Author: Arvind Agarwal, Founder & CEO – C4D Partners
Publication: VCCircle
Dutch impact investment firm C4D Partners is raising its first India-dedicated fund with a target corpus of up to $75 million after deploying its maiden Asia vehicle of $30 million in businesses across India, Indonesia, the Philippines, Nepal, and Cambodia.
C4D made 13 investments in India out of its Asia fund, committing about $18 million in the domestic market. It began preparations for the India-focussed fund in early 2022 and received approval from the Securities and Exchange Board of India late last year. It aims to mark the first close by November 2023, Arvind Agarwal, founder and CEO, told VCCircle in an interview.
In an interview, Agarwal talks about the firm’s investment thesis, impact investing, and the new fund. Edited excerpts:
Earlier, impact investing was done more like a non-profit. Then, it took a fund-structure. A debate started whether you should focus on financial returns or the impact. I felt an impact fund should not be run like a not-for-profit, nor should it run like a venture fund. The objectives of both are not aligning with impact.
Basically, the strategy with which we started our first fund was that an impact fund should operate at the intersection of private equity and venture capital fund. What I mean by that is you should do early-stage investing (after a seed round) but the underwriting should be more like a PE fund.
Social entrepreneurs can build sustainable companies with good growth, but you cannot expect these companies to do a fundraise every 12 months. If you focus on valuation, impact companies would not survive.
The thesis was you look for innovative business models which are woven around society’s problems, where innovation is woven around business not just technology. Impact and business should be inseparable.
When you operate like the pure-play structure of a VC, you can’t operate differently, because your nuts and bolts–incentive, disincentive, fees–is like a VC fund. You need to make some changes here because the objective is more than a VC.
For example, we linked our carry with one of our impact goals, which was investment in women-led enterprises. We said if we are able to commit 30% of our capital to women-led businesses, we gain a carry percentage. So, you are incentivised to overachieve the impact, because carry means something only when you have a financial return.
In the social investing sector, you won’t find unicorns. We don’t look for them. You have to be sensible with respect to portfolio construction and management. We don’t do more than 18-20 companies ourselves, which is like a PE portfolio.
So, if you look at the VC space, 60-70% of their portfolio goes bust. It is actually one or two winners that will give the desired IRR (internal rate of return) of 25% (at the fund level).
For us, the strategy of intersection of PE-VC keeps the mortality rate quite low. We have been trying to keep our mortality rate below 20%.
Of the rest 80% there is one set of companies which has not grown exponentially and which is profitable. So, we try to get an exit from those portfolios because those are cash-flow positive and recoup our cost at least.
Then there is the other set of portfolios, which are doing very well and growing exponentially, where we try to exit through financial investors. If we end up at 30-40% IRR on those companies, on a fund level we can easily get to 25% IRR.
Today, at India portfolio, we are at 19.5%. We’ll be at 25% (when we have exited).
Pretty much similar. We have always remained sector-agnostic. We have invested in agriculture, financial institutions, clean energy, and waste management. Our focus is largely on direct livelihood impact, looking at the businesses that are either rural-oriented or catering to urban marginalised communities.
If we see a space which is overcrowded and overheated, we don’t usually touch it because we know there will be a lot of insanity with respect to valuations and indiscipline with respect to financials.
So, we look for sectors that a lot of people are not running after. For instance, we’ve looked at EV and realised there is a lot of indiscipline.
We come in at the pre-Series A stage, usually the first institutional cheque. When we invest, it is early-stage growth capital. But companies have to get to profitability in the next 12-15 months. In five-six years, they have already grown 20-40x in terms of topline and they are already profitable. These are the kind of companies which PE wants (who we usually sell to). PEs look for stable companies and we are building those companies where profitability is there for three or four years.
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