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Page 1: Challenges faced by First Generation Entrepreneurs in ... · Challenges faced by First Generation Entrepreneurs in India and key areas of intervention 5th July 2012 ... • The overall

© 2012 Intellecap. All rights reserved www.intellecap.com

Challenges faced by First Generation Entrepreneurs

in India and key areas of intervention

5th July 2012

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© 2012 Intellecap. All rights reserved 2

Abbreviation Expansion

AIF Alternative Investment Funds

BDS Business Development and New Market

Services

BFSI Banking, Financial Services and Insurance

BSE Bombay Stock Exchange

CGS Credit Guarantee Scheme

CGTMSE Credit Guarantee Fund Trust for Micro and

Small Enterprises

CIBIL Credit Information Bureau India Limited

CLCSS Credit Linked Capital Subsidy Scheme

DIC District Industries Centre

DST Department of Science and Technology

DSIR Department of Scientific and Industrial

Research

EIS Enterprise Investment Scheme

ERDF European Regional Development Fund

FGE First Generation Entrepreneur

GDP Gross Domestic Product

GBP British Pound

Abbreviation Expansion

IIM Indian Institute of Management

IIT Indian Institute of Technology

INR Indian Rupee

IPO Initial Public Offering

IT Information Technology

ITES Information Technology Enabled Services

MSE Micro and Small Enterprises

MSME Micro, Small and Medium Enterprises

NBFC Non Banking Financial Company

NHB National Housing Board

NKC National Knowledge Commission

NSE National Stock Exchange

NSIS National Small Industries Corporations

NSTEB National Science & Technology

Entrepreneurship Development Board

PSL Priority Sector Lending

R&D Research and Development

RBI Reserve Bank of India

Acronyms and Abbreviations (1/2) ACRONYMS &

ABBREVIATIONS

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Abbreviation Expansion

RUDSETI Rural Development and Self Employment

Training Institute

SBIRI Small Business Innovation Research

Institute

SCB Scheduled Commercial Bank

SCIF Seed Co-Investment Fund

SEBI Securities and Exchange Board of India

SIDBI Small industries Development Bank of India

SSIDC State Small Industrial Development

Corporation

SWC Single Window Clearance

TDB Technology Development Board

TePP Technopreneurs Promotion Program

USD United States Dollar

VC Venture Capital

VCF Venture Capital Fund

Acronyms and Abbreviations (2/2) ACRONYMS &

ABBREVIATIONS

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Executive Summary (1/2)

4

EXECUTIVE

SUMMARY

Introduction

• The overall objective of this project is to identify and advocate for a conducive policy framework for funding and

supporting first generation enterprises

• This is an interim project report that provides a comprehensive view of all the challenges that a first generation

entrepreneur (FGE) faces in setting up a business in India. The report also identifies broad areas of policy

intervention that can potentially foster an enabling entrepreneurial ecosystem in India

• To this end the team conducted primary research with various stakeholders in the Indian entrepreneurial

ecosystem (FGEs, financial institutions, mentor networks and incubators and government representatives) and

supplemented it with secondary research

Key Findings

• As of 2010, it is estimated that there were 18.8-22.6 mn FGEs in India, increasing at an effective rate of 4% per

annum. A low effective rate of growth of FGEs indicates high failure and sickness among FGEs especially in the

early stages of their enterprise

• The challenges faced by an early stage FGE range from limited access to institutional sources of finance to non-

financial challenges which include limited capacity building support, regulatory constraints and human resource

challenges

Financing challenges

− Access to finance is the biggest need for an early stage FGE, however there are limited sources of

institutional finance available to them

− Access to debt is a challenge due to bank‘s conservative lending practices and FGEs limited credit

worthiness. However there are policy enablers in place to increase supply of debt , though they are yet to

gain momentum

− Access to equity is constrained due to the nascent venture capital (VC) and angel investing space in India

and preference of existing investors for growth stage enterprises. Additionally, supply of equity is also

constrained due to inadequate investment readiness of FGEs

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Executive Summary (2/2)

5

EXECUTIVE

SUMMARY

Non-financing challenges

− FGEs have most need for capacity building support in the early stages, however, there is a limited presence

of incubators and networks to provide capacity building support to early stage FGEs. The current set of

incubators are mostly government owned, are set up in educational institutions and provide incubation

services predominately to technology based enterprises

− Various compliance norms and absence of a national body to accord requisite clearances present regulatory

hurdles for setting up and closure of a business

− Talent acquisition and retention is a challenge for enterprises across stages, but it is especially a

pronounced issue for early stage enterprises

• Analysis of the various challenges faced by early stage FGEs highlight two broad areas of policy intervention

that can create an enabling ecosystem for FGEs:

− Increasing the supply of early stage capital by focusing on angel networks and early stage VC funds

− Enhance capacity building support by strengthening the network of business incubators in the country

through greater private sector participation

• The findings of this report will be validated with a few ecosystem players and disseminated in a multi

stakeholder workshop

• Going forward the team will further analyze the above mentioned two areas of intervention and recommend

areas of policy change

• Intellecap will identify representatives from right platforms and actively engage with them to advocate the

proposed recommendations

Key Findings

Next Steps

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Contents

6

Introduction I

Overview: FGE Landscape II

Classification of Key Challenges Faced by FGEs III

Key Areas for Policy Interventions IV

Key Area of Intervention: Increasing Supply of Capital IV a

Key Area of Intervention: Enhancing Capacity Building Support IV b

Key Financing Challenges III a

Key Non- Financing Challenges III b

Next Steps V

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Contents

7

Introduction I

Overview: FGE Landscape II

Classification of Key Challenges Faced by FGEs III

Key Areas for Policy Interventions IV

Key Area of Intervention: Increasing Supply of Capital IV a

Key Area of Intervention: Enhancing Capacity Building Support IV b

Key Financing Challenges III a

Key Non- Financing Challenges III b

Next Steps V

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The engagement entails stimulating an enabling policy environment for

first generation entrepreneurship promotion in India

I)

INTRODUCTION

Context

• Entrepreneurs are a vital catalyst for India‘s

economy. However, the growth of first generation

entrepreneurs (FGEs) is constrained by lack of

access to finance and limited business support

• The focus of the current engagement is to (a)

analyze the challenges of FGEs (b) determine gaps

in the current entrepreneurship policy landscape

and (c) influence policies that create an enabling

environment for entrepreneurs to start, run and

scale businesses

Objectives

• Identify policies that constrain or enable the

entrepreneur‘s access to financing and other

support eco-system elements

• Engage with key stakeholders of the entrepreneurial

ecosystem to potentially influence changes in

policy or address policy gaps

Assess the policy

landscape for

FGEs in India

Conduct primary

and secondary

research to identify

the policy gaps

Understand

opportunities for

policy

recommendations

for an enabling

ecosystem

Detailed

assessment and

validation of the

potential

interventions/

recommendations

Dissemination of

the

recommendations

at multiple

platforms

Phase 1. Preliminary assessment of the ecosystem

to identify the challenges and policies affecting

FGEs in India

Phase 2. Assessment and validation of

policy recommendations

Phase 3. Engage policy makers and

potentially influence favorable policy

changes

1 4 5 2 3

Identify

representatives

from right

platforms to

advocate the

proposed

recommendations

6

Where we are in the engagement

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Features of this report

9

I)

INTRODUCTION

Scope Research Methodology

The following two methods were used to

complete the research for this report:

Primary Research

• Conducted in depth interviews and

workshops with FGEs, investors,

bankers, incubators, industry

associations, entrepreneurship

networks, angel networks, Ministry of

Science and Technology, and

association of MSME clusters

Secondary Research

• Reviewed government policy

documents and policy drafts

• Leveraged existing Intellecap

knowledge base, where available

Structure of the Report

Chapter 2 sets the context by providing a

brief overview of the FGE landscape in India.

This overview provides the definition of FGE,

broad estimates on the number of FGEs in

India, outlines needs hierarchy at various

stages of growth and the challenges faced by

them at early stages of growth

Chapter 3 delves into the challenges that

early stage FGEs face while trying to access

capital and other enablers that could help

them scale. We further identify whether the

challenges stem from causes internal to an

enterprise or due to lack of policies and

government interventions

Chapter 4 includes detailed analysis of the

key challenges for early stage FGEs to

understand the need for policy intervention

Chapter 5 concludes with a final assessment

of the report‘s findings and describes next

steps in the direction of making policy

recommendations

There are multitude of policies affecting

FGEs in India. However, to prioritize key

issues, the scope of this report has been

defined as follows:

• Focus on all aspects of doing business

in India with specific focus on access to

finance and capacity building measures

for FGEs

• Focus on FGEs only in organized

sector i.e. enterprises with legal

structures such as Proprietorship/

Partnership/ Public Limited. / Private

Limited

• Focus on policy interventions that could

address the challenges faced by start-

ups and early stage FGEs (3 - 5 years

in their business cycle)

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Contents

10

Introduction I

Overview: FGE Landscape II

Classification of Key Challenges Faced by FGEs III

Key Areas for Policy Interventions IV

Key Area of Intervention: Increasing Supply of Capital IV a

Key Area of Intervention: Enhancing Capacity Building Support IV b

Key Financing Challenges III a

Key Non- Financing Challenges III b

Next Steps V

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First Generation Entrepreneurs (FGE) are individuals who do not have any

immediate family history of entrepreneurship

Example of First Generation Entrepreneur

• Founder of a VC- funded startup?

• A fresh graduate with a business plan, part of an incubation program?

• A microfinance borrower taking a loan to buy a cow and sell milk?

All of the above

Who?

What?

• First Generation

Entrepreneurs do not have an

existing ecosystem to support

them and find it harder to run

businesses and raise capital

compared to second generation

entrepreneurs

• The challenges faced by an

FGE in setting up their business

differ across sectors/ regions/

stages of growth

Why?

11

First Generation Entrepreneur

refers to:

• All established entrepreneurs

(at any stage of the lifecycle of

the enterprise)

• Individuals with business ideas/

concepts intending to set up a

business

whose immediate families do not

have a history in

entrepreneurship/ setting up

businesses

II) OVERVIEW

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In 2010 the total number of FGEs in India ranged between 18.8 to 22.6 mn,

increasing at a rate of approximately 4% per year

12

1: NKC studied a random sample of 155 entrepreneurs out of which 63% were first generation entrepreneurs, National Knowledge Commission (NKC) Report, 2008; 2: Tata-NEN hottest start ups competition run by

a not-for-profit organization sampled ~600 start-ups in 2008; 3: MSME Annual Report, 2010; MSME Census 2007

II) OVERVIEW

Total enterprises in

MSME sector

(59.8 mn)

Enterprises in

unorganized sector

(30 mn)

Enterprises in

organized sector

(29.8 mn)

Eliminated enterprises in

unorganized sector

Source: MSME Annual Report

2010 and NCEUS Report

Source: MSME Annual Report 2010

Enterprises run by

first generation

entrepreneur

(18.8 mn)

63% of the total

entrepreneurs are

FGEs, NKC report1

Enterprises run by

first generation

entrepreneur

(22.6 mn)

76% of the total entrepreneurs

are FGEs, TATA-NEN Hottest

startup report2

• MSME census suggests that the sector is

growing at an effective rate i.e. accounting for

opening of new enterprises and closure of

enterprise at 4% per annum3

• Assessment of capital investments made in

FGEs enterprises suggest that most of these

enterprises are a part of the MSME sector

• The MSME sector is extremely heterogeneous

and FGE enterprises being a subset of the

MSME sector tend to have similar

characteristics

• The current study will focus on the FGE

enterprises that tend to create higher value-

added and have potential to scale both in terms

of operations and employee base

Estimation of FGE Population in India

A small aggregate growth (4% per annum) potentially indicates that churn rate in the new enterprise or FGEs is high – FGEs

experience number of challenges in starting and operating new businesses

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FGE landscape is extremely heterogeneous

13

Source: MSME Census 2007

NOTE: MSMEs in the organized sector are being used synonymously here with FGEs

II) OVERVIEW

Type of enterprises:

• Only 6% FGEs that are part of the organized sector maintain any financial accounts. These enterprises tend to file details of their

business operations such as investments, nature of operations, manpower with District Industry Centers (DICs) of the State/ Union

Territory. This set of enterprises are referred to as registered enterprises

• However, most of the FGEs in the organized sector do not maintain any regular financial accounts and are referred to as unregistered

enterprises

Industry of operation:

• FGE enterprise space is dominated by the services sector which accounts for 71% of the enterprises

• The services sector is witnessing a gradual increase in the number of knowledge-based enterprises mostly in information technology

and consulting. With an increase in the number of knowledge-based services enterprises, the value-added per unit in the services

sector is expected to increase

Legal structure:

• A very small segment of the registered enterprises in the organized sector are structured as private limited or public limited companies;

these enterprises generally tend to be in new knowledge based industry

• Majority of the enterprises (~95%) adopt proprietorships, followed by partnership form of organization primarily because this structure

requires lower legal overheads

• A large number of enterprises in the unorganized sector do not have any legal structure

Geography of operation:

• More than 55% of organized enterprises are in 6 states: Maharashtra, Tamil Nadu, Andhra Pradesh, Karnataka, Uttar Pradesh and

West Bengal

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The intensity and priority of needs of an FGE vary across stages of

growth

14

Seed stage Start-up stage Growth stage

Registration1

Talent

Infrastructure

Market

Linkage

Capacity

Building

Access to

Finance

1 Covers the spectrum from registering the legal structure of the enterprise to getting licenses for operations, registration under MSME Act etc.

II) OVERVIEW

Decre

asin

g o

rder

of needs for

an F

GE

Capacity building

• Financial literacy and planning

• Awareness on financial sources, instruments

• Awareness on avenues of finance access bank finance, external equity etc.

