Varthana is lending to make affordable private schools bigger and betterSnigdha Sinha
Varthana has a single mission – to improve the quality of education available to low-income Indian youth by providing much needed investment capital to the Affordable Private School (APS) segment.
The latest funding for this Bangalore based Non Banking Financial Company (NBFC) is from the Essential Capital Consortium (ECC). Managed by Deutsche Bank’s Global Social Finance Group, the ECC is providing a $2 million non-convertible debenture (debentures which can’t be converted into shares or equities are called non-convertible debentures [or NCDs]) to Varthana. The transaction was enabled by the co-investment of the Netri Private Foundation, a Spanish foundation that co-lends with the Global Social Finance Group.
A diversified set of funding sources also helps Varthana sail through if there were to be some turbulence in the domestic debt market. Since they are lenders (though they themselves borrow), it is essential that they have a continuous inflow of funds. “We are delighted to secure this investment from Essential Capital Consortium and Netri Foundation. Demand for our loans continues to grow and this capital will enable us to serve a greater number of schools. It also marks an important step for Varthana – to continue to diversify our funding sources and build long-term financing partnerships as we grow the business,” said Varthana’s CEO, Steve Hardgrave.
2013 to now, a quick round up
Varthana was launched in January, 2013. In May, 2013 Accion’s Venture Lab invested in them. This was followed by a Series A round in August, 2014, where they raised Rs. 27 crores led by Omidyar Network, along with existing investors LGT Venture Philanthropy (LGT VP) and Elevar Equity.
SocialStory had spoken to them way back in 2013. At that time they had disbursed only 30 loans and were a team of 10 members. Today, Varthana has rapidly grown its loan portfolio to over Rs. 65 crores (~$10 million), serving more than 800 schools across 20 different cities, and are a 100 member team. They have focused on deepening the impact in the education sector rather than broadening and expanding to other sectors. Steve adds, “For a startup organization working in a challenging new environment, selective focus was important. Over the first couple of years, we have really been laser focused on providing these school loans incredibly well, and making sure the service and processes are the best; and we’re choosing the right schools.”
Which schools make the cut?
At this point of time Varthana typically does not give loans to start new schools unless it is a new setup by a school that already has a couple of branches, and is looking to expand. In fact, the criteria for taking loans are pretty stringent: the school must be running for at least two years; it must be stable in its operations; it must have the capability to pay the loan back.
For a business like this, it is impossible to sit behind a desk and set a cumulative threshold value that decides which school makes the cut. Steve tells us about another important factor that goes into choosing schools that make the cut: who the person behind the vision of the school is. “This is critical for us. We want to work with people for whom the school’s success is of paramount importance and are working towards giving parents and students the very best education available at a particular price point.”
The loans are of two types: Secured loans of greater than Rs 5 lakhs (with the upper limit of 50 lakhs) for up to 5 years, and Unsecured loans with a cap of Rs 5 lakhs for up to 3 years. The loans can be taken for an array of requirements – setting up computer laboratories for students, basic school furniture, didactic material and/or learning solutions, renovation, setting up smart classrooms, purchase of school buses, construction of additional classrooms, etc.
What kind of loan requests usually come to Varthana? Steve says that in terms of the size of the loan, it is the request for building construction (e.g. building a new section) that is largest. In terms of the total number of requests, they get more requests for smaller projects like educational equipment, furniture, or just building restrooms for girls in the school.
With so many developing countries in need of affordable private schools, why did Steve and Brajesh, the Founders, pick India? Steve says, “There is no country in the world that has the demographics that India has. In terms of absolute population size, China rivals India, but then the one child policy makes the school age population in India the largest with about 400 million school age children.”
Steve adds that the majority of our population is the low income group and hence, the majority of these 400 million kids fall in the category that needs affordable private schools. He adds another interesting aspect,
India is also a country, where in the recent decades, individual local initiatives have responded to the education dilemma because of all these affordable private schools starting up. To have so many low cost private schools is just unparalleled in any country.
And lastly, Steve shares an observation. “There is a constant drive among families to provide better education to the kids. It is almost like an unstoppable force of nature.”
Varthana is looking to deepening their relationships with the schools by helping connect them to other initiatives and interventions that will enable the schools to attain better learning outcomes. Explaining this, Steve says, “We have done the hard work of finding a good school under good management in a hard to find location. We’re now trying to find the solution providers and educators who provide valuable help to schools, and then connect them with each other.”
The duo sees innovation leading the way and making a positive impact on learning outcomes.
This will help the children make more informed decisions about their career options. We see a lot of good work happening to equip teachers with better tools; to make teaching more effective. We also see the dropout rates gradually reducing over time.
By 2020, Varthana will increase its footprint across the country, and hopes to work with over 40,000 schools that will impact close to 20 million kids.