India is the third largest innovation ecosystem in the world. From India’s transformational growth in the IT sector to her rapid digitisation, innovation is truly having its moment in India today.
However, despite this promising outlook, social innovation continues to face challenges to scale. Faced by the perennial challenge that the problems for people and planet are running faster than the solutions being created to solve them, social innovation has a critical and lasting role to play in ensuring we break the cycle of creating poor solutions for the poor.
In this episode of Decoding Impact, Rathish Balakrishnan and expert guest Manoj Kumar engage in a dialogue on social innovation that is not only helpful to understand the innovation landscape in India today, but to also numerous ideas and examples of what social innovation looks like.
Through this discussion you will get insight into:
• India’s innovation landscape
• The mental models for entrepreneurs to succeed
• The architecture needed for social innovation to scale
• How we need to look at unlocking diverse forms of capital from across CSR and Philanthropy
Tune into this latest episode of Decoding Impact today!
Manoj Kumar is the founder of Social Alpha, a multistage innovation curation and venture development platform that has supported over 300 startups under his leadership. Manoj is one of the pioneering forces in India’s social innovation landscape, with a wealth of expertise and hands-on experience founding startups.
Explore some of our SKI products related to this topic:
• Decoding the Rupee for Rupee impact of blended finance ft. Ramraj Pai
• Decoding the Role of Philanthropy in Blended Finance ft. Prachi Windlass
• Guidebook: CSR and Corporate Philanthropy Towards Innovation
Episode Transcript
Episode Transcript
[00:00:11] Rathish: There are actually very few people today who are able to really imagine what a blended finance instrument can actually unlock.
[00:00:18] Ramraj: I found myself increasingly drawn to the idea of how can we leverage financial markets and financial technologies. I used to wonder what does it take to make contributing to the less privileged, a national movement.
[00:00:32] Rathish: Sometimes when we look at social programs, we look at what has to be done.We don’t really break down who does and who pays in a nuanced way.
[00:00:41] Ramraj: What blended finance really tries to do is say that, hey, we know that there are risks. Let us see whether a philanthropy or a charity or somebody else can come in and cover up some of the risks.
[00:00:51] Rathish: If there is one structure that can hold different pockets and bottles of money and say, listen, I blend it in a different way. The transaction costs become lesser. I think even in the philanthropy landscape, thanks to companies coming in, this rupee for rupee thinking, which is that, “Hey, listen, it is going to be limited capital. How do we make it work?” is growing.
[00:01:09] Ramraj: There is the investing bucket and there is the philanthropy bucket. In philanthropic bucket, you give away your money. In investing bucket, you make money. What we are talking about here is something in the middle where we are saying, Hey, you know what?
We can make some money, but we can also create a lot of social impact. Now, this is a new paradigm.
[00:01:27] Rathish: Welcome to Decoding Impact from Sattva Knowledge Institute, where we speak to a wide range of experts on population scale challenges to see what does it truly take to solve these problems at scale.
[00:01:37] Rathish: There is a lot of noise about what we need to do to achieve the sustainable development goals. And one of the chief constraints in achieving them is the capital that we need to make it happen. All the studies by NITI Aayog and other organisations highlight a vast and growing gap in the amount of financing we actually need to solve this challenge.
And it’s very clear that unless we can attract a wide range of sources of capital, including commercial capital and public capital, we will not have a standing chance in achieving the sustainable development goals. One of the critical solutions for achieving that is blended finance. And there have been multiple experiments in how we can blend public philanthropic and commercial capital to solve population scale challenges.
However, there are still a lot of questions on what really is blended finance. What does it take to solve a problem using blended finance? Where is it applicable? Where is it not? And most importantly, what is required to be done for us to be able to scale the application of blended finance today? To answer all of these questions, we have someone who’s been part of the impact investing and the blended finance journey in India over the last four years.
Ramraj Pai joins us today. He has been a president at CRISIL, the CEO of Impact Investors Council, and has had a chance to interact with a wide range of stakeholders on impact investing and blended finance.
[00:03:02] Rathish: Ramraj, thank you so much for joining us today. We’ve been talking about blended finance as part of the focus on today’s episode. But before I get into blended finance, I wanted to speak to you. Tell us about your journey and what got you here to this focus on blended finance in your own career trajectory.
[00:03:19] Ramraj: So thanks, thanks Rathish. I really appreciate you giving me this time to come and share some of my thoughts on some of these topics like Blended Finance. So essentially I’ve been a career financial markets and credit markets person. So I worked with CRISIL, which as most people would know is India’s leading rating agency.
So I used to be part of the credit markets team there. I worked on a variety of businesses at CRISIL for close to 24 years. Also had the opportunity towards the end of my stint there to work on setting up the CSR foundation and you know in fact took what you may want one may want to call a sabbatical for two years to set up the CSR foundation We did a lot of work in the Northeast around building a cadre of self-employed financial literacy workers that kind of peaked my interest in this whole social sector space and I found myself increasingly drawn to the idea of how can we leverage financial markets and financial technologies.
To really create impact at scale. So my work at CRISIL Foundation for the last four years before I left showcased to me that while there are a lot of people who have a great sense of the on-ground business realities, what are the challenges of setting up something and, making it work, there was very little awareness or knowledge around how is it that financial markets can be in some fashion, co-opted, not in every situation, but is there a middle ground where we can actually leverage financing more effectively.
And so it is with that kind of a broader sort of thought that I left CRISIL sometime in 2019 and I joined as the CEO of the India Impact Investors Council. So the IIC is really a not-for-profit industry body set up by a bunch of impact investors.
Essentially it was set up by a bunch of social impact investors whose whole idea was how can we bring more capital to social impact in the country.
And I felt that given my past background having worked on the capital market side and with investors, this could be the best way that I could immerse myself in the social sector.
[00:05:42] Ramraj: Rather than get on to the execution side of it, where people have spent careers, understanding education, understanding health, understanding different sectors. I will not be able to really bring very significant value or I’ll also have to spend 20 years.
I am no brilliant person that I can learn all of that in two years. So I decided that I wanted to work in a space where my past experience will help me to add value in the manner that I can create maximum impact with my past background and experience. And that’s how I joined as the CEO of the India Impact Investors Council.
So I was with them for about four years and I’m a bit of a career break now for the last few months thinking through what it is that I need to do next, but clearly the whole space of using financial engineering to maximize impact is something which is very close to my heart. So I continue to remain deeply engaged informally with a variety of market players and stakeholders. To see where is it that I can make my best contribution.
[00:06:51] Rathish: Before we go into blended finance, more a personal question you’ve seen impact on the outside. Then you saw impact from the CRISIL foundation work. And then as part of IIC, you look back at what you’ve learned and your own assessment of the impact space today. What are a couple of reflections that stay with you?
That probably you saw it differently from the outside and now you see it differently. Now that you’ve had the six odd years of experience working in this space.
[00:07:17] Ramraj: I think my biggest sort of reflection or observation is that for a sector which is so large and so critical for advancing social equity in the country. I think there is a far greater need for institutionalised representation and engagement with stakeholders. And that’s something which I see very little of in this space.
Whether it is the not-for-profit social sector, the for-profit social sector, or otherwise. Look at any other sector you can take in this country. You can take steel, you can take chemicals, you can take any sector. In whatever way and fashion they have organised themselves in a manner, that they are presenting themselves, their problems, their challenges, more importantly, their contributions to the larger stakeholders and figuring out how to create an environment where everyone’s interests are aligned and, we make progress as a society and as a country. I feel in this space, I’ve seen very little of that. And it has always sort of, you know, I’ve always thought about why is it that this sector, which has been around in this country for so long, we don’t have more institutional arrangements. Talking to the government, engaging with the government and working with them and figuring out how is it that we can create much larger social sector organisations. Even if we do a, I had read an article a few years back, which benchmarked India’s largest social sector organisations with the U.S.’s largest social sector organisations. And we are a fraction of that size.
And it always, I used to wonder why, obviously, you have all the purchasing power parity and, all of those issues, but what is it that, it takes for us to create larger organisations which are creating larger impact, just like we have banks and we have NBFCs, we have steel companies, why would we not have very large social sector organisations where the collective interest and motivation of society to make a difference is harnessed in a much more powerful and strategic manner.
It’s happening. I think people are making huge contributions, but what does it take to make this a national movement is really, you know, if I have to leave in my own mind, one thought contributing to the less privileged should be as much a part or a national movement as much as anything else is.
Whether it’s Skill India, some fantastic initiatives from the government. I think making a contribution to the less privileged, yes, we could say that, all of us pay income tax and so on and so forth. But I think there is a deep embedded desire in a lot of people. And I’ve seen that in my own work at CRISIL foundation when we actually created a volunteering program, we had volunteering hit rates of 50%. That means on an employee base of 5,000, we used to have 2500 – 3000 people participate in volunteering, which is self-initiated, not the regular, “let’s clean the beach tomorrow” kind of thing.
These are projects that people set up themselves and run it over the weekend with funding provided by CRISIL foundation. And we saw that there is that deep desire. What you need are the right kind of pipes through which this desire can be harnessed. So I thought that’s one thought which I always feel is, as a country, we should be able to do more of.
[00:10:48] Rathish: One of my favorite anecdotes, building on this, is that there is actually an online Rummy Players Association club, which is just online gaming companies that allow for rummy to have an industry association. We employ more people than the railways. We don’t have an association that can represent our interests.
And I think another point that speaks to it, and I want to bring it up today in our conversation as well, Ramraj is that every other large business and industry today has infrastructure that they have built that will benefit everybody else to do better. Here in the social sector, there is very limited infrastructure.
So it’s everybody working and solving the same problems vertically, rather than sort of solving for it horizontally.
[00:11:30] Ramraj: I think we have a lot of value as leaders that we are doing good social service. But I think we have to raise the bar to say that we are doing good only when we have impacted people at scale.
Because I meet a lot of entrepreneurs and I sense sometimes that they feel that they’re doing great work, but I think the difference between, I think our aspiration has to be here in terms of what is it that we believe is doing good; which is not to in any way belittle someone who’s doing work in their own local society or local community, but no, but what are the new tools? What are the new things that we need to move it up here rather than operate it here.
[00:12:14] Rathish: I think it’s a good point and also why, partly why blended finance is important because one of the reasons I feel we need blended finance in some senses of the capital constraint that we have in solving problems has to be solved. But before we get into that, first blended finance for dummies, how would you explain it to someone so that it is very clear what that is?
[00:12:33] Ramraj: If you really look at society or we look at our country, there’s a base of people who are well off, maybe taxpaying, they have incomes and so on and so forth. And there is another category of people at the other end who are really in dire straits. They need support even in terms of food and other basic things, right? These are the two ends of the market, if I may use that word, but the reality is there is a large base of people in the middle.
Neither are they well off enough that they can completely do things on their own. Neither are they, really living completely hand to mouth. Now, because these people are somewhere in the middle, many times it It becomes difficult for commercial investors to understand how to engage with this market. Can we give them loans? Can we, give them some kind of credit support? Can we do anything for them, which will enable this community to also move upward. So there are some risks because obviously these people are neither here nor there. Now because there are risks, many times the banks or financial institutions or other people do not want to engage or do not want to participate in supporting some of these because obviously they have their own fiduciary duties. What blended finance really tries to do is say that, hey, we know that there are risks. Let us see whether a philanthropy or a charity or somebody else can come in and cover up some of the risks. So let’s say, there is 100 rupees of funding that is going to be made available to these people.
Maybe the risk could be 15%, 20%, whatever it is, 80% will be good, 20% could be bad, we don’t know today, could be bad. That’s a broad range. So what could end up happening is, that a charity or a philanthropy says, Hey, you know what I will put up this 20 rupees. So we give out 100 rupees, 20 rupees comes from the charity or the philanthropy 80 rupees could come from a bank or a financial institution. And that 100 rupees is lent out. When the money comes back, when people repay, they possibly all of them won’t repay. Whatever money comes, you first pay out the 80 rupees to the larger commercial investor. And only after he’s fully paid out the, whatever is the residual.
So let’s say you collect 92 rupees, 80 will go first. The first 80 goes to the larger commercial investor and the 12 rupees then goes to the, goes back to the philanthropy or the charity or whoever else it is. Now, what have you achieved in this? What has the philanthropy or the charity achieved? He has now given 20 rupees, but he has created loans worth 100 rupees, right?
So if you really look at it, the impact is 100, but your rupee investment is 20. impact is 4 rupees or 5 rupees depending on how you define it for every rupee or dollar that you have invested. This is as far as the charity goes. This is the first thing. Second is, this bunch of people who nobody knew what the risk was, now that risk has been manifested.
They have become part of the formal financial system. Banks and financial institutions understand the space better. Therefore, next time they’ll say, oh, now we understand this risk a little bit more. We are more willing to lend to these guys. So now you have created a completely new segment. What have you done?
You have blended some form of credit support from philanthropies and grant providers with commercial financing. And in this process, instead of giving away 20 rupees, which would have gone as grants to these people, you have now brought them into the financial system. You have enabled them to raise money of almost hundred rupees.
And therefore, you have created an ecosystem which is virtuous. And this is very important, Rathish, because let’s understand, we are a capital starved country. You don’t have enough money, particularly for the people who are at the margins of potential income viability. So what this does is it really enables you to use your capital more efficiently.
And it’s always my kind of exhortation to charities and philanthropies is not to look at absolute impact, not to look at I impacted 1 million people, but to ask the question that for every rupee that I put in, how much absolute impact, how much impact did I create? So can we change the conversation from absolute impact to impact per rupee? And that is essentially what blended finance tries to do is really blend some capital, which is taking very high risk with some other capital, which is taking some risk. But at this point is little apprehensive. So how do you mix these two together? How do you bring these two together is really what blended finance is all about.
You can put in a lot of bells and whistles to this, but in essence, this is what blended finance is trying to achieve. I’ve given you an example in financial inclusion. I can think about the same thing for health. We can say primary health centers, we don’t know whether they are viable or not. There could be all kinds of problems, demand issues, supply issue.
Every sector will have some risk. Okay. Can somebody in the initial days handhold the sector, handhold an initiative, take that little bit of risk? And in the process attract financial investors who also want to do good, but possibly today their credit filters or their investment filters don’t allow them an entry into this space.
That is really what blended finance is trying to achieve. We’ve had a long history of blended finance in this country. These are, if you look at priority sector lending by Indian banks, it is in some fashion, if you really think about it is one of the largest scaled up versions of blended finance.
Every bank has to lend a certain amount to farmers. Every bank has to lend certain amount to this thing. These are some ways in which blended finance could typically open. So that’s a kind of a sort of, if I may say a blended finance for dummies. This is something that anybody can use, but let’s keep it in mind, Rathish, that in every situation, blended finance may not work.
[00:18:47] Rathish: Absolutely. I want to break you know what you said into three parts that I picked up Ramraj, I want to check with you, whether my understanding is correct. In the example you gave, I think three preconditions were necessary, right? One is the commercial investor who put in the money, the commercial entity that put in the money, is gonna get the money back at a predictable period of time. It’s not like a perpetual, you know, not available at 25 years later, there is a period of time they’re willing to let go of capital so that they get it back. So that predictability within a certain time period is important. Second is the fact that there is a certain probability of risk, which should not be a perpetual risk in some form, which is that once you discover the risk, you can measure it, build your model, et cetera. And that is, I think, important because in some sense of philanthropy capital’s role is catalytic, not perpetual.
And I think that’s an important aspect in some sense that you highlighted which I think is very critical. And in some sense, the third part of it is that the role that the philanthropy plays should be measured in terms of the total capital unlocked. Rather than their contribution, which I think is useful. Are these some necessary parameters to keep in mind?
[00:19:56] Ramraj: I also think there is a fourth point, which is very, it’s a very subtle nuance, but I think it’s very important for a lot of people to understand that access to finance in itself is a huge social good. Even if a small trader can access finance at 21%, Okay. Earlier, he was not able to access it. It is a better social good than him doing a business of say 5, now he can do a business of 50, even if he’s paying a relatively higher price, it is still worth. Most people don’t see access to finance or access to capital in itself as a social good. Okay. Because please understand that when you start a new segment or a new asset class where you’re doing work, obviously, there’s the risks that manifest over a period of time.
Really what happens is a lot of these smaller people, smaller businesses, smaller enterprises, go and raise money at 40%, 50%, 60%, 100%, 200%. You have the vegetable vendors who will take a hundred rupees at the beginning of the day, and at the end of the day, they give back a hundred, 510 rupees.
If you look at it, 10 rupees a day, I don’t know, some 3500% or some such number. So access to capital for a sector is very critical. So when philanthropies and other people look at it, it’s very important to recognize that creating access to capital for a certain segment is important. Immediately an aspiration that they should get money at 8% may not be, it may not be in the right space or, you know, they should get money at 5% because I’m providing catalytic capital.