• Process and operations management

Information and advisory support

• Expert support on book-keeping

• Support for documentation for

registration, credit proposals

• Information on the legal structures for

operations

• Institutional equity from venture funds

• Debt in form of both working capital and

term loans

• Non-fund based products for enhanced

business operations

• External equity

• Unsecured credit

• Debt in form of both working capital

and term loans

• Access to seed capital

• Initial equity – founder‘s equity,

external equity

• Access to unsecured credit

• Government support for timely

clearances, approvals and inspection

process

• Support for documentation for

registration

• Acquisition of staff • Acquisition and retention of staff • Acquisition and retention of staff

• Premises and equipment – maybe a

simple office, or possibly a large,

modern factory; depending on what

the business activity is

• Access to infrastructure such as

power, water etc.

• Access to infrastructure such as power,

water etc.

• Customer acquisition, business

development and new market (BDS

services)

• Customer acquisition, business

development and new market (BDS

services)

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Capacity building and support

• District Industries Centres (DICs) to provide business development

support and information support to prospective and existing entrepreneurs

• Rural Development & Self Employment Training Institute (RUDSETI) to

train and promote micro entrepreneurship

• Business Incubators at major technology institutes

• Small Industrial Development Bank of India (SIDBI) Incubation centre for

new technology enterprises

• National Small Industries Corporation (NSIC) training and incubation for

enterprises

Seed and Start-up Stage

Business facilitation support

• Design clinics for product and packaging design support

• Support in credit rating – expected to facilitate benchmarking and adoption

of best practices

• Government Offset policy to increase business development opportunities

for enterprises

• State Small Industries Development Corporation (SSIDC) to facilitate

procurement of raw material for manufacturing units

• Collateral registry for immovable and movable collaterals

• Various schemes under MSME such as Transport Subsidy Scheme etc.

promotes infrastructure support

Growth Stage

Equity/Quasi Equity assistance

• SIDBI Foundation for Risk Capital – provide long term risk capital for new

and existing enterprises

• Quasi-equity instruments to micro and small enterprises such as BYST

fund

• National Equity Fund (yet to commence operations) to support green field

projects

• Micro venture funds such as Aavishkaar

Debt assistance

• Bank financing for new enterprises

Finance assistance

• SIDBI Foundation for Risk Capital

• India Innovation Fund

• Financing through bank and non-bank companies

• Government finance support schemes such as Credit Linked Capital

Subsidy (CLCS), Technology Upgradation Fund, CGTMSE to enable

finance access to enterprises without immovable collateral etc.

• Micro venture funds such as Aavishkaar

No

n-f

ina

nc

e S

up

po

rt I

nit

iati

ve

s

Fin

an

ce

Su

pp

ort

In

itia

tive

s

There are multiple agencies within the Indian entrepreneurial ecosystem

that help FGEs address their different needs II) OVERVIEW

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Most of the challenges faced by FGEs in running their enterprises occur in

the early stages

16

II) OVERVIEW

12%

25%

29%

29%

Taxation

Capacity buildingsupport

Governmentregulation

Access to finance

• The following are the major challenges faced by FGEs in setting up

an enterprise:

− Challenges in access to finance

− Challenges posed by regulatory and compliance processes

− Challenges in access to capacity building support

• High closure rate of 21% among enterprises indicate that most of

the challenges are faced by entrepreneurs in the early stages of

setting up a business

− Data from entrepreneurship support programs such as

Technopreneurs Promotion Programme (TePP), Small

Business Innovation Research Institute (SBIRI) indicates

that only 3-7% of the early stage entrepreneurs make it to

the growth stage despite incubation support

• Among the enterprises that reach the growth stage, ~12-13% tend

to be sick (The Report of Working Group on Rehabilitation of Sick

MSMEs) indicating that constraints such as inadequate access to

finance, capacity building support are few of the key reasons for

sickness in the sector

Key growth constraints for FGEs in India*

*N=2357; Respondents include nearly 1100 respondents own their businesses, more than 700 are senior managers of existing enterprises, and nearly 500 aspire to entrepreneurship but do not run an enterprise

Capacity building support includes access to knowledge and information and finding qualified staff

Source: The Legatum Institute Survey of Entrepreneurs, India

Percentage share of enterprises that transition to growth stage

21% Failure rate at early stages

of business1

Incidence of sickness in

growth stage enterprises2

Share of enterprises that

transition to growth stage3

Early stage FGEs need an enabling ecosystem including financial and non-financial support to reduce the incidence of

failure and sickness

17%

3-7%

Source: 1MSME Census 2007; 2The Report of Working Group on Rehabilitation of

Sick MSMEs, 3TePP and SBIRI data

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II) OVERVIEW The challenges faced by FGEs at the early stage of entrepreneurship can

be broadly classified as financing and non-financing challenges

Early stage enterprises experience multiple constraints that threaten to derail their growth trajectory and hence there is a need to provide an

enabling ecosystem for their growth and sustainability.

Availability of adequate institutional finance both in terms of debt and equity is one of the major challenges faced by early stage

entrepreneurs. However, challenges often go beyond financing, they also face multiple non-financing challenges such as inability to access

mentor networks, and other capacity building measures such as infrastructure, market linkages and to attract talent.

Non-financing

Challenges Financing

Challenges

Access to

Capacity

Building

Support

Regulatory

Constraints

Human

Resource

Challenges

Access to Debt Access to

Equity

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Contents

18

Introduction I

Overview: FGE Landscape II

Classification of Key Challenges Faced by FGEs III

Key Areas for Policy Interventions IV

Key Area of Intervention: Increasing Supply of Capital IV a

Key Area of Intervention: Enhancing Capacity Building Support IV b

Key Financing Challenges III a

Key Non- Financing Challenges III b

Next Steps V

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Key Non-

financing

Challenges

Access to

Incubators and

Mentor Networks

Regulatory

Constraints

Human Resource

Challenges

Key Financing

Challenges

Key Challenges

Access to Debt

Access to Equity

III

CLASSIFICATION

OF CHALLENGES

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One of the biggest challenge faced by FGEs in their early stages is

access to institutional finance

20

III A) FINANCING

CHALLENGES

Personal Savings

44%

Family Resource

27%

Debt 14%

Equity 12%

Grants 2%

Others 1%

Sources of startup capital

EARLY-STAGE

Idea Start-

up

Pilot

Roll-

out

Growth

Expansion Maturity

Revenue

Tim

e

FFF*

Angel Investors

Venture Capital Funds

Banks

IPO/ Acquisition

Company growth stage and funding sources

*Founders, Friends and Family

Source: Legatum Institute Survey of Entrepreneurs, December 2009

• The need for capital in the early stages of a venture is mostly addressed by non-institutional sources (FGE‘s savings, borrowings from

friends and family), with limited support from institutional sources (Angel investors; Venture capital funds)

− FGEs aim to raise debt (from banks and NBFCs) after they have infused some amount of equity capital in their enterprise

− Non-institutional sources of finance account for 71% of start-up capital for FGEs

− Among the institutional sources of finance equity and debt have the largest contribution with grant funding limited only to FGEs

mostly in the social enterprise space

• In this section we analyze the causes for limited access to institutional finance for FGEs with individual focus on access to debt and

access to equity

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Key Non-

financing

Challenges

Access to

Incubators and

Mentor Networks

Regulatory

Constraints

Human Resource

Challenges

Key Financing

Challenges

Key Challenges

Access to Debt

Access to Equity

III

CLASSIFICATION

OF CHALLENGES

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42

38

20

Accessing bank debt in the early stages of enterprise is a challenge for

FGEs

22

III A) FINANCING

CHALLENGES

13

38

49

Easy

Average

Difficult

Source: NKC Report on Entrepreneurship (2008), 1: Second Generation Entrepreneurs operating in the same business as that of their family

Perc

en

tag

e o

f

Resp

on

den

ts

Ease of access to bank debt across

stages of an enterprise’s growth

Ease of access to bank debt based on family

history of entrepreneurship1

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

First GenerationEntrepreneur

Second GenerationEntrepreneur

Very Easy

Somewhat Easy

Average

Somewhat Difficult

Very Difficult

Perc

en

tag

e o

f

Resp

on

den

ts

Startup Stage Growth Stage

• Access to early stage finance from banks is

perceived to be very difficult at the start-up stage but

becomes comparatively easy at the growth stage.

First Generation Entrepreneurs are particularly

constrained while accessing debt

• The access to bank debt is constrained due to

multiple factors such as:

− Limited access to collateral, limited

information on institutional finance and lack

adequate managerial know-how

− Risk averse lending practices of banks –

primarily due to high non-performing assets in

the small enterprise segment

− High delivery costs for servicing loans to

FGEs

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Early stage FGEs are unable to access bank debt due their limited

capacity and limited financial history

23

III A) FINANCING

CHALLENGES

Lack of collateral

• Early stage enterprises are characterized with limited access to both immovable and movable collateral, whereas financial

institutions prefer collateral based lending

• Financial institutions often insist on immovable collateral for securing loans. Manufacturing enterprises have access to primary

collateral in the form of plant and machinery; whereas service enterprises tend to operate in leased or rented premises and lack

any sort of primary collateral

Lack of financial history

• Enterprises in their early stage of business do not have any recorded transaction history and any financial records; whereas

banks assess all credit applications based on the historical financial performance of the enterprise

• Several enterprises mostly transact in cash and have little incentive to maintain proper financial records - as book-keeping

increases the cost of operation, most entrepreneurs do not maintain proper financial records

Limited capacity and skills

• With limited training and capacity building of entrepreneurs, enterprises experience significant challenges in resource

management, technology adoption and financial planning. In addition, limited understanding of and information on financial

products and services from formal financial institutions presents significant challenges in accessing finance

• This challenge is further exacerbated by the fact that in majority of cases early stage FGEs do not have access to other

experienced personnel who are competent in financial management and accounting

Low awareness among FGEs on available financial avenues

• In addition to poor or absence of financial planning and recording the entrepreneurs in the segment are not aware of the financial

needs, products available as well as have limited awareness of potential financing avenues

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Risk averse lending practices of banks and high transaction costs limit

the supply of debt to early stage entrepreneurs

24

III A) FINANCING

CHALLENGES

Most large banks adopt conservative policies to minimize both credit risk and cost of delivery, as a result a very small number of new and

high risk enterprises tend to get supply of debt from banks.

Risk averse lending practices

• Banks require FGEs to present past 3 year‘s financial data before processing any loan application and lack of any documented

financial information is one of the major challenges in the underwriting process

• The past experience of formal financing to the sector has a poor record, with high levels of non-performing assets. In addition,

inability of enterprises to provide adequate collateral to secure the loan, financial institutions typically tend to peg the value of loan

sanctioned to the collateral value

• Also, information asymmetry and opaqueness in the reported financial statements is one of the key reasons for financial

institutions not sanctioning higher working capital limits

− Financial institutions report that the opaqueness in the financial statements stems from inconsistency between reported

historic financial performance and projected future performance. A deeper assessment suggests that the financial

statements are often prepared for taxation purposes and don‘t accurately reflect the performance of an enterprise. These

records when used for securing finance often cause mismatch between past performance and future projections, leading

to rejection of applications or under financing

Cost of delivery

• Limited branch banking infrastructure increase the cost of acquisition for financial institutions, particularly in rural areas

• Further, high frequency of transactions with small transaction size increases the cost of service, as result many large financial

institutions tend to shy away from operating in the sector

• By distributing standard products financial institutions attempt to manage both risk and the cost of transactions

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Enablers put in place to ease credit flow to FGEs are yet to gain

momentum

Priority Sector Guidelines: Priority Sector Lending (PSL) guidelines set by the Reserve Bank of India (RBI) mandates banks to supply

debt to priority sectors such as agriculture, micro and small enterprises etc.

• However, as the banks mostly follow internal norms and are risk averse in lending to early stage enterprises, most of the supply

under PSL is directed towards early growth or growth stage enterprises that have financial track records and a proven history of

financial performance

Credit Guarantee Scheme: The credit guarantee scheme (CGS) for micro and small enterprise (MSE) segment provides default cover for

MSE credit in case of enterprise default. The scheme has been in existence for more than a decade, yet the penetration of CGTMSE has

been low

• The key factors quoted by financial institutions for lower penetration include lack of complete cover, lengthy claims filing process,

the need to book assets as non-performing before filing claims and length of the lock-in period - 18 months

Credit Information Bureau (India) Limited (CIBIL): CIBIL is the leading credit information company in the country, however, due to lack

of any historic credit data, information on many early stage entrepreneurs is not recorded in the current credit bureaus

• Currently, 146 credit guarantors, including 77 commercial banks (out of 169 commercial banks), have membership in the bureau

Collateral Registry: RBI and the National Housing Board (NHB) have set-up a collateral registry - the collateral registry provides

information on ownership and pledge history of a collateral

• However as MSMEs lack access to immovable collateral, financial institutions are experimenting with movable collateral;

however, the current collateral registry measures do not allow recording and tracking of information on movable collaterals

25

A number of enablers have been put in place to advance credit flow to MSMEs. An increase in the uptake of these enabling

policies can aid in increasing the debt access to FGEs

III A) FINANCING

CHALLENGES

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Key Non-

financing

Challenges

Access to

Incubators and

Mentor Networks

Regulatory

Constraints

Human Resource

Challenges

Key Financing

Challenges

Key Challenges

Access to Debt

Access to Equity

III

CLASSIFICATION

OF CHALLENGES

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Accessing equity is a challenge for an early stage enterprise

27

III A) FINANCING

CHALLENGES

• As mentioned earlier, equity accounts for only 12% of the total startup capital of an FGE. Early stage deals (less than INR 10

crores) accounted for less than 10% of the total VC investments in India in 2011

• The reasons for low access to equity by early stage FGEs are

− Nascent venture capital space in India with preference of existing VC firms to invest in growth stage firms , in few select

sectors

− Regulatory challenges such as limited exit options, frequently changing tax policies as well as operational challenges for

making investments in India

− Inadequate investment worthiness of FGEs due to weak business plans, lack of transparent financial records, lack of

appetite to absorb equity investments

Type of Investor Amount

Raised (INR) Dilution Exit Horizon

Founders,

Friends and

Family

10-50 Lakh 10-15% Limited

Angels/ Seed

Funds 1-4 crores 10-30% Short; Flexible

Venture Capital

Funds 4-20 crores 25-40%

5-7 years; till next

round of financing/

acquisition

Categories of early stage investors

Source: Startup Central (Feb 2012), NKC Report (2008), DealCurry

84 50 94 103 118 138

719 597

580

669

1,393 1,154

461 448 726

455

355 616

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011

Total VC investments (in INR crores)

Greater thanINR 50 crores

INR 10-50crores

INR 0-10crores

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FGEs are unable to access equity due to the limited number of VCs in

India and their distinct preference towards growth stage enterprises

28

III A) FINANCING

CHALLENGES

• The VC space in India is nascent due to multiple factors

− There are 3-4 prominent angel networks and approximately 200 VC

funds currently operating in India

− Most of the VCs are concentrated only in Tier I cities. VCs operate in

lean teams and hence have limited bandwidth to reach entrepreneurs

in Tier II and III cities

− Recent trends suggest that most of the VC firms invest in new

knowledge sectors such as e-commerce, BFSI, IT/ITeS

− No pure play early stage VCs: There are only a handful of VC

investors such as Aavishkar, India Quotient Fund, Seedfund, Accel

and Venture East which remain dedicated early-stage funds in India.

