State Bank of India is by far the largest bank in India.

To give you a sense of scale, in 1H of FY 10 (Apr – Sep 2009) customers opened  a staggering 7.3 million accounts (saving & checking only does not include loans, FDs / CDs etc)

Here are some key stats for the bank:



Source: SBI Investor / Analyst Presentation www.statebankofindia.com

With 51,000 mobile users, this is really a microb of a base for a bank 47m debit card holders and 1.7 billion ATM transactions per day but what is interesting is if you look at the transactions / month per user or account,mobile banking has higher use rate.

This could be driven by 2 factors:

1. The obvious higher penetration of mobile phone vs. internet users, especially across the masses

2. The accessibility & usability of mobile phones.  It is easier to transact with the mobile in a crowded train, while walking on the street versus a computer.

Hopefully with the another 400m potential users out there for mobile banking and introduction of services like Eko we’ll see higher user counts and transactions in the coming year.

In Malawi, biometric ATMs confront traditional ways of moving money.

If you look at rural India, the FMCG companies like ITC, Levers have built out a great distribution network. Look at any small outlet in the hinterlands of India and you can easily find cigarettes, biscuits etc available.

So for these new companies and products to reach these markets should not be an issue. The reality is this is a big hurdle.

Firstly India is a bast country with relatively disorganized infrastructure. Moving good from one place to another is not easy.

Secondly with a multitude of languages labeling and packing becomes an issue.

Thirdly most of transactions are primarily cash and carry based with little credit offered due to the lack of credit infrastructure like ratings, limited credit card penetration etc.

Also there is the if issue of customer acceptance of products and market viability. Distributors will not take the risk of buying products with clear understanding of the market viability ( since they pay cash down for most products today).

I spent a day at a small village that is about 100 km from Bangalore and takes about 2 hours to get to. There is good bus connectivity but no real rail connectivity.

I did a little impromptu survey with the local retailers about their business and the distribution channels available to them.

The bottomline is most of them could
Access popular FMCG products like chocolates, ciggarettes, biscuits etc. They mostly got them directly from the city on bikes or at times through distributors. They also know the demand for specific products and are able to manage their procurement and inventory well but all their buying was cash down. Also when they run out of products they typically just or their ext big buying trip to the city, on the bike.

There is an opportunity here to create a scalable distribution network for the rural markets that addresses sine of issues around credit (using MFIs), transportation (using existing alternatives like buses and bikes). In addition the other value adds that can be leveraged include:

1. Better inventory management using simple SMS and mobile phones to increase product availability and sales

2. Capturing customer inputs and feedback to impove products and create products to meet rural demand. Most end retailers in rural areas are very close to their customers. Creating simple data collection mechanisms can be of enermous value.

We are incubating a company to do just this. Currently we are looking to run a pilot with a couple of new products and about 15 entrepreneurs in villages around Bangalore.

I will keep posting our experiences and the challenges we face out here.

Sorry typos are courtesy of iPhone.

In the developing world, the mobile is not just a communication and social device but has real day-to-day financial impact on the lives of people.  I see visible examples of this upward mobility (ha-ha) all the time in India , be it making small vendors more accessible to their customers or providing important crop pricing data to rural farmers.  I think the most important thing is it empowers individuals by giving them direct access to people and information.  A farmer, for example, previously would have relied on middle men for information and the middle men captured most of the value.  With mobiles the farmer gets direct access to markets and information and this not only creates better economic value for the farmer but also empowers him to plan his crops & yields better. I believe we have really seen the tip of the iceberg here.  The opportunity to introduce new services to provide new ways of doing business will not only have a huge impact on people’s everyday lives but also create large economic activity.  In the next few years, we are sure to see large companies created to leverage this opportunity.

First the story about the New York cabbie.  Kwak was a great person to chat and told me all about his life & family on the 40 minute drive from Manhattan to Newark. He is an immigrant from Ghana and has been working in New York for 20 years. He had saved some money and returned to Ghana to start a business.  There he hit upon the idea of buying a gold mine in Uganda, which he did. No small timer, our man. But after two years of hard work and running through all his savings, he had shut to down the business with no gold in sight.  So he then returned to New York and the only job he could get was driving a taxi cab.  He is about 60 years old and drives from 4pm to 2am every day.

The economics of his business:

On average he pays US$135 / day for leasing the cab and US$20 for gas.  The least profit he takes home is US$100 and on a very good day he takes US$250.  So on average he takes home $2500 – 3500.  He pays $1000 for his apartment.

Assuming he gets 10 miles a gallon at US$2.60 a gallon.  On the revenue side, there is a fixed initial price of  US$2.50 and 40 cents for every 1/5th mile plus a bunch of surcharges. .  Assuming a typical trip of 2 miles, fare  will be US$ 6.50 and gross profits of US$5.98.  So make the lease payment, he has to make 22 such trips or drive 44 miles.  Assuming a US$1.50 tip / ride, he makes about US$33, still below his target of US$100 / day take home.

He told me he has been able to afford a laptop, a desktop and a media player.  The best part is he is always talking to support guys on the phone in India for problems with his computer.  Kwak has some form of group health insurance (though it is not great ) and was able to educate his kids through high school.  Now they are in college and I am not sure how that is being financed.