There are costs of acquiring the client. There are costs of servicing the client. Okay. Many times the client you need to go to his store. Maybe to his thela or to his place and collect the money. There are many other costs which could be involved. So I think access to capital is a huge social good.
In fact, if you ask me one of the most under-recognized social goods that we have in this country is access to capital. A small truck operator, a small person driving a Tata Ace of one ton, if you are giving him access to capital, earlier he was borrowing it from the local money lender, you have created huge social good. And we are somewhere in our systems, I don’t see enough recognition or enough value being accorded. To the fact that a certain kind of transaction or a certain kind of business created that access and brought them into the formal financial system. So I think that’s the only other nuance that I’d like to add.
[00:22:20] Rathish: And I think I want to build on what you just said, which is access to capital in two ways. One is where the access to capital is the intervention, which is that, Hey, listen, I enable access. Two is, I think building on the healthcare point that you were making in sometimes when we look at social programs, we look at what has to be done.
We don’t really break down who does and who pays in a nuanced way like, you know, you want to do provide healthcare training and I always assume that philanthropy is the only way to fund it. You step back and say, who else is willing to pay for this? There is an opportunity to think about an access to finance for that intervention that we default philanthropy almost always.
And there is an opportunity to bring in a commercial interest to that play as well with a certain level of measurable risk.
[00:23:04] Ramraj: And I must tell you that from the commercial investor side today, given the visible pressures on demonstrating sustainability that a lot of banks, financial institutions and other people have; they are actively looking out for such opportunities. In fact, several of the large banks today have their own sustainability team.
They are not very large yet, but I think there is a market. It’s a question about figuring out how to engage and make those transactions work for both the bank as well as for the philanthropy and for the beneficiaries. Blending, you can think, Rathish, at any level, yeah, you can blend on a transaction level, you can blend at an enterprise level also.
Let’s say you have a you have a vehicle, Let’s say you think of a green climate bank, okay, a green bank, then the green bank’s job is to figure out what is the best value for its money in the marketplace. What all can it do? There is no use of us going and putting more money against another solar power.
There is already State Bank of India and ICICI supporting solar power. What this green bank should be doing is getting into areas where no one wants to put money because it is too risky and that is where you need blending. Where is the battery-swapping technology coming? Where are those kind of infrastructure for battery swapping getting built?
Where are those organisations getting funding? Why is MOEFCC not thinking about setting up a green climate fund, which will support all of these gaps in the infrastructure that is getting built. That’s really where blending can be catalyzed at a very different. Then everyone in this fund is thinking about this problem.
How do I solve for this problem using whatever form of finance that I need is available to me. So I’m not stuck here. I will give only equity. I will give only debt. Why? Whichever problem is there, you solve it with that form of financing.
[00:24:57] Rathish: And as you’re talking, I’m just realising that the transaction cost, when the person holding the different types of capital are different people becomes too high because then you have to align them, et cetera. But here, if there is one structure that can hold different pockets and bottles of money and say, listen, I blend it in a different way.
The transaction costs become lesser because one of my biggest challenges that I see in the space today is that the transaction cost is too high.
I want to go back to something you mentioned earlier, Ramraj, which is not all of it is blended finance. And there are places where blended finance may not work and you like, give one example. Do you want to talk a little bit about that? Like where is blended finance not relevant?
[00:25:33] Ramraj Let’s say you are going into you very poor districts. Maybe there is very little income. There are very little employment opportunities. There is very little potential for the customer to pay anything. Let’s look at adaptation in the climate side. A lot of the adaptation work that will come, some of it can be private sector viability could be there, but a large part of adaptation could be something which you are doing for the larger, you know, you’re, you’re trying to make your society a lot more resilient.
You’re trying to make them adapt to the change that is coming. Some of these spaces may not necessarily be open to just looking at it from the lens of economic viability. There may not be an economic viability in setting up schools or setting up a small primary health center in, in places where there is no economic capacity to pay whatsoever.
Those situations, blended finance may not work. And I think the whole idea is not that, this shouldn’t be a nail in a search of a hammer. But we have to be strategic in terms of figuring out where are those places where there is a capacity to pay and potentially if they see value of willingness to pay.
Okay. Because let’s face it. A lot of people who are working, maybe lower middle class also have their own pride. They have their own professional this thing, they are earning themselves. We have to give them the opportunity. To avail of a product or a service in a manner that maintains their dignity and it’s just that we have to design a product or service. It may not be possible for everybody.
Okay, for example, I remember still during the peak of the pandemic, there were a lot of schemes which came up to support Zomato and Swiggy and other, these sort of gig economy workers, as you may call it. Some of those schemes are very much viable, because these are all people who are hardworking, regular folks, they just doing their regular delivery, but no one had maybe lent to these guys.
So no one knew. At the peak of the pandemic, will these guys pay back? How will they because anyway, there’s not too much delivery happening. All of those apprehensions were there. But these are segments where there is economic value running through the work that they are doing. So there is a potential for them to pay, but possibly it’s a segment that nobody has you know, worked with or supported them in any fashion.
So in the peak of the pandemic, not really something that the risk department of a bank or an organisation would be very keen to look at. That is where catalytic capital, that is where blended finance can come and say, okay, hey, I’ll provide you a 30% cover or a 30% support or a 20% support or whatever it is, but after two, three cycles, people will realise, hey, this is how this particular bunch of people operate.
These are the red flags. So let’s say somebody’s been a driver for two years, three years, his ratings are good. All of this is good. Maybe he’s a great credit risk, but the market didn’t know about it. But now he’s become a decent guy who could borrow money at a reasonable rate, may not be at 6 percent or 8%, but still he has now become part of the formal financial system. So that’s really the way we need to about think about this whole thing.
[00:28:42] Rathish: I’m thinking there are three factors we should keep in mind. One is who is the person we are looking to support. Now, there are people who are extremely poor who may not have the economic ability to pay. And if that’s whom you’re targeting maybe there is no opportunity for us to lend in some sense, right?
Because that will go against the grain of what we want to do. So who we work with is one part. Second part of it is the, what we work on. For example, I’m thinking public goods somebody wants to conserve a lake. If there’s nobody who’s going to come in and say, listen, I’m going to pay for the lake, but it has to be done because it’s a public good.
So maybe there are public goods that if you’re building in some sense, there is probably not an economic opportunity there for you to be able to lend. And the third one, which is really where you’re offering something to a person of where the value is not very obvious to the person by start, like if there is no willingness to pay for it today, hopefully when they see the value of it over a period of time, they may be able to play, but in the initial phase, maybe there is an opportunity to only provide it as a grant to sort of switch to a point where they might then say, hey, I see the value of it.
I’m willing to pay, but I’m willing to pay a certain cost. And then you sort of grade them to a point where they at some point are able to pay market price or the market is able to play at the right price but when the value is not acknowledged, maybe again, blended finance may not be the right approach.
Will these three things be a right thing to say?
[00:30:00] Ramraj: Blended finance is a very, very, very, very large word. All I’m saying is there is a social good that you are doing. I am incentivising you in some fashion and encouraging you to try and do more of that social good and trying to create a market for this whole. So you can do it in health, you can do it, you can do it in a whole host of sectors.
Financial inclusion typically has been a sector where it has been a lot more successful, but now people are trying this out in a variety of other sectors. Like I said, health. We are trying to do this in a lot of the, supporting innovation through technical assistance grants and so on and so forth.
Sometime the theory of change of a particular thing may not be very, very clear. How is this going to manifest? You could actually there provide a TA grant and enable people to run through that entire mechanism, see how it’s going to work. No one knows how it’s going to work. Maybe it’ll go towards London or it’s gonna go through Tokyo, or maybe we are going to end up in Ethiopia or we are going to go somewhere else.
We don’t know that. All of that could get supported through some of these kind of things. So in fact, as I’m saying, Rathish, that you will be, I’m sure seeing examples from your past experience that people have done this. It’s just that we didn’t call it blended finance. Okay. So blended finance is a larger word where you’re trying to in some way blend philanthropy with commercial finance.
[00:31:14] Rathish: I want to summarise that so one roughly as you were talking, I was saying there’s India A, B, C.
India A is people with whom there is no need for philanthropy to even play a role. People like us who can pay for what we want. India C are people who are today living at the same level of income, a sub-Saharan Africa. There is a need for a lot of public capital to come in to deliver value for them.
But there is an India B, which today needs access to a wide range of resources that can help them create value for themselves and for their communities and families. And the scale is large enough for philanthropy to not be able to solve that problem. And we need commercial capital. And these types of needs typically have the following characteristics.
One, it will actually result in an economic transaction, which will give back the money in a certain acceptable timeframe. Two, there is an inherent risk and unknown probability there, which will dissuade a commercial entity to jump on head on. Three is that if provided a catalytic role, philanthropy can support it for a short term so that there doesn’t have to be a perpetual support to make this happen.
In all of these cases, blended finance will be an opportunity for us to solve the problem. And as you rightly highlighted access to finance as a public as an intervention that creates value is important to consider. We also spoke a little bit about what will not be in the ambit of blended finance.
One is what we talked about India C. People who may not be able to have the ability to pay for them to try and do blended finance is not going to be worked. Two, it is going to be areas where there is a public good and the public good is something that is delivering value for a lot of people and hence needs a certain type of capital.
And three is where the the perceived value of it in some sense is shot. And hence it’s not seen by the person who is receiving the value. So may not be willing to pay. And hence Blended Finance may not be helpful. I think a lot of examples that you gave today is actually valuable, but for me, there’s a wealth of information around how we can break it down.
And for me, ties to the second part of what I want to talk about, which is really the point you made, which is there is money available, there is money required, and there is an interim problem of imagination. Of being able to find the right ways to unlock that money that we have to solve for.
[00:33:32] Ramraj: I think that’s a good summary. I just want to add two quick points on this. One is when you looked at the India ABC and that classification, We just have to ensure that our small and medium enterprises is a very important element. So that has to be added. That is one element because helping them have multiplier effects in a variety of ways, one. Second, supporting innovation. So for example, On the climate side there is one challenge or there is one issue, which is around the climate transition from all your fossil fuels to that, which is the larger institutional mechanism that the government is working on. But there are a lot of problems where there is a need for innovation finance. Now, who is going to make that available?
Now as the philanthropy, I can use the money in the manner that I imagine is the best value. Okay. Again that’s a space. So for example, now you’re trying to create an entire ecosystem, which is a lot more sustainable than the fossil fuel based ecosystem, right?
The infrastructure for it doesn’t exist. Let’s take the waste management and circularity issue. What infrastructure do you have? You have a huge infrastructure for your fossil fuel based businesses. Everything is available. Think of petrol pump, everything is available for you to access it easily and consume it, right?
But when you think of a circularity or a waste management ecosystem, the infrastructure just doesn’t exist. Collecting the waste or anything else, it just doesn’t exist. Now, these are problems and these are situations from a climate perspective, which also will lend themselves outside of this framework that you provided.
So one would be the innovation part. And the second would be the challenges on climate where creating that infrastructure could have significant combinations of public private partnership.
[00:35:33] Rathish: Absolutely.
[00:35:34] Ramraj: Both of them will be add ons to the framework that you created in terms of supporting a variety of these organisations and enterprises. We don’t have that infrastructure for some of the other challenges, whether it is waste management, whether it is circularity, whether it is water regeneration, none of the pipes for those have been built and those are again, spaces, where blended finance, where philanthropy, they can reimagine their role, and while they need to continue to do the work on way, you know, education and health and all of the other things, the infrastructure for this is again, a very, very, very important space that has to be seen in the ambit of this whole blended finance.
[00:36:12] Rathish: So I want to come back to the imagination point Ramraj, and I’m going to try my best out of my memory to capture all of the various examples that you gave. one is the lending example, which is here is a target person.
We want to give a financial loan to a credit product to risk of returns is unclear. So finance can blend it and make it easier. That’s one. I love the example of emissions that you gave, which is where the financial transaction does not benefit or acknowledge the good behavior. As you reduce the money, which is as I put the outcome focus into it, I can actually reduce your interest rates.
So I can finance can come into blend and saying, hey, if you’re doing good behavior, I can find a way to reduce your interest rates or do things that which goes beyond the actual financial transaction to account for the social and ecological benefits that can come in as well. That’s a second example that I can see.
And we talked about a similar example where schools can be provided lower, you know, lower interest rate loans if they show better learning outcomes, for example. The third is the technical grant example. There is a need for patient capital on innovation that will need to be provided for an innovation to become market ready.
And that could be an example where the technical assistance example that you gave, maybe a loan at a very low interest or a grant that can actually enable them to run when they are not market ready. That could be the third example that we can take in some form. The fourth one, which you mentioned, which is interesting for me, I didn’t think of it before, is infrastructure building work.
Which is, what is the infrastructure that we need to build for a wide range of things to actually happen? You gave the example of climate and, recently I’ve been working in the space of water vulnerability. Where if you’re able to create the right infrastructure for water vulnerability, a ton of other people can actually work on it.
So gives us a very interesting way to look at where finance can be blended. So there are lending product related ones. There are outcome based sort of discounts and saying as a word that can be relevant. There are models of making innovation accessible through technical grants. There is infrastructure building work.
And finally for me was the idea of working capital, which is I am providing you working capital for you to be able to validate and work through a certain lean phase. Hopefully because after a certain period of time, the market model will stabilise, right? Broad five categories. One, your feedback on whether these are five valid categories, and is there a sixth or seventh one that is missing?
[00:38:42] Ramraj: Yeah. I think that’s a broadly valid. I just like to focus just one more piece, which is on the innovation side. We need to keep doing better work on building on what exists, but if we have to genuinely over a period of time, believe that we need to create our own sort of IPs and our own sense of intellectual solutions, which are unique to us.
We need to be able to support various kinds of innovation, whether it is biotechnology, whether it is deep tech, whether it is a lot of new areas that are coming on, who is going to support it. Government will be there, but can philanthropies, can other people also come into it? There may not be a role immediately for commercial investors.
Maybe VCs can come in later, but how can we create or how can we make more funding available for innovation? In some fashion for the sake of innovation in itself, because that is an important harbinger for what we want to be as a society.
[00:39:41] Rathish: I want to dig deeper a little bit there, Ramraj. Before you brought up innovation, my own understanding has been that even globally, a lot of the work that innovation covers is funded by federal capital. Government spends money on innovation because there is really to go back to the principles that we laid out.
The economic value is not going to be seen for a very long time, at least as a part of the life cycle where innovation should be ideally be just purely grant funded. Where exactly do you see the value for blended finance and innovation?
[00:40:11] Ramraj: My worry would be that if you don’t support some of the kind of ideas that people have. If you had a, if 100 people could innovate, okay, maybe only 10, 20 of them will have the mental resilience to go ahead without support. And then out of those 10, 20 of them, maybe five of them will become VC worthy and move ahead from there. If instead of supporting 20 people, we had the wherewithal of supporting a hundred people. Okay, that whole filter and that base would become so much larger that you would have a lot many more unique, specific, innovative ideas or innovative solutions coming together. So my whole idea is how do I increase that sort of, if I may say that pipe for new and innovative ideas.
Right now it is coming despite the lack of funding, not because of the availability of funding.
[00:41:05] Rathish: Yeah, I agree with the funding question. I’m only wondering whether it is actually blended finance.
[00:41:10] Ramraj: You can think of a special purpose vehicle, which will do both innovation, grant support, and then over a period of time, provide venture capital at some level. So it can be a combination within the same vehicle, the vehicle can innovate and also have a VC fund sitting on top of it.
[00:41:26] Rathish: Correct.
[00:41:27] Ramraj: So that’s the kind of, that’s the nature of something that I’m thinking about. So let’s think of a, I’m not again, a specialist say, but let’s think of a specialized biotechnology fund, which will do everything and anything. It will do grant support. It will do venture capital funding. It will provide debt financing.
It can provide all kinds of solutions. So if you’re a biotechnology guy, this is where you need to come…is the way I’m looking at it. You can also have third party biotechnology fund and so on and so forth or other people coming through. The amount of funding available to even accelerators incubator from a CSR side, it’s one of, it’s it’s right at the bottom, somewhere at the bottom in that bottom three, again, somewhere my thoughts come from that.
That out of maybe, I don’t know, crores we spend on CSR, the funding that is available to this accelerators incubators is quite low. You can check that data. I am reasonably sure of my numbers.
[00:42:20] Rathish: And I want to step back now largely to a much broader question here, Ramraj, which is really like you said earlier, there is money and there is willingness from institutions to fund this. The need is of course huge. What is today’s stifling the flow from supply to demand in some form. And my own assessment and please correct me if I’m wrong is what I call the lack of imagination.
There are actually very few people today who are able to really imagine where a blended finance instrument can actually unlock because the people who understand the problem, understand the capital and understand that longterm play. You are actually a very few people. Would that be a fair thing to say?