There is almost a complete lack of seed stage venture funding for the

sector in India

• Existing VCs prefer investing in growth stage enterprises

− The total number of early stage deals (less than INR 10 crores)

account for about 30-40% of all VC deals in India, however, in terms

of actual quantum of investment early stage investments account for

only 10% of VC investments, highlighting the fact that of the total

supply of venture capital in India, the flow to seed/ early stage deals is

very minimal

− Most investment manager‘s compensations are linked to the deal

sizes they invest in, contributing to the skew towards larger growth

stage investments

Receive an initial teaser or information memorandum (100)

Submit a tentative/ nonbinding term sheet (6)

Perform detailed diligence on a target

company (4)

Submit a

bid (2)

Source: India Private Equity Report 2012, Bain & Company, Deal Curry

Only 2% of startups evaluated by VCs end up

getting funding in India

19

10 21

28

29 36

22

25 26

23

48 49

7 6 11

7 6 9

1 1 3 5 3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011

Total number of VC deals in India

Greater thanINR 100crores

INR 50-100crores

INR 10-50crores

INR 0-10crores

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VCs count inadequate regulation and operational challenges as reasons

for limited supply of equity capital to early stage FGEs

29

III A) FINANCING

CHALLENGES

Inadequate regulation

VCs operate by investing in high-risk companies at their startup stage with untried business models that can potentially fail. However,

most investors opine that this risk taken by them in is not adequately rewarded by the current policy framework

• There are limited incentives for angels in the form of tax breaks or other monetary incentives that promotes early stage investing

• The Securities and Exchange Board of India (SEBI) notified alternative investment funds(AIF) regulations in May 2012.It aims to

create distinct private pooled investment vehicles and to regulate Venture Capital Funds, SME Funds, Social Venture Funds and other

registered or unregistered investment vehicles under one roof. The regulations aims to provide a clearer framework for VCs and PEs

while also equipping the regulator to monitor unregulated funds and encourage formation of new capital and consumer protection

Operational challenges

The investment process, from reviewing the business plan to actually investing in a proposition, can take a venture capitalist anything from

one month to one year but typically it takes between 3 and 6 months. This variation in gestation period stems from multiple factors:

• Concerns around transparency and governance of the investee enterprise

• Shortage of experienced fund managers with the right skill set and market knowledge to evaluate multiple investment proposals

applications

• Most fund managers do not prefer to invest in small deals due to operational challenges such as high transaction costs due to multiple

procedures that need to be carried out. The small ticket size of early stage deals do not justify the higher costs involved in conducting

the relevant due-diligence procedures

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Limited exit options and frequently changing taxation policy pose further

hurdles to VCs in supplying equity to early stage FGEs

30

III A) FINANCING

CHALLENGES

Limited exit options: The most common exit routes for VC funds in India are either stake sale to other funds through secondary

transactions or stake sale to strategic industry buyers

• Due to the nascent angel investment and venture capital environment in India, there is no noticeable trend of successful exits in India

which motivates investors to invest in growth stage enterprises with better exit options

• The recently introduced SME Exchange provides small enterprises with limited years of operation with an opportunity to raise equity

capital for growth and expansion and investors with enhanced liquidity/exit options. However, the SME Exchanges were launched in

early 2012 and a significant amount of awareness needs to be created before there is momentum and more SMEs list on the exchange

Changing taxation policies: VCs quote frequent changes in taxation policy as another roadblock to increasing investments

• Capital Gains Tax: Long term capital gains tax for investments in public companies is 10% as opposed to a rate of 20% for investments

in unlisted companies (mostly startups). The skew in the taxation structure does not reward the risk taken by the VCs

− However, a recent (May 2012) proposal allows long-term capital gains for private-equity investors to be taxed at 10% itself

• Tax pass through for VCs: Till March 2012, VCs registered with SEBI enjoyed tax pass through in respect of income received from

investment in domestic unlisted companies engaged in nine specified sectors. However, the Union Budget of 2012 proposes to restore

this pass through benefit to VCFs in respect of income from investments in all domestic unlisted companies by removing the sectoral

restriction

• „Startup‘ Tax: The 2012 Union Budget also proposed to tax any premium on issue of shares in excess of fair market value as income in

the hands of the investee company. This would have directly impacted angel investors in the country

– However the proposal was rolled back later in the year

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Early stage FGEs are unable to access equity due to inadequate

investment worthiness

• Lack of a robust business plan: FGEs need to identify how the company will expand and how they will attract right talent to support the

returns needed to justify venture investment. The business plan of an FGE usually lack in the following aspects:

– Financial feasibility of the startup with potential proof of concept

– Potential market for the product/ service offering

– Financial and Legal details of the enterprise

• Lack of competent and experienced management team: The management of most startups consists mostly of the FGE himself and

their partners. It is important that the FGE be open to professional management

• Lack of transparency in business operations: Most FGEs do not follow standard corporate governance/ compliance norms and

accounting practices which increases the trust deficiency of investors

• Lack of clarity among FGEs about venture capital model of investment: Awareness level among entrepreneurs about external

equity tends to be low – entrepreneurs view infusion of external equity as dilution of management control

– FGEs fear that they might not get favorable deal terms from VCs resulting in excessive dilution of stake

– Some FGEs do not have the appetite to absorb equity investments in the most efficient manner due their small size and non

amenable legal structures such as proprietorship and partnership

31

III A) FINANCING

CHALLENGES

Most early stage FGEs are unable to meet investment worthiness criteria, thus limiting the flow of equity capital to them

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The supply of equity capital to early stage FGEs can be increased by

greater participation of early stage VCs and angel investors

Financing

Challenges

Stakeholder

Perspective Internal External

Access to

debt

FGE

perspective

- Lack of collateral and financial history

- Limited managerial capacity and skill sets

- Low awareness among FGEs on available

financial avenues

Bank

perspective

- Risk averse lending practices

- High cost of delivery

- Enablers put in place to ease credit flow to FGEs

are yet to gain momentum

Access to

equity

FGE

perspective

- Lack of robust business plan and

inexperienced management team

- Lack of transparency in business operations

- Low appetite to absorb equity investments

VC/ Angel

investor

perspective

- Limited bandwidth for deal sourcing and due-

diligence

- Limited access to skilled manpower

- Inadequate regulatory support

- Limited exit options

- Changing taxation policies

The latter section of the report highlights the factors limiting the supply of equity capital to early stage FGEs and gives a snapshot of global

best practices

III A) FINANCING

CHALLENGES

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Contents

33

Introduction I

Overview: FGE Landscape II

Classification of Key Challenges Faced by FGEs III

Key Areas for Policy Interventions IV

Key Area of Intervention: Increasing Supply of Capital IV a

Key Area of Intervention: Enhancing Capacity Building Support IV b

Key Financing Challenges III a

Key Non- Financing Challenges III b

Next Steps V

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III

CLASSIFICATION

OF CHALLENGES

Key Non-

financing

Challenges

Access to Capacity

Building Support

Regulatory

Constraints

Human Resource

Challenges

Key Financing

Challenges

Key Challenges

Access to Debt

Access to Equity

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III B) NON-

FINANCING

CHALLENGES

Access to relevant capacity building support for FGEs in the early stages

helps the businesses stabilize and grow

Source: 1 - Supported by the India STEPS and Business Incubator‘s Association (ISBIA)

Incubation Intervention in the life of an FGE

Advice on

business plan

Infrastructure and

financing support

Access to skill and

competencies

Help with market

linkages New company

with assistance

New company

without

assistance

The success of an

capacity building

program

Eff

ect

Time

Idea

Start-up

Pilot

Roll-out

Growth

Expansion

Maturity

Revenue

Tim

e

FGE Lifecycle and Capacity Building Needs

Capacity Building

Need

• Higher closure rate and high incidence of sickness indicates

that the need for capacity building support is felt maximum in

the early stages of the entrepreneurship

• Incubators, mentor networks, accelerators are a few bodies

which provide a conducive atmosphere and a range of

critical support services to nurture and support a start-up

• Incubator programs provide startups with mentorship, advice

and practical training on technical, business and fundraising

topics to help them get from idea to product to launch and

beyond

• They typically take a small equity stake (5% in case of

incubators to 12-20% in case of accelerators) in exchange

for financial support and entry into the program

• As of now, the number of incubators in India is quite small

and mostly government owned1, private incubators are only

a handful but are growing gradually

• The current crop of incubators mostly provide mentoring and

network access support and are yet to provide services such

as business development and access to finance

• Most of the incubators in India are run in conjunction with

educational institutions and focus on technology based

enterprises

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N=16, Source: Identifying an Agenda for Action, Overcoming Indian Social Enterprise Ecosystem

Challenges, Ernst and Young, 20012, Intellecap Analysis

Incubator infrastructure in India is small, mostly provides mentoring and

network services and are largely government supported

• 75% of incubators use grant as one of the key sources of finance

− Shell Foundation and Rockefeller foundation are the active

donors in the space

• However, most of the incubators are government owned and

supported

− Out of 170 business incubators in India more than 50

incubation centers are supported by Department of Science

and Technology (DST)

− DST provide funds up to INR 5.5 mn to each startup supported

through their incubators and on an average fund ~100

enterprises every year through government schemes such as

DSIR‘S TePP, TDB seed funds)

− The current set of incubators mostly provide mentoring and

network access support

• Private sector has limited participation in supporting current set of

Incubators

− Only 12% of the incubators access finance through private

investors

− Private sector participation is gradually increasing through

accelerators which is a comparatively new phenomenon which

allows for greater funding support and more rapid testing of

products and/or business models

− 4-5 accelerators are currently active in the India

75%

50%

38%

12% 12% 12%

Grants Government Fee BasedServices

PrivateInvestors

Banks Others

Sources of finance for the incubators in India

11 11

8 8

6

4 3 3 3

2

Me

nto

ring

Ne

twork

Access

Re

se

arc

h

Advis

ory

Serv

ices

Fun

din

g

Infr

astr

uctu

re

Hu

man

Cap

ita

l

Tra

inin

gP

rogra

ms

Aw

ard

s

Eve

nts

Services provided by incubators in India

N=16, Source: Identifying an Agenda for Action, Overcoming Indian Social Enterprise Ecosystem

Challenges, Ernst and Young, 20012, Intellecap Analysis

III B) NON-

FINANCING

CHALLENGES

Source: Department of Science and Technology, Venture Center

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III B) NON-

FINANCING

CHALLENGES

The current network of incubators are mostly in technical institutions and

tend to support FGEs in the new knowledge/ technology domain

• Most of the active incubators in India are in educational institutes

such as Indian Institute of Technology (IITs), Indian Institute

Management (IIMs)

− While they are helpful from the perspective of connecting a

start-up to funding options, largely addressing the problem

of start-up funding, they are fairly selective in their choice

of enterprises

− Most of them tend to support enterprises in the new-

knowledge/ technology domains

• Government started the concept of incubators in academic

institutions / research labs with an objective of opening doors of

self employment for young Science and Technology graduates to

foster innovation; however there is a need for private sector

participation to increase the reach of incubators to other sectors as

well

Source: Venture Centre

71% 7%

2%

20%

University/ TechnicalInstitution Linked

Central/ R&D LabsLinked

Management Institutes

Others

Categories of incubators in India

26%

24%

7% 4%

39%

Biotechnology/ Agri-Business

Information andCommunicationTechnologyClean Technology

Engineering Services

Others

Type of enterprises supported by Incubators in India

―An academic setting has a lot of constraints. They are

mandated by government-set rules. Private accelerators, on

the other hand, attract more entrepreneurial talent, and

hence, can identify true agents of disruption"

Vijay Anand, founder of Chennai-based

Startup Centre

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III B) NON-

FINANCING

CHALLENGES

The incubator network in India is limited in its reach and capacity thus

posing a challenge for FGEs in accessing their services

• Till date, only 1,6002 enterprises have been incubated in India

− Incubation centers promoted by DST have incubated only ~800

enterprises

• Major reasons for the limited reach include:

− The current incubator network is predominantly government

funded and supported. The government has limited bandwidth to

scale the incubator network

Limited mentor networks and accelerators (only 170)

when compared to the number of FGEs (18.8 – 22.6

mn) existing in India

− Limited capacity of existing incubators - incubators can incubate

only 5-10 entrepreneurs or even less every year

− Lack of convergence of academicians, entrepreneurs, lawyers,

investors, angel networks, and infrastructure support at one

platform to provide business incubation services

60 per cent of business incubators never raised funds

for their startups, and only 10 per cent of incubators

ever realized an IPO3

Incubator Year of

establishment

Number of

incubatees till 2008

CIIE, IIM-A 2001 24

NSRCEL, IIIM-B 2001 6

TeNeT, IIT-M 1996 20

SINE, IIT-B 2004 26

TBI, IIT-D 2000 19

TREC-STEP 1986 182

TOTAL 277

Source: 1 - NKC Report on Entrepreneurship, 2008; 2 – indodev, Information for Development Program; 3 - Research by Harvard Business School across globe

