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For small-town startups, VC funds difficult despite success

Gunjan Kumar’s business proposition is simple. The 28-year-old buys traditional art and craft products from artisans in villages and sells these in metro cities.

business Updated: Feb 01, 2010 23:10 IST
Deepti Chaudhary

Gunjan Kumar’s business proposition is simple. The 28-year-old buys traditional art and craft products from artisans in villages and sells these in metro cities.

Kumar started Amethia Apparelz and Co. in Patna 18 months ago with Rs. 6 lakh. In its first year, the firm earned Rs. 33 lakh of revenue and expects to end fiscal year 2010 at Rs1.65 crore.

In another part of the country, Nafisa Radiatorwala’s start-up, Nature’s Glow, is clocking 10 times the revenue it made two years ago. The Vadodara, Gujarat-based firm exports herbal beauty and treatment products to the US, UK, and the United Arab Emirates, and hopes to end 2009-10 with revenue of Rs. 5 crore.

Kumar and Radiatorwala are among several profit-making entrepreneurs in India’s small cities and towns keen to attract venture capital (VC) investment as they look to expand.

Deal contribution from smaller cities and towns increased to about 15 per cent in the previous year from below 5 per cent earlier, according to estimates by four investors Mint spoke with.

But not many start-ups from these regions have been able to raise capital from VC funds.

“Investors like glamorous business models,” Kumar says in crisp Hindi. “Ours is a very bottom-of-the-pyramid model but a highly profitable business. Our products are sold from four times to 10 times of their production cost.”

Traditional crafts made for Rs. 200 by an artisan in a village in Bihar or Uttar Pradesh could fetch as much as Rs1,500 in Bangalore or New Delhi, he says.

Kumar is looking for VC funding to open 10 ethnicwear stores across the country in a year—he will open his first store in Patna this week and another in Bangalore in March. He also wants to export Madhubani paintings.

Investors say reaching out to these firms poses several challenges.

“How does one discover what is happening there? Also, due diligence becomes a difficulty while dealing with these firms,” says Kanwaljit Singh, managing director, Helion Venture Partners, one of India’s biggest and most active venture investors.

“Secondly, post investment ability to work closely with them is not easy.”

Shradha Sharma, founder, YourStory.in, a website focused on start-up firms, says entrepreneurs from small cities and towns are not Internet-savvy and do not know how to make business propositions even “if they do get a chance to meet investors”.

Radiatorwala, for example, has heard of VC firms but isn’t sure about how they work.

Nagpur-based Mobile Magic Pvt. Ltd, for example, caters to one of the biggest markets in semi-urban India, selling Indian and Chinese mobile phone brands at its 30 outlets.

Vivek Palod, the firm’s director, says small cities and towns offer a good advantage. “Rentals are very low in these places...and tier II and III towns are the biggest telecom markets in the country today.” The firm is also looking for VC funding to increase stores.

Investors say it’s imperative for an entrepreneur to measure the quantum of opportunities available to them before seeking institutional capital.