If you are looking for proof that seed funding may be about to take off, look no further than legendary Silicon Valley investor Vinod Khosla becoming an investor in the new Unitus Seed Fund.
Seed funding in mission-focused businesses doesnâ€™t pay for itself, most of the time. You canâ€™t raise a $100 million fund for, say, mobile apps, and spray and pray, and then get enough winners to make it pay. The deals in this context have to be examined much more closely because they are often working in difficult conditions on problems that are really hard to solve. That means itâ€™s hard to raise enough money that gets out the door fast enough to have a large enough operating fee to make it possible to hire the best people to evaluate all the options and make those hard decisions and then work with the companies afterwards.
Up until now, seed funders have been small and subsidized by corporates or philanthropists, which is a huge restraint on the growth of the industry.
By launching in India, Unitus thinks it has several advantages: there are lots of entrepreneurs and itâ€™s possible for an engaged investor to get to them quickly. There are larger funds eager for deal flow, from Khoslaâ€™s own Khosla ImpactÂ to big India players like Elevar Â or Lok who could potentially buy out the seed fundâ€™s interest.
One of their first investments is in a company that tutors children in rural villages to augment their public school education. Indian parents believe in spending on their childrenâ€™s education. There are large companies doing tutoring at scale in Indian cities who could be acquirers if their investee can, as they believe, replicate a rigorous, high quality model with low operating costs.
They have sold half of their carry in advance to augment the management fees of their still small fund, which has just reached $8 million. It helps if you have founders like Dave Richards and Will Poole, accomplished entrepreneurs and corporate execs who can afford to work for below market rate on a labor of love, building something that needs to be built.
What Unitus is doing is something I am seeing happen all over the world. I recently learned of three South African seed funds, one spun out of a large multinational information company, one mandated by law, and the other from a large institution tiptoeing into the space. Iâ€™ve talked to Paula Mariwala who has done a couple of traditional, not mission-focused seed funds in India and who has done one social enterprise deal, Frontier Markets. Sheâ€™d like to do more of them, but is aware how spotty much of the countryâ€™s support ecosystem is.
â€œThe LPs (Limited Partners) for impact funds are also largely from the west.Â Most family offices and other HNIs (High Networth Individuals) choose to support NGO / charitable initiatives rather than sustainable impact enterprises.Â Hence, it is hard for social entrepreneurs to get financing.Â Government grants are spread too thin and are difficult to come by for for-profit social enterprises. Most business models in this space are also heavily influenced by Government policies and regulations and hence very high risk and slow success on the ground, making venture funding difficult.â€
Despite the challenges, Mohan Pai â€“ a founder of one of the largest Indian tech companies, Infosys â€“ is a founding investor in the Unitus fund.
He responded to some email questions:
Q: Very few venture funds in India are making seed-level investments outside of the tech space.Â Why is seed-stage investing important for companies targeting the BOP?Â
India’s biggest challenges are in the BOP. Government-led solutions have failed to address this fully over the last 65 years due to bad design, inadequate execution and corruption. The trickle down impact has been poor. There is also a tremendous business opportunity in BOP for business enterprises but they lack the architecture to do this. It is time to have new engines of execution and therefore market mechanisms in the form of social enterprises, many with a profit motive, thatâ€™s what is needed to tackle this. So seed-stage enterprises which will try new models are important for society and for companies targeting the BOP.
Q: Why are you co-investing with Unitus Seed Fund?Â What’s unique or different about their approach?
Unitus Seed Fund has a great team, with a clear vision. They are committed and understand this area. They also have a sufficiently long-term plan. Their investment philosophy is based on impact and focus.
Q: With 800 million living at the “base of the pyramid” in India, do you think a few dozen startups will make a difference?
Well, they will show the way, and hopefully become role models for many others. We need many hundreds of such startups considering the size of the market and population.
I expect to see more seed funds, and their slightly earlier cousins, short-term accelerators, and even longer new style incubators emerge domestically and all around the world. I predict accelerator launches and expansions will explode this year, and that seed funding will expand.
Seed funding from the bottom up may be even larger. Major players are looking at creating a marketplace to let the average person (not just accredited investors) invest in the seed funds and in the best graduates of the accelerators through a charitable vehicle by this fall. Crowdfunder is an example of one mission-focused for-profit crowdfunding marketplace that has come online.
We at the HUB Bay Area and SOCAP are partnering with them. And other partners include Singularity University, TED Fellows, Toniic, the Unreasonable Institute, Sandbox, the X PRIZE, and GOOD. This startup has some savvy marketers and buzz builders behind them, with Rafe Furst building partnerships and CEO Chance Barnett running the operation.
Another online marketplace built by Stu Ruddick â€“ long time investor in organic and sustainable food â€“ is a few months away: WJDITÂ will put $50,000 of its own $6 million fund into each company. Iâ€™m surprised that Slow Money is not leading a big effort on this.
Sometimes it works, as with MobileWorks, one of our Hub Ventures funded startups that adds a quality of justice and community in human relationships to outsourced digital work jobs; in contrast to Amazonâ€™s Mechanical Turk which acts as if a freelancer is an impersonal widget tool. That approach was validated when Andreesen Horowitz followed us in the deal. We’re proud of MobileWork’s big accomplishments in just one year: employing 10,000 people in 53 countries on more than one million tasks.
MobileWorksâ€™ mission insurance is that letting workers self-organize and reach customers on the platform directly (rather than being kept as anonymous serfs) increases quality and lowers costs. Liberating their employees creates trust that cuts costs and increases quality. Implemented properly â€“ as people in open-source software projects have known forever â€“ collaboration can be a means of production that improves relationships, eliminates waste, lowers carbon footprint, saves overall time, and increases margin. In some cases, it can enable extended families to remain together where they otherwise couldnâ€™t because the work can be done remotely, rather than having the alphas leave home to provide for their families.
There is anecdotal evidence that the MobileWorks employees are being asked to do more complicated and high paying tasks, as well. Liberation as a foundational principle lets higher level systems emerge on top of the platform. Liberation that leads to higher margin is a great way to bake in mission insurance in a scalable social enterprise.