For a school dropout who grew up doing odd jobs, H. Rajesh, 35, has done well for himself. Studio Essential, the unisex beauty salon that he and his cousin V. Dhayalan started in Chennai's upmarket Nungambakkam area in 2004, has grown steadily in reputation and size. From 300 sq ft, it has grown to a 2,500 sq ft salon, giving tough competition to its branded rivals in the neighbourhood.
The salon's success prompted Rajesh to plan a second outlet in the city in January this year, but funds proved elusive. "I did not have enough savings," he says, adding that banks were willing to give a loan only against securitised collateral, which would have been enough to meet only his working capital needs.
'The businesses that we focus on are competing with hundreds like themselves. They often survive on volumes, for which they need adequate capital'
Snigdha Rao
COO, VenturEast
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Rajesh felt frustrated, till he stumbled upon VenturEast Micro-Equity Managers, which handles the Bharatiya Yuva Shakti Trust (BYST) Growth Fund. This is a micro-equity fund, which focuses on neighbourhood enterprises run by uneducated, but shrewd and business-savvy, individuals.
Thanks to the Rs 15 lakh equity infusion and mentoring by the fund, Rajesh managed to open his second outlet, a 1,500 sq ft salon, in the posh Anna Nagar neighbourhood, barely five months later. "The transition from a hairdresser to a businessman is not easy and I am still learning.
If VenturEast had not stepped in, my expansion plans would have been delayed by three years. It would have taken even longer to run the business professionally," he says.
Rajesh is not the only one who has set his growth ambitions rolling, courtesy the BYST Growth Fund. C. Raja, who runs a uniform manufacturing unit; S. Rajeshwari, who owns a printing press; M. Siva Kumar, who makes cast gold jewellery and R. Vaidyanathan, who manufactures water level controllers, have all benefited from this unique venture.
"These entrepreneurs are often from the lower middle class, with limited savings and little parental help. Their personal assets are secured with banks against working capital loans. They also take personal loans at high interest rates to make up for the deficit," says Sarath Naru, founder and managing partner of VenturEast, a venture capital fund.
Naru says his entry in microequity was influenced by Washington-based International Finance Corporation (IFC), which has been an investor in several VenturEast funds. The two joined hands with BYST, a non-profit organisation, which encouraged micro-entrepreneurs to create the first micro-equity fund, the BYST Growth Fund.
VenturEast Micro-Equity Managers-formed as a partnership between VenturEast and Aavishkaar Venture Management Services, a pioneer in micro-equity-was the investment adviser to the fund. It raised $2.5 million (Rs 11.25 crore) from IFC, the Small Industries Development Bank of India (SIDBI), and some high net worth individuals. Where does this fund fit in among the various financing models?
"Suppose a microfinance institution has $100 million (Rs 450 crore). It will disburse it among thousands of impoverished people, while a typical venture capitalist will, perhaps, invest the same amount in 20 enterprises. We will look at financing a few hundred people," explains Naru.
Adds Snigdha Rao, the fund's chief operating officer: "The people we target do not have unique business propositions. They belong to an eco-system where hundreds like them compete for attention. Their businesses often survive on volumes for which they need to be adequately capitalised."
Rao and her team have had to face their share of challenges, beginning with the shortlisting of clients. "It took us six months to exercise due diligence to get our first investee and two years to get the first five clients," says Rao. The experience provided important lessons to the team. "Now the evaluation process takes just 30-45 days," says Rao.
- It identifies an entrepreneur in a 'me too' business with growth aspirations.
- The micro-equity fund sells the concept to him in the local language.
- Once the entrepreneur is game, it converts the proprietorship business into a private limited entity.
- It enters into an investor agreement with him.
- It puts in place processes so that mentoring and follow-up become easy.
- The investment, between Rs 12 lakh and Rs 50 lakh, is made in the form of equity/preference shares.
- The fund gets a share of the monthly profits as royalties, though this could vary from month to month.
- At the end of the term (usually 5-8 years), the entrepreneur buys back the shares from the microequity fund.
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The VenturEast Micro-Equity Managers is hoping to sign at least five deals, all in Hyderabad, before February 2011. Over the next 12 months, Naru hopes to get a working model ready for every type of business. After that, it will be 'plug and play', he says.
The fund managers also had to deal with the issue of proprietorship. "Being a venture fund, we could only suggest an equity investment. Initially, entrepreneurs were bewildered because they did not want to give a 'stake' to an outsider," says Rao.
Also, their businesses had to be converted into private limited companies to become eligible for equity funding. This required them to become more transparent and pay their taxes. Besides, they had to read and sign a 50-page document in English, a language they did not understand.
Says Rao: "Once the entrepreneurs understood that the process was essential for growth, they agreed readily. We taught them to formulate business plans and follow up on implementation." Acknowledging the benefits of the exercise, Studio Essential's Rajesh says, "Now I know how much I spend and on what, and whether my enterprise is making profit. I have realised that if the processes are streamlined, I can concentrate better on the business."
How does the micro-equity fund make money? "We get our returns from royalties. This is usually 1-5 per cent of sales or gross profit if the business is making money," says Rao.
The yearly royalties are expected to help the fund recover its capital, with some profits for the investor during the stipulated term, which is usually between five and eight years depending on the entrepreneur's requirement. At the end of the term, the entrepreneur has to buy back the stake from the fund, which is usually 10-15 per cent at the price of Rs 10 per share, adds Rao. The fund typically invests between Rs 12 lakh and Rs 15 lakh, but in some cases it could be as high as Rs 50 lakh.
Siva Kumar, a goldsmith, has always dreamt of owning a jewellery outlet. Currently, he makes jewellery for retailers and gets paid just 0.5 per cent of the cost of gold supplied by them. If he works with his own stock, he will be able to earn more, at least 2.5 per cent of the cost of gold.
"Not only will I be able to sell to varied customers, but will also have a better turnover and margins, and eventually realise my dream of having my own outlet," he says. The moment may not be too far for Kumar, as VenturEast Micro-Equity Managers has decided to give him Rs 30 lakh worth of gold by way of share capital.
Courtesy: Business Today 
