A stake in everyman's dreams
Now even small and unglamorous businesses have the opportunity to grow, thanks to micro-equity.
For a school dropout and someone who had grown up doing odd jobs since his teens, H. Rajesh, 35, seemed to have done well for himself. Studio Essential, the unisex beauty salon that he and his cousin V. Dhayalan started in Chennai's upmarket Nungambakkam area in 2004 had grown steadily in reputation and size.
From 300 sq. ft initially, it had become a 2,500 sq. ft salon by January this year, giving tough competition to its branded rivals in the neighbourhood. The salon's success prompted Rajesh to think of opening its second outlet in the city. But funds proved elusive. "I did not have enough savings," he says, adding that the banks were willing to give a loan only against securitised collateral, which would have been just enough to meet only his working capital needs.
Rajesh felt frustrated and stuck, until he stumbled into VenturEast Micro-Equity Managers, which manages the BYST Growth Fund. Thanks to a Rs 15 lakh equity infusion and mentoring by the fund, he was able to open his second outlet, a 1,500 sq. ft salon in the posh Anna Nagar neighbourhood, barely five months later.
"The transition from a hairdresser to a businessman is not easy and I am still learning. If VenturEast had not stepped in, my expansion plans would have been delayed by three years. It would have taken even longer to run the business professionally,'' he says.
A whole host of small business owners, such as C. Raja, who runs a uniform manufacturing unit; S. Rajeshwari, who owns a printing press; M. Siva Kumar, who makes cast gold jewellery; and R. Vaidyanathan, who manufactures water level controllers, have set their growth ambitions rolling, courtesy the BYST Growth Fund, a microequity fund that targets neighbourhood businesses run by people who are not educated but are street smart with a canny business sense.
"These entrepreneurs are often from a lower middle class background with limited savings or parental help. Their personal assets are secured with banks for working capital requirements. They also go in for personal loans at huge interest rates to make up the deficit," says Sarath Naru, Founder and Managing Partner of VenturEast, a venture fund manager.
Naru says his entry into microequity was inf luenced by Washington-based International Finance Corporation, or IFC, which was an investor in several VenturEast funds.
The two joined hands with the Bharatiya Yuva Shakti Trust (BYST), a non-profit organisation which encourages micro-entrepreneurs, to create the first micro-equity fund - the BYST Growth Fund. VenturEast Micro-Equity Managers - formed as a partnership between VenturEast and Aavishkaar Venture Management Services, a pioneer in micro-equity - was the investment advisor to the fund.
It raised an initial $2.5 million from the IFC, the Small Industries Development Bank of India, or SIDBI, and some high net worth individuals.
Where does this fund fit in among the various financing models? "If a microfinance institution has $100 million, it will disburse it among thousands of impoverished people, while a typical venture capitalist will, perhaps, invest the same in 20 ventures. We will look at financing a few hundred people,'' explains Naru.
Adds Snigdha Rao, the fund's Chief Operating Officer: "The people we target do not have unique business propositions. They belong to an ecosystem where hundreds like them compete for attention. Quite often their businesses survive on volumes for which they need to be adequately capitalised.''
Rao and her team have had their share of challenges, beginning with the shortlisting of their clients. "It took us six months to do due diligence and get our first investee and two years to get the first five clients," Rao says. But the experience taught important lessons to the team. "Now the evaluation process takes just 30-45 days."
The VenturEast Micro-Equity managers are hoping to sign at least five deals before February next year, all from Hyderabad. Over the next 12 months Naru hopes to get a working model ready for every type of business. After that it will be 'plug and play', he says.
The fund managers also had to tackle issues of proprietorship. "Being a venture fund, we could only suggest an equity investment. Initially, entrepreneurs were bewildered. They did not want to give a 'stake' to an outsider,'' says Rao. Also, their businesses had to be converted into private limited companies for becoming eligible for equity funding. This required them to become more transparent, and pay their taxes. Besides, they had to read and sign a 50-page document in English, a language they did not understand.
Says Rao: "But once the entrepreneurs understood that the process was essential for growth, they agreed readily. We taught them to formulate business plans and follow up on implementation." Acknowledging the benefits of the exercise, Studio Essential's Rajesh says: "Now I know how much I spend and on what, and whether my enterprise is making profits. I have realised that if the processes are streamlined I can concentrate better on the business.''
How does the fund make money? "We get our returns from royalties. This is usually one to five per cent of sales or gross profit if the business is making money,'' says Rao. The yearly royalties are expected to help the fund recover its capital with some profits for the investor during the stipulated term, which is usually between five and eight years depending on the entrepreneur's requirement.
At the end of the term, the entrepreneur has to buy back the stake given to the fund, which is usually in the range of 10-15 per cent at a price of Rs 10 per share, adds Rao. The fund typically invests between Rs 12 lakh and Rs 15 lakh, but in some cases it could be as high as Rs 50 lakh. Take goldsmith Siva Kumar, for instance, who has always dreamt of owning a jewellery outlet. Today, he makes jewellery for retailers and gets paid just half a per cent of the cost of gold supplied by them. He can make at least 2.5 per cent of the cost of gold if he works with his own stock. "Not only will I be able to sell to varied customers, but I will also have a better turnover and margins and eventually realise my dream of having an outlet of my own,'' he says.