The Indian Side of the Story

Now the Indian autorickshaw (autos for short) driver.  I ride around in these a lot as they are always available and better than waiting for my driver.  All autos in Bangalore run on compressed natural gas and a 3 wheeled with the top covered and open sides.  A typical auto driver leases the vehicle for Rs. 150 / day (US$3).  Gas costs Rs. 35 / liter ( 75 cents) and runs for 10 kilometers.   So with a variable cost of Rs. 3.50, and per k charge is  Rs. 7, an autodriver needs to drive at least 42 kms a day to break even.

I think both the NYC cabbie and the Bangalore auto driver have a tough life.  A couple of key differences, the NYC cabbie has health insurance.  I have spoken to several auto drivers who live a hand-to-mouth existence.  During the swine flu scare in Bangalore, they all complained about how this could destroy their lives.  These guys cannot afford to fall sick, or else their families cannot eat or they cannot make daily payments to vendors and debtors.  So their health is such a critical aspect of their existence.  Secondly there are not peak hour or traffic delay surcharges in Bangalore, which are in place in NYC.  These are important as they account for the time and cost incurred by the auto driver.

India is filled with micro-entrepreneurs who provide a host of products & services.  Most of these folks tend to have immigrated to urban centers like Bangalore and find ways to use their skills to earn a living.  To a large extent their daily existence depends on their business and they really work hard to make ends meet.  It is so easy to miss them and their stories as you see a lot of them in every day life.  But each person has some thing unique about her/him and it is often inspiring to see how they got to do what they are doing and their approach to their business.

This is Krishnappa, he is originally a farmer from a small village near Mysore (120kms from Bangalore).  He migrated to Bangalore 30 years ago and has been selling various things since to earn a living.  He has no education and has had no vocational training.  He has two kids, who has supported through school and, as with most others I have met, he is very clear that education is extremely important for his children to get a better life.

Krishnappa works from 8am in the morning when he picks up his produce from the market.  He usually buys a sack of fruit, here he has  guavas as they are in season.  He then organises his products on the bike and walks all over Malleshwaram area till about 9pm selling the fruits.  He has a small packed lunch from home and on days he can afford it, he has a cup of tea.

The economics of his business:

Sack of fruit (guavas) : Rs. 800  for 350 fruits

His variable cost / fruit = Rs. 2.2

He typical selling price is Rs. 3 / fruit

His average net take is Rs. 100 / day and assuming he goes through 12 inventory turns (12 sacks / month).

He usually borrow money for working capital at 5%  from a local lender.

For 12 turns he borrows approximately 9600 and pays Rs. 480 / month in interest

A great candidate for micro finance  - Here is hard working guy who barely is able to make ends meet and is losing 60% of his capital every year.  Imagine if the interest was dropped to 30% (still high by any standard), he would have Rs 240 in additional cash every month  - that is 10% in extra income for him.

I bought some fruit from him- 3 fruits for Rs. 10.  Here is the best part, after our conversation, he added another fruit to my bundle and reminded me to buy from him again.  Very touching and also nice to see how he was building customer relationships.

The trend in the industry has been to create funds of at least a US$100m in size while most are much larger.  To successfully manage a US$100m fund, a team of 2-3 GPs can at best invest in 20 companies.  This implies that the average ticket size should be US$5m.  With most sectors in India experiencing double digit growths, there are several companies that can absorb 5m and get 2x-3x returns in 3-5 years.  From a fund manager’s perspective the best approach is go after revenue generating, growth companies that need at least US$5-10m in capital and have market and product risks all ironed out.

Now looking at the other side, a early stage entrepreneur is typically seeking US$100K-1m in capital to validate his product / service and get to revenue.  These entrepreneurs not only need the capital but also need the strong support of the investors to build the business.  Unfortunately most VCs in India will shy away from these opportunities as these companies would be a big drain on their time, have additional product / market risks and increase the risk in the portfolio.

Participation by angels in these transactions is also minimal as a US$100K risk is still large for one person to take in the Indian context.

Most early stage investors in the US have strong operating and entrepreneurial backgrounds.  They typically tend to not only invest with a financial mind set but most importantly their understand of the space and potential disruption a startup can bring in the market place.  They bring skills and experience that may be critical in creating that 10 or 100-bagger, rather than a 2-3x growth.

India needs more funds managed by operating and entrepreneurial partners that are smaller in size that can take advantage of these opportunities.  For example a US$25m fund can comfortably accommodate 1-2 partners and a small team at 2% fees.  The funds can invest between US$500K-3m to create a portfolio of  10-15 companies.  mostly importantly the entrepreneurial background of the managers can bring enormous value to the startups.  A typical early stage success can generate 5x-10x return and in a portfolio of 15 companies, if 3 companies generate 5x returns the fund is home with a 25% IRR.

Technology combined with some traditional India ingenuity can can provide a way to address both. Telemedicine is one example of reducing overheads while expanding the reach of the scare resources.

One other idea could be in the preventive medicine and disease management area, by creating a McDonald’s for healthcare.  These centers can offer fixed menu of services including basic diagnostics and disease management.  The centers can be staffed by semi-trained medical professionals or nurses who follow a fixed process.  In addition to this, a tele-medicine setup can provide enhanced consultations and diagnosis.  Combining this with a micro-insurance product for pregnancy, neo-natal care or diabetes can potentially be a strong business model.

Best practices on handling swine flu diagnosis put together by St. John’s Hospital, Bangalore and shared by Dr. Sanjiv Lewin. All copyrights & credits belong to them.