Impact investments or funding for positive social impact, along with strong financial returns, may not be a new concept for Indian investors. However, the dynamic model only gained traction in the past decade. Earlier, the landscape was dominated by not-for-profit organisations. But by 2010-2011, investors realised that creating a lasting impact required a more sustainable structure, something akin to the venture capital model. That shift in perception boosted domestic funds like Capital 4 Development (C4D) Partners, which has been making waves since 2017.
C4D’s journey began in 2013, when it was known as ICCO Investments, a subsidiary of the Dutch NGO ICCO Cooperation. Backed by the Dutch Ministry of Foreign Affairs, it started with a $20 Mn fund and focussed on small and medium enterprises (SMEs) across Latin America, Africa and Asia. By 2016, it had invested $15 Mn in more than 30 companies but ran into a host of challenges like regulations, limited partners’ lack of enthusiasm for evergreen funds and the need for stronger management ownership.
The team spun out in 2017, rebranded as C4D Partners and hit the ground running. By 2018, it closed the $30 Mn C4D Asia Fund, while ICCO Cooperation was later acquired by Cordaid Investment Management.
Today, C4D Partners stands out as an early stage impact investor with a private equity mindset. Unlike the shotgun approach of investing in dozens of companies, it carefully picks 15-20 businesses which can become profitable within 18-20 months.
C4D prefers businesses that grow steadily, around 40-50% annually, without relying on aggressive sales tactics. It also uses stress-test models to ensure portfolio companies can weather harsh conditions and remain cash flow-positive.
“We don’t need 100x growth,” said founder and managing partner Arvind Agarwal. “What matters is manageable, sustainable growth and profitability within a year or two.”
C4D Partners has zeroed in on agriculture, waste management, the circular economy, climate action, skilling, education and rural-focussed businesses as its primary focus areas. Financial inclusion is another critical area, although it steers clear of microfinance, a sector that has already matured.
The fund house does not invest in EV-as-a-service models (think of delivery startups using electric two-wheelers) or any industry on its ESG-negative list. In essence, it maintains a well-chalked-out and disciplined investment strategy that reflects its mission-driven but clear-eyed approach to emerging opportunities.
As part of our ongoing Moneyball series, Inc42 had an exclusive conversation with Agarwal, who discussed the evolution of impact investing in India, C4D’s investment thesis and where the industry is headed. Here are the edited excerpts.
Inc42: How has been your India journey in the past six years?
Arvind Agarwal: In the six years of India operations, C4D has invested in 13 companies and has a portfolio mortality rate of less than 20% [compared to 60-70% often seen across VC funds]. We have made six exits – three full and three partial – and returned 50% of the LP capital.
Our first fund was launched in 2017 and the second, the C4D Bharat Shubharambh Fund, came in May 2024, with a target of INR 375-550 Cr. We target to achieve its first close by 2025.
C4D’s notable exits include Ananya Finance for Inclusive Growth, Ecotasar Silk and Alpine Coffee. We have also invested in well-known startups such as Freyr Energy, Mirakle Couriers, Saahas Zero Waste and LabourNet.
We have a clear focus on sustainable growth and meaningful exits. We have also proved that impact investing can deliver solid financial returns and real societal changes. It is not about chasing the unicorns. It is about building businesses that solve real problems, and that’s where we shine.
Inc42: Did your investment thesis change between the two funds?
Arvind Agarwal: The core investment thesis has not changed. The first fund was Asia-specific and we invested in India, Indonesia, Nepal, Cambodia and the Philippines. It was a hybrid fund offering debt and equity funding. We did equity in India and debt or mezzanine investments in Southeast Asia.
Based on our experience with the first fund, we soon realised that managing a multi-country fund with mixed instruments was challenging, especially when we want to set ambitious targets for returns. So, the second fund entirely focusses on India but sticks to the same strategy as the first fund.
Inc42: C4D focusses heavily on women-led and women-owned enterprises. What is the rationale behind this approach?
Arvind Agarwal: Diversity was at the core of our strategy when we started with ICCO. As we raised our first fund, a limited partner only investing in women-owned businesses suggested that a percentage of our AUM should go to such companies to align our mission with real-world impact. We agreed, set a target to put in at least 30% of our AUM and linked it to our carried interest [a share of the GP profits]. If we exceed 30%, we gain additional carry, but falling short of the goal means losing carry, with a floor and ceiling of 15-25%.
In our first fund, 42% of the total AUM was invested in women-led enterprises; in India, it reached 58%. It was a stark contrast compared to the global VC industry with its single-digit allocation to similar companies. So, our strategy is all about setting higher benchmarks and creating meaningful change.
For us, gender lens investing [GLI] goes much beyond representation. Our proprietary toolkit helps us identify exploitative practices in sectors where women dominate supply chains. Take waste management, for instance. Most women working as waste segregators are poorly paid and face hazardous working conditions. When we invested in a waste management company, we assessed its ability to change these practices. We didn’t look at the average salary but ensured that the minimum wage paid to employees would exceed the minimum living salary of INR 16K. In this case, the company paid a minimum wage of INR 17K, a tangible improvement.
