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University of Cambridge – Business and

Poverty Leadership Programme

Aavishkaar India Micro venture capital

Vineet Rai, Co-founder and CEO

November 14, 2006


Business at Base of the Pyramid are complex

Local communities Small businesses External


environment

Working with
Supporting new
Integrating local government,
entrepreneurs and
communities into the competition,
established small
value chain customers and
companies
NGOs

The vision for intervention thus has to look beyond the


bottom line issues !
The Challenges of Small Business (I)
An Example: Servals Automation
Servals manufactures and markets kerosene burners which utilize 30% less fuel
than standard kerosene burners

Annual number of burners sold Annual profits (INR Million)


3
400,000

2
300,000

200,000 1

100,000 0
2003-04 2004-05 2005-06 2006-07

0
-1
2003-04 2004-05 2005-06 2006-07

Projected Actual
Note: Projections made at time of investment in Dec 2002. Dotted line represent current forecasts based on half year performance
The Challenges of Small Business (II)
Lessons Learned

A good product doesn’t guarantee a market: Innovation is not enough


–Marketing strategy is a frequent stumbling block
–Need to build sound capacity along with projections

Support needs to be patient and nurturing


–Take a long-term view
– Ride through the bumps

Relationships with entrepreneurs need to be close and open


–Ongoing feedback and advice
–Partners, not just investors
Involving Local Communities (I)

Challenge The intervention

Fragmented and weak suppliers


Recognized importance of strong
of textiles and other artisan
institutions across the value chain
products
Integrated backwards to work with
Missed connections and weak
local producer groups, NGOs and
points in the value chain
small businesses
Lack of supplier working capital Established a fund to create and
support community businesses

Product delays and quality issues Provided capacity building and


access to working capital
Sales growth limited by
production capacity Networked with other funding
Involving Local Communities (II)
Lessons Learned

Community based distribution chains need to be strengthened from


the bottom up

A corporation’s responsibility goes beyond its customers and


employees
–Significant role to play in supporting communities and players
across the value chain

Working with local community can provide financial as well as social


returns
Scaling up effort – Franchising
Social Businesses
It is clear that the effort to scale up is a must. One can look at two
possible strategy to do the same.

$
Approach OR Approach
$

A B $ $

$ $ $ $

the outreach of the a large number of new


existing organizations institutions have to be
has to be expanded created

Approach A is interesting but ….. Approach B has a multiplier effect to


growth.
Both approach working together would lead to maximum impact
Managing the External Environment (I)
The Intersection of Social Business

Earn Profits and


provide a return
Business to shareholders

Social
Social
Ensure business
business
connection to Regulate and
social goals NGOs Government develop a
and measure supporting
outcomes environment

The point of intersection can create confusion and complexity

The slide is inspired by a presentation at a recent conference by Mr Vijay


Mahajan, Founder of Baisx
Managing The External Environment (II)
Lessons Learned

Players in the operating environment are frequently working towards


different goals and under different assumptions

Social businesses needs to understand motivations of other players


• Crucial to develop risk management techniques to deal with likely
conflicts

Possible to look at other players as partners, but need to develop


roles and understanding early on
The Pie logic
I
The northern perspective I
I The sourthern Perspective

I
I
Investor Investor

I
Promoter

Promoter

I
I
I

Key Attributes I Key Attributes


I
Size Survival
Scale I Control
Growth I Contentment
I
Circa 2001

• Definite lack of economic activity at BOP


• Start-up businesses in rural India:
- Lack access to funding from conventional sources
Findings - Lack management bandwidth
- Seek hand-holding, operational & strategic support
• That entrepreneurs were not open to equity funding was a myth

• VC model was befitting, however, conventional VCs cater to big


businesses and seek high financial returns
Analysis • There was a need for an innovative VC approach to cater to
micro, small and medium enterprises (MSME)
• The model would seek socio-commercial returns for its investors

Intervention Aavishkaar India Micro Venture Capital Fund


The Fund aims to achieve both a Social and
an Economic Return
Aavishkaar Investment
Financial capital + Strategic advice +
Operational support + Contacts & network

Social Returns Economic Returns


•Ownership and empowerment at a •Aavishkaar works on a for-profit basis
grassroots level
•The fund expects to provide returns
•Livelihood creation and increased to its investors in the range of 12-18%
economic activity at BOP IRR over an investment horizon of 10
years
•Bridging the poverty divide and
enhancing entrepreneurial spirit
Fund Target Industries

