Rural-Focused Venture Capital

Why do you invest in SMEs?
We want to invest in entrepreneurs and support new businesses because they have a greater potential to create change. Compared to already-established businesses, new and emerging businesses generate more impact in terms of creating jobs and livelihoods, and in addressing vulnerabilities. When an entrepreneur comes to us, we ask them, “Are you creating livelihoods or reducing vulnerability, at what price are you reducing it, and were are you reducing it?” They need to convince us that they are doing all of those things but in a commercial way, and that it’s different from what the market has been doing.

If we can create livelihoods or help reduce vulnerabilities in remote rural areas, then we’re doing something groundbreaking. Of course once the impact has been established, our due diligence only focuses on commercial viability. For companies to be successful they need capital and that’s what we provide. But our capital is of two kinds – financial and intellectual. We provide more than just capital though. We aim to help them by creating SME ecosystems.

What do you mean by SME ecosystems?
Biologically an ecosystem is a community where all participants act as one system, where a network is defined by interactions. The whole idea is that entrepreneurs will get the support they need at every level. We work with our own networks and other national networks to help educate entrepreneurs about investing, for example how to write a business plan, and how to run a business. We introduce them to a large number of people that might be able to invest in them, advise them, and mentor them. We aim to create an end-to-end solution and all the opportunity for success. By setting up these ecosystems we’re being a catalyst for change.

Is it only a pre-investment concept?
No. One very important aspect of the SME ecosystem is post-investment mentoring. There is always a need for pre-investment mentoring because entrepreneurs need to understand issues such as governance, exposure, and transparency. But post-investment is very different – you’re talking with someone who has more confidence, is more capable, and who has the money in the bank. Their attitude is different and it can become challenging to help shape a business.

Sometimes you have to have a discussion that is in conflict with your own objectives. For example, we might make better commercial returns if the SME is less focused on social impact, or the SME might want to make too much social impact at the expense of financial returns. You need to be very skilled to help the company meet its impact objectives and to find the right balance with the financial objectives. It’s important that we agree with the entrepreneur on the right balance between the two, and to continuously do so.

What challenges do you face?
One of the biggest challenges we face is determining if an entrepreneur understands the social and commercial nature of his businesses. We’re the first investor in almost all of the SME’s we’ve invested in. We have to make the right choice of entrepreneur, taking a high risk that other investor are not willing to do. We go into geographies that nobody wants to go, where there is no infrastructure and things take a lot of time. But our biggest challenge remains being patient and persevering against the odds whilst at the same time helping the entrepreneur build the business.

So how do you know when it’s the right entrepreneur?
Entrepreneurs tend to be very clear on what they want and how they want to get there. We look for people that have strong ideas, and that believe in them passionately enough to be able to give up stable and less riskier employment options. They also need to be able to tell a persuasive story that convinces us that they clearly understand risk and challenges associated with their idea.

It’s not about the business plan because that can change frequently in early stage businesses. It’s about sensing the passion and knowing that the entrepreneur is able, adaptable, responsive, and committed to staying on course when things get tough. We also have to determine the true motivation of the entrepreneur. Sometimes people find it exciting to run a small local business, and can be distracted by media attention. These companies will either not scale or they will fail. With experience we’ve learnt how to read all of this – it’s intensive and it takes time.

What is your vision for the next ten years?
At present we manage close to USD 160 million and are looking to invest that in around 50 to 70 SMEs. In ten years we want to invest USD 1 billion in 300 SMEs. We are looking to take our experience from India to other countries. We believe we can be successful in countries where there’s a high density of low-income earners and a reasonable amount of entrepreneurial activity. Low-income populations in high-density countries always need basic amenities, just like India, and there are always entrepreneurs with ideas to meet these needs. This defines our vision and business model.

We’re currently raising a fund to take our model to Indonesia, Bangladesh, Pakistan and Sri Lanka. Of course, the culture, context, history, policy and regulations are different in each country. We will have to adapt our methods and approach with regard to these differences. That’s the challenge, but it’s exciting. The learning is immense. In the end, we strongly believe that our model is portable because it’s about meeting basic needs and they are the same worldwide – better livelihoods and better access to basic amenities. The way of doing business may change in each country, but the concept of investing and mentoring entrepreneurs and taking the risk to do so is what we want to share.

(Source: Kelly Barrett for Upsides)