[00:42:59] Ramraj: Yeah. So there are, there is a, it’s a complex hydra headed kind of problem. First of all, we for long years in India have built the entire institutional infrastructure to support regular grant making and execution. And we have done it with a decent degree of support. So whether it is an education, health, the regular projects give grants.
This is something if I’m meeting the CEO in an elevator and he asks you what is happening, what are you doing? I can very simply in half a minute, between the 0th floor and maybe 7th floor or 8th floor, I will be able to in one minute explain exactly what we are doing.
CEO is there. I am also happy. Everyone is happy. Moment you get into blended finance, it’s a complex you know, it’s, it doesn’t lend itself very conveniently for an elevator pitch. Okay. To me, it may sound like a very basic or a very crude thing, but effectively your ability to explain it in a very simple way, it doesn’t, it’s not very easy and very simple and easy to explain.
Okay. It’s far easier for us to say we did x things to 1 million people in x, you know, in, in Bihar or Rajasthan or Tamil Nadu or whatever else it is. It’s a simple model. So blended finance in itself, If I may say, has in itself inherently a certain degree of complexity, because we are trying to change the paradigm in which we are thinking about impact.
We are saying that was for every rupee I put, I created so much of impact rather than saying I helped 1 million people. I had 1 million people. Did you use 100 crores or 500 crores or 10, 000 crores? Where is the relationship between what money you put in and what impact you created? It doesn’t exist. And so changing this paradigm really is where the problem is.
If investors start thinking, if grant providers start thinking like this, and if the not-for-profits and the executing organisations start thinking like this problem can move ahead but really all our institutional mechanisms right from the education that we make available in the social sector, let’s go and look at the syllabus of education.
How much of exposure is there on the financing side? There is an inherent idea, grant will be there, then we will execute and create this kind of solution. But thinking about how that procedure happens, how can we use that? So we do not have the pipes, we do not have that infrastructure through which some of this is made available.
Centrally the issue is at some level, there has to be greater imagination as you have rightly said, and the board has to think about, how is it that we are creating something very radically different. The funding which is available, whether it is philanthropy or CSR, we have to think about it as innovation capital for development. It is not capital for development. The paradigm today that exists is it is capital for development. No, this is money given by the shareholders or by the trustees of the philanthropy or the charity.
This money is given. If you can think about it as innovating for development, then we will solve a lot of these problems because then my idea is not that, okay, what is this money? How can I help people know? How can I create new pathways, new methods, new ways of maximizing the impact because that is the fiduciary duty of the head of CSR.
That is the fiduciary duty of the head of the philanthropy to think, how can I maximize this? How can I create something that 10 years later, somebody will say, yes, this organisation created this new thing. I think that is a paradigm which needs a strategic shift from the chairman or from the board to say, was use this money for innovation.
Because the amount of capital that a philanthropy or a CSR will have is very small. So you will not be able to create absolute change on impact, but if you use it for innovation and we aggregate it across, you can do a lot more,
[00:46:48] Rathish: Absolutely. Absolutely. And I think that many times we forget how the philanthropy capital is such a small percentage of the total amount of money we need to solve social problems. And hence being catalytic is going to be very mandatory.
[00:47:03] Rathish:
But you talked about pipes and infrastructure, Ramraj.
And maybe I want to break it down because, you know, usually we follow this system thinking approach where we say mindset is step one. Rules and structures that we have to create is step two. Incentives we are creating is step three. And then there is capacity, capability that we have to establish.
I think the first thing that you talked about is mindset. Do you have a mindset thinking of philanthropy as catalytic and innovation for development rather than development capital, which is very, very important. If I had to break it down, break down the infrastructure point and the piping the plumbing that you talked about, what are some of the critical aspects that you think we have to build?
[00:47:38] Ramraj: so the infrastructure is needed at every level. You asked me one of a very tough question, I must say, because fundamentally the change of mindset itself, it takes a bit, because I knew at CRISIL that we had a very, very enlightened you know, sort of CSR subcommittee of the board. People who’ve been deeply engaged in the social sector for a very long time and also deeply engaged with the financial market.
So it’s a very rare combination. But even there I think there are a variety of pulls and pressures, there is obviously the reporting that you have to do. You have to ensure that the monies are spent, you are not in violation and all of those kinds of things. So I think getting the pipes and the infrastructure in place will happen only if there is that change in mindset because after that, then you have to think of a variety of things you have to think about, from the education that is being made available because today the people who are passing out of our leading social, sector education organisations are the ones who are going to become the heads of these organisations in 20 years time.
So if that imagination is not catalyzed at their college level, they are going to be carrying the same idea. In no way am I trying to say that the regular stuff that we do is not important. It is valuable and important. In a country like ours, where there’s a shortage of capital, we have to think about squeezing development capital for every rupee for what it is worth.
So I think we need a paradigm shift there, one. Second is we also need a far greater celebration of these innovations in the social sector. We don’t see enough of that. In general, in popular media, you know, we don’t see celebration of social enterprises. I think there is a cultural shift that needs to happen.
Today, you have an entire page in every newspaper which says XYZ got ABC funding, so and so got DYF funding. How is it that we can create more oomph, if I may use that word, around social sector support, social sector finance, difference that people are creating, new ideas that people are coming up with?
I think we see some of that happening with, stuff that we see on Shark Tank and, the local, the version and so on and so forth, but I think we need to create a kind of shift in the way society as a whole thinks about creating social impact, which is not that we went and helped two kids on the road.
Important, valuable. Good way to begin. But if you can create something a little more innovative, you will be able to create. Maybe you may be impact 100, 000 or 1 million people. We’ve normalised being an entrepreneur in India, 30, 40 years back, being an entrepreneur is you didn’t get any job.
So you became an entrepreneur today. You have normalised and made that aspirational. How do I make social impact? How do I make innovation in social impact? How do I celebrate that and make that a lot more aspirational that it is today? How do I create a hundred more Jaipur Rugs, a Fab India? How do I celebrate?
Some of those kind of organisations at a level, which is a lot more than what it is today.
[00:50:44] Rathish: And I fully agree. I think even in the systems thinking thing, we say that if mindset doesn’t shift, nothing else is going to shift, but I also want to make it tangible, Ramraj, because there is today, in my opinion a few tailwinds that are important, right? There are actually professionals from industry who are coming in who understand a certain level of finance to the social sector.
So there is a transition that is happening. I think even in the philanthropy landscape, thanks to companies coming in, This rupee for rupee thinking, which is that, “Hey, listen, it is going to be limited capital. How do we make it work?” is growing. Third, there is actually now that constraint of the fact that this is only catalytic becoming more understandable for people.
They’re like, “Okay, this is the amount of money I have. My ambition is this much.” So there are tailwinds. So even if I have to tell the early adopters that, Hey, listen, this is where you can start and demonstrate value, that zero to one journey. I’m wondering how can we get that started and how can, let’s say today CEOs listening to this podcast or funders listening to this podcast, if they say, listen, I want to do this in my organization, where do they begin?
[00:51:42] Ramraj: one is that increasingly we are seeing a variety of specialized blended finance consulting organisations or organisations trying to become blended finance investment banks. I think starting off working with some of them, for example, a bunch of social impact investors have set up the blended finance company.
There are other organisations like Intellicap and a bunch of other people, Sattva themselves, and a whole host of other organisations who can consult and who can help these people on that particular journey. So that is one part of what I would think. I think re ideating the philanthropy framework is something that I would think that the founders of these philanthropies should be working with a structured approach with institutions and organisations that specialise in blended finance is one part of what they should do. I think the other thing which is needed is somewhere for the government to become a lot more active because there are a variety of frictions and challenges and potential, I may say gray areas
in terms of what is allowed and not allowed as per regulation, what is it that can be done? Because what we are talking about here is the confluence of for profit and not-for-profit. And in general the paradigm in India as from a legal and regulatory perspective has been, we have two buckets.
There is the investing bucket and there is the philanthropy bucket. In philanthropic bucket, you give away your money. In investing bucket, you make money. These are the two buckets in which traditional regulation is operated. What we are talking about here is something in the middle where we are saying, Hey, you know what?
We can make some money, but we can also create a lot of social impact. Now, this is a new paradigm. So most rules and regulation, whether it is the Charities Act, whether it is the Social Venture Fund Act or some of the other regulations that exist don’t necessarily talk to this kind of a new paradigm, not because of a design, it’s a it’s basically something that hasn’t existed.
And that is something that we will, I think somewhere need to work on creating structures, work with the government in figuring out how is it that we can engage them in some of these endeavors. The government themselves coming in, say as an anchor investor in some of these will give a huge boost because the moment it happens like that, from that fashion, that some arm of the government is participating in this, it brings a certain degree of legitimacy.
And, there’s a lot more institutional and regulatory support that comes in once something like that happens. So I would say the two sides of the equation are, as I described, that it will be good for philanthropies and CSRs to reimagine their own role in this space. And second is somewhere, if we can exhort the government whether it is through Niti Aayog or some of the other organisations to create a somewhat more facilitative environment for blended finance, I think a lot, many more people will be interested because I think there is a genuine intention to do this, but time and again, we will, come across issues from a tax side, maybe from a GST side, maybe from a many, some of the other challenges which come up in terms of what charities can do and cannot do.
That people just stay back and say, okay let’s not get into anything which can put a black mark on, our regulatory compliances. I think it’s something that we can work with the government and explain to them, particularly now, because we have these initiatives on the climate side, which are coming up.
The need for climate capital is so huge. So I think there’s a huge value for the government to think about something centrally where they initiate this kind of a blended finance platform loosely put which can actually harness the intentions as well as the capital from a wide variety of players, both from India as well as internationally.
[00:55:44] Rathish: I want to summarise some of the points you made, Ramraj. One, as you rightly highlighted, is the mindset, which is what is the definition of success for me as a philanthropist should shift from my capital created impact to my capital created impact per rupee.
And I’m seeing my capital as catalyst for impact or innovation for impact rather than capital for direct development itself. Second part of it is like you said, the supply of talent that is coming in, be it academic institutions that are working on impact. How do we embed this thinking right from there to say, if you’re in a factory today, if you are in a college degree, if you are in academic programs, can you think about this aspect of work, which is impact per rupee rather than impact as part of the way you’re thinking.
Third is how do we create a healthy intermediary ecosystem? And some of them are already emerging. The blended finance company being one. Sattva, the Convergence Foundation. There are a couple of them. So how do we look at all of these players becoming more robust and how do more organisations engage with us?
That’s the third part. I think the fourth part that you talked about is also to make sure that these systems, the government systems, not only talk about the for-profit models and the nonprofit models, but create facilitative structures for the blended finance models as well. Because a lot of times the fear of being on the wrong side is actually higher than the actual risk of being on the wrong side.
And for something that companies do as part of 2% of their net profits, they don’t want to take the hassle of saying, is there a risk that I will be called out by an auditor for doing this, et cetera. So even just creating that facilitative environment, guidelines, notes and support, et cetera, will be very helpful.
I think putting all of these parts of the plumbing and infrastructure that we talked about, I think is critical.
Anything that we might have missed.
[00:57:25] Ramraj: Yeah. So the challenge Rathish is really that every organisation is living their day to day life. you have your day to day work and your business and everything. You need an organisation. You need an umbrella body for sustainable finance or social finance in this country, which will represent the interests of the community as well as a larger variety of players, which is whose job it is to create these engagements, to work with the NITI Aayog, to work with the government, to figure out how are they thinking about it and figure out how is it that we can, in a more structured way, not on an episodic basis.
A lot of people whose hearts are in the right place are doing this work, but it is episodic. When they go do something and then some other business pressure picks up and then they’re off. How do I make this a structural intervention where I’m partnering with the government? And I’m partnering with the NITI Aayog, where I’m partnering with the line ministries, figuring out what is it that they want to do, figuring out where is it that blended finance can help, figuring out, what structures will be something that could be viable.
You’re setting up the sustainable finance working group of the ministry of finance. How is it that we can partner with them? This has to be part of a larger goal of creating a sustainable finance ecosystem a development finance ecosystem. And I think There needs to be a kind of a broader intervention, which works on this, on a regular basis, not one off. And this has to traverse the continuum of not-for-profit social impact, that whole continuum. It’s a complex mix and but we need to engage with this mix.
[00:59:04] Rathish: I cannot agree more with you on the bigger tent approach, Ramraj. I think unless we bring that unified view, I think it will always be a niche problem to solve by a niche set of people.
And I don’t think it will go, it’s going to get that pull because we have to merge some of these words. But I think one of the critical challenges there is regulations. People don’t even know what they don’t know. So if you can give us a quick view of what are some of the regulatory hurdles there, that will be useful to understand.
[00:59:28] Ramraj: you want an organisation which is able to receive various forms of financing, okay? What can be the forms of financing?
It can be grant money, it can be debt or loans, and it can be equity. So that institution should be able to access equity, debt and grants, and it should be able to dispense equity, debt or grants, depending on the mandate. So let’s take an example of what we used about this whole space of say biotechnology. There could be certain spaces where only grants can, will be given because those are very new areas.
In certain other areas, some of those companies have advanced, they have reached a level where possibly they can take equity in a venture capital. So this entity can therefore give potentially equity for these kinds of companies. So that’s on the asset side. In terms of its financing, there may be a bunch of philanthropists who say, yes, this is a specialised philanthropist, a biotechnology accelerator. We think it’s very important or a waste management circularity accelerator. We want to give grants to this particular. Someone else may say, Hey, I have this money. This is the money that I use to support growth level enterprises in biotechnology, I will make equity available.
So there could be a bunch of investors who have a variety of interests, and there can be a bunch of investment options with a variety of opportunities. What this vehicle needs to do is to be able to mix and match these for maximum. The problem that we have is that this is a very, if I may say a radically a different idea because in a traditional vehicle, you take grant, you give grant.
You take equity in a venture capital fund, you give equity in a venture capital. That’s the typical model. But what we are trying to say is we want to mix and match. We want to blend. There can be different models, different. Let’s say I create a healthcare blended finance fund. In some situations, I may want to give grant.
In some situations, I may want to give debt because these organisations can scale. It’s a steady business. I can give debt. In some situations, I may want to give equity. And on the investor side, there can be a bunch of people who want to do different things. So how do I combine this right now, the regulation may not allow, say this vehicle, can it take money from an international foundation?
It may not have today, is this FCRA approved? Does it need an FCRA one? Can it take equity in this fashion and not give equity, but give something else? So effectively the regulation, the regulatory challenge really Rathish is in the fact that we look at, if I lend to an enterprise and I get a return, any kind of a return, it is seen as not being of social impact. You are a social enterprise, you are helping low income kids and maybe, running a school and if you are generating some return somewhere, there is a feeling that there is a, this is not a socially, I mean, it is socially impactful, but making money from this is somewhere seen as being commercial. And I think the paradigm that needs to be shifted from a regulatory perspective is as follows, and which is what you will talk about briefly on the social stock exchange, which is trying to give a very rigorous definition of a social enterprise. A definition in terms of what areas it will operate in, what are the conditionalities under which it will be defined, the audit standards, the regulatory, self regulatory organisation for social enterprises.
And the SEBI has created an entire ecosystem for building up the social enterprises. Now, what we need to do is to use this social enterprise definition as a pivot and provide a lot of support to funding the social enterprises. They could be funded through grants, they could be funded through equity, they could be funded through debt.
Now, if you are able to give some concessions or some benefits in terms of, if I give money to a social enterprise and they give it back to me with say 8% interest, and if I can see that as a social good and not be seen as a commercial transaction, that is something that can help. Right now, those
pipes or those structures are not yet very defined and that is what maybe a social stock exchange can play a huge role because the definition of a social enterprise, the entire bells and whistles around their audit, their control, their management, all of that is being put in place. And I think this is the first if I may say, larger government-supported and mandated framework for social finance in India. And I think it, it needs that we are able to build on it in a lot more of a structural way in terms of ensuring that we’ve got, we’ve got this whole little highway being built.
How do I build the side roads such that we don’t have the last mile issues that, you know, you build this fantastic Metro, but to get to that, you don’t have autos or you don’t have, you know, peripheral kind of.
The real challenge is this that mixing up these things does not necessarily lend itself to the traditional models of how, not just India, globally, we think about taxation, we think about income, we think about impact.
[01:04:36] Rathish: As you were speaking about this , I was thinking of what type of capital is required for making an innovation happen. And I see four stages.
And I want to paint this back to you because this is a topic that’s of huge interest for Sattva. I personally know of four you know, stages. There is a pure research stage. Which is where you’re actually saying, is there a new substance, a new technology, et cetera.
There is a second where a research becomes an early innovation that is lab tested. Third is, it becomes from a lab tested model to a community tested model. Fourth is where it can actually achieve unit economics to actually be viable in the market. In my mind, the public spending can, is really option one and two.
