#44- Inviting Impact Entrepreneurs for a Probationary Portfolio

Changing the way impact is created

The goal for Malpani Ventures is to fund frugal innovation in India. We have been privileged to partner with entrepreneurs that have been the torchbearers of frugal innovation in India. Today, we want to take this one step forward: by reaching out to frugal innovators in the impact space by providing them innovative funding solutions.

The biggest challenge for investors is to find the right entrepreneurs to back. This is especially difficult for social impact investors because you need someone whose heart is in the right place but also someone who is hard-headed enough to be able to run a business profitably and sustainably and scale it well. The reality is that there is no good way of being able to gauge how well someone can run a startup because there is no correlation between startup success and an IIT degree or an IIM diploma or pass successes, or actually anything at all. And that's why the best way to see how someone performs is by actually seeing how well they perform in the job.

This means we need to run real-life experiments. And these experiments need to be low-cost experiments. We understand that many of these experiments will fail but we are hoping that the overall results will be favorable.

The problem of giving money to entrepreneurs is that investors need to monitor how this money is being deployed. This creates a considerable administrative burden and we want to reduce that and make this self-monitoring so that the entrepreneur does monitoring for themselves. We believe one way of doing it is by insisting that they build in public so that it's easier for us to track the performance, irrespective of whether we actually get a financial return. We are also hoping that the second-order effect of incentivizing founders to share their experiences will also help the Indian startup ecosystem. As a part of SOPs, and KPIs for monitoring the investments we will make in the impact space, we will only prefer to fund entrepreneurs who are willing to Build in Public. The reasons are two-fold:

• The betterment of the ecosystem if everyone learns from each other

• If entrepreneurs we fund build in public, we have to spend less time monitoring the portfolio and get more time to engage and fund more entrepreneurs

Check out this ‘Building in Public How-To Guide’ by Gaby Goldberg for more information.

---

We will start with the education space where we will work with the entrepreneurs creating a deep & long-lasting impact for the betterment of society. In the essence of frugality & innovation- we present '1-10-100' an innovative funding mechanism that provides funds to those founders who are doing exemplary work in education without the hassles of dilution, compliance, and legalese to do what they do best - create impact.

---

How?

The 1: The probation

We will provide a non-equity grant of Rs 1 lac to entrepreneurs wanting quick access to capital to validate their product

Why probation?

This is the period we want to critically examine and evaluate the business model, its viability. This is our diligence period where we will work very closely with the entrepreneurs to test, evaluate & validate their product. We want to put our money where our mouth is - and our non-equity grant of Rs 1 lac is a signal of our intent, without diluting the entrepreneur who gets cash quickly to start. This is akin to a portfolio company in probation before it is made permanent, if you perform well, you will be retained!

Example:

An entrepreneur that wishes to make K-12 learning accessible for all - without the need for fancy apps or technology. MVP built and wishes to validate quickly. The grant of Rs 1 lac is to enable the entrepreneur to finish developing the product and validate with initial customers. We expect the entrepreneur to share publicly: product roadmap, key milestones, and weekly metrics along with weekly update calls

We have earmarked a total of Rs 1 cr for these nonequity grants. Whether these grants will be 1 lac cheques to 100 entrepreneurs, or 2 lac cheques to 50 entrepreneurs, or 5 lac cheques to 20 entrepreneurs, we dont know. We won't know until we start doing it, and just like entrepreneurs who start up and pivot after A/B testing or learnings along the way, we hope to find our sweet spot soon!

---

The 10: The dating

We will top up the grant with an iSafe of Rs 10 lacs to build their product

Why dating?

1-3 months after Stage 1. This period of dating will enable both the founder & the funder to see if we are a good fit for each other. We will take this opportunity to date the founder and build our conviction surrounding their vision. After all, a successful courtship is the hallmark of a long-lasting relationship. We will further strengthen our intent by offering Rs 10 lacs as an iSAFE that can quickly be put into motion without taking the bandwidth of a founder in legalese.

Example:

Entrepreneur building an accessible K-12 learning venture, that has a functional MVP with successful beta. We will provide funds to enable product building. We expect the entrepreneur to share with us the results of the beta, product demos, customer references. We expect the entrepreneur to share publicly product roadmap, key milestones, and weekly metrics along with weekly update calls

We meet hundreds of entrepreneurs every year, but end up funding a select few that we fall in love with. Similarly, those entrepreneurs that shine out of the cohort in the previous stage will be the ones that we would want to continue dating. We have earmarked a total of Rs 1 cr for this stage. Whether these are 10 lac cheques to 10 entrepreneurs or 20 lac cheques to 5 entrepreneurs is again something we will ideally find out later.

---

The 100: The marriage

Will we invest either by way of equity or by revenue-based financing, or a combination of both, in companies that have been top performers in the cohort with a vision to multiply their reach and build a sustainable venture to create impact

Why marriage?

3-6 months after Stage 10. A successful long term relationship between two persons who want to build their lives together. The funder-founder relationship is such - one of equals. In order to further strengthen our relationship, we will offer Rs 100 lacs to the entrepreneur by way of equity or revenue-based financing or both, depending on the business model. This is to enable the entrepreneurs to run, not walk, their way towards creating impact & value, without a lot of equity dilution

Why a combination of equity & RBF?

• To show intent in the business model by putting in capital as equity

• To not dilute the entrepreneur on the cap table

• To nudge the entrepreneur to build a sustainable business based on positive cash flows that are required to service an RBF

Example:

Entrepreneur has built an accessible & affordable K-12 product. We will provide the entrepreneur with funds to scale, and further develop the product if required. By this time, we have walked with the entrepreneur through their journey, now we wish to run. The entrepreneur has the liberty to build the venture for growth, or cash flows, or exit. We expect the entrepreneur to share publicly product roadmap, key milestones, and monthly metrics along with monthly update calls. 

This stage is something that will happen about a year from now, and hence we will take our learnings from the two steps above before we earmark funds for this.

---

We will require the entrepreneur to promise the following:

1. A promise to keep obsessing over the customers

2. A promise to do the right thing by the business

3. A promise to be fair and transparent to all stakeholders

---

In return, we promise the following:

1. A promise to be customer-first, with a founder-friendly approach

2. A promise to provide patient & long term capital & support

3. A promise to be a sounding board, and mirror to enable founders to do the right thing

---

Just like any other entrepreneur, we want to get out of stealth mode and get our MVP out quickly. We want to run this low-cost experiment to validate our hypothesis.

If you are an entrepreneur in the education space with an exciting idea or model to create impact, please be ready to pitch to us. Details will follow shortly.