Number of enterprises incubated by key incubators1

The most prominent incubators despite being in operation for more than a decade have shown limited success

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Non-financing

Challenges

Access to

Incubators and

Mentor Networks

Regulatory

Constraints

Human Resource

Challenges

Financing

Challenges

Key Challenges

Access to Debt

Access to Equity

III

CLASSIFICATION

OF CHALLENGES

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III B) NON-

FINANCING

CHALLENGES

Early stage FGEs count multiple compliance norms in the setting up and

closure of an enterprise as a significant constraint

• Starting a business along with getting construction

permits, electricity and registration of property in

India requires 57 procedures, takes 367 days

- The numerous approvals required to be

obtained by an entrepreneur prior to setting up

a business not only increases time involvement

but also pushes up the expenses of the FGE

• There has been no significant difference in the number

of years and costs (% of the debtor‘s estate) to wind

up a business over the past 5 years

- It still takes 7 years for closure of business

which is often demoralizing and results in a

considerable amount of social stigma in

starting a new business again

- Limited enforcement of creditor‘s rights in case

of liquidation of an enterprise increases the risk

perception and costs associated with financing

startups

58 57

390 367

2007 2012

Number of procedures

Number of days

Source: Doing business India, World Bank, 2012

10

7

9 9

2007 2012

Time in Years

Cost (% of estate)

Change in the number of procedures and days required

to start a business over 2007 to 2012

Change in the number of years and cost involved for

closure of business over 2007 to 2012

Though reforms have been introduced by the government of India to address the problem of multiple compliances, the

process still remains a formidable challenge for FGEs

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III B) NON-

FINANCING

CHALLENGES

Absence of a national body to accord requisite clearances is another

regulatory constraint faced by early stage entrepreneurs in India

• The existing legal framework does not allow one consolidated

department or agency at central level to accord all requisite

clearances

• Single Window Clearance (SWC) procedure has facilitated

the process of obtaining clearances

− There has been an increase of 14% in the number of

enterprise (with more than 10 workers) in states with

SWC norm

• However, discussion with entrepreneurs and industry bodies

suggests that it is still a challenge to start a business with the

SWC, the reason being

− There is a no independent SWC authority which can

function as a lead organization at central level for the

related process of approvals. Currently the system

operates under the main industrial development

authority whose core responsibility is industrial

promotion, financing, and infrastructure development

− The power to accord approvals is still vested with

various departments and agencies under their separate

statutes and notifications in a particular state

0.6%

-3.5%

14%

4.7%

States with SWC States without SWC

Less than 10workers

More than 10workers

Source: Catalysts for Entrepreneurship: Policies for Growth; Indian School of Business (June 2009)

*States with Single Window Clearance (SWC) - West Bengal, Assam, Rajasthan, Uttar Pradesh, States without SWC - Haryana, Punjab, Chandigarh, Bihar, Maharashtra

Percentage of enterprises established in states

with and without SWC between 2000-05*

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III B) NON-

FINANCING

CHALLENGES

Prohibitive labor laws and lack of experience in dealing with these laws

lead to the regulatory constraints in setting up or closing a business

Most early stage FGEs do not have the knowledge on how

to best address all the required compliances

• In a large number of early stage enterprises, the

entrepreneur carries out most functions on his own, with all

activities often undertaken by one person. Many business

owners have no experience in running a business, with

limited information on legal issues

• With limited knowledge and bandwidth, an early stage

entrepreneur faces challenge in complying with a lot of

paperwork requirement to meet the current compliance

norms for starting and closing a business

- This challenge is further compounded by the fact

that in majority of cases early stage FGEs do not

have access to other experienced personnel who

are competent in dealing with compliance issues

Prohibitive labor laws in terms of closing a business,

especially in the case of the manufacturing sector

• India has 45 laws at the national level and close to four

times that at the level of state governments that monitor the

functioning of labor markets

• These labor laws are often perceived to be too restrictive on

employers

• Despite repeated demands from industry for liberalization in

the regulatory framework, little legal change has been

allowed since the reforms began in early 1990s

―Labor is highly protected and Indian labor laws do

not allow hire and fire policy‖

―Labor laws that limit the mobility of labor forced

entrepreneurs to fear growth in employee strength‖

Dr. Tarun Das, Economic Advisor,

Ministry of Finance, India

Entrepreneurial India, Sculpting

the Landscape,

KPMG, 2009

Source: NYT India

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Key Non-

financing

Challenges

Access to

Incubators and

Mentor Networks

Regulatory

Constraints

Human Resource

Challenges

Key Financing

Challenges

Key Challenges

Access to Debt

Access to Equity

III

CLASSIFICATION

OF CHALLENGES

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III B) NON-

FINANCING

CHALLENGES

Talent acquisition and retention is a challenge for enterprises across

stages, but it is specially a pronounced issue for early stage enterprises

Source: Success and social enterprises: Understanding Scale-‐Up & Commercial Success, Villgro research program 2011-2012

• Attracting and retaining skilled manpower is one of

the biggest challenges faced by a number of early

stage entrepreneurs

• Primary research with entrepreneurs, MSME

associations suggests the following reasons:

− A startup is unable to offer the kind of

compensation or name recognition that is

offered by more established enterprises

− Inability of a startup to offer competitive

salary

− A number of people join smaller enterprises/

seed stage enterprises to gain experience,

often aiming to move to large corporates

which mainly look for skilled resources at a

later stage

60%

50%

35%

10%

30% 32%

42%

30%

Raising capital Hiring/Retaining

qualified staff

Building thevalue chain

Marketlinkages

Early stage

Growth stage

Comparison of various challenges across stages of

growth of an FGE

Recruiting qualified staff is one of the biggest HR challenges faced by startups

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Access to capacity building support for early stage FGEs can be

improved by increasing private sector participation

Non

financing

Challenges

Stakeholder

Perspective Internal External

Access to

capacity

building

support

FGE Perspective - Limited number of capacity building support providers

Incubator

Perspective

- Limited capacity of incubating

with each of the support provider

- Lack of convergence of academicians, entrepreneurs,

lawyers, investors, angel networks, and infrastructure

support at one platform to provide business incubation

services

- Limited private sector participation

Regulatory

constraints

FGE Perspective - Lack of requisite skillsets/ human

resource to meet the regulatory

compliances

- Multiple compliance norms in starting a business

- High time and cost involved in closure of business

- Prohibitive labor laws

Regulator

Perspective

- Absence of a central department to accord requisite

clearances

Human

resource

challenges

FGE perspective - Difficulty in talent acquisition and

retention

III B) NON-

FINANCING

CHALLENGES

The latter section of the report highlights the factors limiting capacity building support for early stage FGEs and gives a snapshot of global

best practices

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Contents

46

Introduction I

Overview: FGE Landscape II

Classification of Key Challenges Faced by FGEs III

Key Areas for Policy Interventions IV

Key Area of Intervention: Increasing Supply of Capital IV a

Key Area of Intervention: Enhancing Capacity Building Support IV b

Key Financing Challenges III a

Key Non- Financing Challenges III b

Next Steps V

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A robust ecosystem of angel investments and early stage VC funds

helps to enhance the flow of capital to early stage FGEs

47

IV A) INCREASING

SUPPLY OF

CAPITAL

• As mentioned in previous sections the first port of call for

institutional finance for any FGE is an Angel Investor

• The Indian angel investment space is nascent and there

are no comprehensive measure of the total quantum of

early stage investments

− It is estimated that as of 2011 there were 36 early

stage deals (less than INR 10 crores) at an

average deal size of INR 3.8 crore3

• In developed economies the estimated market sizes of

angel investment is comparable to the venture capital

markets (catering to growth stage firms)

− Since angel investors provide financing in the early

stages of an enterprise, the role of angels in the

developed economies is as significant in promoting

entrepreneurship as venture capital funds that

mostly tend to support more growth stage firms

Country ‘Visible’ Angel

Market Size 1

Estimated size of

total angel market2

Total VC

market

United

States

469 17,700 18,275

Europe 383 5,557 5,309

United

Kingdom

74 624 1,087

Canada 34 388 393

1: Angel Groups and Networks; 2: Estimates including investments by private individuals not linked to any formal angel network, 3: Source: DealCurry

Source: Financing High Growth Firms; The Role of Angel Investors (2011)

Estimates of the angel market and comparisons with

venture capital in 2009 (In USD)

Flow of capital to an early stage FGE can be significantly increased by focusing on means to expand angel and early

stage venture capital investment in the country

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Angels and VCs not only provide financial support to early stage FGEs

but also provide mentoring and network access support

48

• Provide investment in that stage of a business‘s lifecycle when most financial institutions deem it ‗too risky‘

Capital

• Most early stage investors tend to invest in industries where they have some prior knowledge or experience, thus aiding their investees in leveraging their contacts to support development

Network Access

• Most early stage investors tend to aid entrepreneurs in their decision making process by drawing on their experiences as ex-entrepreneurs and investors

Mentoring Support

In addition to increasing the flow of early

stage capital to FGEs, early stage

investors (angel investors and early

stage VC funds) also help build the

overall entrepreneurial ecosystem in the

country by providing capacity building

and mentoring support

IV A) INCREASING

SUPPLY OF

CAPITAL

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IV A) INCREASING

SUPPLY OF

CAPITAL

To enhance early stage investment in India, a number of operational

issues need to be addressed

Issues faced by early stage investors in India today:

• Nascent space with limited knowledge about angel investment:

− There is a need to educate FGEs about the concept of angel investment and what is the best time for them to approach angel

investors

− FGEs also need to appreciate the importance of a robust business plan and transparent business practices in order to be

considered worthy of any early stage investment

• Lack of incentives for early stage deals: The average deal size of early stage investments tend to be low (ranging from INR 25 lakh –

2 crore). The costs involved in executing these deals do not vary by deal size i.e. the number of procedures that need to be carried out

to conduct a deal remain the same irrespective of the size of the deal.

− Early stage investors do not have any tax incentives/ cost sharing methods that can help reduce the transaction costs

− Most early stage investors find its difficult to access the supporting infrastructure of lawyers, investment bankers, chartered

accountants etc. for carrying out transactions, as these entities tend to have high billing rates which further pushes up the

transaction costs

• Lack of exit options: In India most exits by angel investors have been to VCs in the subsequent rounds of an enterprise‘s funding.

However, this is unique to India as globally angels invest for about 7 years in a company and then choose an M&A exit or an IPO exit

• No capital support: Co-investment support from established public and private bodies could encourage the angel investors and early

stage to participate in risky early stage deals

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Policy makers globally have used various tools to enhance the flow

of early stage investment

50

Policy

Measure Country Details

Tax Incentives

Israel “Angel Law”: Allows investment deductibility, over three years, from any income source on investments of

NIS 25,000 to 10 mn in private high-tech companies, registered in Israel. In addition, the initial

investment is considered as capital loss on the day of investment

Italy Tax relief on capital gains from the investment if re-invested in startups within 24 months

United

Kingdom

Enterprise Investment Scheme (EIS): Taxation relief available to investors in EIS schemes up to 30% on

the amount invested

Co-investment

Funds

New Zealand Seed Co-Investment Fund (SCIF) of the New Zealand Venture Investment Fund Ltd: Provides NZD 40

mn of matched seed funding to support the further development of early stage investment markets

through a co-investment fund alongside selected Seed Co-Investment Partners

Scotland Scottish Co-Investment Fund: GBP 72 mn equity investment fund, partly funded by the European

Regional Development Fund (ERDF) for both angel and VC investors

England Angel CoFund: GBP 50mn business angel co-investment fund created with a grant from the Regional

Growth Fund to invest alongside business angel syndicates from across England

Support to

angel

associations,

networks and

groups

Setting up of national angel associations/federations of networks to support angel investors by:

− Raising awareness of the industry

− Representing the industry to policy makers

− Training and development of angel investors

− Providing a platform for the sharing of practices via conferences/ workshops etc.

Source: Financing High Growth Firms; The Role of Angel Investors (2011)

IV A) INCREASING

SUPPLY OF

CAPITAL

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Contents

51

Introduction I

Overview: FGE Landscape II

Classification of Key Challenges Faced by FGEs III

Key Areas for Policy Interventions IV

Key Area of Intervention: Increasing Supply of Capital IV a

Key Area of Intervention: Enhancing Capacity Building Support IV b

Key Financing Challenges III a

Key Non- Financing Challenges III b

Next Steps V

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Source: NBIA, Venture Center, Intellecap Analysis

1 – CAGR over 2007-08 to 2010 – 11; 2- NBIA Survey

IV B) ENHANCING

CAPACITY

BUILDING

SUPPORT

The small network of incubators in India is largely government owned,

with limited private sector participation

72%

17% 11%

21%

43%

20% 16%

Governmentowned

Private sectorowned

Academicinstitutions

owned

Others

India

USA

• India accounts for only 3% of the total incubators across the globe and has only

~1/8th of the total incubators present in USA

− In USA, business incubators assists more than 27,000 start-ups annually

while in India, incubators have supported 1,600 enterprises till date

− In addition, the number of enterprises incubated per year per incubator

ranges between 25 – 30 in US where as in India it is 5-10 incubatees per

year

− The success rate of incubated companies in USA (87-90%2) is also higher

than the incubated companies in India (60-70%) according to a survey

conducted by the Department of Science and Technology (DST)

