Song Investment Advisors: Building purpose-driven organizations on financial sustainability
In previous posts, we have illustrated the rationale for supporting impact investment opportunities where fund managers and entrepreneurs are highly experienced in either the markets they serve or the operating skills they can bring to bear. If we assume that the mission of an impact investment is to sustainably address an underserved market, the challenge is to do it in a financially scalable way. This is what Vishal calls the “builder’s mindset”—an approach to developing practices and processes that promote both the mission and the means to achieve it.
As a further illustration of this approach, Song Investment Advisors also invested in education, which has underlying issues similar to healthcare. In India, the government operates more than 90 percent of the K-12 schools, but the poor quality of these schools results in a large numbers of enroll-able kids seeking out private schools instead. Not surprisingly, there are some great alternatives at the upper end of the financial spectrum for families that can afford fees of INR 3,000-5,000 ($50-$85) per month or more.
Song was attracted to the market for INR 750-1,500 ($12.50-$25) per month because it fit in the target income market and because it could find very few other companies trying to attack that segment. It expected high demand from kids with working-class parents who see the advantages of education all around them, but Song did not see many companies that had expanded beyond one or two small schools.
K12 Techno Services, the management company behind Gowtham Model Schools (GMS), was the exception; it had about 50 schools in Andhra Pradesh when Song got to know them. In addition, K12 Techno was working hard to standardize some administration processes to ensure quality. It had centralized teacher training, lesson plans drawn up for each hour of every class, and some new pedagogy models specifically designed for this market.
The problem was that it had developed too fast; it hadn’t spent enough time or energy on building the infrastructure necessary to manage such a large system. While the growth was truly impressive, there were many challenges just under the surface. Attendance was starting to drop, putting pressure on fee collections. There was no central IT system, so getting this information took much longer than necessary and made a mess out of attendance roles. Complicating matters, the company’s multiple debt lines were secured in a complex arrangement of assets that pushed lending rates higher just as cash was getting tighter.
Again, by looking past the business itself, Song found that the fundamentals were in place for strong growth in a market that fit squarely within their purposeful mandate. The entrepreneur behind K12 Techno had done a great job of recognizing a need and trying to make his system work, but he required more professionalism to build a sustainable organization. An added challenge, in this case, was that Song was not large enough to re-capitalize the company by itself.
Vishal recognized that Sequoia Capital in Bangalore had also been in discussions with the company. Sequoia had already invested in an education business, but given the work required at K12 Techno, they were open to having a local partner. Together, Song and Sequoia were able to craft a solution that would inject new money into K12 Techno to implement an end-to-end school opening and operations system, and build a more formal school management company. It is impossible to convey how challenging the diligence was—the two companies had to do a lot of work on the income statement and balance sheet. A significant portion of the new investment went to clean up poorly reported, outstanding liabilities that were crippling K12 Techno’s ability to grow.
Song and Sequoia eventually made their investments, but it took another six months and new additions to the management team before GMS was able to start opening new schools again. When it did, more services and innovations in technology-enabled tools, math, and languages were added as a way to strengthen content and consistent delivery. These additional services improved cash flow and contributed to a decrease in payback time on new school openings.
Less than two years after the initial investment, Naveet Publications approached the company. Naveet was keen to add a schools management business to its business. It seemed like a great fit and would bring even more capital to expand operations across state lines. Plus, the valuation was at a substantial premium to the initial investment on a per-share basis. Sequoia decided to stay in the investment with Naveet, given the underlying growth potential, but Song’s investment committee—feeling that its role as a small minority investor was no longer a fit with its purpose—exited the investment with a substantial gain.
While Song’s investments are small in size, they do represent an encouraging example of how impact investors can successfully invest purpose-driven capital for financial return. As globalization and increased access to technology open up the opportunity for a huge population of new middle-class entrants, we expect that many new impact investors can replicate the Song experience. The key to success, however, will be in how well their fund advisors understand and reduce the risks of investing in these nascent markets.
The risks Song accepted in its chosen marketplace required that it get very involved with each company well before making an investment. This approach places a high premium on upfront diligence. But it is absolutely necessary to see past the individual challenges of any one company and uncover the extraordinary growth opportunities it may represent. India, like many emerging economies, is full of local lore and lots of shortcuts. To be successful, Song needed to avoid shortcuts and bring an operational builder’s mindset—critical to achieving scale.
As investors experiment with more ideas and solutions, we will likely see the field of return-oriented impact investing rapidly grow into a dynamic and opportunity-filled new market for active managers who design an investment strategy for purpose and execute for profits.