•A significant growth area in rural India


Technologies •Strong contacts with IITs and IT incubators provide an advantage in scouting
for •Potential opportunities in software advancements for BoP financial services
development and technologies for health service delivery
•A huge opportunity: Despite a plethora of traditional crafts, India has only
1.2% of the US$ 100 Billion international handicrafts market
Handicrafts •Aavishkaar’s experience in the sector and a partnership with Fab India places
the fund in a unique position to help build this market
•The Fund seeks to invest into companies engaged in the power generation
Renewable using renewable sources such as biomass
Energy & Waste •This could include both independent power providers (IPPs) as well as
Mgmt manufacturers of related equipment
•Growth in rural retail is stimulating a large number of small start-ups looking to
supply to large retail initiatives such as Reliance, Big Bazaar etc.
Agribusiness •Other major agri-business opportunities exist in export markets of organic
foods etc. and in developing the marketing and distribution systems
•Aavishkaar will continue to seek out companies which provide
Rural innovative and affordable products and solutions that result in
Innovations resource savings for the rural population
•The fund will leverage its association with grassroots networks such
as the Rural Innovation Network etc. to source projects
Aavishkaar’s journey since 2001

Servals Tide
Automation Technocrats Net Systems A healthy pipeline
Resource efficient Micro-hydel & Technical Writing CK Technologies of 8 prospective
burners & sprinklers biomass energy & Accessibility Local Language S/W investments
2002 / Chennai 2003 / Bangalore2005 / Mumbai 2006 / Chennai

Aavishkaar Shree Kamdhenu Craftsbridge Naveengram Vortex


Electronics Indian handicrafts Marketing of Engineerin
set up in
Automated Milk Collection 2004 / Pune Agri-technologies g
2001 & Milk Analyzer 2005 / Jodhpur Rural ATM
2003 / Anand (Guj.) (Raj.) 2006 /
Chennai
Vaatsalya
Rural Healthcare
2006 / Bangalore
The Majority of Aavishkaar Investments are Showing
Strong Growth
Company revenues

300

250

200
Revenue (lacs)

150

100

50

0
2005 2006 2007E

SKEPL Craftsbridge N-Syst Servals


Tide Technocrats Naveen Gram CK Technologies
India’s Rural Environment Is Changing, and Aavishkaar is
Uniquely Positioned to Both Contribute and Benefit

Increasing economic activity in •Large companies and MNCs beginning to focus on the
rural and semi-urban India immense opportunities at the BoP
•An increasing number of entrepreneurs will emerge from this
dynamic market and look to Aavishkaar for funding
•Aavishkaar’s current companies receiving greater interest
from mainstream companies and investors

New industries taking hold •The retail and IT sectors are penetrating new communities daily
•Aavishkaar investee companies are first movers in this trend,
allowing Aavishkaar early exposure to a booming market
•Aavishkaar’s track record in rural IT solutions will help the fund to
identify the best innovations going forward

Quality entrepreneurs and •Top managers following the opportunity to rural markets
managers moving into rural •Aavishkaar entrepreneurs are successful professionals,
India entrepreneurs and community leaders

Aavishkaar have proven that the opportunity is there; The fund


must now scale up to capture it
Fundraising Efforts Are On To Develop a $10M Fund (I)
Fund Details

No. Features Particulars


1 Target Fund Size US$10 Million

2 Target Investors HNIs and Individuals

3 Final Closing Q1, 2007

HNIs - US$ 25,000 - 100,000


4 Minimum Investment Size
Institutions – US$1,000,000

5 Commitment Period 10 years from Final Closing

6 Bonus Hurdle rate 6%

3.5% pa during Investment period


7 Management Fees
2.5% pa of the Invested capital thereafter

8 Performance Fees 15% carried interest with 6% hurdle rate

9 Fund Manager Intellecap Venture Management Services


www.aavishkaar.org

Aavishkaar India Micro Venture Capital Fund


201 Atlanta Estate, Dr. Ambedkar Chowk
Off Western Express Highway, Goregaon (E)
Mumbai – 400 063, India.

Tel: (+91 22) 3253 5292 / Fax: (+91 22) 2877 8255
E-mail: vineet_rai@aavishkaar.org