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A stake in everyman's dreams

Now even small and unglamorous businesses have the opportunity to grow, thanks to micro-equity.

Nitya Varadarajan        Print Edition: December 12, 2010

For a school dropout and someone who had grown up doing odd jobs since his teens, H. Rajesh, 35, seemed to have 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 had grown steadily in reputation and size.

From 300 sq. ft initially, it had become a 2,500 sq. ft salon by January this year, giving tough competition to its branded rivals in the neighbourhood. The salon's success prompted Rajesh to think of opening its second outlet in the city. But funds proved elusive. "I did not have enough savings," he says, adding that the banks were willing to give a loan only against securitised collateral, which would have been just enough to meet only his working capital needs.

Rajesh felt frustrated and stuck, until he stumbled into VenturEast Micro-Equity Managers, which manages the BYST Growth Fund. Thanks to a Rs 15 lakh equity infusion and mentoring by the fund, he was able 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.

Micro-equity vs other financing models

Micro-finance
Offers loans varying from a few thousand rupees to a few lakh and targets the impoverished segment

Angel funding
Provides equity to start-ups with some amount of mentoring, but looks at high-risk business models with exponential growth

Venture capital
Comes in at the angel stage for additional funding requirements or in the next stage when the business still has some risks

Private equity
Comes in later when the business has grown and the risks are almost mitigated and the company can, in the near future, approach capital markets for funds

Micro-equity
Provides equity to common businesses that are not startups but have reasonable growth potential; does considerable mentoring
A whole host of small business owners, such as 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 set their growth ambitions rolling, courtesy the BYST Growth Fund, a microequity fund that targets neighbourhood businesses run by people who are not educated but are street smart with a canny business sense.

"These entrepreneurs are often from a lower middle class background with limited savings or parental help. Their personal assets are secured with banks for working capital requirements. They also go in for personal loans at huge interest rates to make up the deficit," says Sarath Naru, Founder and Managing Partner of VenturEast, a venture fund manager.

Naru says his entry into microequity was inf luenced by Washington-based International Finance Corporation, or IFC, which was an investor in several VenturEast funds.

The two joined hands with the Bharatiya Yuva Shakti Trust (BYST), a non-profit organisation which encourages 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 advisor to the fund.

It raised an initial $2.5 million from the IFC, the Small Industries Development Bank of India, or SIDBI, and some high net worth individuals.

Where does this fund fit in among the various financing models? "If a microfinance institution has $100 million, it will disburse it among thousands of impoverished people, while a typical venture capitalist will, perhaps, invest the same in 20 ventures. We will look at financing a few hundred people,'' explains Naru.

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