That moment may not be too far for Kumar, as VenturEast Micro-Equity Managers has decided to give him Rs 30 lakh worth of gold by way of share capital.
From 300 sq. ft initially, it had become a 2,500 sq. ft salon by January this year, giving tough competition to its branded rivals in the neighbourhood. The salon's success prompted Rajesh to think of opening its second outlet in the city. But funds proved elusive. "I did not have enough savings," he says, adding that the banks were willing to give a loan only against securitised collateral, which would have been just enough to meet only his working capital needs.
Rajesh felt frustrated and stuck, until he stumbled into VenturEast Micro-Equity Managers, which manages the BYST Growth Fund. Thanks to a Rs 15 lakh equity infusion and mentoring by the fund, he was able to open his second outlet, a 1,500 sq. ft salon in the posh Anna Nagar neighbourhood, barely five months later.
"The transition from a hairdresser to a businessman is not easy and I am still learning. If VenturEast had not stepped in, my expansion plans would have been delayed by three years. It would have taken even longer to run the business professionally,'' he says.
| Micro-equity vs other financing models Micro-finance Offers loans varying from a few thousand rupees to a few lakh and targets the impoverished segment Angel funding Provides equity to start-ups with some amount of mentoring, but looks at high-risk business models with exponential growth Venture capital Comes in at the angel stage for additional funding requirements or in the next stage when the business still has some risks Private equity Comes in later when the business has grown and the risks are almost mitigated and the company can, in the near future, approach capital markets for funds Micro-equity Provides equity to common businesses that are not startups but have reasonable growth potential; does considerable mentoring |
"These entrepreneurs are often from a lower middle class background with limited savings or parental help. Their personal assets are secured with banks for working capital requirements. They also go in for personal loans at huge interest rates to make up the deficit," says Sarath Naru, Founder and Managing Partner of VenturEast, a venture fund manager.
Naru says his entry into microequity was inf luenced by Washington-based International Finance Corporation, or IFC, which was an investor in several VenturEast funds.
The two joined hands with the Bharatiya Yuva Shakti Trust (BYST), a non-profit organisation which encourages micro-entrepreneurs, to create the first micro-equity fund - the BYST Growth Fund. VenturEast Micro-Equity Managers - formed as a partnership between VenturEast and Aavishkaar Venture Management Services, a pioneer in micro-equity - was the investment advisor to the fund.
It raised an initial $2.5 million from the IFC, the Small Industries Development Bank of India, or SIDBI, and some high net worth individuals.
Where does this fund fit in among the various financing models? "If a microfinance institution has $100 million, it will disburse it among thousands of impoverished people, while a typical venture capitalist will, perhaps, invest the same in 20 ventures. We will look at financing a few hundred people,'' explains Naru.
Adds Snigdha Rao, the fund's Chief Operating Officer: "The people we target do not have unique business propositions. They belong to an ecosystem where hundreds like them compete for attention. Quite often their businesses survive on volumes for which they need to be adequately capitalised.''
Rao and her team have had their share of challenges, beginning with the shortlisting of their clients. "It took us six months to do due diligence and get our first investee and two years to get the first five clients," Rao says. But the experience taught important lessons to the team. "Now the evaluation process takes just 30-45 days."
The VenturEast Micro-Equity managers are hoping to sign at least five deals before February next year, all from Hyderabad. Over the next 12 months Naru hopes to get a working model ready for every type of business. After that it will be 'plug and play', he says.
The fund managers also had to tackle issues of proprietorship. "Being a venture fund, we could only suggest an equity investment. Initially, entrepreneurs were bewildered. They did not want to give a 'stake' to an outsider,'' says Rao. Also, their businesses had to be converted into private limited companies for becoming eligible for equity funding. This required them to become more transparent, and pay their taxes. Besides, they had to read and sign a 50-page document in English, a language they did not understand.
How micro-equity works
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How does the fund make money? "We get our returns from royalties. This is usually one to five per cent of sales or gross profit if the business is making money,'' says Rao. The yearly royalties are expected to help the fund recover its capital with some profits for the investor during the stipulated term, which is usually between five and eight years depending on the entrepreneur's requirement.
At the end of the term, the entrepreneur has to buy back the stake given to the fund, which is usually in the range of 10-15 per cent at a price of Rs 10 per share, adds Rao. The fund typically invests between Rs 12 lakh and Rs 15 lakh, but in some cases it could be as high as Rs 50 lakh. Take goldsmith Siva Kumar, for instance, who has always dreamt of owning a jewellery outlet. Today, he makes jewellery for retailers and gets paid just half a per cent of the cost of gold supplied by them. He can make at least 2.5 per cent of the cost of gold if he works with his own stock. "Not only will I be able to sell to varied customers, but I will also have a better turnover and margins and eventually realise my dream of having an outlet of my own,'' he says.
That moment may not be too far for Kumar, as VenturEast Micro-Equity Managers has decided to give him Rs 30 lakh worth of gold by way of share capital.
