Monthly Archives: September 2009

Mobile phones : How they impact our economy

Here is an interesting article from The Economist on the mobile phone industry.  What interested me, apart from the widely known facts about the growth in the mobile industry, is the impact on GDP.  Adding 10 phones for every 100 individuals (10%) creates a 0.8% growth in per capita GDP.

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.

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Micro Enterprises from two continents

Continuing on my micro-entrepreneur story line, I was recently in New York and had an interesting conversation with the cab driver on the way to the airport.  Talking to him was interesting as it gave me an opportunity to compare him with a similar service provider from India, a local autorickshaw driver.

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.

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More micro-entrepreneurs

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.

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The elusive early-stage investor

The Indian venture capital and private equity industry has seen phenomenal growth over the last few years.  The industry has attracted the best capital from LPs across the US and Europe  along with some of the best investment managers.

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.

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