Startups that impact low-income communities: Elevar Equity’s investment modus operandi

Founded in 2008, Elevar Equity is an impact-focused fund that looks at investing early growth capital in startups that address inclusivity, have affordable products or services, and can be deployed, en masse.

Startups that impact low-income communities: Elevar Equity’s investment modus operandi

Wednesday April 27, 2022,

8 min Read

While the last two years have been hard for everyone for varying reasons, no other socio-economic group has run out of roads as much as the low-income community,  which, in India, constitutes around 86.8 million people, according to the World Poverty Clock.

Contrast that with the fact that, over 2020-2021, India’s 100 richest people saw their wealth increase by $257 billion, as per a Forbes report, and the growing income parity between the country’s well-to-do and those living in abject poverty becomes glaringly clear.

In a lot of ways, the low-income problem is exacerbated by a ‘no-supply’ problem, making it even more difficult for the group to subsist. There’s a stark lack of solutions tailored to the group’s specific needs, and that’s mainly because companies have to put in a lot more effort to create margins that are able to sustain.

Second, there’s very little support in the ecosystem for startups looking to solve problems of the low-income group because playing the unit economics game is not an easy feat, and there’s a graveyard somewhere full of companies that have tried to play the numbers game, only to fail because of n number of reasons — the most common ones being loss in focus and improper guidance.

Impact investing firm Elevar Equity believes it can help change that.

The Bengaluru-based VC firm funds early-stage startups building solutions for low-income communities. It looks at solutions that generate and encourage inclusivity, are affordable, and can be deployed at large — all while being able to show profitability.

The firm was founded in 2008 by Sandeep Farias and Johanna Posada. Jyotsna Krishnan, who joined Elevar in 2011, currently serves as its Managing Partner, and bolsters the leadership of the company.

Elevar Equity

'Underserved’ and ‘low-income communities’ are at the crux of the context Elevar operates in, and it is what informs all of its investment decisions — the “who does this help?” question, Sandeep tells YourStory in a conversation. That is then followed by "is this scalable, sustainable, and can yield high returns?".

Beyond impacting low-income groups and underserved segments of society, Elevar looks for solutions, products, and services that are affordable, accurately address the communities’ aspirations and needs, and have some stickiness to them — three ingredients that basically constitute the VC firm’s investment thesis.

“Scale is very important,” Sandeep says, adding “it is important because we’re dealing with affordability”.

To date, Elevar has deployed $210 million in capital, so far, across five funds, and in 44 companies. Through its portfolio companies, Elevar estimates it has impacted 45 million households across India and Latin America, where it has also been investing, and created over 75,000 jobs.

Thinking from the ground up

Elevar’s jumping-off point before and when it makes investment decisions is actual, physical field-work where it investigates and tries to understand the spending habits of the community the potential portfolio company is looking to address.

“The question we ask is how are people spending their money? How are they earning it? What are the priorities of families in the community?” Sandeep says.

Starting from the ground up and working its way from there is important for the VC firm because it helps it formulate its own hypothesis and takeaways — which it then transposes on to what the startup’s reading of the situation has been. If there's resonance, there's an investment opportunity.

Elevar Equity

"If the entrepreneur’s perception of what works on the ground is different from ours, we probably won’t make the investment. We’re always looking for that alignment in thinking, objective, approach, and distribution strategy," he adds.

Next, Elevar looks at how the startup it is assessing caters to or solves the problems of that specific community, and what its own definition of impact is. It also considers the scalability of the solutions: if it has the potential to impact more people, and its stickiness (if people are authentically willing to recommend a product or service to others in their community).

But even more importantly, perhaps, is if wanting to impact or affect low-income and underserved communities is part of the startup’s DNA.

“We believe that the DNA of the company needs to be low-income focused to increase and optimise the chances of success. Pivots are very hard,” Sandeep says.

Elevar’s assessment metrics broadly include:

  1. The community metric: To assess if the solution or product is focused on the community’s specific needs. For example, while education in and of itself is an important impact, education for low-income families that don’t have access to, say, screens such as laptops, or decent data service, is the kind of problem Elevar would be keen to address via investing. Education startups addressing the needs of such a community would qualify for Elevar’s portfolio.
  2. The business model metric: Assesses if and how customers are valuing a particular product or service, if they would refer others to it. One way to look at it, Sandeep says, is repeat signups.
  3. Scale: Which encompasses the number of people impacted and the potential for more impact.

"When you put them together, it makes for a fairly powerful statement in terms of your impact, what you’re creating, and, consequently, the measure," Sandeep quips.

The definition of low income and underserved

There is a universally accepted definition of what ‘low income’ means. According to the World Bank, it’s people living on $1.9/day or less. India’s financial authorities peg it as anywhere between Rs 3 lakh to Rs 6 lakh in annual household income.

And while that is also what Elevar generally accepts, it also takes into account the community or set of people a startup is building solutions for — the target audience or the group who the product or service is aimed for.

“In the context of a particular company and its product or service, we look at what is ‘underserved’, what is ‘marginalised’. What is lack of access?” Sandeep says.
Elevar equity

Elevar Equity's India portfolio (Image source: Elevar's website)

That is to say that Elevar doesn’t just look at broader low-income communities — its investment decisions are more incisive than that, and the end goal is to address even sub-sets within a marginalised, underserved community.

To illustrate: Among Elevar Equity’s initial investments in microfinance, were startups focussed on serving women in low-income communities — a marginalised sub-set in the context of a broader community.

“We’re applying this lens of what is the more marginalised community within this broad construct of a specific community to our investment decisions. It’s not a dogmatic definition — but underserved, lack of access — that’s where we’re focused,” Sandeep says.

Obsession with unit economics

Because Elevar Equity works with low-income communities that cannot afford to squander money as liberally as those in the socio-economic group above them, it looks at ROI from a distribution standpoint. Profitability or at least positive margins for affordable products can only come from more takers, buyers, adopters, so quantity is important — and therefore, unit economics or distribution economics is a metric Sandeep says everyone at Elevar is obsessed with.

“We like our early-stage capital to go in demonstrating positive unit economics before we even encourage the company to start scaling. That’s in our core DNA of how we work with entrepreneurs,” Sandeep says.

But given an increase in the number of startups and government initiatives catering to Elevar’s target audience, is there a point where unit economics may start to fail?

Absolutely, says Sandeep, there’s always the chance that unit economics may fail, especially because its value is derived from the number of people paying.

However, in a country like India, we’re still far from that happening. Addressing even 1 percent of the total market in India would mean being able to cater to 10 million-plus people — and that’s a sizeable, significant opportunity for most companies that exist today.

Elevar Equity

Elevar Equity's India portfolio (Image source: Elevar's website)

You don’t need to be at 80 percent penetration today because of the sheer mammoth size of the Indian market and the number of problems that need to be solved, Sandeep says.

"Even in sectors like fintech, we’re nowhere near saturation levels in terms of penetration, so we’re not really worried about that at all."

Elevar Equity’s latest investments include unicorns LEAD and Brazilian ecommerce startup Nuvemshop. It has also invested in fintech companies such as Niro, SarvaGram, InCred, Indifi, CreditMantri, Samunnati, Shubham, and Vistaar, among others. Cloudphysician Healthcare, The Better India, Bike Bazaar, and Glocal are also part of the VC fund’s cohort.

The firm is currently putting together a new fund to invest in 12-13 more startups this year, across sectors including healthcare, agriculture, education, supply chain, etc.

Edited by Teja Lele