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Inc - organic entrepreneurship

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The opportunities and challenges of supporting entrepreneurship beyond the metros in India

The opportunities and challenges of supporting entrepreneurship beyond the metros in India

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  • 1. HOMETOWN HEROES The visibility and acceptance of entrepreneurship has multiplied several fold in the past two decades. From a point where an entrepreneur was perceived as a “promoter with a scheme” to a point where most stu- dents in colleges outline entrepreneurship as their ultimate pit stop, India has come a long way in mak- ing entrepreneurship respectable and aspirational. The emergence of successful role models, who came without much family backing and yet managed to create leading global enterprises, has contributed immensely to this change in perception. At the same time, the inflow of institutional capital in the form of venture capital and private equity has provided the required ammunition. However, the bulk of these success stories are still con- fined largely to the top 10 cities. Sixty per cent or more of private equity investments continue to be focused in the top five cities (Q1 2011: VC Circle). By the time one adds up numbers from the top 10 cities, precious little is left for even Tier II cities, let alone smaller towns. To understand this concentration, and how entrepreneurship may be fueled in smaller cities, we need to analyse the entrepre- neurship phenomenon in smaller cities. Consumer demand and diversity It is a well-recognised fact that India is going through a secular developmental path which is cre- ating considerable disposable income. This is leading to the demand for new products and services, as well as raising the standards of quality that an Indian consumer expects. This is a fundamental opportu- nity that Indian markets will offer over the next 50 years, if not more. This explosion in demand is hap- pening not just across the top 10 cities, but deep into the hinterlands. Thus, there are white spaces that need to be filled in addressing consumer sectorsCOLUMN | ALOK MITTAL directly. There is also huge derived demand in indus-Organic trial and other business sectors. Also, sheer diversity is India’s most unique charac- teristic. There is a new flavour to India every few 100Entrepreneurship kms—be it in terms of regions, lan- guages or cultures. Unlike the large developed countries, India remains a largely “non-standardised” market. Thus, there is an opportunity for entre- India’s sheer diversity allows preneurs to spring up in every part of the country, bottom-up entrepreneurship. solving the same problems, but with unique socio-cul- But governments and tural flavours. Thus, unlike a top-down model of entre- institutions must pave the way preneurship, where one model is created and then replicated across a country, India will probably see a for mainstream capital to COURTESY SUBJECT more organic bottom-up approach over the next sev- reach smaller cities eral years. Specialised businesses will come up to tackle the unique needs across geographies and economic38 | INC. | AUGUST 2011
  • 2. HOMETOWN HEROESreach. Businesses in retail, vocational training and healthcare areclassic examples where local tastes and preferences drive success. Big Fish, Small Ponds Our hometown heroes are in good company. Some of theSupply constraint in capital world’s largest companies were born beyond the usual hubsAgainst the backdrop of exploding demand, the flow of venturecapital and private equity remains supply-constrained. This is ontwo distinct counts. First, the absolute amount of dollars flowing Airbusinto the market in the form of institutionalised private equity is too Toulouse, Francesmall—last year the $8 billion in private equity investments corre-sponds to about 0.5 per cent of GDP. In markets such as the US and UK, this number hovers in the3 per cent zone. The second key supply constraint has been theaccessibility of these funds to Tier II markets. Private equity as aform of capital tends to target companies that can be national andglobal leaders in future—in a diverse and fragmented market likeIndia, this leaves many viable businesses at a regional scale out of Nestléthe ambit of private equity. Vevey, The fact that most private equity managers are thinly staffed in Switzerland Wiproline with their business model compounds the problem. These Amalner, Maharashtramanagers tend to evaluate the “return on time”, which is optimal inlarger high-concentration cities, rather than in smaller ones. In a classic Indian paradox, while penetration of private equity Syndicate Bankremains low, and there are “too few deals and valuation pressure” Manipal, Karnatakain the top 10 cities, in the smaller towns, deserving entrepreneurscontinue to be strapped for capital. This actually represents a mar-ket failure in organising capital where it might be most productive. NokiaMaking capital accessible Tammerkoski Rapids, South Western FinlandI believe that governments, especially at state and city level, need toplay an important role in bridging the capital divide outlinedabove. There are several measures, some short term and otherslong term, which need to be taken. One of the earliest sources ofventure capital in the country have been state sponsored funds. of entrepreneurship development boards, incentives for develop-Many of them have been successful in supporting businesses at ing local angel investors, public-private partnerships around keystate level—the few that come to mind include those from Gujarat, start-up clusters, or facilitating expert resource groups. Over a lon-Rajasthan and Punjab. While some of these have been partially ger period, building entrepreneurial ecosystems in Tier II citiesprivatised over time, they continue to have a strong regional pres- will have multifold returns.ence. These initiatives need to be strengthened across states. While Its not an accident that organised entrepreneurship is firstsuch funds may not necessarily employ the best talent or produce showing its impact in larger metros. For decades, organisedthe best financial performance, the social return they generate commercial activity has been concentrated around large citiesmust be factored into their contribution. in India and entrepreneurship is following the same path. How- Several other government agencies are also taking steps to ever, one can now see entrepreneurial ambitions bubble upencourage entrepreneurship. For example, DST has a programme to from various other parts of the country. Like organic farming,put 1000 incubators across the country. There are technology funds organic entrepreneurship is harder, takes more investment andavailable from TDB. The list goes on. Such initiatives must be focused time, and involves short term trade-offs. And like organic farm-to support entrepreneurship in Tier II cities—in fact, the quantum of ing, organic entrepreneurship is more healthy and sustainablefunds themselves can be multiplied by extending such support. over a longer span of time. Not unlike other pieces of infrastruc- Finally, the government should pave the way for mainstream ture, it is time to start building the entrepreneurial infrastruc-capital to reach their cities and states over time. The incentives that ture in every corner of India.state governments are willing to provide for large industries arewell known. States which believe in the power of entrepreneurship,not just to create businesses but to solve the key problems of their Alok Mittal is the managing director of Canaan Partners, India. He is also a co-founderpeople must develop programmes and incentives, be it setting up of Indian Angel Network, and is on the board of TiE (The Indus Entrepreneurs), Delhi. AUGUST 2011 | INC. | 39