Therefore, it’s not just about funding women-led businesses but also ensuring that these investments drive systemic changes in exploitative industries. We align financial and non-financial metrics to create measurable impact.
Inc42: Isn’t it challenging to find Indian startups led or owned by women?
Arvind Agarwal: Well, finding such companies is not a challenge. It is more about refining the process to make sure that we are genuinely inclusive and transparent. For instance, we have seen that women founders don’t often approach us through investment bankers. So, we have simplified the process. Anyone looking for funding can apply directly on our website, and the entire team reviews applications to eliminate personal biases.
Again, looking closer, we have noticed something really interesting. Women founders tend to be more cautious about standard clauses like drag-along rights [a clause that lets a majority shareholder compel others to take part in the company sale]. In contrast, male founders don’t worry about the fine print. They focus on the matters at hand, the funding amount and valuation. To make things easier, we have started sharing detailed term sheets much earlier, explaining the nitty-gritty before taking these deals to the investment committee. This way, we have improved access and created a more diverse and inclusive portfolio pipeline.
Inc42: What about LP’s interest in impact funds operating in India? How has it evolved since 2015-16, a watershed year for this dynamic new field?
Arvind Agarwal: Their interest has dwindled for a few reasons. First, the line between an impact fund and a typical VC fund has blurred over time. When you look at the landscape today, you will often see a wide range of funds coming under this category, making it difficult to distinguish between the two. Therefore, many global LPs have pulled back, feeling their work in India is done. Their focus has now shifted to new geographies like Africa.
Besides, some limited partners had sub-par experiences, and they now hesitate to invest. Others with more mature strategies prefer to invest directly instead of parking their money with impact funds. These factors combined to lead to a decline in the funds available for impact investments.
As I said earlier, the challenge lies in clearly defining an impact fund, its unique role and the outcomes investors may expect.
Inc42: Talking about exits, what are the listing challenges, especially on the NSE Emerge, the SME platform of the National Stock Exchange?
Arvind Agarwal: We are actively exploring this area over the past two years. The main challenge for SMEs looking for an IPO is valuation. These are businesses still in their growth phase. They have yet to reach the maturity or EBITDA margins typically seen in companies with a turnover of INR 100-300 Cr. This means their IPO valuations heavily rely on EBITDA multiples, a sticking point as this framework doesn’t always capture their growth trajectories and overall potential.
The best approach in such cases is to first secure the growth capital that helps them stabilise and then go for better profit margins. We are already working with a few companies which are eyeing mainboard IPOs. However, the ideal path should be to go through an SME IPO first and give themselves around three years to solidify their market position before opting for the mainboard. Of course, at C4D Partners, we always consider SME IPOs. But the valuation constraints tied to the growth dynamics of these businesses tend to pose a significant challenge.
Inc42: You have been vocal about the PE/VC fund structure. What is the core problem investors face?
Arvind Agarwal: It’s time we address the core issue in private investing: An outdated funding structure we rely on. From my conversations across the industry, it is clear that the 10-year fund life, coupled with a five-year exit horizon, is no longer practical.
There’s no inherent reason why PE/VC firms can’t shift to a 12-year fund life. But these proposals are routinely dismissed because the market standard is 10 years. Ironically, even the 10-year model struggles to wrap up in 12 years, a discrepancy the industry is willing to overlook.
As an industry, we must come together and rethink our operations. We should align a fund’s structure with the market dynamics of each region. What works in India may not be suitable for Southeast Asia or the Middle East, and a one-size-fits-all approach is no longer viable.
We can foster sustainability and long-term success if the industry collaborates and innovates to embrace new models.
Inc42: What are the key areas impact funds should focus on?
Arvind Agarwal: Impact funds must prioritise primary and secondary sectors [agriculture and manufacturing, respectively] over the tertiary ones to drive long-term growth and inclusive development. The first two are critical for India’s progress but remain significantly underfunded.
Take agriculture, for example. Shifting focus upstream or pre-harvesting processes such as technology adoption and yield improvement receive far less attention than downstream or post-harvesting activities like storage and deployment. This imbalance is evident when you compare India with other countries like the US, where upstream investments are more robust. India should adopt a similar approach.
In manufacturing, there should be a stronger push to build small-scale industries, especially in rural areas, rather than focussing solely on large industrial projects. Small enterprises can boost the secondary sector by creating jobs and promoting balanced economic growth.
Inc42: Finally, which sectors will attract maximum impact investments in 2025?
Arvind Agarwal: Climate-related investments will likely dominate the impact investment landscape. With the global focus on climate risks and opportunities, a substantial flow of funds will target this critical area.
The circular economy is another promising sector where innovative and sustainable business models are gaining traction. Health, too, is emerging as a focus area, but the scale of investments is still uncertain. Agriculture will continue to attract interest, especially as investors try to address the gaps in upstream and downstream funding.
We are also noticing a shift in the SME space. They were content to stay small earlier but aim to scale up now. The challenge here is the capital mix. Small and medium enterprises need more debt than equity, as they have historically operated on a profitable, cash flow-driven model. Equity investments are critical to professionalise these businesses. But their growth hinges on access to affordable debt. This nuanced approach fosters SME growth, especially when they pivot towards large-scale operations.
[Edited by Sanghamitra Mandal]
