Category Archives: entrepreneurship

The opportunity in rural markets

I have been interacting with a bunch of folks who are building products targeting the rural markets in areas like irrigation, energy and services. What is interesting is all of them are looking for an efficient and scalable distribution channel to these rural markets.

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.

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Filed under entrepreneurship, Micro-enterprise, sustain

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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Filed under business, entrepreneurship, Micro-enterprise

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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Filed under business, entrepreneurship, Venture Capital

Micro Business – Corn Entrepreneur

This is a typical Indian entrepreneur, Malamma, with her school going daughter next to her.  I met this lady in Lal Bagh at the flower show.  Curious, I had a quick chat about her business and life.  First off, here are the economics:

Fixed Costs:
Coal = Rs. 150 ( 5 Kgs per a day)

Variable Costs:
Corn = Rs. 300 (A bag of 100 kernels)

Revenues:
1 Kernel = Rs. 10 (on a good day)

Gross Profit = Rs. 7

So this lady has to sell about 22 kernels to break even.
On a good day like this she sells 50 odd kernels.  That gives her:

Gross Profit = Rs. 350
Fixed Costs = Rs. 150
Net Profit = Rs. 200 (US$ 4)

(For simplicity, we ignored travel costs, garnish costs – lemon, salt and her opportunity costs)

So she usually sets up shop only on special occasions like these, at fairs and large public gathering.   She picks up a bag of corn from the central market early in the morning (6-7AM) takes it to the location, finds a good location and starts up the coal flames in time for customers. Malamma is great business person, she understands her customers (rainy days are better, men with their girlfriends / wives / kids buy easily) and is extremely positive and motivated. She knows that she has to be smiling and positive.  To stay competitive, she understands, location is key and has a strong voice to shout out and attract customers away from other vendors.

She works 12-14 hours a day.   She wants to build assets for her kids and educate them. Given her hard life, one might expect her to feel sorry for herself.  In fact she is happy and content, despite having  to work hard, travel long distances and bear the heat from the naked coal flame.

Talking to her is energizing, this lady who is so full of life and optimism.  She is not looking for pity or hand-outs but is working really hard to build a future for her kids, give them education and participate in the great Indian growth story.  She did not talk about what her problems were or what she does not have but focussed on what she wants to achieve.

One note: I did not notice a mobile phone with her, so there is still some market left for the operators 🙂

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