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© 2012 Intellecap. All rights reserved www.intellecap.com
Challenges faced by First Generation Entrepreneurs
in India and key areas of intervention
5th July 2012
© 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
© 2012 Intellecap. All rights reserved 3
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 8
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
© 2012 Intellecap. All rights reserved
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)
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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)
© 2012 Intellecap. All rights reserved 15
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
© 2012 Intellecap. All rights reserved 16
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
© 2012 Intellecap. All rights reserved 17
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 19
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 21
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 26
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 32
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 34
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
© 2012 Intellecap. All rights reserved 35
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
© 2012 Intellecap. All rights reserved 36
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
© 2012 Intellecap. All rights reserved 37
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
© 2012 Intellecap. All rights reserved 38
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
© 2012 Intellecap. All rights reserved 39
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
© 2012 Intellecap. All rights reserved 40
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
© 2012 Intellecap. All rights reserved 41
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*
© 2012 Intellecap. All rights reserved 42
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
© 2012 Intellecap. All rights reserved 43
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
© 2012 Intellecap. All rights reserved 44
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
© 2012 Intellecap. All rights reserved 45
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 49
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 52
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
© 2012 Intellecap. All rights reserved 53
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
© 2012 Intellecap. All rights reserved 54
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 58
End of
Document
Contact Details:
Nisha Dutt
Director, Business Consulting
M: +91 8008111418 | T: +91 40 40300200 (extn:218)
5th Floor, Building 8-2-682/1, Banjara Hills Road No 12, Hyderabad - 500034, India
© 2012 Intellecap. All rights reserved
APPENDIX
59
© 2012 Intellecap. All rights reserved 60
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.
© 2012 Intellecap. All rights reserved 61
APPENDIX 1 FGE Case Studies
Alma Mater I
Bhushan Agro II
Ennatura III
Kakatiya Energy Systems Limited IV
Saraplast V
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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)
© 2012 Intellecap. All rights reserved 65
APPENDIX 1 FGE Case Studies
Alma Mater I
Bhushan Agro II
Ennatura III
Kakatiya Energy Systems Limited IV
Saraplast V
© 2012 Intellecap. All rights reserved
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)
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
• 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
© 2012 Intellecap. All rights reserved
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.
© 2012 Intellecap. All rights reserved 71
APPENDIX 1 FGE Case Studies
Alma Mater I
Bhushan Agro II
Ennatura III
Kakatiya Energy Systems Limited IV
Saraplast V
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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‟
© 2012 Intellecap. All rights reserved 77
APPENDIX 1 FGE Case Studies
Alma Mater I
Bhushan Agro II
Ennatura III
Kakatiya Energy Systems Limited IV
Saraplast V
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 82
APPENDIX 1 FGE Case Studies
Alma Mater I
Bhushan Agro II
Ennatura III
Kakatiya Energy Systems Limited IV
Saraplast V
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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.
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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 .
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved 88
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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
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APPENDIX 2
© 2012 Intellecap. All rights reserved
List of participants for investor workshop at Sankalp Forum
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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
© 2012 Intellecap. All rights reserved 93
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
© 2012 Intellecap. All rights reserved
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
© 2012 Intellecap. All rights reserved
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)
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APPENDIX 3