Thursday, January 14, 2010

Nano to Mega Entrepreneurial Spectrum: Need for Financial Entrepreneurs

Enterprises emerge from entrepreneurial energy. Entrepreneurs fight against odds to create entities that can convert ideas into products or services. An entrepreneurial journey involves several challenges including, but not limited to, the conceptualization of the entrepreneurial initiative, arrangement of finances, assembling of the team, establishment of the project, delivery the product or service and finally earning of reasonable returns to please the shareholders. These core, critical steps in the journey of an entrepreneurial enterprise also need to be consistent with the capabilities and potential of the entrepreneur. There is little clarity on when and how the challenge for entrepreneurial journey ends and the quest for enterprise sustainability commences.

The popular appreciation of entrepreneurial effort tends to be limited to first generation enterprises which have achieved scale and scope, with high visibility in media. Despite such enterprises achieving a significant success relative to the starting milestones, the pressures are ever higher on them to grow beyond boundaries, in a virtually limitless process. In this endeavor, the true creative spirit of an entrepreneurial venture gets overwhelmed by the clinical intellect and aggressive force of such companies pursuing scale and scope. Pursuit of scale and scope no doubt transforms the entrepreneurs heading such firms into global business leaders but also limits them from institutionalizing their intellectual talent on a wider entrepreneurial base, as a national comparative advantage.

Infosys insight; foresight for growth

A brief study of Infosys Technologies Limited, India’s leading information technology corporation, and their founders offers certain unique insights and possibilities in this complex interplay of enterprise and entrepreneurship. Infosys was founded in 1981 with a very modest capital of USD 250 by a team of seven software engineers, led by the founder N R Narayana Murthy. The company was in many ways a pioneer in leveraging Indian software talent for providing global information technology solutions. With a singular focus and a creative global delivery model, Infosys never had to look back in its growth journey. Today, Infosys is a NASDAQ listed global IT and Consulting Services corporation with 105,000 employees, revenues of US$ 4 billion and market capitalization of approximately US$ 27 billion.

Of the seven founders, N S Raghavan retired from the services of Infosys in 1999 as its joint managing director and went on to become a mentor for several entrepreneurs. N R Narayana Murthy continued to nurture Infosys into a global corporation as its chairman, and more recently as its chief mentor. Logically, a large global corporation such as Infosys with excellent revenue and profitability would have the ability to encourage entrepreneurial entities all across its value chain, and possibly would have created platforms for various entrepreneurs dock in with the company. Yet, N R Narayana Murthy has recently set up a Rs 6 billion (USD 133 million) venture capital fund called Catamaran Investment Pvt Limited, headed by him to encourage entrepreneurial venture, across sectors.

The establishment of the Murthy-Catamaran venture implies that even a global company cannot do more than encourage ancillary entity development in its own value chain, while an entrepreneur who grew such a company can possibly contribute to more broad-based entrepreneurial development as an entrepreneur rather than as a corporate honcho. Indications are that Catamaran would be sector and scale agnostic while investing, which is an encouraging sign. Going beyond Infosys and N R Narayana Murthy, however, one needs to recognize that entrepreneurial development could occur in different configurations and formats. Entrepreneurs who tasted success have now the opportunity and option to provide a discrete institutional structure, distinct from the firms that they founded and grew, to provide a genuine and powerful thrust to entrepreneurial development in the country.

Scaling and scoping; pathway to growth

Any enterprise emerges and grows on only two fundamental dimensions: product (service included) and market (geography or customer segment included). Depending on the product range and market spread enterprises get positioned in terms of scale and scope. The modernization of the corporation on a number of collateral and enabling factors such as technology and organization has to only serve these two fundamentals. While the entrepreneurial spirit of discovery of product and market niche has always been an integral part of social and economic development, the emergence of the modern corporation has sought to substitute that spirit with systematic quest.

It is imperative that entrepreneurial effort is viewed independent of scale and scope as the overwhelming factors on one hand, and technology and organization as the differentiating factors on the other. India has traditionally given considerable importance to the development of cottage and small scale industries, essentially through investment and tax incentives. Evolution of large scale industry has been seen as a logical pull for further development of such smaller enterprises. Yet, the whole cottage and small scale enterprise movement has got grounded over the years due to the enterprises failing to appreciate the product-market interplay. There is a need to redefine the enterprise hierarchy to identify where and how different generations of entrepreneurial effort fit best.

From nano to mega; a wide enterprise spectrum

Entities which cater to one product group and one small homogenous market segment are best termed as nano enterprises. We see nano enterprises all around us but fail to appreciate how the entrepreneurial effort is surviving despite lack of attention to it by the formal economic system. The vegetable cart vendor who serves the neighborhood homes, the tailor who meets the clothing needs of the location and the corner grocery shop which provides the food and family items, for example, constitute nano enterprises. A nano enterprise is usually operated by only one individual, the founder or the owner.

