh, Pakistan and Sri Lanka. It was the first attempt by an Indian team to invest in the region, and especially in Pakistan which has difficult political relations with India. 

And in between these two jobs, I also set up my social enterprise, a company called What’s up Bharat (which means India in Hindi). This was an online platform for young people to do polling on sensitive social issues – how people feel about politics, religion, gender, poverty, human rights and so on. And it was also a three floor physical center for co-working, music, arts and events on social issues, the first such space focused on inclusion I am aware of. The idea was to allow people from different works of life – poor people, rich people, across political opinions – to interact and break boundaries. It was a very interesting social experiment but ultimately I closed it as it was not financially sustainable except through grant funding, and I was keen to go back to venture capital. 

Please, tell us more about the Asha Impact’s work

Asha Impact was founded in 2014 by two veteran business leaders who are highly respected investors and philanthropists, Mr. Vikram Gandhi and Mr. Pramod Bhasin, as a network for like-minded HNIs to leverage their collective expertise, networks, and capital for social impact. They hired me to set up and lead this organisation which has both for-profit and non-profit arm.

The Asha Circle Investment platform is a capital-on-call ‘virtual fund’ to mobilize domestic capital from high net worth individuals and family offices to fund high quality for-profit social entrepreneurs solving major social problems by leveraging business principles in a scalable and sustainable manner across the country. Over the last five years, we have invested in over twelve companies at the Series A and B stage and generated some decent returns and one very profitable exit to date. In 2018 we were voted as the top impact fund in India by Venture Intelligence.

What about the work of your non-profit in market building?

The second part of what we do is Asha Impact Trust, a non-profit entity to capture lessons from the experiences of our investee companies who are working on the ground and share these targeted insights with policymakers to design better market-friendly regulations to create social impact at scale. We do this work in specific social sectors like affordable housing, waste, or education and also broadly to drive policies that unlock more development capital – for example by India’s CSR law requiring all large companies to give a certain portion of corporate profits to charity.  The Trust also works to build the capacity of the impact investing ecosystem in India and globally by conducting research on issues like impact management and educating investors about the sector through conferences and communications outputs like our newsletters, op-eds, and webinars. Finally, we have been very active in building what is called the Blended Finance market at the intersection of philanthropy and commercial investing, with new financial instruments like Social Impact Bonds which can be used to fund NGOs in a more targeted and outcome focused way.

What are the core sectors you look at?

When we first started in 2014 we focused on four broad areas – financial services, which tends to give the best returns and has the most activity; affordable housing, waste management and energy. The latter three were all under-covered sectors despite having high capex/funding requirements and a strong policy push post the Modi government coming into power. After a few years, we also added Education as a major vertical and we have made three investments here including the company that we exited at a high return. In the last few years, we added Agriculture and Healthcare as two major areas where we continue to focus our new investments. So we are broadly a sector-agnostic fund with a focus four broad themes: financial inclusion; education & healthcare delivery; agribusiness and rural supply chain; and urban development (housing, waste, energy, mobility).

How you select specific startups to support?

Our investment team led by my colleague Aditi follows a robust process of

1. inbound and outbound origination;
2. screening and evaluation
3. detailed due diligence and
4. negotiation and structuring which is strengthened by our unique position has having two veteran business leaders (who have both built and funded billion-dollar companies) anchoring our investment committee.

Thus we tend to have a very low selection rate – especially as we are looking at both market level financial returns and measurable social impact on low-income populations. But the companies that make the cut, for the most part, they tend to be high performers. And the team and LPs spend a lot of time post investment to help the investees scale and eventually achieve an exit.

In terms of what we look for in specific startups – in addition to the core things VCs look like at market size, traction, scale and defensibility, quality of management team etc. – to me the crux of it is a disruptive innovation that can be delivered profitably with reliable execution. Most of the challenges in India, especially in the sectors and customer segments we focus on, are based on the ability to profitably deliver a product or service to a customer who till then did not have access to this (usually because he/she is poor or excluded in some way). So it is about supply side engineering, taking something you and I take for granted – a house, access to a toilet, a good school, hospital or bank branch – and giving a similar level of quality at a much lower cost and massively wider distribution. Technology plays a key role in driving these innovations – both in the product but equally importantly in the business model, lowering the cost and improving customer service.