• With 72% of the incubators being government owned/ supported, it is quite

evident that in India, it is still the Government who has identified the need to

support and nurture entrepreneurship through their NSTEDB program

− Ministry of Science and Technology is continuously increasing its

support towards research and development (R&D). It allocated INR

4,825 crore for the year 2010-11 for R&D activities which is a 12%1

growth over 2007-08

− However, the initiatives by government are mostly sector driven; for

instance, central government has decided to set up a venture capital

fund of INR 2,000 crore to promote R&D specifically in the

pharmaceutical sector

− There is a growing need for private sector participation in India to enable

the growth and sustenance of incubators and to expand the services to

other sectors as well

1400

1000

800

300 170

USA UK China Korea India

Total number of Incubators

across globe = 5000

Total number of incubators across countries 2009-10

Comparison of incubator sponsors across India and

USA

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IV B) ENHANCING

CAPACITY

BUILDING

SUPPORT

For effective private sector participation in capacity building support a

number of issues needs to be addressed

• Potential Partners

− India currently lacks convergence of government, and private players such as lawyers, investors, legal support, angel networks,

venture funds and infrastructure support at one platform to provide business incubation services. However, examples from

developed nations such as US, Europe suggest that a common platform to support the start-ups can help increasing the scale of

incubation services. Thus it is imperative to identify the list of potential partners who could come together to provide the capacity

building support

• Incorporation

− There is a need to identify different forms in which private sector can increase its participation in capacity building support. It

could be a hybrid model in the form of public private partnership or it could be pure play private sector incubator/ accelerator. As

of now there are very few pure play private sector incubators/ accelerators active in India

• Sources of fund

− The various funding options for the incubators could be one time grant from government/ DFIs, continuous support from

government or solely private sector contribution. However, the long gestation periods required for the incubatees, and their

relative insecurity, combine to make solely private funding of incubators a generally unrewarding prospect for investors. The

mismatch between relatively small private returns and the larger public benefits of incubation and business growth imply a good

case for public funding

• Revenue model

− There are 3 revenue models for business incubators: revenue from incubated enterprises, revenue from equity and brokerage

fees for raising finance, and ongoing government or donor funding. Most business incubation environments currently combine

elements of each of these, however there is a need to evaluate the pros and cons of each of these models and identify other

revenue streams to make the incubators self sustainable

• Operating model

− To increase private sector participation, it is important to provide some incentives to increase the scope of services provided and

the breadth of sectors

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Startup America is a White House initiative that was launched to celebrate, inspire, and accelerate high-growth

entrepreneurship throughout the nation

• In January 2011, President of USA called on both the federal government and the private sector to dramatically increase the

prevalence and success of entrepreneurs across the country

• The administration rolled out a set of entrepreneur-focused policy initiatives in five areas:

– Unlocking access to capital to fuel startup growth

– Connecting mentors and education to entrepreneurs

– Reducing barriers and making government work for entrepreneurs

– Accelerating innovation from ―lab to market‖ for breakthrough technologies

– Unleashing market opportunities in industries like healthcare, clean energy, and education

• Leaders in the private sector launched the Startup America Partnership, an independent alliance of entrepreneurs, corporations,

universities, foundations, and investors, joining together to fuel innovative, high-growth U.S. startups. Within just one year, the

Partnership has mobilized to make over USD 1 billion in business services available to a national network that will serve as many as

100,000 startups over the next three years

Convergence of government bodies and private sector participants in US

has helped in increasing the scale of business incubation centers

IV B) ENHANCING

CAPACITY

BUILDING

SUPPORT

Source: www.whitehouse.gov/economy/business/startup-america

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According to a report commissioned by the European Commission which benchmarked business incubators, incubators are more likely to

succeed when supported by a broadly-based partnership of public and private sector sponsors. There are examples, especially from

developed countries of private enterprises establishing incubators with government support

55

Public Private Partnership model in EU countries

• In the majority of EU countries, a funding mix based on the matching of national funding – usually up to a maximum of 50% of the

operations – and other sources such as regional/local public and private funding is the most common funding structure for an incubator

IMPACT OF THE PROGRAM: Below are two examples of success amongst many others across the UK:

- SETSquared (www.setsquared.co.uk/) a partnership between the universities of Bath, Bristol, Southampton and Surrey has raised over

£120 million of early stage funding and secured 1,000 jobs

- Wansbeck Life (www.nc4e.co.uk)—a traditionally, socially and economically challenged part of the UK, have delivered 85% survival

and success of their new and small business. The national average survival rate for new and small businesses is between 20% and

40%

Other developed countries too demonstrated success and scale of

incubators through Public Private Partnership

IV B) ENHANCING

CAPACITY

BUILDING

SUPPORT

Public Private Partnership in Israel

• Ministry of Industry, Trade and Labor, Israel, covers 85% of the expenditure for start-up enterprises‘ who stays in the incubators for up

to three years. If an enterprise succeeds, the support or loan is repaid by the incubator through royalties calculated on the basis of the

enterprise‘s turnover

IMPACT OF THE PROGRAM: A large-scale reform of the system was carried out in 2003. All incubators went through a privatization

process which gave ownership and operations to private-sector partners, but the incubators retained their public funding

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Contents

56

Introduction I

Overview: FGE Landscape II

Classification of Key Challenges Faced by FGEs III

Key Areas for Policy Interventions IV

Key Area of Intervention: Increasing Supply of Capital IV a

Key Area of Intervention: Enhancing Capacity Building Support IV b

Key Financing Challenges III a

Key Non- Financing Challenges III b

Next Steps V

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Going forward the team will conduct detailed assessment on the identified

areas of potential intervention

57

Assess the policy

landscape for

FGEs in India

Conduct primary

and secondary

research to identify

the policy gaps

Understand

opportunities for

policy

recommendations

for an enabling

ecosystem

Detailed

assessment and

validation of the

potential

interventions/

recommendations

Dissemination of

the

recommendations

at multiple

platforms

Phase 1. Preliminary assessment of the ecosystem

to identify the challenges and policies affecting

FGEs in India

Phase 2. Assessment and validation of

policy recommendations

Phase 3. Engage policy makers and

potentially influence favorable policy

changes

1 4 5 2 3

Identify

representatives

from right

platforms to

advocate the

proposed

recommendations

6

Areas of investigation for greater private sector participation

in capacity building support:

• What benchmarks should be used to identify the potential partners?

• What should be the legal structure of hybrid models of incubators vis-

à-vis pure play private incubators?

• What should be the sources of fund, revenue model and operational

structure for a successful incubator/ accelerator?

• What is the existing advocacy work being conducted for promoting

capacity building support in India?

Areas of investigation for increasing early stage investment:

• What is the definition of an early stage investor in India? What are the

mechanisms of identifying angel investors who are not aligned to

formal angel networks?

• What are the steps taken to educate entrepreneurs about existing

early stage investment in India?

• What are the existing and planned incentives for early stage investors

in India? Are there any proposed tax breaks/co- investment funds

planned?

• What are the plans to enhance exit options for early stage investors

in India?

• What is the existing advocacy work being conducted for promoting

early stage investments in India?

V) NEXT

STEPS

Specific areas of research going forward

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End of

Document

Contact Details:

Nisha Dutt

Director, Business Consulting

[email protected]

M: +91 8008111418 | T: +91 40 40300200 (extn:218)

5th Floor, Building 8-2-682/1, Banjara Hills Road No 12, Hyderabad - 500034, India

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APPENDIX

59

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APPENDIX 1 FGE Case Studies

Alma Mater I

Bhushan Agro II

Ennatura III

Kakatiya Energy Systems Limited IV

Saraplast V

• The team interviewed 5 first generation entrepreneurs across sectors and stages of growth. This was to identify the needs and to assess

the different financing and non-financing challenges faced by each one of them. The following slides will present case study on each of

the five entrepreneurs.

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APPENDIX 1 FGE Case Studies

Alma Mater I

Bhushan Agro II

Ennatura III

Kakatiya Energy Systems Limited IV

Saraplast V

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Alma Mater: Online brand offering custom-made school and college memorabilia

62 62

Brief Profile

Name of Promoters

Rohn Malhotra and Varun Agarwal

Year of establishment

2009 (website went live in November 2009)

Legal structure • Established as a partnership in August 2009

• Incorporated as a private limited on 13th December, 2011

Stage Early stage

Sector Services

Sub- sector E-Commerce (Retail)

Valuation USD 2 million

Geography • Bangalore-based company • Delhi office set up on 12th

January, 2012 • Has partnered with institutions in

Bangalore, Chennai, Ooty, Delhi, Dehradun etc.

Number of Employees

~15 employees (Across Bangalore and Delhi offices)

Overview of Product/ Service

• Alma Mater is a venture which aims to offer students and alumni of various schools and colleges across India with customized apparel (sweatshirts and t-

shirts) and other memorabilia such as mugs and stickers, to enable them to display the names/ logos of their institutions on custom-made campus

merchandise. In addition to schools and colleges, Alma Mater has also partnered with a sports brand

• They largely undertake retailing of customized memorabilia through their online store. www.almamaterstore.in. The customized garments supplied by Alma

Mater are made of 100% super combed cotton with fused rubber matte finish printing

Varun Agarwal (Left) & Rohn Malhotra (Right) Sample of a customized t-shirt

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Company Overview

63

Funding and

Growth

• Alma Mater is primarily self funded by Varun and Rohn who invested INR 1 lakh each at start-up. They also utilized private

sources for a short period by borrowing from a relative. However, there is currently no debt on Alma Mater‘s books

• Rohn mentioned that revenues have doubled every 6 months, as per the trend largely observed so far. As per an Economic

Times article dated June 2011, the Alma Mater website saw a monthly turnover of INR 7-8 lakh, estimated to increase to INR

15-20 lakh a month in the subsequent quarter

• While Alma Mater began with the vision of establishing a presence in the top 10 schools in every city, it is now expanding to

cover many more institutions across the country, and generate more visibility. Alma Mater has received significant media

coverage and accolades, including a mention in the "Top 25 Most Promising E-commerce Companies" list in the June 2011

edition of ‗The Smart Techie‟ magazine

• Debt finance has been a challenge as efforts to obtain loans from banks in the last 6 months to 1 year have not been

successful. Alma Mater is in discussion with equity investors, venture capitalists etc. with respect to potential equity funding

• Rohn Malhotra has a Bachelor of commerce degree and previously worked in the Risk Advisory Services division of KPMG.

Varun Agarwal has a Bachelors in telecom engineering, and is a film maker, having previously worked with a production house

in Mumbai. Varun has penned his entrepreneurial journey in a book titled „How I Braved Anu Aunty and Co-founded a Million

Dollar Company‟, which is scheduled to be published in March 2012 by Rupa Publishers

• When Varun and Rohn initially got sweatshirts printed for their own school, Bishop Cotton School, Bangalore, they realized that

the concept had immense potential since it was a relatively unexplored market, with dearth of an organized offering, especially

from the perspective of an online brand. In addition, Alma Mater's focus was on quality, branding and service, aiming to make

the end to end shopping experience more pleasant for customers

FGE Background

and motivation to

start enterprise

• Alma Mater primarily retails through their website, and also undertakes institutional sales which refers to bulk orders

• Alma Mater approaches school/ college/ alumni associations, and obtains their permission regarding logo usage, design etc. In

addition, royalty fees are paid per transaction to the relevant institution, thereby serving as an incentive to the institutions

• Marketing via social media networks is an important focus for the company. Alma Mater utilizes Facebook extensively for

marketing to reach out to it‘s target customers. In addition, the positioning of the brand as established by and targeted at ‗regular

people‘ and significant use of word-of-mouth promotion has had a viral effect and resulted in a strong connect to their brand

• Alma Mater does not undertake in-house manufacturing of their products. They source sweatshirts and t-shirts from vendors in

Tirupur (Tamil Nadu) and Ludhiana (Punjab), while smaller items such as mugs, caps etc. are sourced locally. Printing is

undertaken by a vendor in Bangalore

Business Model

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Challenges: Overview

64 64

Financing

challenges

• With respect to efforts to raise debt funding over the past year, Alma Mater faced a significant challenges to access debt,

even though the company was a 2 – 2.5 year old company with growing revenues, due to banks‘ requirement of provision of 3

years Income tax returns for lending. Therefore, Alma Mater was not considered eligible for debt funding in many instances

• While the company is exploring equity financing options, the founders would be keen to access debt funding if available, as

debt finance would not involve dilution of ownership at this point

Other challenges

• One of the biggest challenges mentioned by Rohn in Alma Mater's journey was getting vendors, institutions etc. to take them

seriously in the beginning, as they were young entrepreneurs. They realized the way to overcome the same was to

demonstrate results

• As vendor management plays a significant role in Alma Mater‘s business model, enlisting the right vendor is key. In addition,

market conditions also have an impact on the business. For example, the textile industry has taken a big beating in recent

time, leading to huge escalations in price. However, these increasing costs cannot be passed on to customers, thereby

necessitating Alma Mater to absorb the same

• Acquiring and retaining quality talent has been a significant challenge for Alma Mater, on account of the relatively lower

compensation structure inherent in a start-up and an incentive model dependent upon the growth of the company. While the

company faced issues with respect to performance and retention of a prior set of employees, the founders subsequently have

been more careful with respect to the quality of recruitment

• Lack of specific provisions for E-commerce companies was observed during the registration process, on account of which

Alma Mater was categorized as a retailer of garments. This was observed again when registering the company as a private

limited. While the E-Commerce space has seen significant growth in India and contains tremendous potential, there is a

considerable amount of uncertainty in the space regarding the government‘s stance on the same, and with respect to policies

and regulations governing this space

‘Entrepreneurship is about being the CEO, the HR person, the sales manager, and the tea guy’. – Rohn Malhotra and Varun Agarwal; India Today

Aspire (December 29, 2011)

Sources: Primary Research - interview with Rohn Malhotra, Alma Mater website, Economic Times article: June 2011 (Indian e-commerce: How it is evolving), The Smart Techie: June 2011 (Top 25 Most Promising

E-commerce Companies)

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APPENDIX 1 FGE Case Studies

Alma Mater I

Bhushan Agro II

Ennatura III

Kakatiya Energy Systems Limited IV

Saraplast V

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Bhushan Agro: Working towards aggregating farmers and integrating the agricultural

supply chain

66 66

Brief Profile

Name of Promoter

Mr. Chandra Dubey

Year of establishment

2010 (Registered in Gurgaon in June 2010)

Legal structure Private Limited

Stage Start-up

Sector Agriculture

Revenues (2011-12)

INR 10 lakh (Includes revenues earned from cultivation on 36 acres of land, consulting services and sale of R&D output)

Paid-up share capital

INR 10 lakh

Geography • Pilot in 2010 on10 acres in Sagar, Madhya Pradesh

• Current area of operation is one village near Sagar (M.P)

