Ashish Dhawan on going non-profit to tackle the BoP education crisis: Ashish Dhawan

Last July, Ashish Dhawan stepped back from a successful 15-year career in private equity to focus on philanthropy in the education sector. His new venture, Central Square Foundation (CSF), is in the early stages of building India’s first venture capital fund for non-profits.

Over time, the foundation also intends to play a significant role in the area of advocacy for better quality education at the bottom-of-the-pyramid. CSF has already invested in four non-profit enterprises and will start rolling out its research and advocacy activities from this year.

The 43-year old Dhawan, who founded Delhi-based ChrysCapital, one of India’s most successful private equity firms in 1998, spoke extensively to StartupCentral about his model for philanthropy, why education at the bottom-of-the-pyramid demands a non-profit approach, growth plans for the next five years and how private equity is receding from his life.

Edited excerpts:

Why CSF wants to be a non-profit VC to non-profit startups

We picked this model for a couple of reasons. One, I believe in the ability of private philanthropic capital to do experimentation, to be innovative and to eventually be a leverage point for policy. I also feel very strongly that we need a next generation of education reformers in India. We need a next generation of non-profits as well. Much like the non-profits in the Western world, that are much more professional and very ambitious. There are obviously some very good ones in India but there aren’t enough. If we really want an education reform movement in this country then we need a couple of hundred really dynamic reformers and today there are maybe 10-20 such people. Doing grant work and just giving money to existing non-profits that are doing good work, and we will work with a few existing ones, is not going to be enough.

“There is very little seed capital available to get the next generation on non-profits started”

My other insight, from talking to several existing foundation particularly in the US, was that generally the person who is giving the money either isn’t alive or even if the person is alive, he or she is not active. The people who are sort of running the foundation tend to be conservative and protect the interest of the family and the foundation. There are a whole bunch of rules that they come up with and then they operate within the confines of those rules. The idea is to create a legacy and so therefore their goal is to be very conservative. They would rather not take risk but do things that have already been proven and do it at a certain pace.

As a result, there is very little seed capital available to get non-profits started and that is one role we could play. So we have taken a slightly different grant-making model. One is not to be passive, be very active. Two, build a fairly tidy mix of startup non-profit organizations. Three, be extremely innovative. We’ll pilot an idea for the first year or two, such that if it is not working we will be ready to kill the experiment. So it allows you to say that I am willing to test, for instance, new education technology and how it could work, as opposed to just copying the aid model.

How research and advocacy fits into the equation

The second piece in the CSF model is the research and advocacy part. At the end of the day, philanthropic capital is limited and you cannot scale beyond a certain point. You need to involve government and policy makers. Therefore, advocacy becomes a very important part of the equation. For advocacy purposes what we need today is a lot of community, build a lot of networks, research, engage with media and of course, most importantly, engage with the policy makers. Very few people are sharply focused on research and advocacy. There are a couple but not enough.

Why education reform at the bottom-of-the-pyramid (BoP) demands a non-profit approach

See at the end of the day I’m a corporate guy. I’m not one of those guys who say that markets are bad. Markets are great. But the fact is that markets don’t work in many areas. Particularly if you look at K12 and the bottom half of the pyramid, if you want quality, the market is not going to solve that problem very easily. Advocacy is very simple. Obviously there’s no revenue model for advocacy and so that has to be a non-profit activity. Research in this area has to be a non-profit activity.

Now, if you take an area like teacher training the market is fundamentally broken. Even in regular schools, it’s not like teachers get additional certification or in-service training. And it’s not like they get career progression or higher pay because of in-service training. As a result the willingness to pay for it at the teacher level isn’t there. Even at the school level it isn’t there. When you take it down to the low-income schools the affordability clearly isn’t there. The revenue pool is so small in the whole affordable schools space there really isn’t the opportunity to eke out a large portion of it to services that you provide into that segment.

“A social investment fund where you are halfway here, halfway there doesn’t work. You are either creating a commercial venture or you are not.”

If we could set up a viable commercial venture, I would have gone down that route because it is clearly scalable. But, first, I don’t believe that it is possible. Second, this whole idea of setting up a social investment fund where you are halfway here, halfway there doesn’t work either. You are either creating a commercial venture or you are not. My sense is that if we were to call ourselves a social investment firm,  and we did equity and some debt, it would force us to look at certain types of things and we would never look at doing initiatives that I think are frankly more critical to solve the education problem.

So, first markets don’t work and therefore the non-profit approach is the way to go. Two, the non-profit approach allows you to start with the education problem and say okay, there is a crisis is our country. We have to play some role in helping solve that crisis. What are the things we would do? As opposed to starting by saying what are the things I would do that could earn me the most revenue tomorrow, which you are forced to do if you go down the commercial or quasi-commercial path.

How non-profits can also be accountable and performance-driven

To begin with, it is very important for us to back the best people. Even in the Western world, non-profits are being held accountable in a very different way than they were 10-15 years ago. One of the ways to build accountability into the system is to tranche the money you put in so that there is real pressure to perform.

Then you need to get in sharp metrics, set targets, monitor performance based on those metrics and hold people accountable. So, for instance, we track what cost per child we are able to achieve. Get in some semblance of how we are comparable with the public system, etc. We’ve thought through what metrics we will use in each of the areas that we will look at.