Can you tell us about an example of a successful startup in your portfolio?

One of our portfolio companies is a dry waste aggregator and processor called Nepra. It collects dry waste both through its own operations of working with residential societies and corporates and in some cases through an arrangement with the municipality where it receives segregated waste. It then processes the dry waste, especially the plastics, and sells the end products to recyclers. This may seem like a very basic business in Europe, but in India, the dynamics are very different – we have hardly any segregation at source and huge landfills, but we also have an informal waste collection system which companies like Nepra are able to utilize and ‘formalize’ thereby improving its productivity, as well as the quality of life of the waste pickers through higher incomes. As waste management has become a topic of high public interest (with campaigns by our Prime Minister on ‘Clean India’) and with regulatory drivers like penalizing companies for generating waste, while incentivizing them to recycle, companies like Nepra have benefited, growing dramatically in size since our investment and attracting large amounts of follow-on capital. We are very optimistic about this company and its future to become the top waste management company in India.

Do you have some sort of inspiration?

My biggest inspiration without a doubt is my father. He is a one of the world’s top development economists, was a global leader in the UN and as importantly is a human being with values I would like to emulate. I have also been very fortunate to have incredible bosses – from my current mentors at Asha Impact, Vikram and Pramod, to pioneers in impact investing like Vineet Rai (Aavishkaar) and Rajiv Lall (Lok) and finally Mr. Amit Chandra, who was my first boss at Merrill Lynch and continues to be a mentor and inspiration (he is one of the most active philanthropists in India today).

What continues to inspire me to work in impact investing is its potential to find market-based solutions to pressing social problems that all of us see on a daily basis when living in India, and scaling these solutions in partnership with the government so they impact the maximum people. At present microfinance is about an $8 billion industry and is now part of the mainstream financial services scenario in the country – with eight out of 10 of the small bank licenses awarded by the RBI being given to erstwhile microfinance companies that started as social businesses supported by India’s early impact investors. This shows that in ten years dramatic things can happen.

So what is the future outlook? How this area will be transformed in the next ten years? 

This is a great question, especially as we are at the turn of the decade and also because of the new reality post-Covid. Asha Impact just released a major study on the last ten years of impact investing in India, showing that in total over $10 billion has been invested in approximately 500 social sector startups which cumulatively have impacted 500 million citizens in India. And this is just the beginning. Impact investing is what is most needed in the new normal because government funding will not be enough to finance the development journeys of countries like India. And indeed one is starting to see more and more commercial capital becoming more impact-oriented.

I think this Black Swan moment we in right now, with fundamental changes that are going on – not just economically but sociologically, behaviorally, psychologically – the first thing investors look for is downside protection. Many of us are quite fortunate: we are safe, have savings, and can work from home. But most are not and now we are getting to see much more closely all the pain and suffering that is caused by poverty and lack of access, fundamental existential issues. 40% of the population of my country doesn’t have the income to sustain consumption for one month. The number of people falling into poverty, or becoming more vulnerable to it, has increased due to COVID. Impact investing is still considered a niche industry. A small amount of capital that has come into a date, but it’s an increasing proportion of overall venture capital in India. And this will continue to grow. 

Secondly, the government is playing a positive enabling role with the increasing awareness that private capital is needed to achieve the SDGs, and specific proposals like having a Social Stock Exchange (where social startups and NGOs can list and raise funds from different investors) that have been put on the table by our capital markets regulator could come to reality in the next few years. If this happens, we can expect to see an even bigger expansion of the social financing ecosystem in India. The keyword for this sector is collaboration. Collaboration among different types of funders (philanthropic, commercial) and between the private and public sectors. Overall, if these trends continue the next ten years will see impact investment become a proper asset class and gain increasing acceptance as the best way to achieve growth as well as equity