VC investors head to Bharat for real impact
There is growing realisation across the board on the need to look at businesses that address problems in tier II towns.
Take the example of Ahmedabadbased waste management company Let’s Recycle. Policy guidelines introduced last year to support the government’s Swachh Bharat (or Clean India) Campaign has given clarity and drive to investors to start looking at this sector, which was considered tough to scale up. But the long durations such firms need to build their offline operations is becoming the moat that is attracting mainstream venture capital funds to them.
“Today, it takes up to two to three months to replicate the model to kick-start operations in a new city. Now that value chains are established, we can use technology for key processes and information sourcing,” said Sandeep Patel, chief executive at Let’s Recycle who is looking to expand to four more cities and aiming to raise funds from both mainstream venture funds as well as impact funds. “The interest is high from venture funds and we get calls from them to understand how the business works and whether it is suitable for their kind of money.”
The underlying thesis for the change in strategy is that tier-II India and beyond is where the next wave of consumption lies. This collective market can generate humongous business volumes and revenues that can far outweigh volumes from cities.
“The frenzy of chasing US models, which lasted up to 2014, has slowed in the past three years,” said Gopal Modi, president at Orios Venture Partners.
The investment firm, which had backed now failed startups Yumist (food delivery) and Taskbob (hyperlocal home services) during the period, is now eyeing dairy ventures that source produce directly from farmers and have a quality management system in place.
IDG Ventures India, which backed agri-tech venture AgroStar, is currently considering investments in a weather monitoring startup and another firm that has built 140 toilets, costing Rs 21,000 each.
“We are seeing many such ventures. I think companies are not limited to urban areas and are more disruptive than before,” said Sudhir Sethi, managing director at IDG Ventures India, who believes the concept of impact investing in India is fading away. “Anything that is innovative and disruptive and can scale is a good investment.”
Impact investors say they come with a deeper understanding of the rural economy since they have worked with ventures in getting the model right. “You see that VCs are generally interested in front-end areas like agro-processing and fin-tech, where we are seeing huge interest from both sides (impact funds and mainstream VCs),” said Vineet Rai, managing director at Aavishkaar Ventures, which in the past decade has seen about $600 million worth of follow-on investments in companies that it backed at their early stages.