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

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 sectors
COLUMN | 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 100
Entrepreneurship
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 economic
38 | INC. | AUGUST 2011

2. HOMETOWN HEROES
reach. Businesses in retail, vocational training and healthcare are
classic examples where local tastes and preferences drive success.
Big Fish, Small Ponds
Our hometown heroes are in good company. Some of the
Supply constraint in capital
world’s largest companies were born beyond the usual hubs
Against the backdrop of exploding demand, the flow of venture
capital and private equity remains supply-constrained. This is on
two distinct counts. First, the absolute amount of dollars flowing
Airbus
into the market in the form of institutionalised private equity is too
Toulouse, France
small—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 the
3 per cent zone. The second key supply constraint has been the
accessibility of these funds to Tier II markets. Private equity as a
form of capital tends to target companies that can be national and
global leaders in future—in a diverse and fragmented market like
India, this leaves many viable businesses at a regional scale out of Nestlé
the ambit of private equity. Vevey,
The fact that most private equity managers are thinly staffed in Switzerland Wipro
line with their business model compounds the problem. These Amalner,
Maharashtra
managers tend to evaluate the “return on time”, which is optimal in
larger high-concentration cities, rather than in smaller ones.
In a classic Indian paradox, while penetration of private equity Syndicate Bank
remains low, and there are “too few deals and valuation pressure” Manipal, Karnataka
in the top 10 cities, in the smaller towns, deserving entrepreneurs
continue to be strapped for capital. This actually represents a mar-
ket failure in organising capital where it might be most productive.
Nokia
Making capital accessible Tammerkoski Rapids,
South Western Finland
I believe that governments, especially at state and city level, need to
play an important role in bridging the capital divide outlined
above. There are several measures, some short term and others
long term, which need to be taken. One of the earliest sources of
venture 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 key
state 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 cities
privatised over time, they continue to have a strong regional pres- will have multifold returns.
ence. These initiatives need to be strengthened across states. While It's not an accident that organised entrepreneurship is first
such funds may not necessarily employ the best talent or produce showing its impact in larger metros. For decades, organised
the best financial performance, the social return they generate commercial activity has been concentrated around large cities
must 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 up
encourage 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 and
available 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 sustainable
funds 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 are
well 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-founder
people 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