The level one and two, largely is where public funding or maybe huge philanthropic capital can play a role. Level four is where markets should ideally pay for it. A VC picks it up, et cetera. But the level three really where it goes from being lab ready to community ready is really where today a massive funding gap exists because market is not ready to pick it up yet.
Federal funding says, listen my mandate is over. And I feel the blended finance opportunity could really be there at level three to say, can we measure that risk, make a possible instrument that can make it work. I don’t know if that makes sense.
[01:05:48] Ramraj: Yeah. It does. In fact, I would say that even in level one and two, if there is a large scale, say a government initiative. To support one or two funds, there may be a fund of funds which supports one or two or three or four maybe biotechnology funds, which are exclusively focused more on just that, just the core innovation at the R and D level itself.
And, you know, the whole cycle may be between one, two, and three. I think there will be people who will be interested. Right now, you are not getting sort of market intermediaries or other people interested, primarily because there are not one or two heavy hands who are putting bigger money on the table.
And if government, you know, maybe uh, the BIRAC or, you know, the, the ministry behind brings that together in some fashion, you will see the emergence of some of these kinds of organisations and with government and maybe one, two, three large philanthropy sitting on top, and that provides the core kind of a capital for some of these things to be done. Already work is happening.
All I’m saying is there is opportunity there also in one, two, as well as three.
[01:06:54] Rathish: We are at the end of our conversation Ramraj.
But what I want to talk about in the last section is really way forward. What are some of the things that we absolutely should do? To make this happen. And I want to summarise some things we’ve already talked about so that you can build on it. One aspect of it is this entire mindset change that we require at the funder side, which I think we, and there is an organisation that needs to drive that.
And we have to push that at an ecosystem level. Second part that you talked about is this setting up of a bigger tent where different stakeholders can come together and cut across grants, for profits, blended finance, so that it doesn’t become a niche problem, but a central problem. The third point you highlighted is that there is a remarkable opportunity with the social stock exchange coming in for us to define what a social enterprise is, what is an definition of impact, how do we create models and products for delivering finance, etc.
And the fourth is hopefully find the regulatory environment that can help us. truly build blended institutions in some form institutions that have the ability to blend diverse forms of capital and lend diverse forms of capital. I think all these are really broad agendas and ambitious ones, but I want to still come back and say, are there other things that we need to do, especially now that domestic philanthropy is supposed to grow within India and start a lot more work in solving for impact around much.
[01:08:16] Ramraj: So my thought on this Rathish is that the three, four things that we spoke about are the key building blocks. The major building block to me is and I’ll answer this question. To me, domestic philanthropy is money which is there, which is available. You have to take an investment banking approach to the problem.
Or maybe let’s talk about a family office. They will do public listed equity. They will do debt. They will do some AIFs. They will do venture capital and they will do some philanthropy. How does this market operate?
There is a whole bunch of investment bank. There’s a whole bunch of other people, mutual fund, all of these guys go to them with a deal. Who is going to them with social sector deal flow, social sector deal flow, which is not just saying that, okay, this is the number of, we want to have this sort of engagement in this district in Tamil Nadu or this district in Bihar. Who is taking social finance, blended finance deal flow?
It’s very sporadic. It’s very anemic. Okay. And there are a variety of reasons why it’s anemic. We spoke about it. Building the pipes in the social stock exchange is one way we can solve for it. Because if using the social stock exchange, we are able to clarify on a lot of the regulatory kind of issues. We can motivate a lot more regular other than obviously the Sattvas and the, blended finance company and others.
We can motivate a lot many more people to get into and get interested in some of these areas. Then what will happen is domestic philanthropy will see more deal flow. If they see more deal flow, there will be more understanding, more learning, more exposure, more knowledge, and over a period of time, more consummation of transactions.
Eventually, without having regular deal flow, domestic philanthropy or any philanthropy for that matter is not going to move. In any sector, you have to, you have to show them more deals. Okay, here it is. If one deal is coming in six months, I am sure, there could be some problem or this issue, that issue.
But if you are able to show them transaction, which have a higher degree of regulatory blessing plus regular frequency of transactions come to the table, you will definitely see domestic philanthropy and other people getting far more interested. You know, they have their own reasons why they are not participating today.
Okay. But I think clarifying on the regulatory side, using the social stock exchange as the platform from where we are building. Okay. The point is, everything is bespoke. The moment everything is bespoke, then every analysis, every evaluation is bespoke. And the moment every evaluation is bespoke, your timelines are long.
Your, the whole chain is much, much more complex. How do I simplify it? I, we need commoditisation of social finance moving from bespoke, uniquely design structures. How can I commoditise it? How can I dumb it down? How can I simplify it? How can I tell a CEO in a lift, in an elevator, in 15 seconds, what is exactly happening?
So what we really need to do is use the social stock exchange platform for commoditisation, for standardisation, for, it just needs to be as simple as someone saying, I went to this district and I did 5,000 cataract operations. It’s a commoditised thing, there is nothing much that has to be in terms of a huge value addition.
Okay. So impact measurement, everything gets then much, much, much more commoditised. The moment it is commoditised, more money will come, easier flows, easier understanding, everything will fall in place. So I think working on helping commoditise transactions on the social stock exchange has to be a very big agenda.
So that will need a lot of work that has to be done with SEBI, with other players, with Ministry of Finance and others to see if there are any problems and how to fix some of those issues that we will have to undertake.
[01:12:14] Rathish: Absolutely. Domestic philanthropy is still not still new philanthropy money, you know, the behavior, how to give have not ossified to a point where people can’t change it. It is now that we are starting to think, and if you can establish a new behavior now, it’s a lot easier for us to then be able to drive it to scale as that numbers continues to grow.
And like you said, the social stock exchange is an opportunity. The number of intermediaries are few, but can grow and the India giving stories only starting in my opinion. So I think mining this as a de facto approach. And creating the deal flow in some sense, where every week we are evaluating something I think is going to be very important.
[01:12:56] Rathish: I think these are very, very good points. Ramraj, it’s a pleasure to talk to you because you’ve seen this problem hands-on with a wide range of people. We started with a very broad definition of what is blended finance, got into the weeds around what it is not, what are some of the challenges today, what are the building blocks to make this happen and why now was probably a great time to make this happen.
Given some of the things that are going on. Thank you so much for your time. We’ve covered a lot of ground. It was a great conversation.
[01:13:21] Ramraj: Thank you. Thank you, Rathish. Pleasure to be here and all the very best. I think this is a great initiative, the Sattva Knowledge Institute, and I look forward to staying engaged. Thank you so much.
[01:13:32] Rathish: Thank you for listening to Decoding Impact, a Sattva Knowledge Institute production. If you liked my conversation with Ramraj, do head out to Sattva Knowledge Institute’s website, where we have a lot more content on blended finance and capital for impact in general.
If you liked the conversation do check out the season one and season two of Sattva Knowledge Institute on YouTube, Spotify, or wherever else you consume a podcast from.
Thank you for joining us today. I hope to catch you again in a fortnight for another episode of Decoding Impact.
Episode Transcript
[00:00:11] Rathish Balakrishnan: The problems that innovations are trying to solve, especially for people and the planet, are running faster than the solutions that we are creating.
[00:00:17] Manoj Kumar: While we are seeing very sophisticated innovation in telecommunication or mobility, we are not seeing the same level of innovation coming to market and say drinking water or sanity.
[00:00:26] Rathish Balakrishnan: Most smart people in India are solving for groceries reaching us in less than 10 minutes than solving for Tuberculosis.
[00:00:31] Manoj Kumar: Value creation becomes more important in this market. Innovators need to understand that their product will never be successful in the market if they cannot demonstrate value to their customers.
[00:00:42] Rathish Balakrishnan: I’m thinking of all the people who are listening to us, they’re thinking Software, ChatGPT. There is innovation at a very physical, material, science level as well, which is an extremely important force multiplier for solving for things.
[00:00:55] Manoj Kumar: It is about competing with poverty and competing with climate change. How do you create a competitive advantage against poverty and climate change? Through full stack. So what Steve Jobs and Elon Musk have done, we have to do exactly that for the poor and the planet right now.
[00:01:08] Rathish Balakrishnan: Today, all the data tells us that the innovation investments in CSR (Corporate Social Responsibility) have been very low. Like we’re talking about 0.3% of all CSR money being spent on innovation.
[00:01:16] Manoj Kumar: Innovation is unpredictable, right? It’s risk taking and it requires a lot of trust. Historically, we have been trained in thinking binary. And we have to start thinking spectrum.
[00:01:26] Manoj Kumar: It’s not black and white. There are multiple colours. The risk management models that the investment community uses need to be recalibrated, and redefined for the development sector.
[00:01:36] Rathish Balakrishnan: Welcome to Decoding Impact from Sattva Knowledge Institute, hosted by me, Rathish Balakrishnan, where we look at complex social problems and understand what it takes to solve them at scale and systematically.
[00:01:49] Rathish Balakrishnan: It’s fair to say that there is a general zeitgeist of innovation and entrepreneurship in India today, more than any other time in my living memory. There are more entrepreneurs and more innovators who are trying to solve a wide range of problems in India. There has been a 300-fold increase in innovation investments in India, and India is actually the third-largest innovation ecosystem worldwide.
[00:02:16] Rathish Balakrishnan: And there are today, tailwinds in terms of governments investing in innovation, CSR law supporting investments in education, high net worth individuals and families investing in innovation ecosystems as well.
[00:02:29] Rathish Balakrishnan: However, it is fair to say that the problems that innovations are trying to solve, especially for people and the planet, are running faster than the solutions that we are creating. There is a need for a far higher and far greater level of engagement and investment in problems that innovations are trying to solve in the social impact ecosystem. And a large part of it also ties back to unlocking capital that can solve for some of these challenges as well.
[00:02:58] Rathish Balakrishnan: In today’s conversation, we are going to talk about what the innovation ecosystem in India looks like. What are the structures and mental models that define how we understand it. And the need for unlocking diverse types of capital that can help us solve this challenge.
[00:03:15] Rathish Balakrishnan: To discuss this today we have with us Manoj Kumar, who is the founder of Social Alpha, a multi-stage innovation curation and venture development platform that has worked with over 300 startups. Having known Manoj personally, I know he spent a significant amount of time thinking about the structures behind the innovation ecosystem and truly what it takes to solve for innovation at scale in India.
[00:03:39] Rathish Balakrishnan: Manoj, thank you so much for joining us today for this conversation on innovation and unlocking capital for innovation at scale. Manoj, before I get onto the discussion itself, it’d be great to hear from you, your own journey, what brought you here, and to this focus on innovation.
[00:03:56] Manoj Kumar: Rathish, thank you so much. My journey, I have been a banker, I worked in the software industry. I’ve been an entrepreneur, did private equity, mergers, acquisitions, leverage buyouts, but you know, over several years, the desire to work in the development sector latently has been there. It was there but never got prioritised.
[00:04:19] Manoj Kumar: So very opportunistically at some point of time in your age, you start, and I really compare this with the entrepreneurs who are starting at 20 something that they are taking much higher risk than I took in my life, right? So I think about 10 years back, this latent desire to work in development became very strong.
[00:04:41] Manoj Kumar: And then I started talking to people in my network about how I can add some value. What can I do? The last thing I had in my mind was I didn’t want to say that, ‘Okay, I’ve done enough in the corporate business world. And now suddenly you know, I have this change in my philosophy and I want to now contribute or give back to society.’
[00:05:06] Manoj Kumar: That was not the reason. It was just a very selfish latent desire to do something and then I said okay, let me see what value I can add, right? And there are so many nonprofits, NGOs in the development sector, they’re already doing great work.
[00:05:22] Manoj Kumar: So there is no desire to do another nonprofit or another NGO. No desire to compete with anyone. It’s just that, what can I contribute? So I started engaging with foundations, philanthropic organisations, and NGOs and started learning more on the ground that, before even I talk about what value I can create, let me learn.
[00:05:42] Manoj Kumar: So I spent a few years, about three, four years, just exploring myself and exploring where I can add value. My biggest learning in that phase was that our development sector needs a little more innovation.
[00:05:56] Manoj Kumar: We have dedicated people, we have an organisation, we have great institutions working on the ground with communities. But if we could bring a little more innovation to the sector, it would be something worthwhile trying. And that is what I can probably bring to that.
[00:06:13] Manoj Kumar: So yeah, that’s been the journey. And then we started off bootstrapping it a little bit, some experiments with bringing innovation and that learning was even bigger because it was not easy.
[00:06:27] Manoj Kumar: The gap between where innovation originates and where it is deployed, that gap is really, really huge. Now we are learning, trying, and iterating to see how we can bridge that gap.
[00:06:42] Rathish Balakrishnan: I want to come to that journey because many times, Manoj, people don’t get a sense of the gaps in that journey today. And it’s something that can spend decades and years and not months. And I don’t think we have that full sense of time. But before that maybe just a framing question around what is different for innovation in the social sector as opposed to innovation in general?
[00:07:04] Rathish Balakrishnan: Because innovation is, you know, bandied about everywhere. But what would you say is a big difference in innovation?
[00:07:10] Manoj Kumar: You and I both are consumers of innovation, right? Every time we have a new phone, new gadget, new consumer goods. It’s not a challenge to take innovation from lab to market, because if you see in the history of business since the Industrial Revolution, we have seen innovation.
[00:07:27] Manoj Kumar: They’re starting with the steam engine and now we are talking about battery-operated airplanes for local mobility, all kinds of stuff. So we have built vaccines and drugs. So for me, there is a market. And there are players in that market from innovators to capital providers to policymakers to, you know, the entire ecosystem that promotes innovation, right?
[00:07:57] Manoj Kumar: So your higher education system, your R&D (Research and Development) infrastructure, their innovation thrives, right? In India, where is innovation thriving? We have seen huge innovation in digital public goods. We have seen huge innovation in e-commerce. And last-mile logistics. We have seen innovation in FinTech, AdTech, and AgriTech.
[00:08:18] Manoj Kumar: And globally, we have old classic examples of innovation I know and we have seen innovation in services and products in deep science. But what happens to innovation in a market failure case?
[00:08:31] Manoj Kumar: While we are seeing very sophisticated innovation in telecommunication or mobility, we are not seeing the same level of innovation coming to market in say, drinking water or sanitation or service treatment, or getting small and marginal farmers sophisticated equipment which are affordable, reduce the treasury and improve their productivity and efficiency, right?
[00:08:55] Manoj Kumar: Or diagnostic devices for last-mile health care, which can be used by a frontline health worker, have great user experience, but are affordable and make healthcare more accessible.
[00:09:07] Manoj Kumar: So that is where we see market failure. So for me, whether you call it social innovation or impact innovation, fundamentally you are addressing market failure, right? And when you address market failure, you then need to identify where all market failure is happening and what level of de-risking you have to do in order to attract the market.
[00:09:29] Manoj Kumar: You are not going to replace markets. You’re not an alternative to the market, but you are trying to make this whole game more exciting and fun. And therefore, rewarding, for people who operate in the market, right?
[00:09:42] Manoj Kumar: So someone operating in, you know, EdTech or FinTech or airlines or telecommunication or pharma, can we attract them to work in primary care? Can we attract them to work in horticulture? So yeah…
[00:09:59] Rathish Balakrishnan: And I want to build on that market failure point, Manoj, because I remember once I was in a conversation where somebody said that more smart people in India are solving for groceries reaching us in less than 10 minutes than solving for tuberculosis, though the people dying of tuberculosis are far more. But the question is, why do these market failures happen?
[00:10:17] Rathish Balakrishnan: Is it just a capital flow that today there is money to get your groceries in under 10 minutes, but there is not enough money to get you a vaccine or a solution for tuberculosis?
[00:10:26] Manoj Kumar: That’s a great question. Rathish, who addresses market failure? It’s the government. The government uses taxpayers’ money to address market failure. You remember, like in the 1950s, when India’s private sector was not very evolved, we built the public sector, right?
[00:10:45] Manoj Kumar: Today, we are even building airports and ports in the private sector. But there was a time that the Airport Authority of India would be the only player in airports, right? So we have moved from the public sector to the private sector because we had policies, infrastructure, capital, everything available for that, right?
[00:11:03] Manoj Kumar: Today, like you see, the government would play less and less in business. Earlier state governments had their own PSUs (Public Sector Undertaking) and central government, we had the National Textile Corporation in this country 30 years back, right? We have seen the government playing the role of market maker when the market failure is there.
[00:11:23] Manoj Kumar: But see in today’s context, the government role, while it is really important, is going to be suboptimal because we have a large number of problems and for a country of our size and number of problems, while the government will continue to address market failure, we need new players, right?