A printer who prints multiple products for multiple clients with a printing machine and a small team of assistants, a restaurant which provides multiple cuisines for a multi-ethnic population, a boutique which caters to multiple clothing styles constitute the next level of micro enterprises. When these are upgraded to a network in each case with better technology and logistics support for larger multi-location coverage they become small scale firms; a desktop networked printer, a chain of restaurants and a designer clothing studio cum boutique, for example.

A publishing cum printing house, a pan-Indian fast foods restaurant and an apparel manufacturing company all of which in modern times require modern technologies, trained work force and capable management represent medium scale enterprises. All listed national companies with highly organized research, manufacturing and marketing capabilities are the typical large companies; for example, a multimedia corporation with core competencies in print or television media, a ready-to-eat foods company and an end-to-end textile and apparel company. Blue chip companies and giant corporations in diverse industrial segments corporations, with global scale and scope, constitute mega corporations.

The efficiency with which each enterprise operates (for example, the number of households the vegetable vendor can cater to in a day) and the speed with which a firm can morph from one stage to the next higher stages (for example, leap from being a cart vendor, grocery shop and tailor to becoming a retail chain) is a function of entrepreneurial energy, duly supported by finance and management. The indigent nano entrepreneur, if equipped with a semi-motorized cart, can cover more neighborhoods. Finance and management can make an aggressive local retailer become a national multi-brand retail chain.

Idea to enterprise; passion to performance

From the yesteryears’ business magazine idea to yesterday’s direct-to-home television, true entrepreneurial effort is not one of a product or service whose time has come but of an idea which has been thought of ahead of its time. With the explosion in knowledge levels and the implosion in customer needs there exist today far more product and service ideas than at any point of history. Mentorship and financing are two critical inputs which can help the nano, micro and small enterprises get established first, and later become medium, large and mega enterprises. While large firms have the necessary track record and competencies to raise resources for new entrepreneurial ventures in their quest for growth, nano, micro and small firms need explicit, dedicated and empathetic support.

India does not have angel investors. The financing and investment eco-system in India is not specifically geared to spot entrepreneurs and help them translate their ideas into enterprises or organized activities. Established venture capital firms and private equity funds cater to large firms, and only occasionally to medium firms. In India, nano, micro and small firms can emerge and survive only based on conservative bank priority funding. India therefore needs a wholly new genre of entrepreneurial financing, whether it is a uniquely Indian type or an established Western type. There is a need for a new breed of financial entrepreneurs to emerge to lead a whole new entrepreneurial revolution in India. Several alternative models, all of them, relevant to different types of entrepreneurial initiatives need to be simultaneously considered.

(a) Individual financing model

The ability to finance nano entrepreneurial ventures exists among all earning members of the society, especially the high net worth individuals (HNIs). The investment required for a vegetable vendor to acquire a modern cart, for a tailor to add a multi-purpose sewing machine and the corner grocery shop to have its own brand of home foods would not exceed Rs 10,000 in each case, which amount is entirely within the means of any earning individual with high savings potential. HNIs more particularly could keep a target of creating a nano-entrepreneurial venture each year and leave their stamp on the history of entrepreneurial development. Even retired personnel can reinvest a small part of their retirement proceedings to set up their own nano enterprises, be it a corner shop or a core service for the community.

Extending the concept further, gated communities and apartment associations which would have a larger access to collective resources and provide a captive user need basket can help establish nano-entrepreneurial ventures that meet the community needs effectively. From a security service to a mechanized laundry and from a library service to a documentation service, opportunities for creation of nano ventures by residential communities are indeed plenty. As these gated communities develop into new suburbs and mini-cities the nano and micro foundations of business can indeed grow over time.

(b) Corporate catalyst model

Major corporations, given their organizational infrastructure and market reach as well as their financial capability can contribute impressively to the entrepreneurial movement directly and indirectly. The logical way, as discussed in an earlier post, is to convert or let go fragments of their value chain or operational spectrum as nano- or micro-entrepreneurial ventures. This is a natural and economical way of creating entrepreneurial value while enhancing cost-competitive position of the company. Each function or domain of a firm, for example, research, manufacturing, marketing, supply chain, human resources, accounting, information technology and clinical trials offers scope for creating entrepreneurial outfits for outsourcing of fragments of such domains.

Yet another way is to leverage a corporation’s resources to reach out to wider population, create awareness and harness passion, in association with Non-Governmental Organizations (NGOs) and Not for Profit Organizations (NPOs). The success of the Teach India 2009 campaign organized by the Times of India media group in association with select NGOs in bringing together educated experts to teach underprivileged children is proof enough. Corporations can undertake equal aplomb entrepreneurial initiatives utilizing their resources. In addition to individual corporations industry associations such as FICCI, CII and ASSOCHAM can play a catalyst role by creating divisions for entrepreneurial projects.