Number of Employees

5 full-time employees, with resources added for critical farming operations

Overview of Product/ Service

• Bhushan Agro is a start-up focused on agriculture utilizing modern scientific methods of crop production, aiming to achieve improved agricultural yield,

productivity and increased revenues

• Agricultural land is leased from farmers, and farming is carried out using modern scientific methods, equipment, systematic crop rotation, and water

harvesting techniques. The crop cycle consists of a monsoon crop (E.g. soybean) followed by a winter crop (wheat/ gram), with the possibility of undertaking

a third crop (E.g. corn/ pulses) as a spring crop. The company has plans to include vegetables and other high value crops in the future

Mr. Madhavan (Left) & Mr. Chandra Dubey (Right) Urad dal threshing, Mr. Santosh Shukla (Left)

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Company Overview

67

• The venture was initially self funded by Mr. Chandra Dubey, supplemented by borrowings from relatives and Mr. Amit Mittal

(VP-Farm Mechanization). In addition, equity was invested by Mr. Madhavan, who is the CTO of the company

• With respect to equipment, the company has invested in a 60 HP Arjun Mahindra tractor, chiseller, disc-harrow, fertilizer

placement machine, cultivator, land-leveler, soil probe etc. The investment so far amounts to approximately INR15 lakh, for

equipment and other capital expenses. In addition, a 2000 sq. ft. construction is being undertaken on a personal basis, which

could serve as collateral for future borrowing

• Growth plans for the company involve expansion to10,000 acres in approximately 5 years‘ time

• Mr. Dubey mentioned that the company is in discussion with banks regarding a potential overdraft facility with a limit of

approximately INR 20 lakh, upon Bhushan Agro reaching the 2 year mark

Funding and

Growth

• Scientific methods of farming are used via soil testing, soil nutrient balancing, methodical crop selection and management,

chiselling for greater absorption of rain water and siphon irrigation for optimal water usage, as required

• Land is leased at approximately INR 10,000 per acre per year for irrigated land, and INR 5,000 per acre per year for non-

irrigated land, with variable costs from seeding to harvesting ranging from INR 8,000 – 10,000 per acre per crop

• The company has roughly 41 acres of land under cultivation, with farming on 36 acres of leased lands and consultancy being

undertaken on 5 acres of land owned by the village sarpanch. Under the consultancy model, Bhushan Agro is entitled to 2% of

the sale proceeds of the output from the 5 acres of land

• Monsoon crops including soybean and urad dal have been harvested and sold, and wheat has been sown as the winter crop.

In addition, for R&D purposes, potato has been harvested and sold, turmeric harvested and moong dal has been sown

• The model aims to increase the annual gross revenue per acre from INR 30,000 for 2 crops, to INR 100,000 for 3 crops after 3

years using modern methods of farming

• While the leasing model is currently being followed, Mr. Dubey mentioned future plans to undertake a cost/ revenue sharing

model to enable provision of production benefits to the concerned farmer, whereby 50% of the costs and revenues would be

shared with the farmer, with respect to cultivation on his land. However, Mr. Dubey stressed the importance of demonstrating

the increased productivity of modern methods to the farmers, in order to ensure adoption of this model

• Marketing and sales is currently undertaken through local mandis. However, there are plans to enter into marketing tie-ups with

retail chains, existing food processing units etc. in the future, upon increased scale of operations

• The founders believe that increased and assured farm output will enable others to establish food processing units to produce

value added items. In subsequent years, the company is considering commencement of contract farming, once key processes

are standardized. In addition, seed production and processing is an integral part of Bhushan Agro‘s strategy

Business Model

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Innovation in farming practices: Mr. Chandra Dubey

68

Background of entrepreneur and motivation to establish the enterprise

• Mr. Dubey was previously associated for close to 3 years with Patni Computers, where he worked in the corporate marketing team and was also responsible

for marketing activities of the Enterprise Application Services (EAS) business unit. Prior to working with Patni Computers, Mr. Dubey has also worked in

organizations such as Tata Engineering and NIIT. He has an MBA from IIM, Lucknow, and a B.Tech from IIT, Kharagpur

• Mr. Dubey was inspired to start this venture based on an article he came across on Mr. Madhavan, who has extensive farming experience and utilizes

innovative methods of farming (currently serves as the CTO of the company). Mr. Dubey subsequently attended a workshop on modern methods of farming

by Mr. Madhavan in Chennai and was very inspired by what he has achieved, especially with respect to the potential to attain annual revenues amounting to

approximately INR 100,000 per acre

• Mr. Dubey is the founder of Bhushan Agro, and serves as the CEO of the company. He has 44% shareholding in the company

• Mr. Madhavan, who has over 21 years of extensive farming experience, serves as the CTO of the company and has 15%

stake. He is based in Chennai, and visits Sagar periodically during the year

• In addition, Mr. Amit Mittal is the VP-Farm Mechanization and Mr. Santosh Shukla is the VP-Business Development. They

both get sweat equity with a lock in period of 5 years

• While Mr. Amit Mittal is currently based in western Uttar Pradesh and visits Sagar periodically, Mr. Shukla is involved full time

in the company. Mr. Mittal will be involved full-time and based out of Sagar once the company reaches the requisite scale of

operations

Management

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• The company initially approached banks in Madhya Pradesh, however, it was not successful in obtaining debt funding. Mr.

Dubey believes that it was not the right time to approach the bank, and that once the company has a 2-3 years balance sheet,

it may have a better chance of obtaining debt financing

• While the company had initially managed with self-funding, external funding will be required to scale up, as the company is

aiming to reach 10,000 acres in 5 years. The company has approached banks again in recent times, with respect to an

overdraft limit to finance operations. ICICI Bank, whom Bhushan Agro has a current account with, has agreed in principle to

provide the overdraft facility upon submission of 2 years‘ audited results, revenue projections and business plan, INR 10 lakh

as paid up capital and the house under construction in the village as collateral

• While the company is open to equity infusion at this point, they are currently not focusing their efforts on the same. They are

considering an equity infusion of INR 5 crore next year to support the company in attaining its goal of an INR 100 crore topline

in 5 years. The founders are reasonably well connected with 5-7 investors, whom they are considering for equity

• Mr. Dubey mentioned that there is a need to find a solution to monetize the leased land, which is a challenge that they are

currently grappling with. As the agricultural land does not belong to the company, capital raising on the basis of leased land

has been a challenge. The company, being the lessee, is not eligible for government subsidies for purchase of equipment

(25-30% of cost of select equipment is subsidized), as government subsidies are given to the farmer, not to the company.

Hence, the company has to bear the full cost, increasing the cost of operations, or resort to make-shift arrangements such as

back to back agreements with the farmers to avail of the subsidy

69 69

Financing

challenges

Other challenges

Mr. Dubey stressed that there is a need for greater enablement of the leasing model in India, as the lack of clarity regarding the leasing model has led

to considerable uncertainty for the lessee with respect to subsidies, borrowing, crop insurance etc. He believes that there is a need for the

government to develop a conducive regulatory environment to enable the aggregation of small landholdings via the leasing model, with government

schemes working towards aggregating small farmers and assisting companies undertaking the same.

• Mr. Dubey mentioned that while financing was a key challenge previously, it has now become a secondary constraint, as

enlisting people with the right skills in the village (for the operation of tractors etc.) and ensuring adequate technical know-

how are significant challenges. The team‘s knowledge of farming and modern methods is a very important consideration. As

Mr. Madhavan and Mr. Mittal have significant technical expertise in farming, they have played a vital role in this regard. Mr.

Dubey mentioned that there is a burgeoning opportunity for educated personnel and companies engaged in activities similar

to Bhushan Agro, to serve as a bridge between the government and farmers with respect to technical knowledge and

dissemination

Challenges: Overview

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Challenges: Overview (Continued..)

70

Other challenges

(contd..)

• On-the-ground implementation has been a challenge as old myths related to traditional farming practices need to be busted,

bringing about a change in mindset amongst the farmers

• In addition, certain specialized tools required for farming are not available in India such as a seeding machine to ensure

seeds are properly sown and accounted for, irrigation tools to enable siphon irrigation, weeding tools which can be tractor

mounted etc. Mr. Dubey mentioned that while tools required across stages from sowing to weeding to pesticide spray to

mechanical harvesting are linked and integrated, there is a lack of uniform standards making such integration challenging as

of now

• Stamp duty is also a challenge due to the need for upfront payments. For example, if the company is taking a lease of 7

years, the company is required to pay stamp duty for 7 years upfront, which results in a heavy expense, as the payment of

stamp duty is in addition to the lease rentals required to be paid on a periodic basis

• With respect to the enforcement of contracts. Mr. Dubey mentioned that in the US, if the concerned farmer (lessor) desires to

sell the leased land during the lease period, the lease agreement is transferred to the subsequent buyer, and the lessee can

continue to do business in the same manner as before, with lease payments now being made to the new owner of the land.

However, Mr. Dubey mentioned that in India, while penalties are incorporated in the clauses of the agreement to protect the

lessee in case of sale of leased land during the lease period, there is a need to enable a smooth transition during the same

• Crop Insurance is another important consideration with respect to agriculture. While Bhushan Agro is currently not insuring

the crops cultivated, crop insurance will be considered going forward upon achieving greater scale. Mr. Dubey mentioned that

there is scope for greater development and clarity with respect to the availing of crop insurance by the lessee (companies

such as Bhushan Agro), and the lessor (farmer). There is a need for improved clarity and user friendliness to ensure proper

coverage for all crops without increasing premiums beyond reasonable limits

Sources: Primary Research - interview with Mr. Chandra Dubey, Business Plan of Bhushan Agro (January 2012): provided by Mr. Chandra Dubey, Company profile on Facebook, Linked In profiles.

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APPENDIX 1 FGE Case Studies

Alma Mater I

Bhushan Agro II

Ennatura III

Kakatiya Energy Systems Limited IV

Saraplast V

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EnNatura: Provision of eco-friendly, cost-effective and quality ‘offset printing’ inks

and solutions

72 72

Overview of Product/ Service

• Under the brand ‗Climaprint‘, EnNatura provides eco-friendly printing inks and solutions to printers and consumers. The key offering is eco-friendly printing

inks and washes to printers, while it previously also catered to the commercial offset-print requirements of companies/ organizations keen on green printing

• The key ingredient which makes the ink eco-friendly is resin, with a breakthrough in resin chemistry enabling the development of water washable inks. While

conventional printing inks are based on petroleum products, EnNatura's inks are based on vegetable oils. In addition, EnNatura's inks can be washed off the

printing press using a water based solution, rather than a hydro carbon/ petroleum based solvent as in the case of conventional inks

• Thus, it reduces hydrocarbon consumption, leading to a significant decline in volatile organic compound (VOC) emissions, and a reduced environmental

footprint. It is an economical option for printers, as the use of hydrocarbon solvent is eliminated during washing of ink, and the cost of water based washing

is negligible. In addition, it also contributes to economizing paper recycling as the ink chemistry enables easy removal from waste paper during recycling

Co-founders Krishna Gopal Singh (Left) and

Sidhartha Bhimania (Right) ClimaPrint Ink cans

Brief Profile

Name of Promoters

Sidhartha Kumar Bhimania and Krishna Gopal Singh

Year of establishment

Incorporated in December 2006 and incubated in June 2007

Legal structure Private Limited

Stage Start-up

Sector Manufacturing

Sub- sector Specialty chemicals (Printing inks)

Revenues INR 23.58 Lakh (For 2010-2011)

Geography • Incubated at IIT Delhi • Plant and Corporate office at

Faridabad, Haryana • Customers: Delhi - NCR region,

also exploring foreign markets

Number of Employees

11

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Company Overview

73

• The venture received a grant of INR 9 lakh under the Technoentrepreneur Promotion. Programme from the Department of

Scientific and Industrial Research (Ministry of Science and Technology), which funded the venture at start-up, along with INR 1

lakh contributed by the founders. In addition, the Ministry of Science and Technology approved a grant of INR 45 lakh in 2010,

which is being disbursed in tranches

• Navam Capital came on board as an investor in 2010, with equity investment amounting to INR 1.1 crore, in tranches. With

ambitious growth plans of scaling revenue to INR 500 crore by 2015-16, EnNatura is looking to raise USD 5 million over the

next 5 years to support scale-up. The company is also exploring western markets, with a focus on the United States, and is

carrying out pilots with Apple Inc. EnNatura has also tied up with a sales & marketing company in the U.S to reach out to

printing presses there

Funding and

Growth

• EnNatura‘s patented inks are developed using renewable sources which lessen hydrocarbon consumption. They emit zero

VOCs and reduce washing costs by eliminating the use of hydrocarbon solvent, as EnNatura‘s washes are aqua solutions

consisting of 95% water. EnNatura inks also enable high efficiency recycling of paper printed with their ink, as the ink

chemistry eases removal from waste paper during recycling, thereby consuming less energy and allowing for a smaller

environmental footprint during paper manufacturing

• EnNatura‘s charges to the printing presses amount to INR400/ kg for EnNatura ink, which is the same as the charges for

conventional inks in the market. However, it is more cost-effective for printers to use EnNatura when compared to regular inks,

where the cost of washing amounts to INR150 – 200, due to cost savings in case of EnNatura on account of water based

washing. According to EnNatura research, it results in cost savings to printers of 30% on printing chemicals

• The current production capacity of EnNatura is close to 50 metric tonnes (MT) per annum, as the manufacturing capacity has

now increased from 1 MT/ month to 4 MT/ month. The founders are keen to reach 25 MT/ month by December 2012, and aim

to increase the same to 10,000 metric tonnes per annum in the next 5 years

• With respect to customer acquisition, EnNatura not only presented the value proposition of Clima Print to the printing presses,

they also targeted the printer's customer i.e. the print buyer. EnNatura educated printers and print buyers regarding the

potential to adopt an eco-friendly solution without an incremental change in printing/ print procurement costs, and clarified that

is no need to alter production processes to use Clima Print. EnNatura‘s customers currently include 17 printing presses

• While indirect buyers (i.e. the printer‘s customer) largely consisted of green NGOs in the initial stages, it now also consists of

leading corporates, advertising agencies etc. such as GE Capital, Ernst & Young, Ogilvy & Mather, JWT, McDonalds, SAB

Miller etc. who have recommended ClimaPrint inks to their printers

• The company leverages digital media for promotion purposes. Apart from their website, the Linked in and Facebook networks

have been helpful as numerous printing companies and corporates are active on such networks and it easier to engage key

decision makers there. EnNatura has also received media coverage from Economic Times Now, the Wall Street Journal etc.