Third, we are fairly early in the learning stage in terms of helping people build out their teams. We need to work with a portfolio organization in enabling them to hire people who are extremely competent, build a culture where everything is open to being questioned, literally rely on data and evidence. It’s hard to do because people tend to be more ideological in this space than they would if they were just solving a business problem. But we have to find people who are less ideological and focused on making decisions based on evidence.

Are for-profit education startups, even very promising ones, a complete no-no?

Yes, we would not invest in any for-profit enterprise. Our belief is that if they’re really that good someone would find them. There is enough capital focused on commercial projects. We don’t need to fund them. If we come across such enterprise we will pass them on to our friends in the private equity or venture capital industry.

However, we are interested in engaging with the for-profit world to learn. There are many innovative things happening in the for-profit world. We could also be in a situation where a non-profit that we have funded eventually after proving the concept decides to switch to the for-profit model because that’s the way to scale. We have not problem with that. Our view is that the grant money should be used for the experimentation and to solve the problem.

Investment strategy and roadmap for the first five years

In the first five years we’d like to have a portfolio of 20-25 investments. On the research side, at least in 2014, in the first year we should have at least four pieces of research out. Again there we have five-year targets.

In terms of the investment or grant amount per company, we’re sort of babes in the woods right now. So we would rather be very small  now, make mistakes and not have them be very costly mistakes. Our view is to keep it (the investment per company) capped at a couple of crores per investment at least in the early stage. There may be a time when we will raise it to Rs 5 crore. With startups a small ticket size not a problem at all actually. They really don’t consume much money. The good news about having a cap is that it forces us to get out and quickly validate the idea.

Our goal is to play a catalytic role and frankly we’d rather conserve our money for more early stage projects. Once we get a good idea up and running, as I said before, there’s plenty of money after that. For instance, we’ve committed Rs 1 crore to a project called 3.2.1 Schools, which is a network of affordable schools that are working in partnership with the BMC (Mumbai municipal corporation). A friend has committed additional funds and some private equity guys are also interested. The main issue is that people are risk averse and they don’t necessarily roll up their sleeves and get something new started. Once you get something started and see some early signs that it will produce results, there is capital out there.  Investors will see that we have done reverse analytics and that will induce them to get involved.

“There’s an opportunity to evangelize non-profits and get global foundations interested in India.”

If you recall, ChrysCapital did a lot for evangelizing the private equity industry in India, for global limited partners (institutions and individuals who invest in private equity funds) to take an interest in India. Invariably the first fund they put money into in India was ChrysCapital. There is the same opportunity here. There are some foundations in the United States, the United Kingdom and other places that don’t yet invest in the non-profit sector in India. This is a real opportunity to get them interested.

There is also the opportunity to work with non-profits abroad who have some interesting intellectual property that we can leverage to help jumpstart their process here. Take for instance what we have done with 3.2.1 Schools. There is an organization in the US called KIPP Charter Network. They run the largest charter school network in the US, 139 schools, and they have a fantastic school initiative program (charter schools are primary or secondary schools that receive government money but have more flexibility to decide their curriculum in exchange for setting clear, measurable outcomes). I personally went and sat in for a day on their programme. We’ve subsequently sponsored people to go through the programme. We had the co-founder of KIPP come here and spend a week and they decided to support us on this venture and they have shared a curriculum with us.

So, there are lots of opportunities to learn from the outside world and attract capital from there.

How life has changed after becoming a part of the non-profit world

I work harder, much harder. That’s how it is in a startup. When I look the state of education in the country, I feel so disappointed and disheartened as a citizen. But as an entrepreneur I see wide, open spaces waiting to be captured. There’s obviously whole new set of people who I have met and built relationships with. They are very different from the people I have met in the past. Much more passionate about what they do, very deeply involved, more emotional, less analytical. It’s fun to build new networks and make new friends with people not cut from the same cloth that I am.

There’s this whole big challenge now. It’s not just philanthropy that excites me, but the potential to have some systemic impact. I believe that in the next 20-30 years we will have the ability to solve this problem. Education is at an inflection point. We were at an inflection point when I started my private equity career. And so, it’s daunting because it (education) is much more complex, daunting because one is dealing with policy change, politicians and bureaucrats. There are so many stakeholders. It’s harder to measure our work and our impact than in the corporate world.

Is private equity and ChyrsCapital a closed chapter?

I have nothing to do with the new fund (at ChrysCapital). We’ve been exiting our earlier investments. We have about 15-plus portfolio companies. I go in for weekly meetings but it’s a small percent of my time.

Because I’m not engaged on the investing side, I’m not following companies, I’m not reading the business newspapers as I used to in the past. Of course I miss it, miss my colleagues and friends in the industry. Investing has been in my blood for a long time and sometimes there are withdrawal symptoms. For example, it’s in the middle of results season right now and I used to focus a lot on how each company had performed, form some view on what we should be looking at and so on. When I read I can still connect the dots a little bit but I know that it (the ability) is starting to fade. Today, if someone asks me what’s going on in Europe, I don’t have an opinion. I’m not embarrassed but part of me says, oh god, there’s this know-how I had and I can see it dissipating.

I know it wont completely going away, it’s a skill-set, but because everything is so current and you need to be on top of stuff day-to-day, slowly my edge in this field is evaporating. There is a little bit of remorse, but the new thing is so exciting it more than makes up for that.

Also read: How Ashish Dhawan is building India’s first VC fund for non-profits