[00:11:45] Manoj Kumar: And whether these players will come from the mainstream finance world is a question mark, right? Now we also know that every investor in the market, whether it’s an equity investor, a banker or a debt provider, will have their own cost of capital and risk-reward equation, right? So there, their own investors would expect them to deliver a certain level of risk-adjusted return on their capital.
[00:12:10] Manoj Kumar: So expecting a mainstream venture capital to actually do something where risk is unknown, unexplored, and you are still working on very early stage innovation is something, I would say it’s not fair, right?
[00:12:25] Manoj Kumar: Because a VC (Venture Capital) is responsible for their LPs (Limited Partner) for providing a certain level of risk-adjusted return and they have a fiduciary responsibility to look after their LP.
[00:12:36] Manoj Kumar: So I think it’s not only lack of capital flow. It’s also not understanding the risk profile of those business activities because we don’t have enough historical data or evidence, right? So 30 years back, nobody would do an airport or an airline or an oil exploration or refinery project.
[00:12:55] Manoj Kumar: But today they do it because they understand the risk. And then the investors, once they understand the risk, they’re willing to bring in the money. So, if I do not think from a social or commercial point of view, and just think from a risk-reward equation, a risk that I understand and evaluate, is something that I can also underwrite if I have the capital, right?
[00:13:17] Manoj Kumar: So the market is also waiting for enough evidence that they can actually earn their expected rate of return on their pool of capital if they go to the agri-equipment market, right? Or they address climate change or they address new battery chemistry, right? I don’t think they understand that.
[00:13:38] Manoj Kumar: Do we understand that? No. But we are learning that, right? This whole Social Alpha experiment is the process of learning early-stage risk in innovation, curation, and venture development. And at some point of time, we think that we can use a pool of capital to de-risk these companies and attract the market, right?
[00:13:58] Manoj Kumar: Our success is not dependent upon how much we do and how big a portfolio we build. Our success is how much market capital we can redirect to sectors that do not get market attention, right? 30 years back, nobody would have invested in a PhonePe or PayTM.
[00:14:15] Manoj Kumar: Today, people are investing and they’re not talking about P&L (Profit and Loss). They are talking about growth and customer acquisition, right? So I think you remember microfinance is a classic example. 25 years back, microfinance was only done by NGOs and nonprofits, right?
[00:14:30] Rathish Balakrishnan: Yeah. Yeah.
[00:14:31] Manoj Kumar: Today, you see my microfinance company getting mainstream valuations, right? Every big business and investor wants to have exposure in microfinance.
[00:14:42] Manoj Kumar: Microfinance is no more starved of capital. So I think what we call today social innovation is a sector that has not received enough attention, right? Other than the government. And I think this is high time investors start looking at it, but in order to get investors to the sector, you need to do a lot of work in understanding and explaining the underlying risk.
[00:15:09] Rathish Balakrishnan: I think you’ve hit the nail on the head, which is really this element of risk, right? And I would like to go one level deeper in that. Because innovation needs capital. One is the quantum of capital and the other is the risk appetite of the capital.
[00:15:23] Rathish Balakrishnan: And as you rightly said, risk is two things. One is, do I know the risk and is the risk too high? Sometimes I know the risk is too high. I still might take it. But if I don’t even know what the risk is, then I can’t even pick it, because otherwise, I can’t hedge that in any form.
[00:15:36] Rathish Balakrishnan: And I want to maybe share my thoughts on, Manoj, why is risk indeterminate, right? One, I’ve spoken to you before, innovations by themselves have a success rate that nobody can really capture. Will this work or not work? We don’t know. So that is one level of it.
[00:15:52] Rathish Balakrishnan: Second is, and this I wanted to understand from you, even the people that we build this for, their ability to pay, their ability to use, their ability to adopt, we don’t know.
[00:16:04] Rathish Balakrishnan: So, you know, if it’s really built for India, A, will I use grocery? At least we have heuristics to say, “Achha ho jayega matlab” (Yes, it will be done) but for the people we are building, I don’t think the markets really understand, listen, what does the adoption sort of put probability, potential, et cetera, which is another risk that we sort of carry.
[00:16:21] Rathish Balakrishnan: And the third risk that we are carrying is returns. Financial returns of any form. Is that valid or are there other elements to this risk as well that you will say is important?
[00:16:29] Manoj Kumar: Yes. It’s a really interesting conversation now, because sometimes the fear of the unknown is interpreted as high risk, right? Just because I do not have the ability to assess the risk, I would assume that it is high, right?
[00:16:44] Manoj Kumar: So the perception of risk is not necessarily real unless you iterate, do something about it, right? And second, the assumption that, for example, the poor cannot pay, right? These assumptions are so… I used to think like that 10 years back, right? Poor cannot pay.
[00:17:03] Manoj Kumar: Actually, you know, discarding a large population of the country, by assuming that they are price-sensitive is such a wrong assumption. People are not price-sensitive, people are value-sensitive, right?
[00:17:21] Manoj Kumar: If you want to build a product for small and marginal farmers, and you understand what problems they have, then you have to build a market-appropriate product, right?
[00:17:32] Manoj Kumar: Building a product that they can’t afford, and then blaming them for not being able to pay for it is not…These are the same people who borrow money to get their kids private education or private health care and get into indebtedness many times, right?
[00:17:52] Manoj Kumar: During my learning phase, and which I continue to do right now, when I go and meet the communities, which we want to convert into a market for our startups, they very clearly articulate what their problem is and they actually give you a specification of the solution they need.
[00:18:10] Manoj Kumar: They may not use your language, they may not give it in your design thinking model, but they actually tell you what they need. And they are customers, right? In our sector, in the development sector, we have never treated them as customers.
[00:18:25] Manoj Kumar: One of the words you would have come across talking to people in the sector is beneficiary. The moment you treat them as the customer, even if it’s a small amount of payment they are making for your product and service, your perception would change.
[00:18:41] Manoj Kumar: Then you start thinking about their affordability and their user experience. Are they getting the right user experience? Is this agri-tech product going to reduce the drudgery of women who are working in the field? Does it have the right design? Is it lightweight? Does it consume less energy?
[00:19:02] Manoj Kumar: The moment you start building products for your market and establish what we call product market fit, right? You have a market there, right? So, one, it’s not about price. It’s about value.
[00:19:16] Manoj Kumar: Customers on the top of the pyramid are not sensitive to it because I don’t think someone buying a one-crore-rupee car is doing a value analysis because that person can buy another two-crore-rupee car, but someone buying a 15,000-rupees equipment for agriculture will do value analysis because for that person, a 14,000 or a 16,000 actually is going to have an impact on their cash flows and their business model, right?
[00:19:44] Manoj Kumar: So value creation becomes more important in this market. That is where innovators need to understand that their product will never be successful in the market if they cannot demonstrate value to their customers.
[00:20:00] Rathish Balakrishnan: Yeah. And you know, 10 years ago Manoj, I was in XLRI where there was a gentleman called Joe Madiath who founded Gram Vikas. And I remember him vividly saying that we just get along by building poor solutions for poor people and wonder why they don’t get adopted. And that framing has just stayed with me and I’m just saying it bluntly, saying, “Tumhare aukaat ke liye, yeh kaafi hai” (For your status, this is enough).
[00:20:25] Manoj Kumar: Absolutely. It’s criminal, right? This is another level of injustice, saying that you are not using my product, right? And now I will do behaviour change, right? So, there’s this big industry that wants to change the behaviour of the customer because their product doesn’t fit them.
[00:20:43] Manoj Kumar: I really feel irritated sometimes about this whole thing of capacity building, behaviour change, and beneficiary analysis kind of stuff because we need to treat people with respect, even if they’re poor.
[00:20:59] Manoj Kumar: And if we treat them with respect, we develop products that have the right user experience. And demonstrate value to them. I would totally agree with the statement that you made that, make good products for everyone, including the poor.
[00:21:16] Rathish Balakrishnan: Absolutely. Manoj, you speak to innovators every day. You see innovations, you know, regularly. As you look back, are there certain characteristics for innovators and innovations that you think is a very good indicator for success?
[00:21:31] Rathish Balakrishnan: Like from what you’re saying, humility, the willingness to listen, the ability to go on the ground and be able to have an actual conversation is probably the secret to success. At least one of the characteristics that I see is important rather than sitting in a consulting room and saying, ‘I’ll make great PPTs to show how it will work’.
[00:21:49] Rathish Balakrishnan: But are there other qualities that you see both on the innovator side or an innovation side that you usually say, this is a good marker for success for us to solve this problem.
[00:21:58] Manoj Kumar: So all that you said is yes, they are all checkboxes. But there are two things I want to add.
[00:22:03] Rathish Balakrishnan: Yeah.
[00:22:04] Manoj Kumar: One very important, is the skin in the game. So I have seen the best of the innovators doing it with their own time and money and then raising capital, right? And valuing their time and money and equity in the company, not diluting very early and not just giving away their equity to others shows a lot of confidence in their idea.
[00:22:26] Manoj Kumar: People in a hurry to raise a lot of money and take pride in diluting their company versus people who take pride in their idea product and their customer discovery and building for the right customer, right? So they would be a little more attached to their company and not in a hurry to dilute and raise money, even if there is a need for early-stage capital, right?
[00:22:48] Manoj Kumar: The second thing is that the best of the innovators are hands-on. They build, test, pilot, iterate, sell, collect the money, go and check the after-sales service, and check with the customer. They are not our typical managers who want a team on day one, and work with the people. So, some of my best startups are very hands-on. They know their stuff.
[00:23:19] Manoj Kumar: Sometimes I struggle where for example, innovators have only technology knowledge, and they don’t understand the business, or business knowledge, but don’t understand the technology. We struggle and then we look for co-founders, right? As a team, do they have complementary skills? But usually if it’s a single founder, you will see they are mavericks.
[00:23:40] Rathish Balakrishnan: Excellent. And I want to build on the last point that you mentioned as well, Manoj, because today interestingly, when you say innovation and, I’m thinking of all the people who are listening to us conversing, they’re thinking software, ChatGPT they’re thinking, you know, digital models for doing things.
[00:23:56] Rathish Balakrishnan: But there is innovation at a very physical, material science level as well which I think is an extremely important force multiplier for solving for things. And again, I know you’ve worked a lot in that space, but innovation is not just a software innovation, but there is a hardware innovation.
[00:24:13] Rathish Balakrishnan: Is there a sufficient talent pool in India that is looking at those innovations today? And do we have an ecosystem for it?
[00:24:19] Manoj Kumar: It’s a chicken and egg kind of situation, right? But let me give you a historical perspective. When we had our 1990s movement, services companies started in India, right? Infosys, Cognizant, all the success stories, innovation was all around the service model, right? Business process optimization, right?
[00:24:38] Manoj Kumar: And then this developed, you know when engineering colleges started introducing IT, computer science in their core discipline more than electrical, mechanical, electronics, et cetera, right?
[00:24:50] Manoj Kumar: Then we had this second wave post-internet, right? When we saw how the internet and app economy and the emergence of smartphones started, you know, models like e-commerce and car booking and food delivery and all that, you saw the next level of innovation there, right? Which was slightly higher in terms of value creation than just the IT services, right?
[00:25:18] Manoj Kumar: And then this, you know, international multinational companies just started building their products in India. So people started understanding that, oh, there are companies around the world who don’t do outsourcing of IT services, but they actually build products, right? And then sell the products and build an ecosystem around that.
[00:25:37] Manoj Kumar: And then we have our own homegrown companies, right? Like from Tally to Zoho Corporation, building products from India, Freshworks, all great examples.
[00:25:46] Rathish Balakrishnan: Yeah.
[00:25:47] Manoj Kumar: I think we are now at a stage where all this is mainstream right? So software, IT, digital, AI, data science, ChatGPT, it’s all mainstream, right? The next wave of entrepreneurship in India is going to be building products where there is a convergence of hardware, software, materials, etc, right?
[00:26:13] Manoj Kumar: So we have two big crises in front of us, other than poverty which is climate and health, right? You need to build drugs. You need to build therapeutics. You need to build vaccines. You have to do some stuff, real, right? Physical stuff. You need to replace plastic. The software will not eat plastic.
[00:26:36] Rathish Balakrishnan: Right.
[00:26:37] Manoj Kumar: You want to replace plastic, you need biodegradable, new polymers, and biopolymers which behave like plastic because we are so used to using plastic. We need packaging, we need to replace thermocol, right?
[00:26:52] Manoj Kumar: But thermocol’s replacement will not come from digital, right? So we have to start now thinking about new battery chemistry because we have lithium in security, we need better energy density, and we need long-duration energy storage.
[00:27:07] Manoj Kumar: If you want to get away with the intermittency in solar and wind, then you need long-duration energy storage. Otherwise, you will continue to use fossil fuels. You need new materials to replace so many things, as I said, plastic, bio-plastic packaging material, et cetera.
[00:27:24] Manoj Kumar: We have little water, so we need to recycle water. At some point in time, we will create our own drinking water in our own house. Maybe we have water purifier today. Tomorrow we may have every apartment fitted with a circular water system. I don’t know.
[00:27:40] Manoj Kumar: So, you know, at some point in time, we have to solve some of these problems that we created for the planet.
[00:27:46] Manoj Kumar: And you need material science innovation there, right? You need energy innovation, right? In healthcare, right? If we have to extend really high-quality healthcare service to people in remote areas, telemedicine will only work, right? But nowadays you hear about digital health. Yeah, digital health will work but health is not only about digital, it’s also about tissues.
[00:28:11] Manoj Kumar: It’s also about blood and bone, right? It’s also about fever and it’s also about surgery. So there is a physical element to it, right? So you need a diagnostic device. You need a sensor that is probably built into the bangles of a woman, right? That communicates to you the haemoglobin level, right?
[00:28:28] Manoj Kumar: So now you have this small device, a lot of people have nowadays to do constant sugar monitoring. A lot of diabetic patients are now getting on their smartphones, right? This innovation can happen.
[00:28:39] Manoj Kumar: I’m sure the majority of women in rural India are anaemic. Some kind of a device can be built to just monitor the haemoglobin level. So what I’m saying is that a lot of innovation will require these boundaries of software, hardware, and material science, to be broken.
[00:28:58] Manoj Kumar: You will use software and artificial intelligence and hardware optimization or designing better hardware. But I think the next wave of innovation that we are seeing now, we are, we have a company in our portfolio that has built a 1.5 Tesla MRI machine. We have another company that has built a leather replacement using mycelium fungus.
[00:29:18] Manoj Kumar: We have seen that. We are evaluating a company that is creating micro-based colours so that the textile industry stops using chemical colours. You have a problem with effluent treatment or you have a problem of chemicals being used in textile. Maybe the dyeing industry has to change, the dyeing industry needs to adopt biodegradability, right?
[00:29:36] Manoj Kumar: Where will it come from? It will come from the real, you know, the physical science world. But the role of computer science and AI and data science will increase in this because you will do a lot of modelling, you will do optimizations. So I think this whole software-hardware thing, it is over now. We have to think about creating a solution, using whatever.
[00:30:01] Rathish Balakrishnan: And you’re seeing enough innovators who were able to think, imagine, and do this today.
[00:30:07] Manoj Kumar: Yeah. They were hidden. They were hiding in government jobs, in CSIR (Council of Scientific & Industrial Research) labs, in ISRO, in IIT, IISC, right? So the moment they see, like yesterday I was talking to a scientist and she said, she never knew that there was an organisation that could help her take her solution from lab to market.
[00:30:25] Manoj Kumar: And then we are working with her in finding out what kind of a business model will emerge two years down the line. I think we are at that point right now where a lot of people are showing interest. They are excited about it. We have some role models and case studies. What do we need now?
[00:30:46] Manoj Kumar: And there is a policy framework right now, right? So it’s that science and technology innovation is on the agenda at the state level, at the federal level, everywhere. So talent is there. The policy framework is there.
[00:30:58] Manoj Kumar: The missing piece is a new category of capital, the playbook that, that we have adopted in our venture capital world, that 10-year close-ended 220 model will not work here. That playbook will not work here. Because it’s a new way of doing things. It’s a new time to market. The risk is different, right? The mortality rate is different. Capital structure has to be different, right? And the rewards are also very different.
[00:31:28] Manoj Kumar: It’s very non-linear, right? So if you invent the next diagnosis kit or the next battery it’s going to be a very different reward for the entrepreneur as well. You will create a huge impact and you will actually get financially rewarded. So that also.
[00:31:45] Manoj Kumar: You know, the impact was like 10 years back, people would ask me, okay, what do you think? Like its impact or profit, right? For-profit or not for profit, right? Impact or commercial. These binaries are getting broken.
[00:32:00] Manoj Kumar: It’s no more… you know, like in politics, no left and right. You have a spectrum, right? In colour, you always had a spectrum. So in nonprofit, for profit, this dichotomy that our law still recognizes that if you are for profit, you have one set of rules. If you are a not-for-profit, you have other sets of rules. This is getting broken.
