Impact investing breaks the misconceptions that profits and social impacts cannot go hand in hand. As the most active venture capital firm in Indonesia, East Ventures believes that investing in the right companies matters, not only in terms of profit, but also in regards to the social impact.
When it comes to investing in Indonesia, economic and social impacts are two sides of the same coin. As a developing country, Indonesia is full of potential: among its huge youth population, there are millions of entrepreneurs who have great ideas that can benefit not only themselves but also society. What happens in Indonesia is that when a startup comes up with a new solution for existing problems, they actually end up creating a large impact on the society at large as well.
In the past few years, there has been a heightened emphasis on environmental, social, and corporate governance (ESG), even among mainstream investors and venture capitalists. I think this signifies that impact investing has hit a critical mass of companies that are growing so well that they attract more and more investors into the landscape. Globally, the work that is being done into responsible investment is also ascending. It seems to me that impact investing is here to stay.
One of the examples from East Ventures’ own story is Kudo — which was acquired by Grab in 2017. As an online to offline (O2O) platform, Kudo managed to reach out to the unbanked and less tech-savvy customers in Indonesia. The presence of Kudo and its digital agents allowed this segment of the population to enjoy the benefits of the digital economy while simultaneously helping increase financial inclusion in Indonesia.
Kudo’s story is just one of many examples in East Ventures’ ecosystem. We are investing in Indonesia with the belief that we would be able to be a part of the digital economic revolution in the country through various startup companies in their respective sectors. We have also come to take a leap of faith that the companies we invest in will be able to make a tremendous social impact in the country.
Impact investing offers a unique opportunity: here you have a company that can make a difference through direct impacts, and it is positioned in a potential market.
Risk and slower market education
Photo courtesy of Waste4Change
Currently, there are about 20 companies in East Ventures’ portfolio that we categorize as startups with social impact. While these companies are focusing on social impact, they must also have a business model that is designed to deliver scale. Among others are Warung Pintar, Sayurbox, Xurya, Aruna, and Waste4change.
However, we must also acknowledge that there are risks to impact investing. It goes without saying that there is an inherent risk in investing in a company in the first place. Aside from this inherent risk, there is an added time that is needed to educate the market, which can lead to a slower monetization stage. The startups also have to build partnerships with stakeholders in their fields in order to engage them properly. All of these take time and must be done before the actual operation.
All these factors are reflected in the case of Waste4Change. As a waste management company, Waste4Change must work with various stakeholders in society. Hence, Waste4Change also requires several business models to work at once, from business to consumers (B2C), business to business (B2B), to business to government (B2G).
Risk management in impact investing
Risk management is key to any investment. In making investment decisions on social enterprises, we go back to the investment philosophy in East Ventures: people and potential market.
First, we look at the entrepreneur. Can this entrepreneur drive the business? This is a basic investment principle that we use in both conventional and impact investing.
Second is the potential market. The company has to do its research well in order to make a direct impact through the business. Not only does the startup have to have the right solution, we want the addressable market to be big so that the company can scale.
For instance, in the case of Waste4Change, we realized that there is a huge potential for waste management and the readiness for such a solution. At that time, a lot of multinational companies (MNCs) were under pressure to manage their waste responsibly.
Photo courtesy of Aruna
Another case is Aruna, which helps fishermen gain better livelihood by helping them export their products directly. This addresses a longstanding problem in Indonesia where fishermen face difficulties in selling their products for a fair price due to lack of infrastructure and the presence of tengkulak (middlemen) who take big cuts for the products.
As social enterprises, Waste4Change and Aruna came at the right time and therefore did not need such a long market education time. At the end of the day, the risk was not as big as we initially thought it would be, thanks to the two aforementioned factors.
Another thing that we consider as a way to minimize risk is collaboration. Once a startup has joined East Ventures’ ecosystem, there are a lot of collaboration opportunities with another company in our portfolio. Ideally, a startup can help another company to run and scale with shared capabilities.
All in all, impact investing does not stray too far from conventional investment. Despite its focus on social impact, impact investing must also fulfill the basic needs of conventional investment: an adequate business model and the ability to scale, both of which will deliver profit for the company and the investors as well.
However, for social entrepreneurs, profits are not only financial gain but also a way to ensure the sustainability of the company so that they can continue to make social impacts. From the investors’ side, while the capital gain is surely a necessity, the social impact might be another way to measure the success of the investment.
For East Ventures, we are still in the stage of developing our own capabilities and measuring the impacts that we can make. We believe that impact investing is in line with our goal to deliver digital economic equality for all Indonesians, and we are committed to making a bigger impact.
By Melisa Irene, Partner of East Ventures.