Business Model

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Commercializing water-washable printing inks: Mr. Bhimania and Mr. Singh

74

Background of entrepreneurs and motivation to establish the enterprise

• Sidhartha Kumar Bhimania holds a Bachelor of technology (B.Tech) in chemical engineering from IIT Delhi. He returned to India from the United States in

2005, midway through pursuing post-graduate studies in chemical engineering at Rice University in the United States

• Mr. Krishna Gopal Singh completed his BTech in chemical engineering from IIT Delhi. Post his graduation, he worked at Gas Authority of India Ltd. (GAIL) as

a process engineer. Mr. Singh consequently re-joined IIT Delhi's post-graduate program in chemical engineering, where he met Mr. Bhimania

• Offset printing is utilized by the publishing, media, advertising and packaging industries across the world. Petroleum-based inks utilized in traditional printing

releases hydrocarbon vapors called Volatile Organic Compounds (VOCs), thereby contributing to pollution. According to EnNatura research and analysis, in

the year 2007, 3 million tonnes of hydrocarbon-based printing inks and chemicals were consumed by offset printing, with worldwide VOC emissions from

offset printing amounting to approximately 500,000 tonnes

• Co-founders Sidhartha and Krishna were keen to create a research spin-off, and were evaluating research topics which could be commercialized. They were

hoping to undertake a project which was feasible with respect to resource requirements and could generate sufficient profit margins to be sustainable even at

a small scale. As a significant amount of research had been conducted with respect to inks, and there was a reasonable amount of development with respect

to the same, the founders decided to develop a marketable product based on the research conducted by IIT Delhi Professor Ashok Bhaskarwar, who

conceptualized the theory of 'water washable inks‘

• The development of water washable printing inks was undertaken by EnNatura in 2006. The founders saw an opportunity in making eco-friendly paper ink

utilizing vegetable oils and a water based solution, and developed a marketable product with respect to the same

• The venture was incubated at the Technology Business Incubator unit under the Foundation for Innovation and Technology Transfer at IIT Delhi in the year

2007. Filing of a patent application under PCT (Patent Cooperation Treaty) was undertaken in August 2009 and a U.S Patent application was filed in

2011.Customer trials and commercial production commenced in the years 2009 and 2011 respectively

• Mr. Bhimania is the CEO and co-founder of EnNatura. He heads marketing, management and operations at EnNatura

• Mr. Krishna Gopal Singh is the CTO and co-founder of EnNatura. He heads technology and product development at EnNatura

• Dr. Ashok N. Bhaskarwar is the ‗Scientific‘ co-founder of the company, based on whose research EnNatura‘s water-washable

inks were developed. He is the PetroTech Chair Professor and Head of the chemical engineering department at IIT Delhi. Mr.

Bhaskarwar obtained his PhD from the Indian Institute of Science, Bangalore, in 1987

Management

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Challenges: Overview

75 75

Financing

challenges

• The establishment of EnNatura is described by the founder as a bootstrapped operation, with a large amount of bootstrapped

R&D undertaken with crude equipment. While the company has been provided with various government grants, the process

was relatively slow as the company had commenced efforts to obtain grant funding from 2007, but was able to raise the same

only by 2009. As start ups largely work on cash flows, slow disbursement of grants was a challenge for EnNatura, partly

contributing to delays in establishment, limited scale of the company etc.

• With respect to debt funding, Sidhartha stated that there is a lack of understanding regarding debt funding options etc.

amongst entrepreneurs, and hence there is a need for training on how to access debt as an instrument

• Sidhartha mentioned that accessing debt finance could be a challenge on account of low turnover and small scale, and

believes that the company will become more attractive from a debt finance perspective as it scales. Some potential options for

debt financing mentioned by Sidhartha include soft loans (simple interest rate of 5% per annum) from the Technology

Development Board (Department of Science & Technology, Government of India), debt finance from SBI (EnNatura has an

overdraft facility with SBI), Intellecash etc.

• Sidhartha mentioned that the company is trying to shorten its‘ credit cycle which is currently around 60-70 days, and that there

is a need to increase supplier credit, and avail of working capital finance as the working capital requirements of the company

will increase with scale-up of operations

• Sidhartha stressed that raising venture capital funding for a green chemicals company is difficult in India, and took a fairly long

time. In addition, private equity investors in India are not able to value such companies easily. Sidhartha opined that equity

investors are keen to see growth of the enterprise before they can commit large amounts of capital, hence he believes that the

right time for EnNatura to absorb venture capital would be end of this year

Other challenges

• Poor equipment and infrastructural support was a key challenge for EnNatura at start-up stage. As EnNatura was the first of its

kind start-up at IIT Delhi, infrastructure was limited, with few provisions for specialized infrastructure. In the initial stages, the

founders undertook development of ink at a tin shed in IIT Delhi, which had previously functioned as an IIT lab, but had not

been used since. While the incubator did not have a lab, the founders were allowed to use the labs at IIT Delhi. As they had

relatively no access to usable instruments, requisite instruments were fabricated in local areas. For example, a machine to

measure the viscocity of ink was fabricated for around USD 60 locally (would have actually cost close to USD 20,000)

• Low production capacity was another concern, even though production processes were established. Key problems faced have

been with respect to scaling up the production capacity, supply at large volumes, and refinement of the product to the right

quality. Though the ink works fine in smaller printing presses, certain quality issues have been observed at a larger scale, with

respect to two perspectives; the level of technical expertise and equipment/ infrastructure used. Sidhartha mentioned that the

company is trying to partner with industry experts, to overcome technology gaps faced

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Challenges: Overview (Continued..)

76 76

Other challenges

• Significant efforts were undertaken by EnNatura regarding customer acquisition, as distribution channels were already fairly

well established, and there was a general lack of awareness amongst printers regarding the advantages of using a green

product. In addition, there was a perception that using a green product would be more expensive. Hence, there was a strong

need to establish market acceptance of the product by explaining the value proposition of such a product to potential

customers and demonstrate the economic proposition of such a product to printers. While EnNatura initially highlighted the

‗green‘ aspect of the inks to printers and printers‘ consumers for increased awareness and differentiation of the product, the

company also focused on the strong economic proposition to entice printers, on account of associated cost savings

• Sidhartha mentioned that market entry for a technology entrepreneur dealing with a product that requires business to business

(B2B) marketing is challenging from various aspects. These include devising an appropriate sales strategy for selling to

enterprises, pricing, management of working capital and payment terms etc. There is a need for capacity building regarding

B2B sales and marketing and increased information on market linkages and suppliers

• The policy framework in India is not considered to be conducive for start ups, as entrepreneurs end up spending a significant

amount of time in paper work and obtaining approvals, while they would rather focus on the product/ service. Sidhartha

recounted his experience when he began building a factory in Faridabad as he refined the EnNatura ink. He was approached

by numerous local officials who asked him to acquire various approvals and licenses, such as the local tax office, municipal

corporation, health safety office, chemical disposal agency etc. Therefore, he hired a lawyer to deal with the numerous

demands and rules which kept cropping up. There is a need to streamline the process for a start-up and make it faster, as the

current process is fairly cumbersome and bureaucratic, and involves a substantial amount of form filling to obtain various

licenses and approvals such as factory licenses, pollution approvals etc. There is also a need for greater information regarding

government regulations and schemes

• Human resources was not considered to be a major problem area for EnNatura as labor in the printing ink industry is not very

expensive, as per Mr. Bhimania. In addition, as the company has experienced people from the printing ink industry and

specialty chemicals industry on the board of directors, it has enjoyed considerable support in terms of technical expertise and

business development

Sources: Primary interview with Sidhartha Bhimania, EnNatura and Clima Print websites, Coverage by Economic Times Now's StartingUp, The Wall Street Journal – India (November 2011); „From Fitness to E-

Commerce, India‟s Startup Challenges‟, The Washington Post (November 2011); „Why Silicon Valley should fear India‟

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APPENDIX 1 FGE Case Studies

Alma Mater I

Bhushan Agro II

Ennatura III

Kakatiya Energy Systems Limited IV

Saraplast V

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Kakatiya Energy Systems Limited: Manufacturers of automated energy saving lamps

and innovative lightning systems

78 78

Brief Profile

Name of Promoter

P. R. Lakshmana Rao

Year of establishment

Started in1999

Legal structure • Established as Private Limited • Incorporated as Public Limited

in 2008

Stage Early stage

Sector Manufacturing

Sub- sector Electronic Lightning Control

Revenues ~ INR 3.5 crore in 2011-12

Geography Headquarters in Hyderabad with operations across India, middle east and South east Asia

Number of Employees

Over 18 permanent employees

Overview of Product/ Service

• The company is engaged in the manufacture of four main types of switches - nature switch series, sign switch series, save switch and the Swadeep series;

the nature switch series and Swadeep series are automatic outdoor light switching devices that are widely used for industrial purposes; the Swadeep series

carries a higher load capacity in comparison to nature switch series. Save switch offers automatic dimming of HID lamps

• The company presently has patent rights and other IP for its products and is in the process of obtaining ISO 9001 and CE certification to strengthen its

brand

Installation at Raj Bhavan Road, Hyderabad

Mr. Rao (in the center) with his colleagues

at his office in Hyderabad

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Company Overview

79

• The main activities carried out by the company are procuring and testing of electronic and mechanical components, testing sub

systems, parallel assembling of mechanical components, and sub systems, testing the final product, providing environmental

protection, labeling, and dispatch

• The company imports raw material from Taiwan, Hong Kong, Singapore, Japan, and US; raw materials imported are light

emitting diodes, batteries and micro-switches

• Kakatiya Energy Systems Private Ltd. follows two model for the sales of their manufactured products

- Model 1: Outright sale of the products ---- the conventional model.

- Model 2 : Offering supply, installation, commissioning and maintenance of the systems on the basis of sharing a major part

of the energy savings - The Energy Service Company (ESCO)

• Major source of revenue is through the conventional model however ESCO offers an enhanced revenue stream; they have

state wide distributors in India and country wide distributors abroad especially in countries such as Turkey, Iran, UAE, Saudi,

South Africa, Mauritius, Philippines, Malaysia

• The marketing offices are based out of Delhi and Hyderabad to cater to Indian market; activities such as molding, mounting of

electronic components, and soldering are outsourced to other companies

Business Model

• The project was initially self funded, supplemented by other partners to the tune of INR 80 lakh

• In 2009-10, the company had planned to start a manufacturing facility in Uttaranchal due to tax benefits and incentives in the

area. The total capital expenditure on the project was expected to be INR 10 crore, of which the company had received INR 1.5

crore from Bennett Coleman and Company Limited (The Times group) in the form of equity share capital. The remaining

amount was expected to be raised through private equity under the financial advice of ICICI Bank Limited. However, the plan

was not executed as the company was not able to raise adequate funds

• The company plans to open two assembling plants each in Middle east and South east Asia for export operations

• Mr. Rao is keen to explore equity as an option in near future; as the projected sales of the company account to INR 10 crore in

next one year; This would contribute to higher valuation of the company and will delay the dilution of ownership in the company

Funding and

Growth

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Mr. Lakshmana Rao: Pioneer in energy conservation through automated energy

saving lamps

80

Background of Entrepreneur and motivation to establish the enterprise

• Mr. Rao prior to setting up Kakatiya Energy Systems Pvt. Ltd. attempted another enterprises engaged in the development of photo sensor based products,

and introduced ‗RAKSHA®‘ Auto Dipper for automatic control of automobile headlamps. He is a Chartered Accountant by qualification but turned an

entrepreneur and an electronic engineer by practice. Improving Road Safety has motivated him to start the venture.

• Mr. Rao is instrumental in creating the company and the new family of lighting controls for energy conservation by introducing automated energy saving

lamps and innovative lightning systems; high involvement of labor and cost in manual controlling of lightning circuits motivated him to start the venture. The

lighting automation offers a substantial scope for conservation and contributes to reduction of Green house Gases

• Mr. Rao is the founder Kakatiya Energy Systems Pvt. Ltd., and serves as the managing director of the company. He has 35%

shareholding in the company

• Mr. GVS Rao, who has over 20 years of experience, serves as the Director-marketing and production management of the

company

• In addition, Mr. R.Subba Rao, Mechanical Engineer is the Director-quality check and Mr. Ramesh, an electrical engineer is the

Director-new projects

Management

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Challenges: Overview

81 81

Financing

challenges

• Mr. Rao consider lack of easy and adequate funding as one of the biggest challenges in the growth of his firm. He had to

discontinue his business of producing auto-dipper due to lack of finances. He received INR 16 lakh from IDBI bank, however

these were under-estimated fund projection and were not sufficient to scale up the production

• In his second initiative ―nature switch‖ he had initially managed with self-funding, external funding will be required to scale up.