[00:32:19] Rathish Balakrishnan: Yeah.
[00:32:20] Manoj Kumar: The capital pools will also be different now. They will have to behave differently for different startups in their life cycle depending upon what is the complexity of the problem they are solving and what stage they are in. So stage-appropriate capital, complexity-appropriate capital, that kind of blending will happen.
[00:32:39] Rathish Balakrishnan: Absolutely. I want to summarise what we’ve spoken about so far because it sort of helps us navigate to the next phase more effectively.
[00:32:45] Rathish Balakrishnan: So one, the kind of problems that we are facing, there are sufficient market failures that the government cannot solve where the need for innovation is critical. If you have to solve for health and education and agriculture, et cetera, it is not going to be by the hand of the government.
[00:33:02] Rathish Balakrishnan: It’s going to be by innovation that is happening. I think what you highlighted is that there are tailwinds that are enabling that innovation. There is a policy framework right now, there is interest in momentum and making this happen, et cetera. But there are at least four challenges that we spoke about in this conversation.
[00:33:17] Rathish Balakrishnan: The first challenge is the mindset challenge, which is, if you don’t believe that everyone deserves a good solution, you will build poor solutions for poor people. And that does not want to help us drive innovation at all.
[00:33:28] Rathish Balakrishnan: Second is indeterminate risk. It is not high risk. It’s a fact that the perception of risk you know is indeterminate and hence there is an unwillingness to unlock capital resources all of that to make it happen.
[00:33:41] Rathish Balakrishnan: The third is the capability mix. We are looking at solutions that combine material elements, that combine the digital elements and so on. But then you understand business and you have to understand teams.
[00:33:53] Rathish Balakrishnan: This combination of talent, as you said, is not unavailable, but it’s hidden today. And there are pathways that need to be established for us to be able to understand.
[00:34:03] Rathish Balakrishnan: And then the fourth is the structural challenge. We have dichotomies and false choices, private, non-profit, impact or profit, et cetera. And what we are trying to create requires us to separate all these false choices and say, what is the new paradigm for us to think of these as ‘ands’ than ‘ors’, you know, impact and profits, nonprofit and for-profit structures, et cetera, that I think is going to be very important.
[00:34:27] Rathish Balakrishnan: That sort of leads me, you know, to the next part where I want to talk to you a little bit more about what does this new capital structure look like? And I know you’ve spoken about a full stack architecture before. Why don’t you tell us about it? What is this conceptualization of a full stack architecture for innovation?
[00:34:43] Manoj Kumar: So that is when we started, right? Again, a lot of time we start with assumptions, right? So I thought capital is the only problem, right? And I thought I’ll raise money and invest in companies. Very oversimplified view of the sector. And then very quickly we learned that this is not the case.
[00:34:59] Manoj Kumar: We have several incubators and accelerators working in this space trying to provide different elements of success and support. The biggest learning was that if you take an innovation from the lab to the community, that is basically the customer base, right? That needs innovation.
[00:35:20] Manoj Kumar: One, it has to go through the market. That means you need entrepreneurs, right? Without entrepreneurs, innovation can happen in the high science laboratory, but taking innovation from lab to market requires entrepreneurs. And in the process, you are also creating the market by showing them the revenue stream, downstream right, from the community, which is using or paying for this.
[00:35:47] Manoj Kumar: So a lot of work actually, you have to do closer to the lab. Closer to the R&D ecosystem, right? What works in a lab environment is not necessarily ready for manufacturing production or even pilots, right? And that is what we in the industry call it incubation, right? That getting companies to a stage where they can be ready to go to market.
[00:36:13] Manoj Kumar: But that incubation piece has to happen closer to R&D, right? And a lot of testing in the sandbox and real environment has to happen there. And then once you are at a stage where this venture can even think about going to market, you probably need venture capital.
[00:36:36] Rathish Balakrishnan: Right.
[00:36:37] Manoj Kumar: And when do you transition from that lab stage work that venture capital will not fund to a stage where venture capital is required, will depend upon again, the complexity of the problem and what sector you are in.
[00:36:53] Manoj Kumar: So it’s not one size fits all. And therefore, it has to be highly customised for each and every innovation. So what will work for plastic is not necessarily what will work for battery chemistry or medical devices.
[00:37:06] Manoj Kumar: While the playbooks, the investment playbooks are designed for a homogeneous type of B2B playbook, B2C playbook, this is not B2B, B2C. Each and every scientific innovation is different.
[00:37:20] Manoj Kumar: And then when you pilot a test, you may go back to the lab for another round of iteration, right? So this build, test, iterate, and rebuild process is tried and tested in the software industry. So anybody who works in the software industry knows that you don’t ship your software on day one.
[00:37:46] Manoj Kumar: We still get bugs on Microsoft Office, right? For 30 years we have been using it. So the software industry has actually figured it out. Therefore, software companies get investment from the VCH.
[00:37:59] Manoj Kumar: But the same level of sophistication or advancement in the hardware or materials or physical goods industry is not there yet.
[00:38:09] Manoj Kumar: It is there. I’m sure people who invented refrigerators and washing machines and water purifiers would have done it for many years before we see a TV in our house and phones keep iterating. Every year you get a new model with new features and new functions, right? And you never thought, ‘Oh, this is a good feature. They should have given it three years back.’
[00:38:28] Manoj Kumar: So in places where you are addressing the problem of poverty and the planet, right? Climate, agriculture, water, or healthcare. You need the same level of ecosystem and capital support that was available to durables or automobile companies, right?
[00:38:47] Manoj Kumar: For example, if Indian Institute of Science develops a new molecule, which has the potential of converting into a cancer drug, it will just licence it to say a Novartis or a Pfizer or a Roche and they will then their internal R&D will do the lab-to-market, right?
[00:39:04] Manoj Kumar: So this lab-market actually happens in the corporation. A Boeing will have R&D and Lockheed Martin will have its own R&D, Tata Motors or Reliance Petroleum will have their own R&D. So this lab-to-market piece in mainstream business happens in the market and not in the lab. And every successful company has R&D budget, right?
[00:39:25] Manoj Kumar: Who will do R&D for this planet, for climate change, for energy transition? Who will do R&D for the women in Eastern UP who have 2-acre land and do not have equipment that helps them improve productivity on the field?
[00:39:44] Manoj Kumar: Who will do R&D for an ASHA worker who is going door to door collecting data? And not being able to do a quick test on this part and do a quick referral to the primary health centre. So mainstream business has no incentive today to do R&D for people and the planet.
[00:40:05] Manoj Kumar: Where they have incentive they are doing it. For example, mobility is getting enough investment. So I’m sure if you, I have not done the calculation, my guess is 80 to 90 percent of so-called climate investments are only in mobility. But who will do other things, right?
[00:40:26] Manoj Kumar: Since the transition between lab and market, since the Industrial Revolution, it is very well defined and it is through something which we call technology licensing regime. So you do R&D and licence it out. And that’s what most labs do.
[00:40:45] Manoj Kumar: But when it comes to people and the planet, there is nobody to licence. So what people say, okay, I open source it. It’s in my library. I published it. I patented it or I open sourced it.
[00:40:58] Rathish Balakrishnan: Correct.
[00:40:59] Manoj Kumar: So without having an architecture that integrates with the R&D ecosystem and then integrates with actual consumers or customers downstream, this transition won’t happen, right?
[00:41:15] Manoj Kumar: So you have to mimic what is happening in the successful world of automobile and aerospace. You have to mimic that in the world of small and marginal farmers, micro and small enterprises, and of course, the forest, the land, the water, the Nature, right? Creating that parallel ecosystem requires a full-stack approach.
[00:41:41] Rathish Balakrishnan: Yeah.
[00:41:41] Manoj Kumar: So for example, you are inventor in a new EV, you will have to think about charging infrastructure, you will have to think about charging standards, but you don’t have to think about tyres, because the mobile industry doesn’t think about tyre and petrol pumps. They only think about internal combustion engines and the rest of everything is either hardware or software and they can figure it out, right?
[00:42:07] Manoj Kumar: There’s an ecosystem. Where is the ecosystem for water resource management? Where is the ecosystem for sanitation? Where is the ecosystem for healthcare devices, right? And therefore, it was a compulsion for Social Alpha to start thinking for the stack.
[00:42:23] Manoj Kumar: It was not a choice. So what we have done over the last eight years, we have built this full stack architecture, which we call Social Alpha lab, Social Alpha ventures and Social Alpha communities to make sure that we are integrated from lab to market to community, right?
[00:42:39] Manoj Kumar: Will it always remain like this? I think it should not. I think we should be replaced by other players. I think over a period of time, Social Alpha should become irrelevant, because as more and more sectors become mainstream, our role will end there, right?
[00:42:55] Manoj Kumar: And more people will try to do this early-stage risk. So full stack is that. Full stack is in business, full stack is done by people who want to create closed systems like Apple or Tesla, Blackbox. I want to build full stack because that gives me my competitive advantage.
[00:43:11] Rathish Balakrishnan: Yeah. Correct.
[00:43:12] Manoj Kumar: Right now, it is not about competitive advantage. It is about competing with poverty and competing with climate change. That’s the competitor here. So how do you create a competitive advantage against poverty and climate change? Through full stack. So what Steve Jobs and Elon Musk have done, we have to do exactly that for the poor and planet, right now. Because the competitor is very powerful.
[00:43:34] Manoj Kumar: Poverty, development, oppression and inequity. That’s your competitor, right? Climate change is a competitor. How do you fight with them? So this is a compulsion to do that.
[00:43:45] Rathish Balakrishnan: I want to maybe rephrase and paraphrase what you said, Manoj, so that I have understood correctly, but also take an example so that it’s very clear for everyone.
[00:43:54] Rathish Balakrishnan: So one, what I understand is that today there is a market, like you rightly said, when IISc creates a cell, Roche has an entire ecosystem to say, that cell to a drug, to a delivery system, to a services approach, sales, go to market, everything they will take care of.
[00:44:11] Rathish Balakrishnan: Anything that today we care about, where there is sufficient financial returns, markets are efficient enough to create those systems. You know, “Paisa banane ke liye hai, toh karwa lenge na hum, kyun nahi karenge?” (Because it’s like, if there is money to be made, we will make it happen. Why won’t we?)
[00:44:23] Rathish Balakrishnan: But if there is a way where we have to solve for poor, and I’m thinking we need it even more for poor, because for these problems, they’re far larger. Today, that stack doesn’t exist and we have to create it, but I want to explain the stack as I’ve understood it.
[00:44:36] Rathish Balakrishnan: One, you’re saying that there is an R&D stage, which is the lab stage. Which is how do you help an innovator think about: Is this the right problem? Right solution? Is this built well? Is it tested? Is it patented? Compliant? All of that.
[00:44:50] Rathish Balakrishnan: And once and they probably sandboxed it to a point where they say, ‘Hey, listen, this works on the ground to a certain extent.’ The second stage is where they have to have some risk capital that can give them the chance to go try it out in a real-life scenario where they transform from being an innovation to a company in some form.
[00:45:07] Rathish Balakrishnan: They say now, “Paisa liya hai, prove karna hai” (I have taken money, so I have to prove). I have to pay back something. And then there is the third stage where they have to work much closer with the community and actually adopt it and build the community side infrastructure. If I use it, who services it, if I use it, who will support me in sales, all of that. Are these the three stages that you are referring to?
[00:45:29] Manoj Kumar: Yeah. So these are the three stages, but unfortunately, it’s not a relay. You will see in a lot of publications where you see, you know, early stage this happens then you transition. So it’s not like primary to high school to graduation. It’s not like that. It’s lifelong learning, right? You have to focus on R&D, focus on venture building and focus on scale-up implementation of scale up. This is the three stages that identify what is your primary focus in that stage.
[00:46:04] Manoj Kumar: However, the work that you do, the iterations that happen, the capital structure that is required is actually common. We have seen companies requiring philanthropic grant capital at the implementation stage.
[00:46:22] Rathish Balakrishnan: Correct.
[00:46:22] Manoj Kumar: …At the venture development stage, and of course, at the early stage, right? So it is this relay of a stage and accordingly change in the nature of capital and its stage is a big misconception and only the manufacturers who are building the product understand it because this is their daily struggle, right?
[00:46:45] Manoj Kumar: I have companies who have actually raised venture capital but need our support to actually do a pilot on the ground. And also in this whole process, you have to actually see if there is a policy obstacle or is there a policy accelerator that can happen or a catalyst that can happen. And then go and do some advocacy with the policymakers that look, we are introducing this new solution.
[00:47:10] Manoj Kumar: It creates an impact in the lives of farmers or small businesses or patients, but it requires some support from you. Maybe subsidies, maybe market access support, right? Some kind of that. How do you leverage it? Government policy, government subsidies. So that continuum is there, right?
[00:47:27] Manoj Kumar: Early stage grants, for example, the Government of India has several schemes for early stage grants, but are those grants really enough? No, right? Are they distributed across multiple startups? Of course, yes. Is it suboptimal? Yes. So how do you supplement that?
[00:47:47] Rathish Balakrishnan: And I think that’s a very important point. And this comes up in multiple conversations I am part of as well. But one of the points I wanted you to highlight a little bit more, maybe with an example is this journey is not the same for every innovation.
[00:48:01] Rathish Balakrishnan: This journey is very, very different. You know, maybe a health innovation will probably be high on R&D, iterative, etc. And agri may be very different. Can you maybe take two examples of innovations that you’ve seen where the journeys have been very different for each of these across these phases and not just a ‘one size fits all’ approach?
[00:48:18] Manoj Kumar: Yeah, it’s very difficult and it takes a lot of time.
[00:48:23] Rathish Balakrishnan: Yeah.
[00:48:24] Manoj Kumar: Voxelgrids, one of the companies in our portfolio made the world’s first liquid helium pre 1.5 Tesla MRI machine that basically has the potential to not only reduce the cost of MRI scan, but also make it more accessible by making it mobile and also very efficient and has a much higher level of resolution than comparable machines from big players.
[00:48:47] Manoj Kumar: It started in 2016, the product development. That means the scientific R&D was done even before 2016, and we are in 2024 and we just got the CDSCO (Central Drugs Standard Control Organisation) which is India’s FDA (Food and Drug Administration) equivalent; CDSCO approval for manufacturing last year. It had to go through clinical trials, regulatory approvals.
[00:49:08] Manoj Kumar: Now, will anybody fund clinical trials or regulatory approval? It’s product development, then healthcare is regulated. So you have to go through those steps. And then you have to find partners for manufacturing or go to market, right? So the journey can be complex. It requires deep science understanding, like imaging physics in this case, but also the market is large, right?
[00:49:33] Manoj Kumar: So we actually could not raise money from any financial investor. The first investor who actually came after Social Alpha is a corporation. So this can be very long.
[00:49:46] Manoj Kumar: In agriculture, it’s a completely different story. You can build a product very quickly, but adoption takes time. You build a product, say, in three years. 85% or more of our farmers are small and marginal, right? Their landholdings are small. You cannot go and tell them, use this product.
[00:50:08] Manoj Kumar: So even when you have built a product, you will have to do pilots. When you do pilots, we have different agroclimatic zones. So some pilots done in Tamil Nadu will not work in Eastern Europe, right? Soil type will change, the climate will change, water availability, water table, crop pattern, the crop they grow will be different, the cultural preferences would be different. So you will have to do pilots in those specific small geographies, right?
[00:50:34] Manoj Kumar: And see whether the product is suitable for the community, right? This requires risk funding because you are actually asking the community to change something in there, use new equipment or use a new method or use something new, and they will use it. And you will have to see whether you are getting the right results before you can ask them to pay for it, right? So you are trying to establish the market, but the market is not yet proven.
[00:51:07] Manoj Kumar: In the mainstream world, you can get funded for a discount and order from food delivery, you get one plus one free, right? So there is enough venture capital, which is available for adoption of B2C businesses. We all started ordering more because some scheme is there, some sale is there or something. There is no scheme for the farmers to adopt climate-smart technologies. Not only there is no scheme, there is no lender also.
[00:51:36] Manoj Kumar: If I go to a financial services provider and say you are talking about financial inclusion and that is why you have been created. I have these 50 farmers and they are already victims of climate change and we are trying to bring climate-smart technology to them, but they will pay in 24 instalments, not upfront.
[00:51:54] Manoj Kumar: For the last one year we are struggling with the lenders. They’re not responding, most of them, right? So now you know what I need? I need to give lenders, who are experts, whose existence is about financial inclusion and lending, I am offering them counter guarantees. First loss, the guaranteed interest of them to do their business, right?
