A quick glance at the portfolio of VCs in the country reveals a high level of metro bias. Bangalore, Delhi and Mumbai perhaps have the most funded companies in India.
Despite realising the potential that lies in the entrepreneurs and ideas in the hinterlands of India, venture capitalist (VC) firms haven’t been able to make inroads into the markets outside the metros.
A quick glance at the portfolio of VCs in the country reveals a high level of metro bias. Bangalore, Delhi and Mumbai perhaps have the most funded companies in India. According to VC and private equity (PE) deal tracker Venture Intelligence, in the last one year only 10 out of the 150-odd deals closed came from non-metros. The most popular sectors are microfinance, agro based industries, healthcare delivery, pharma-related companies, food and clean tech.
Rajesh Srivathsa, managing partner, Ojas Venture Partners, said, “There is a huge addressable market in tier 2 towns and villages for a range of sectors like agro based industries. However, identifying good businesses still remains a major issue as the due diligence process is complicated.” Lack of manpower to track potential investment candidates, challenging due diligence and lack of scalability in many rural and semi-urban start-ups have been some problems VCs face. “These companies address a small town or city and hence, revenues are limited. This affects future scalability across India,” said Sachin Maheshwari, principal at Draper Fisher Jurvetson (DFJ). Lack of management bandwidth and professionalism are other reasons, he feels.
However, VCs are now devising ways to address these challenges. For instance, IDG Ventures has tied up with Microsoft India and The Indus Entrepreneurs (TIE) to identify promising start-ups from across the country. “Due to the popularity of Microsoft and the network base of TIE, we can enter into those areas of the country where innovative entrepreneurs do not have too much exposure to VC funding,” said Ritesh Banglani, senior investment advisor, IDG Ventures. Rahul Chowdhri, VP, Helion Ventures, said that the company is dialogue with educational institutions and bank officials in non-metros to find good investment opportunities.
Arun Natarajan, founder and CEO of Venture Intelligence, said the limited partners (LPs) of VCs are pushing for investments in non-metro companies. This is because not many VCs play in the space and competition is lower. Also the potential for cheap investments with large returns is huge, he said. “Rural areas in particular have shown to be recession proof. Lots of auto companies and FMCG companies have invested in these areas heavily in recent times. We are looking at numerous opportunities in microfinance, rural technology and food processing,” said Kartik Srivatsa, associate at Lightspeed Venture Partners.
Another VC firm VentureEast recently raised its eighth fund that will focus entirely on companies from non-metros. Zephyr Peacock, which is raising its second fund, is also said to be targeting this area.
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