Much has been said about the Companies Act, 2013 that requires companies of a certain size to spend two percent of their net average profits towards CSR activities. What is not talked about enough is a small clause in Schedule VII of the Act, which deals with supporting incubators.
The clause states that contributions or funds provided to technology business incubators (TBI) — herein referred to as incubators — that are approved by the government of India and located within academic institutions qualify under the two percent mandate.
In June 2014, the government issued a clarification by way of a circular, stating that incubators that are not based in academic institutions but have been approved and supported by the Department of Science and Technology (DST) are also eligible to receive CSR funds. There are currently 64 incubators approved by the DST.
How CSR can support social start-ups
Incubators who work with start-ups in various sectors, geographies and over multiple stages, represent a big opportunity for CSR spending.
The clause has been kept deliberately flexible to ensure simplicity, given that funding to incubators is a novel idea. Money can be spent in multiple ways, based on the company’s and the incubator’s mutual interests: to cover the incubator’s operational and internal costs, to directly fund certain enterprises in the incubator’s portfolio, or to support other programmes the incubator organises, such as hackathons, events, etc.
Money can be spent in multiple ways, based on the company’s and the incubator’s mutual interests. Over the past few years, there have been many examples of CSR funding through incubators: Mahindra & Mahindra Financial Solutions funded SustainEarth (INR 20 lakh) and FlyBird (INR 50 lakh) through Villgro Innovations Foundation; Bajaj Electrics funded CIIE to support Onergy Solar; Take Solutions supported Bodhi Health Education Services through CIIE with a seed investment of INR 75 lakh; and Mphasis funded SkillTrain through Villgro.
CSR funds have also gone into supporting specific initiatives by incubators. For instance, Microsoft, Capital First, PayU, ICICI Bank and Amazon supported ‘empoWer,’ a tech accelerator for women entrepreneurs in India, initiated by Zone Startups.
Similarly, Pfizer and Foundation for Innovation and Technology Transfer (FITT)–IIT Delhi’s incubator–co-created a healthcare-focussed accelerator to reward innovators. Pfizer provided an unencumbered grant of up to INR 50 lakh to each innovator who won.
What makes incubators an attractive CSR investment opportunity?
Funding social start-ups is a good way for CSR to maximise the potential of their funds to create large-scale, sustainable impact.
Nonprofits are typically structured to not generate returns and may have to end their geography-specific interventions after corporate funding stops. Social businesses on the other hand generate revenues through their specific service or product. As a result, even after funding ends, these companies have a better chance of continuing to operate and impact lives than traditional nonprofits, where perpetual fundraising for grants is necessary.
New ideas and innovation
There are sales and product development advantages, too. Supporting a start-up that works in the same field as the corporate providing the CSR, gives the company access to new market research and untapped customer segments. It can also provide exposure to advanced technology that can feed in to the business in the future.
An example of this is Mahindra & Mahindra Financial Solutions’ strategic investments in agri-tech enterprises SustainEarth, Sickle Innovations and Flybird Innovations.
Incubators conduct stringent due diligence on the start-ups they accept in their portfolio with very specific parameters on evaluating a company. They also ensure a smoother monitoring and reporting process of the companies they invest in.
By investing in an incubator, CSR can contribute to the development and success of a larger social impact ecosystem. The Global Accelerator Learning Initiative (GALI)—which collects and analyses data to determine the effectiveness of accelerator programmes worldwide—has found through research carried out across 43 accelerator programmes worldwide in May 2017 that revenues of incubated ventures grew at a rate of 50 percent while ventures that were rejected grew slower at around 30 percent. Similarly, debt and equity financing grew 38 percent for incubated ventures, compared to 22 percent for rejected ventures.
By investing in an incubator, either for their portfolio company or for the incubator’s operational costs, CSR can contribute to the development and success of a larger social impact ecosystem.
It’s early days still
In 2015-16, of the total CSR spend of INR 6,578 crore, less than 0.2 percent (approximately INR 12 crore) was spent towards incubators. While that number increased in 2016-17 to INR 20 crore (of the total INR 6,871 crore CSR spend), the quantum remained less than 0.5 percent.
This points to a certain hesitation about funding incubators, including concerns about funding for-profit businesses, the high risk that comes with supporting start-ups, and the legalities and processes involved with supporting incubators.
The good news is that various agencies today—such as GIZ, Samhita, Villgro and YourStory— have initiated various programmes and publications to try and spread awareness about the process of CSR funding to incubators.
Today, it is a well-acknowledged fact that incubators and start-ups are here to stay; government schemes like Startup India and Niti Aayog’s Atal Incubation Centres reaffirm this. By giving the strength of money, networks and expertise, corporates can help incubators and their enterprises truly accelerate their impact.