[00:52:20] Rathish Balakrishnan: To a customer, they already serve in some sense…
[00:52:24] Manoj Kumar: I have proximity to the customer because a financial services provider does not know how to assess the credit risk involved. They know how to assess the credit risk in selling you a mortgage or selling me a refrigerator in instalments, but they do not understand the credit risk of selling climate-smart agriculture equipment to a small and marginal farmer in Jharkhand, they don’t know.
[00:52:50] Manoj Kumar: And if they know, they would say that my operating cost doesn’t allow me to do that business, even if they’re very digital, they would tell you that no, it doesn’t work. And those who are ready, they will say I want 22% interest or 24%. So you know, the ecosystem is not there to promote a startup. So even if you are a great startup in Bangalore or Pune building agri tech, your deployment ecosystem is not yet ready.
[00:53:20] Manoj Kumar: So the journey is not only tough and complex, the innovator needs to understand it upfront, that it will take many, many years and an ecosystem support, right? To get me to a stage where I am on my own. The growth we have seen in this sector, where we operate, is not very well funded, so you cannot have the same growth hacking concept, right? This growth hacking doesn’t happen here. It’s slow, steady, test, pilot. You’re dealing with health, you’re dealing with agriculture, you’re dealing with climate change. It’s slow. The nonlinearity of impact and the nonlinearity of return are interrelated.
[00:54:08] Rathish Balakrishnan: Right.
[00:54:08] Manoj Kumar: If you really create non-linear impact, you will have non-linear return, right? It’s not a low-risk, low-return, high-risk, high-return mainstream graph. It’s an unknown risk. Right. And potentially very high return if you figure it out. So whoever figures out a one-drop blood test for five things, not Theranos type, but real stuff, that person is going to make money, right?
[00:54:36] Manoj Kumar: And this has been proven in microfinance. Unfortunately, the microfinance interest rate did not come down significantly. They have come down reasonably well, but microfinance at least is now accessible.
[00:54:50] Manoj Kumar: If you are a dairy farmer with the regular cash flows, you can access microfinance. But is it accessible to a farmer for agriculture activities? Not yet. The only loan that is available to a farmer is Kisan Credit Card. That’s the only thing, right? So the ecosystem has to be built, right? You need commercial capital, you need philanthropic capital, you need ability to unlock debt, you need the ability to unlock public policy, you need ability to unlock subsidies.
[00:55:22] Manoj Kumar: And this is what we call blended finance. We don’t call what is known in the market as blended finance. In the market, blended finance means you subsidise my risk because I cannot take the risk. So you are subsidising. No. Blended finance means unlocking various capital pools together and deploying them based on the need, stage appropriate, sector appropriate.
[00:55:46] Manoj Kumar: And it may not be the same for all, right? You can’t wear an investor hat and give money to these people. Because even after you have invested in a company that is building medical devices for primary health care. Primary health care in this country is provided by the state government through their primary health care system and the procurement for primary health care system does not happen from the startup, right?
[00:56:10] Manoj Kumar: However, globally around the world, the defence procurement system works. If you are a Lockheed Martin corporation, the U. S. defence will fund you, right? But what about healthcare, right? So, you have to build not only affordable solutions with great user experience, you have to unlock multiple pools of capital, including public policy, debt, equity, everything.
[00:56:42] Rathish Balakrishnan: Absolutely. So, Manoj, I think the last point I think was the next question I wanted to ask, which is the types of capital. As you were speaking, I realised that there is just restricted grant capital that says, ‘Hey, listen, I don’t know where this is going to go. I’m going to give this.’
[00:56:56] Rathish Balakrishnan: There is capital for high-risk experiments. For example, for you to do pilots, there is equity capital, which is that I’m taking a share. I’m committing to growth, but I’ll have an expected rate of return that I am going to get.
[00:57:10] Rathish Balakrishnan: There is working capital, which is, you need this capital for a certain period of time. I’m going to give this to you. There is lending capital, which is that ‘Hey, listen, your customer might need lending loans.’ And I’m going to offer that all of these types of capital are actually very required. And I think by identifying all of these capitals and finding ways to bring these capitals.
[00:57:29] Rathish Balakrishnan: And as you rightly said, not linearly, ki “Achha Phase 1 mein yeh chahiye, Phase 2 mein yeh chahiye…” (Okay, in Phase this. In Phase 2, we want this..) But across the life cycle, you might just need them in different types and shares and ways. I think it’s going to be very important.
[00:57:41] Manoj Kumar: And it’s not utopian. Actually, this is how the world works. So if you and I start a company tomorrow, we know where to raise grant capital from, where to raise equity from, which bank to go for the loan. So for a mainstream business, this is done.
[00:57:56] Manoj Kumar: The problem is when you try to solve for poor, when you try to solve for planet, the moment you’re trying to solve the problems of poor and planet, this larger capital architecture has not been designed for them, right?
[00:58:12] Rathish Balakrishnan: And a follow-up question to that, Manoj, is it also because of just lack of governing structures or operating structures? Because I’m thinking, Social Alpha has a certain scale. I mean, an entrepreneur is already carrying a mountain and solving. Imagine them having to resolve all of these problems and then run their organisations, all the problems of the poor and get the capital.
[00:58:33] Rathish Balakrishnan: So what parts of this should an entrepreneur be solving and what parts of it should institutional structures be enabling? I’d love to hear your thoughts.
[00:58:40] Manoj Kumar: If you see the history of the American banking system, one fine day JP Morgan called all the bankers in one room in New York and said we need to create governance, and the Federal Reserve Bank of the United States was actually born out of that meeting.
[00:58:57] Manoj Kumar: Elon Musk, while building Tesla, built North American charging standards that now every automobile company in the US will have to follow because he was the, you know, innovator and primary front runner, right?
[00:59:12] Manoj Kumar: So a lot of the time, innovators, entrepreneurs, who have this first-mover advantage and also the risk they take, end up doing a lot of this ecosystem building.
[00:59:25] Manoj Kumar: The first automobile manufacturer in the world would have thought about wheels and steering, but now you and I don’t have to think about it, right?
[00:59:34] Manoj Kumar: Software industry, it has happened, right? The semiconductor industry grew because there were some early movers, AT&T, Bell Labs, and others who actually created Silicon Valley out of it, right?
[00:59:45] Manoj Kumar: So this whole question of institutional governance never starts before entrepreneurship. It always follows entrepreneurship. For example, if the Government of India starts a startup policy, then every state has got a startup policy, right? The startup policy or innovation policy actually follows startup and innovation. It’s not that first policy came and then startups came.
[01:00:12] Manoj Kumar: Somewhere in the world, people are innovating, right? I think in sectors like clean energy, in material science, in healthcare. As innovators do new stuff, then markets will respond, policymakers will respond, and governance structure will evolve.
[01:00:34] Manoj Kumar: For example, in the software industry or ISO or CMM, all these were later, right? So, you know, the risk takers, the entrepreneurs, they build the world, right? Historically. Traders running around the world, going from one continent to another, innovating all the time, building new stuff. This building and shipping is very important. Build something, ship something, then regulation will catch up.
[01:01:01] Rathish Balakrishnan: Hmm. There is this phrase for paving it backwards. Where they say walk and then pave backwards. You can’t first pave and then walk. It’s just not going to happen.
[01:01:10] Manoj Kumar: Wait for the ecosystem to respond, then that is a dream. You’re basically creating a dream that if X, Y, Z happens, then this industry will grow. See, look at the pioneers of Indian industry, right? They would have started by building stuff. I’m sure when Jamshedji Tata built the Taj Hotel, there was no hotel management school in this country.
[01:01:32] Manoj Kumar: TCS or Infosys would have struggled to hire software engineers when they started their journey or even the regulations, right? So for example, internet happened and then a lot of data security and all these acts and rules about privacy and things because internet had to happen first, right?
[01:01:53] Manoj Kumar: So I think governance, organisation, infrastructure, ecosystem is very important, right? But the need for an airport will happen after someone is actually talking about building an aerospace industry.
[01:02:09] Rathish Balakrishnan: Absolutely. Two follow-up questions, Manoj. One, and both usually come up in our conversations with potential funders. One is, hey, the government already put so much money on innovation, why am I also putting in grand capital? And this is a question and they say, is it a leaking bucket problem?
[01:02:28] Rathish Balakrishnan: How do you see in the continuum of capital conversation, the role of the government and the role of the rest of philanthropy?
[01:02:34] Manoj Kumar: I think the rich and privileged of our country need to understand that tax that they pay, it’s not enough for a country of our size and the complexity of problem, whichever regime it is, whichever party is in the power, there’s not enough money, right? For science and technology innovation.
[01:02:51] Manoj Kumar: We don’t have something like DARPA (The Defense Advanced Research Projects Agency in the US) with a large budget, doing moonshots, right? And also, the government money is very suboptimally distributed. The government does not act as a capitalist doing resource allocation where Darwinism work is working in giving grants, right? It’ll have to go.
[01:03:11] Manoj Kumar: For example, a government scheme would be that let’s build a hundred incubators, let’s give five crore to each, and let’s see how they perform. That’s the distributive nature of equity in policy making.
[01:03:22] Manoj Kumar: Markets have excellence in resource allocation. Markets would put resources most efficiently, right? And therefore, the rich who have a surplus to deploy need to allocate capital to innovation because they can allocate capital in a very different model than the state would do. They can use their venture capital, private equity type of knowledge to create a new category of capital that is willing to take the risk that the venture capital doesn’t take. But still using the operating model of resource allocation that the venture capital does, right?
[01:04:01] Manoj Kumar: But adding a level of specialisation to that, that okay, if I am investing in batteries as a startup, it would be a different playbook than I am investing in a medical devices startup, which would be a different playbook, right? This level of thinking requires one specialist in the sector to the capital that is willing to take long-term risk. And it cannot come from this typical LPGP (Limited Partner, General Partner) model where you are managing other people’s money.
[01:04:30] Rathish Balakrishnan: Yeah. Yeah.
[01:04:31] Manoj Kumar: Why has impact investing failed to do this? Because impact investing was using the same playbook as mainstream investing.
[01:04:37] Manoj Kumar: There is no difference. Same 220 model fiduciary responsibility. The only thing was, okay, we will also create them. The model that works and I am really, I don’t take names in the conversation, but I’m very impressed with Nithin Kamath and Nikhil Kamath.
[01:04:52] Manoj Kumar: That is the model, their own money. They created a pool of capital. And in several of our companies, they are investing. They are investing their own money.
[01:05:04] Manoj Kumar: And for example, in Social Alpha, if I ever build a fund in Social Alpha, I will take money only from people who are giving me to manage their money and not in a typical LPGP structure right? But in a structure where they believe in our resource allocation capability, our due diligence, and our innovation curation, but not expecting a, eight-year, 20% IRR (Internal Rate of Return), that model will not work here because you are taking a very high level of risk, right?
[01:05:32] Manoj Kumar: You are creating new markets. So we have seen that the best investors in this sector are people who have money, but have empathy for solving the problems that people and planet have today and are willing to live with suboptimal returns compared to the risk we are taking.
[01:05:52] Manoj Kumar: We have situations where we invested in a sewage treatment, STP company. And we got co-investment from Rainmatter and a philanthropic organisation created for philanthropy has refused to put money in that company as a grant, right? So you see the difference.
[01:06:17] Manoj Kumar: A VC that is raising money from others with a promise of return will not take that risk. You have to think a little more philanthropically when you are creating the market. However, if the product is really successful and later investors come and there is a growth, everybody else will get paid.
[01:06:36] Manoj Kumar: So last year, we had an exit of almost four or five crore rupees in Social Alpha. Not because we planned for it, but because some of the companies managed to raise more money and became attractive to the corporations and we got… so exit in this case will be a really good situation so that we can recycle this capital, for the same cause right?
[01:06:58] Manoj Kumar: But incidentally, because you are taking a very high risk, right? And some of these entrepreneurs are doing fantastic. We are sitting on a 5x return. This 5x return is not because of our talent or our ability to pick the winners and invest the money in that.
[01:07:12] Manoj Kumar: This 5x return is because we have taken an option risk. And markets have accidentally rewarded us. So nobody gets a bonus because we made a 5x return in Social Alpha because it is not… it is just because you played in a market structure where nobody was taking a risk and you took the risk aur aapke patte lag gaye toh aa gaya (You got lucky and reaped the benefit).
[01:07:34] Rathish Balakrishnan: Right.
[01:07:35] Manoj Kumar: You worked hard. You did. You tried helping these companies with grant money. You help them in building their product. You help them with the pilots. You took them, you did everything, but the credit actually goes to People who actually brought in money in the company, right? Who, the entrepreneur who took the risk without the money, right?
[01:07:57] Manoj Kumar: A lot of credit goes to people who are actually building and shipping. We are just enablers here. We have to do it because nobody is doing it. If others do it, we will stop doing it. But entrepreneurs need a lot of support.
[01:08:08] Rathish Balakrishnan: Yeah. As I was thinking, as you were talking, the mindset for assessing indeterminate risk is different from the mindset of assessing high risk. And then I’ll explain to you what I mean.
[01:08:19] Rathish Balakrishnan: Like when you said oh this enterprise has worked and that doesn’t mean we have cracked it. That just means, you know, it’s just, we just got our cards, and on a tangent, I was once in a Vipassana programme where they tell you nothing is permanent, right?
[01:08:33] Rathish Balakrishnan: And by day five, once you go through the programme, you get the sense of, wow, I’ve now cracked the Vipassana breathing technique, and they say, that’ll also not last.
[01:08:42] Rathish Balakrishnan: So it is an indeterminate state and not a state where there is logical progression. And because when you do some things like this, sometimes there’s a mindset to say that, okay, four of my enterprises have succeeded. I’ve cracked the code.
[01:08:53] Rathish Balakrishnan: But the code could not be cracked. It’s an indeterminate risk problem. I think it is a very important thing. And I think the second reflection I had as you were speaking, and this is probably my bigger summary, is that sometimes we build a mental model on how something works and we force-fit all our thinking to fit that mental model… ki mental model abhi linear hai (That the mental model is linear).
[01:09:12] Rathish Balakrishnan: We say that I’m going to do R&D, then I’m going to do testing, then I’m going to do market. And then I’m going to scale and then I’m going to do returns. And that’s our mental model for innovation. And so everything that we imagine is because of this.
[01:09:24] Rathish Balakrishnan: And I think what you’re forcing us to say is that, listen, the mental model is actually different. It is a blend of various things at different stages where things are running in parallel. And unless we build the vocabulary for that mental model, unless we actually understand that things here are not a linear model, that there is determinate risk and there is a different type of support that is required in different ways.
[01:09:45] Rathish Balakrishnan: We will not build the structures that we need to make this happen. And I think that’s a very, very important way for anyone who’s investing in innovations.
[01:09:54] Manoj Kumar: This whole concept of uncertainty, iterative nature of product building and shipping, changing context, changing climate… Climate change, right? Now weather predictions are going wrong, right? It doesn’t rain when the prediction says it will rain. Including in some of the countries that took pride in forecasting rains and drought, they can’t do it anymore. Like it’s not working. So this openness that, if A plus B was C, not necessarily next time A plus B will also again be C. And therefore, accepting and living in that randomness is very critical. And the financial investment models today do not model that risk.
[01:10:39] Rathish Balakrishnan: Exactly. Exactly. In the last part of this discussion, Manoj, I just specifically want to talk about the role of CSR and innovation. And I think this is important for multiple reasons because sometimes people think of money as money.
[01:10:52] Rathish Balakrishnan: For me, CSR is corporates’ way of engaging in the innovation ecosystem beyond what they do in their own regular businesses. They bring a certain interest you know, and asserts a level of capital to do this.
[01:11:07] Rathish Balakrishnan: But today all the data tells us that the innovation investments in CSR have been very low. Like we are talking about 0.3% of all CSR money being spent on innovations. You’ve had a chance to work with companies today, where do you think are some of the frictions in innovations in corporate CSR capital coming together?
[01:11:26] Manoj Kumar: See, most of the corporates who have CSR budgets are big listed companies, right? And they are used to quarter-on-quarter reporting, annual reporting and all that. And their business model is based on the fact that they know their product or services and they know their shareholders, that they are already working with that, with a cadence, right?
[01:11:48] Manoj Kumar: They know their business inside out. Now, unfortunately, innovation is not as predictable as the… as you say that this month’s target is 20% growth, and then we achieved 18%, let’s increase the dealer commission and all that, right?
[01:12:05] Manoj Kumar: Innovation is unpredictable, right? It’s risk taking and it requires a lot of trust, right? So, when you have a CSR project and you say, I want you to distribute 60 computers in five colleges around Bangalore, it’s a very easy thing to do.
[01:12:26] Manoj Kumar: Procure, distribute, give proof of distribution and you have created an impact kind of thing. But when you are funding innovation, the willingness to fail. This year’s annual report will probably have very short paragraphs and not many visuals about our CSR, right?