The company has approached banks in recent times, however due to lack of adequate collateral, it has been quiet difficult for

Mr. Rao to access debt finance. He had a working capital loan from Corporation bank for a few years, but very recently closed

down the account. Due to cash comfort from revenues. Kakatiya Energy Systems has also undergone credit rating done by

CRISIL, which was quiet easy and streamlined process however, according to Mr. Rao it has not enabled the firm in getting

access to easy finance

• Mr. Rao feels that there are not many early stage equity investors in new product based businesses in India. VC and PE will

join at growth stage

Other challenges

• Mr. Rao mentioned that while financing is the major constraint, enlisting people with the right skills and ensuring adequate

technical know-how are significant challenges

• Low awareness of the benefits of energy conservation by automated energy saving lamps and innovative lightning systems is

another challenge faced by Mr. Rao. According to him, it requires market building and market linkage support and adequate

manpower with required skill-sets

Mr. Rao considers lack of adequate and easy access to finance as one of the major challenges faced by him in the growth of his business. Primarily

due to lack of collateral he has not been able to avail debt from banks while equity investors prefer to invest in e-commerce businesses as they yield

higher and quicker returns

Source: Primary Research – Interview with Mr. Lakshmana Rao; Rating Report, CRISIL 2010

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APPENDIX 1 FGE Case Studies

Alma Mater I

Bhushan Agro II

Ennatura III

Kakatiya Energy Systems Limited IV

Saraplast V

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Saraplast (Brand – 3S Shramik): Provision of portable sanitation and waste

management solutions

83 83

Brief Profile

Name of Promoter

Rajeev Kher

Year of establishment

Started in1999. Manufacturing plant established in 2006

Legal structure Private Limited

Stage Growth stage

Sector Services

Sub- sector Portable Sanitation and Waste Management

Net Sales ~ INR 10 crore

Geography Headquarters in Pune with operations largely focused in West and South west India

Number of Employees

Over 200 across India

Overview of Product/ Service

• Variety of product designs for different uses such as Indian toilets, Western toilets, Toilets for physically challenged, Urinals, Washstand, Security cabin,

Shower cabin

• Different service contracts for different clients including evacuation of liquid waste, cleaning of septic tanks etc.

• Units are often provided for free and only the servicing is charged

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Business Model Overview

84

Manufacture and

assemble units at plant Urban Slum

Events

Construction site Import cabin

walls and roof

Source raw

materials

locally

Cleaning truck unit with two

technicians, a driver and a

supervisor. 70-75 toilets to be

cleaned on a single route

Manufacturing Servicing

Pay-per-use

Arranged by the

builders, the end

users do not pay

High-margin

need-based

deployment

•Average revenue per unit = INR 3,500 – 4,500 (USD 93 – 100) per month

•50 usages per day per unit on an average

• Sanitation solutions also provided through an innovative ‗pay-per-use‘ facility and social enterprise model (management by local Self Help Groups, NGOs

etc.) to increase awareness and hygiene amongst communities

• Additionally, the design of the portable toilets is innovative in terms of energy efficiency and water savings.

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Mr. Rajeev Kher: Pioneering portable sanitation solutions in India

85

Background of Entrepreneur and motivation to establish the enterprise

• Rajeev Kher, Managing Director and Founder of Saraplast is a management graduate from Symbiosis, Pune with 13 years of experience. He has worked in

India and abroad in marketing, strategy, sales and business development prior to starting this company

• Mr. Rajeev states that merely 20% of the urban population has access to water /flush toilets connected to sewage system, while its only 3% for the rural

population. Also, over 1000 children die everyday because of the lack of sanitation, and this is something Rajeev Kher wanted to change. When he saw

portable toilets being used in the United States, he saw the potential impact something like this could have in India, from the perspective of both business

potential and social impact. Thus to improve the sanitation facilities available in the country, he introduced the concept of portable sanitation products with

the unique concept of manufacture, service and lease in India

• Two family members are on the board of Saraplast

- Rajeev Kher, Managing Director. He is a pioneer of the portable sanitation movement in India and the visionary behind the

concept, elected now as member of Board of Directors of PSAI (Portable Sanitation Association International www.psai.org)

and CEO

- Ranjit Kher, Executive Director, is an execution and planning expert and manages the expansion and day to day operation

• Other senior management includes Ulka Sadalkar, Director Production who manages the factory and all related technical and

design aspects and Noshir Colah who is the Investor Nominee

Management

• Mr. Kher was able to access debt and equity both

• Mr. Kher mentioned that the company approached an impact investment fund, largely because it wanted to leverage on the

access to the social enterprise eco-system, and on account of the rapport he developed with the promoter of the same

• Shramik wants to strengthen its business model to cater to additional segments other than its primary business of construction

by developing a retail model for slum sanitation. It is intended to install toilets under the slum sanitation model at different

locations across 5 cities – Pune, Mumbai, Delhi, Chennai and Bangalore in a phased manner

• In the next 1 year they wish to grow to 1.2 million toilet cleaning services and by 2013 to grow to 2.4 million toilet cleaning

services per year within slums, urban infrastructure sites and events

Funding and

Growth

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Challenges: Overview

86 86

Financing

challenges

• Access to finance was a key challenge at the start-up stage for Saraplast. Banks foresaw significant risk in the business and

questioned the feasibility of the model, since it was an innovative concept in India and hence, were skeptical about financing

the same. In Rajeev‘s own words ―I approached bank for a loan of INR 2 lakh; bank officials laughed at the proposal probably

because nobody had approached them before me for such business proposition‖ which demonstrates how banks are fairly

conservative and often resistant to offering loans to a start-up, at times with preconceived notions regarding innovative

business ideas

• While bank debt would have been the preferable mode of financing, due to a lack of access to bank debt in the initial stages,

Mr. Kher recounted that he was required to approach private financiers, and obtained personal loans at extremely high

interest rates (ranging from 22 – 24%)

• Scale has also been a challenge for Saraplast, as it is a capital intensive business. Mr. Kher believes that while the company

has grown to be more attractive from the perspective of bank financing over the years, due to an established track record and

year-on-year growth, bankers would still prefer to lend to traditional companies such as an IT firm etc.

Other challenges

• Low market demand and low awareness of the benefits of sanitation facilities presents another challenge for Saraplast;

educating people, changing their mindset and spreading the message of hygiene, awareness and dignity consumes a lot of

time. These posed challenges with respect to scale-up and required a strong need to establish market acceptance of the

product and service. Initially, Rajeev had to offer complimentary services to constructions sites, who after seeing the tangible

benefits of the service, agreed to pay. According to him it is still difficult to monetize the service even in places that have

urgent need (E.g. government schools etc.)

• Mr. Kher mentioned that one of the biggest challenges faced by Saraplast has been with respect to the perception of

standards regarding sanitation and the products/ services offered by Saraplast. He stated that there was a substantial gap

between the level of standards as perceived by the government, private parties etc. and those of Saraplast, as Saraplast aims

to provide clean, hygienic, eco-friendly sanitation solutions and effective waste management techniques. This gap often

adversely affects the concerned parties‘ willingness to pay for Saraplast‘s offerings, and hence there is a strong need to

convey the importance and value proposition of the same

Gaining acceptance of the product/ service concept, need and viability was stated as a key challenge by Mr. Kher. He described difficulties faced in

pitching the idea to bankers, potential customers etc. as it was an innovative idea, and there was a need to demonstrate the intrinsic value of the

product/ service .

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Challenges: Overview (Continued..)

87 87

Other challenges

• Acquiring skilled human resources as a part of the team was described as a significant challenge by Mr. Kher due to the non-

glamorous and unconventional nature of the business, which often makes it difficult to attract sound professional acumen.

According to Mr. Kher, ―we need to hire people who are ideologically aligned to our goals and should have deep

understanding of ‗What we do‘ and ‗Why we do‘‖

• Getting the urban poor to pay for something they have not needed before is a huge challenge. With rampant open defecation,

potential users have neither had to pay for the service nor worry about waste disposal; also affordability varies in different

places, hence pricing needs to be adjusted for the diverse markets. For instance, in Delhi, a monthly charge of INR 150 per

month for multiple uses of the toilet is accepted by the slum households, but in a place like Sangli, a small city in

Maharashtra, the acceptable amount is as low as INR 30

• Sewerage connection, water connection and electricity for installation of mobile toilets at slums pose challenges as these

facilities are not available in most of the slums and in cases with the available facilities, 3S require permissions from multiple

urban municipal and government authorities. Mr. Kher mentioned that there is a need to engage the government as a partner,

and to demonstrate the viability of the model

• In addition, with respect to the slum model, Mr. Kher mentioned that collection of money is a challenge, as day-to-day

operation and payment collection is undertaken through an ‗inclusive‘ model involving the users

Source: Primary Research – Interview with Mr. Rajeev Kher; b-smart magazine – Jan-Mar, 2010, Vol 1, Issue 1; Clean India Journal, September 2010

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APPENDIX 2 Details of the FGE and investor workshops conducted

• The team conducted 3 FGE workshops to identify the needs and financing and non- financing challenges faced by FGEs. The team also

conducted one workshop with investors to identify the biggest challenges faced by them in supplying capital to FGEs

• The following slides present the list of participants at each of the workshop mentioned above

FGE Workshop - CODISSIA I

FGE Workshop - NIA II

FGE Workshop - NASE III

Investor Workshop IV

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List of participants for FGE workshop at Coimbatore District Small Scale

Industry Association (CODISSIA)

Sl. No. Name of the entrepreneur Name of the enterprise

1 Mr. Kandhaswami. M Anandha Fabrications (CBE) Pvt Ltd

2 Mr. Surulivel. S Prakash Gears

3 Mr. Ramesh Babu. M.V Paramount Platers

4 Mr. Kumar. A Sree Balaji Enterprises

5 Mr. Ponnuswamy.E.K Suriya Machines

6 Mr. Ramamurthy. R Sri Rang Industries

7 Mr. Vijayakumar.K Chalanger Pumps India Pvt Ltd

8 Mr. Thirugnanam. V Meridian Mediteck

9 Mr. Sashidharan. K.V Equipments India

10 Mr. Karthikeyan.M Venkatapathy Foundry

11 Mr. Ramarathinam. V. R Squaretex Super Casting

12 Mr. Shasikumar.R Metro Metal Finishers

13 Mr. Jaikanth.D Ramdevs Motors

14 Mr. Nagappan.K NK Engineers

15 Mr. Selvaraj.V Excel Metal Processes

16 Mr. Gandhikumar.D Gandhikumar Foundry

89

APPENDIX 2

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List of participants for FGE workshop at Naroda Industrial Association

(NIA)

S. No. Name of the entrepreneur Name of the enterprise

1 Rayjibhai Patel Milestone industries

2 Shri Navroz Tarapore H. T. Engineering

3 Dr. Vadekar ICO Pharma

4 Sailesh Patel Bhavani Industries

5 J V Shah Shreenath Orgochem

6 Nimesh Patel Asiatic Chemical

7 Pankaj Patel Rakesh Chemical Industries

8 Ram kumar Aggarwal Akshya industries

9 Sagar Shah Shah industries

10 Satish Aggarwal Continental Chemical

11 Moulin Shah Shree Swati texdyes

12 Udhyan Patel Maruti Dyes

13 Mr. Solanki Leap Dye Chemicals

14 Mahesh Patel Mayur Dyes

15 Deepak Patel Ambika Dyes

16 Prashant Kumar Prashant Industries

90

APPENDIX 2

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List of participants for FGE workshop at National Association of Social

Enterprises in India (NASE)

S. No. Name of the entrepreneur Name of the enterprise

1 V Murali Rural Shores

2 Rajeev Kher Saraplast

3 Sweta Mangal Ziqitza Healthcare

4 Shilpi Kapur Barrier Break Education

5 K. Chandrasekhar Forus Health

6 Anup Akkihal Logistimo

7 Pankaj Patel Rakesh Chemical Industries

8 Ashwin Naik Vaatsalya

9 Neelam Chhibber Mother Earth

10 Sanjay Gupta English Helper

11 Jacob Matthew Idiom Design and Consulting

12 RK Misra Change India, Member of BJP

91

APPENDIX 2

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List of participants for investor workshop at Sankalp Forum

92

APPENDIX 2

S.No. Name Designation Organization

1 Vinod Keni Chief Financial Officer Aavishkaar Venture Capital

2 Pankaj Jain Principal Impact Law Ventures

3 Richard Alderson Co Founder & Director UnLtd. India

4 Neera Nundy Co Founder Dasra

5 Gaurav Mehta CEO & Founder Project Dharma, Gajam India

6 Randall Kempner Executive Director Aspen Network of Development Entrepreneurs (ANDE)

7 Rajesh Sharma AVP Brand Capital

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APPENDIX 3 Details of the interviews conducted

• The team conducted interviews with financial institutions, and ecosystem players to gain the perspective from the industry on the needs

and financing and non- financing challenges faced by FGEs.

• The following slides present a brief profile of all the interviewees

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Brief Profile of Interviewees (Equity and Debt Providers)

S. No. Name Designation Organization

1 Mr. Bejul Somaia Managing Director Lightspeed Venture Partners

2 Mr. KG Subramanian Chief Financial Officer Nexus Venture Partners

3 Mr. Nikhil Khattau Director Mayfield India Fund

4 Mr. Siddharth Tata Agricultural Portfolio Manager Acumen Fund

5 Mr. Satish Andra Venture Partner Draper Fisher Jurvetson

6 Mr. Hemendra Mathur Managing Director SEAF India Agribusiness International Fund

7 Mr. C. Shekhar Kundur General Partner Ventureast APIDC

8 Mr. S Gnanavel Deputy General Manager, SME Banking Bank of Baroda

9 Mr. Brahmanand Hegde Managing Director & CEO Vistaar Livelihood Finance

10 Ms. Satyavathi Dinker Deputy General Manager, Small and Medium

Enterprises

State Bank of India

11 Mr. R.K. Das / Mr. Amit Sethi General Manager/ Manager Small Industries Development Bank of India

(SIDBI)

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APPENDIX 3

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Brief Profile of Interviewees (Ecosystem Players)

S. No. Name Designation Organization

12 Prof. Krishna Tanuku Executive Director Wadhwani Centre for Entrepreneurship

Development, Indian School of Business

13 Mr. Hemant Seth Joint Director, MSME Federation of Indian Chambers of Commerce

and Industry (FICCI)

14 Mr. Mukesh Gulati / Mr.

Abhimanyu Bisht

Executive Director/ Manager Foundation of MSME Cluster

15 Mr. Anil Joshi Vice President Mumbai Angels

16 Mr. Srikant Sastri Member/ Chairs a special interest group

on Social Enterprises

Indian Angel Network/ TiE Delhi/NCR

17 Mr. H.K. Mittal Secretary Technology Development Board

18 Mr. Anjan Das Executive Director Confederation of Indian Industry (CII)

95

APPENDIX 3