[01:12:47] Rathish Balakrishnan: Right.
[01:12:48] Manoj Kumar: Nobody likes failure.
[01:12:51] Rathish Balakrishnan: Correct.
[01:12:51] Manoj Kumar: Number one, you cannot deliver results in the short term. And number two, failure may happen. That I think is a deterrent, right? And the R&D head of that organisation doesn’t run the CSR…
[01:13:08] Rathish Balakrishnan: Correct.
[01:13:09] Manoj Kumar: …Probably the only person who understands innovation life cycle and has probably some failed projects as well as funded by shareholders.
[01:13:17] Manoj Kumar: And corporates don’t like to talk about failure. They only want to talk about success because it impacts their market positioning. So if you want more money from corporations to flow into innovation through their CSR budget, we have to address this issue at the highest level you have to set aside some money in your CSR budget that you can just give as a grant to the organisation that is going to manage innovation for you. This is one.
[01:13:52] Manoj Kumar: Second thing that we have experimented and done well with our CSR partners, we do not go to them for our upstream work, because we know they’re not yet ready for that. So hopefully you guys will be able to convince them to give us money for Social Alpha labs. But we go to them when we are deploying, because when we are deploying and doing pilots, we can give them in less than one year what they need.
[01:14:20] Manoj Kumar: If you see our CSR project, there will be more towards the deployment side, where we have a product and we are doing pilots, right? Or implementation or market access, right? So all our CSR projects are with companies which are at a stage where they are ready to go to market or doing clinical trials or doing regulatory approval where we can show progress, right?
[01:14:44] Manoj Kumar: Unfortunately, while building the product, and if the product development takes two or three years, it will be a trust-based philanthropy. And therefore, a part of CSR money has to be set aside, which is just given as an innovation grant, right?
[01:15:01] Manoj Kumar: Part of the CSR money can go as a deployment grant, which can give them short-term results, which meet their expectation and their shareholders’ expectations. But there are some progressive corporations who have understood the regulation very well. So they have given us money for deployment as equity capital, which is the most difficult thing, right? That can take money in CSR projects and deploy as equity in a company that is ready to take equity money.
[01:15:33] Manoj Kumar: That is a much higher level of enlightenment that the corporate CSR teams have, but we have had some success there as well. But yeah, maximum CSR money in our case, has gone into our downstream work and not in the upstream work. And regulation allows. It’s not that it’s prohibited by regulation, so it’s basically space for people like you in Sattva to convince the CSR boards and CSR heads of companies to set aside money for innovation.
[01:16:07] Rathish Balakrishnan: Right. Right.
[01:16:09] Manoj Kumar: Today upstream, there’s only one investor and that’s the Government of India. And that’s because there’s so many and the upstream funnel is also big, right? As you start building the product, right? That is where you have a large number of companies. And towards the downstream, you have a smaller, narrower funnel because mortality is very high. So, upstream money actually gets distributed to many incubators, and many academic institutions, right? And therefore not enough.
[01:16:37] Manoj Kumar: Downstream, by the time you are at a stage where you are testing and have early results, you know, you start seeing some traction in the market also.
[01:16:46] Rathish Balakrishnan: Right.
[01:16:46] Manoj Kumar: Some traction. Not yet there, but some traction.
[01:16:50] Rathish Balakrishnan: Yeah. And I think the two divisions that you highlighted are very interesting. One of the hypotheses that I also had is that unlike a lot of other countries, where a lot of R&D investments are actually, or innovation experiments happen in academic institutions, we have standalone labs, CSIR, et cetera, which are largely quasi-government run.
[01:17:12] Rathish Balakrishnan: You know, they have government leadership, et cetera, really smart people, but in a way, isolated from the talent pipeline that we build as a country which is college, work, et cetera. Do you think that is also contributing in some sense for lack of interest among companies and others or in general collaboration difficulties in form?
[01:17:31] Manoj Kumar: No. We have been able to collaborate with CSIR as well as ISRO, right? So CSIR-NML (National Metallurgical Laboratory), we have a great partnership with them on aerospace and defence space. With ISRO we run a programme on space tech, so I think we have some of the finest institutions in the country.
[01:17:48] Manoj Kumar: The problem is that they are not yet integrated with the startup ecosystem, which we are trying to do. They’re already integrated with the larger players. So I’m sure if there’s a big aerospace company in India, they know how to deal with an error and vice versa. I’m sure there are national labs who have licensed their technologies to many big corporations, but we are seeing how we can build this parallel ecosystem where innovators and startups can also work with them and use the infrastructure, right?
[01:18:20] Manoj Kumar: For example, our IITs, IISc, CSIR labs, all of them have world-class infrastructure. They have labs, they have equipment, right? Can we get access to that? Because these labs and equipment were built with your and my tax money, right? It’s a public asset.
[01:18:39] Manoj Kumar: India’s large investment in R&D infrastructure is publicly funded, but it’s in lock and key. It’s behind the locks, behind the several levels of security and passage, right? How do we open it?
[01:18:52] Manoj Kumar: How do we get entrepreneurs who are building the future of India? How do we get them access to publicly funded, publicly built and managed infrastructure? So some of the institutions are very open.
[01:19:04] Manoj Kumar: Institutions will say, yeah, our gates are open. If you have a startup, bring them in, we’ll open our labs, but somewhere you will have a struggle. I think one of the things is that India’s R&D ecosystem has no prior experience of hiring off or spinning off startups.
[01:19:25] Manoj Kumar: Then with incubators being built in educational institutions, that process has started, right? So now incubators do this, but if you go to an institution and see what the incubators do in terms of value addition, can we increase that? Can we work with the incubators, cherry pick some of the best innovators there and provide them additional support that incubators may not, right?
[01:19:52] Manoj Kumar: Intercept an amazing work, right? They have laboratories, they have funding, they are able to raise money from the private sector as well as the government. But there is still that missing link, right? That they’re not full stack, right? So we go and work in partnership with all the incubators, and in the process we have built our own, three or four incubators in the country.
[01:20:15] Manoj Kumar: The idea is to have an incubator as one of the legal blocks of this architecture. So this architecture is, you know, more modular, where you have an R&D ecosystem, incubators, accelerators, small investors, big investors, corporations. But somebody needs to orchestrate this whole thing and this orchestration is not required and we don’t think it is required because in the mainstream world, this orchestration automatically happens.
[01:20:44] Manoj Kumar: Because the incentives are aligned, right? The incentives of all the suppliers in a mainstream business are aligned because they’re all working for the same piece of revenue.
[01:20:56] Manoj Kumar: Here, how do you align incentives in the development sector, right? A large number of players who work in the development sector are non-profit. So aligning incentives in the nonprofit world is a big challenge, right? Therefore, the need for full stack and then creating an example.
[01:21:13] Rathish Balakrishnan: One other question Manoj that I often hear from CSRs is whether there is an unwillingness to support for-profit organisations. And then some part of this is just mental model thinking. Yeah, “For-profit matlab profit ke liye hai” (For-profit means it is for profit). Why am I using philanthropic capital? And that I think is only a question of journey.
[01:21:29] Rathish Balakrishnan: I mean, I’m a for-profit organisation myself. We have gone through this journey of convincing people that we are impact-focused. But I want to flip this and be a devil’s advocate, Manoj.
[01:21:39] Rathish Balakrishnan: Raising capital is always hard. And when you know, some type of capital is easy to get, even as an entrepreneur, sometimes it’s easy to say that, listen, I have a technology that can solve problems for the poor, but the same technology can solve the problems for a larger market and raise more money.
[01:21:54] Rathish Balakrishnan: Do you see there is a risk of mission drift also in for-profit organisations sometimes where after the point they’re like, listen, I’ve run this fight, I’ve got the capital I need at the innovation stage but for me to go, have breakthroughs, maybe a certain level of mission drift will just help me unlock larger capital, solving a different problem for a different set of people.
[01:22:14] Manoj Kumar: So there are two, two things here, right? One is that mission drift is overly highlighted in case of people who are working on the impact space. The mainstream business also gets subsidies. They also get access to grant capital. They get very cheap land when the state governments attract them. They get tax holidays.
[01:22:33] Manoj Kumar: We don’t talk about mission drift in that case, right? We only talk about mission drift in poor innovators who are just starting off. So, to be very honest, when they’re trying to solve the problem and the problem is not changing, the likelihood of mission drift doesn’t happen, right?
[01:22:49] Manoj Kumar: If somebody solves the problem of clean drinking water at an affordable price, and then that clean drinking water is also available to the rich and privileged, this is not mission drift.
[01:22:59] Manoj Kumar: UPI being used by a rich person is not mission drift, but UPI was designed for the right context for the poor, right? You can actually make a payment frictionless. You don’t have to stand in a queue in a post office or a bank. You don’t have to pay an intermediary. You just can use your mobile phone and transfer money from one account to another.
[01:23:18] Manoj Kumar: This is the greatest example of social innovation in our country, isn’t it? Now, a rich person can, I’m sure a rich person can also use UPI for its convenience. And if somebody does a wrapper around UPI, makes it even more user friendly and additional services on top of it and charges people, it’s okay.
[01:23:35] Manoj Kumar: Solving for the poor and planet and creating that market, making the product affordable, accessible with the right user experience. After that, its adoption can scale, right? If you have a one-rupee test or a 10-rupee test for tuberculosis that can be done very quickly, let everybody enjoy the benefit of that.
[01:23:55] Manoj Kumar: See, innovation does not, if you innovate for the rich, it will not reach them. It took mobile phone 30 years to reach the poor, right? But if you innovate for the poor, it will reach up. Context-appropriate innovation will always go.
[01:24:08] Manoj Kumar: So on one hand, you have mobile phones that took 30 years to become Das rupee ka recharge (10 rupees recharge) and free data and 5,000 rupees a smartphone. It took 30 years. However, UPI took what? Six months, right? So yeah, who are you innovating for? That’s very important.
[01:24:28] Rathish Balakrishnan: Excellent. I just want to end with this point that you made, Manoj, in two ways. One is that CSR money has two places. You can come into deployment, you can come into labs. And maybe roles for organisations like Sattva is even just to be able to frame this for organisations to say “Yeh fixed deposit hai aur yeh working capital, you know, liquid loans type thing hai” (This is fixed deposit and this is working capital, you now, like liquid loans).
[01:24:51] Rathish Balakrishnan: And do you want to look at liquid loans or do you want fixed deposits? And it is the capital that is the most patient. CSR does not have to really report quarter-on-quarter outcomes. So even the self-imposed stress can be removed. And I think roles for us as intermediaries is to be able to highlight these categories. Frame the risk returns for each of them and then tell them that there is really no external compliance norm that stops you from doing one of the other things. It’s really attitude and mindset.
[01:25:18] Rathish Balakrishnan: But I’d come back to the question I asked earlier, Manoj, as you’re solving this problem, if you had a wish list of things that you thought should be in place at an ecosystem level, what are some of the things that you would say, hey, we should probably build this.
[01:25:32] Rathish Balakrishnan: If India builds three, four things for everyone, for like 10 Social Alphas and thousands of innovators, maybe this entire journey would be faster. What would your wish list be for such three, four things that we need to build as a country?
[01:25:45] Manoj Kumar: Okay. As we build more products, science and technology-based products, they cannot be built on a screen, right? Like software products can be built by 10 people on cloud, but these products require infrastructure labs, right?
[01:26:02] Manoj Kumar: My wish list number one would be, can we make our national labs or our regional labs, which are funded and exist from public money, can we make them more accessible and more affordable to the start-up? Our incubators, because all of this has been publicly funded, but they need to stop rent-seeking, right? And they need to open it, right? People on startups are not going to destroy what has been built over the last 75 years.
[01:26:31] Manoj Kumar: They’re going to use it and make it better, right? We have provided free education to people, right? We have provided subsidised food, education, everything. We have not provided innovators and entrepreneurs that level of access.
[01:26:45] Manoj Kumar: And this access has, maybe it’s there, but it has to be very transparently published and propagated, right? To domestic philanthropy, the rich and privileged in India, they need to allocate capital for innovation.
[01:27:03] Manoj Kumar: And we have role models who have done this. We need more domestic philanthropy to write unrestricted capital for innovation. Like people like Nithin Kamath, Kris Gopalakrishnan, they have really done this, right? So it’s not that there are no examples, but we need more.
[01:27:22] Rathish Balakrishnan: Yeah.
[01:27:23] Manoj Kumar: Three, corporations through their corporate CSR, they need to think a little more pragmatic about innovation. They need to understand that taking an innovation from technology readiness level three to six is also a positive impact, right? Investing in a startup in climate change is a positive impact.
[01:27:42] Manoj Kumar: Deploying a solution in a primary health centre is also a positive impact, right? So innovation life cycle has to be funded, right? And last is that we need to unlock non grant and non-equity capital also. It is not about grant and equity. It’s also about subsidies, market access support. It’s also about that.
[01:28:04] Manoj Kumar: And I don’t know that’s a much bigger problem. We have not yet started doing anything about it, but we have to solve the problem of that because our startups, our MSMEs, our small and marginal farmers, they have one problem. None of them have access to debt. This is the wish list.
[01:28:22] Rathish Balakrishnan: Manoj, this has been a super phenomenal conversation where we’ve covered a lot of ground on innovation. I’m going to do my best to just summarise the entire conversation and then leave it for the audience.
[01:28:33] Rathish Balakrishnan: Number one, I think we started by asking why innovation is required. And I think what we are clearly saying is that places where market failure happens, where every human’s deserved rights of clean drinking water, effective productivity, good health, and good education. It’s important for us to solve for.
[01:28:52] Rathish Balakrishnan: It’s not a question that we should ask whether we should solve for it or not. I think the fact is that the government cannot solve for it and we need innovations to solve for it. And I think that articulation is very critical. We talked about the four challenges in terms of mindsets, capacity, capital, and all of that in there.
[01:29:09] Rathish Balakrishnan: Then secondly, we highlighted how our current mental model for innovation may not be the mental model that will help us solve it, which is that innovation is not a linear journey.
[01:29:18] Rathish Balakrishnan: Number one, innovation is not where different people work at different parts of the value chain. It is intermingled. It is iterative. It requires different forms of capital at different points of time. And understanding that structure is going to be very important. And as you highlighted, oftentimes the first entrepreneur is paving it backward for the rest of them to do it like Elon Musk, in terms of building charging standards.
[01:29:41] Rathish Balakrishnan: Third, the role of CSR in this is actually huge. They can actually deliver money today. There are two pockets. While there’s a greater willingness to support the deployment-related capital that is available where short returns are possible, annual reports look okay, there are these long-term capital investments that can be, make a significant difference, but having the mindset, being able to think of it as my fixed deposit investment in some sense of CSR, I think is going to be important.
[01:30:07] Rathish Balakrishnan: And I think the point that you made that infrastructure for innovation is very necessary. It would be a different problem if we didn’t have it. But to have it and lock it and make it not available for people, I think it’s probably a crime when we are solving problems like this, especially when they’ve been built with public capital.
[01:30:24] Rathish Balakrishnan: So how do we unlock infrastructure? How do we unlock domestic capital? How do we unlock CSR are essentially going to be big levers for us to be able to solve this. Manoj, you’ve been wonderful. Thank you so much for your time.
[01:30:37] Manoj Kumar: You have summarised it so well I’m going to just note it down and use it, right? One thing that probably comes to my mind is that historically we have been trained in thinking binary, right? And we have to start thinking spectrum in whatever we do.
[01:30:53] Manoj Kumar: In politics, we are already thinking spectrum, right? In for-profit, not-for-profit, we need to think about that. In sexual orientation, we need to recognize that. So I think increasingly people need to think that it’s not black and white. There are multiple colours.
[01:31:09] Manoj Kumar: And therefore, the risk management models that the investment community uses need to be recalibrated, and redefined for the development sector. The development sector needs this capital, but it needs this capital on its own terms, that playbook will not work in this.
[01:31:29] Manoj Kumar: And that is where dissatisfaction will come from the investment community. Oh, these guys don’t deliver. No, these guys don’t deliver because they need a different type of capital, right? Then you can make the development sector more innovative and put it on a nonlinear scale.
[01:31:46] Rathish Balakrishnan: Absolutely. Absolutely. Couldn’t have said it better. Thank you, Manoj. Thank you so much for your time.
[01:31:51] Manoj Kumar: Thank you. It’s really good to talk to you.
[01:31:54] Rathish Balakrishnan: Thank you for listening to Decoding Impact. I am your host, Rathish Balakrishnan. If you liked what you heard, do check out the Sattva Knowledge Institute website, where we speak a lot more about innovation and the CSR’s role in the innovation landscape.
[01:32:08] Rathish Balakrishnan: You could also check out Season 1 and Season 2 of Decoding Impact on Apple, Spotify, YouTube, or wherever you actually consume your podcast from.