(c) Not-for-profit organization model

Not-for-profit organizations (NPOs) headed by passionate leaders can spur and support entrepreneurial initiatives. Bharat Yuva Shakti Trust (BYST) is a trend setting model in this context. BYST is a non-profit organization headed by Lakshmi Venkatesan and set up for providing end-to-end support for disadvantaged micro-entrepreneurs in the form of loans, mentoring, networking and marketing. The young micro-entrepreneurs are nurtured until they reach a level where they are not only self-sufficient, but they in turn make a valuable contribution to the society through creating wealth and employment.

Nationally, BYST has supported 1900 micro-entrepreneurial ventures, employing over 20,000 people and providing training to over 75,000 people. BYST has both rural and urban training programs covering six major regions of India. The Confederation of India provides the infrastructure and administrative support to BYST. BYST is also networked with international organizations that are aligned to similar objectives. A high point of BYST is its ability to bring business and industry experts into its programs of mentorship for the micro-entrepreneurs. This “beyond the financing” strategy provides the requisites competencies to the micro-entrepreneurs and enables sustainability to their ventures. For a country as large as India, there is potential for many more NPOs organized on the model of BYST to support nano and micro enterprises.

(d) Microfinance corporation model

The Grameen Bank was founded by Muhammad Yunus in Bangla Desh to provide tiny loans for the poor to enable self-employment. The success of the Grameen Bank and the global recognition it secured is reflective of the potential of directed micro credit. Over a period of 12 years, the Bank created over 6 million active borrowers disbursing over 900 million in tiny loans. The pioneering work in employment generation touching the lives of the poorest of the poor fetched for Yunus and the Grameen Bank the Nobel Peace Prize in 2006. Today the Grameen Bank has become more diversified in its product offerings, leading to greater generation of wealth for its customers.

Extending the concept further, a bank dedicated for creation of micro-entrepreneurial enterprises can lead to creation of millions of micro enterprises in India. Potentially, banks and specialized institutions such as Small Industries Development Bank of India can lead this micro-enterprise initiative by transforming their respective priority banking arms into divisions of nano finance and micro finance for appropriately scaled entrepreneurial enterprises, with a new direction. While rural banks did get set up in India even decades ago, their inability to lead an entrepreneurial revolution is related to adoption of policy driven big bank mores rather than entrepreneurial risk taking approaches. A new format and approach for micro finance corporations is called for in India.

(e) The Murthy-Catamaran model

The Catamaran Venture Capital fund was set up by Infosys founder, NR Narayana Murthy and his wife Sudha Murthy by selling their shares constituting a small part of their shareholding in Infosys to raise Rs 6 billion (USD 133 million). This amounted to 0.43 percent of the total capital of Infosys. The move by Narayana Murthy is a trend setter for successful entrepreneurs to share their wealth and expertise to reinvest in others’ entrepreneurial ideas and create wealth for others and the society. The companies listed in the National Stock Exchange of India have a combined market capitalization of over USD 1 trillion. A sale of even 0.5 percent of the capital could lead to a massive USD 5 billion fund that could be set up to several Catamaran style venture capital funds.

Assuming that promoters have on average over 25 percent of the overall capital structure of the listed companies, successful entrepreneur heads of Indian corporations have in their hands a huge funding potential to support millions of micro, small and medium scale entrepreneurial enterprises. It is hoped that the entrepreneur-heads of all listed companies, including public sector undertakings would dedicate at least 0.5 percent of their respective companies’ shareholding to support entrepreneurial ventures. When this scale of finance is coupled with their personal commitment to mentor budding entrepreneurs a sea change would occur on the entrepreneurial scene. It is to be hoped that several other successful entrepreneurs as well as corporate group heads would replicate or improve upon the Catamaran model.

(f) Western venture capital model

Venture capital firms entered the Indian industrial scene in the 1990s in a big way along with the economic policy liberalization. Their entry was pursuant to a decision of the Government of India to allow foreign finance companies take stakes in the Indian companies. Taking small stakes of 10 to 25 percent in the capital structure of new as well as fast growing companies, venture capital firms enabled a number of first generation enterprises strengthen their equity structures and also list themselves on the bourses. Venture capital funds enable companies achieve the crucial leap from a modest beginning to a modern era, accessing technologies or markets through their financing. As companies are not typically listed at that stage, venture capital firms take stake based on stock pricing negotiated with the promoters.

While venture capital firms serve a valuable purpose their emphasis on growth and exit at attractive valuations, through listing or further sale to other strategic investors tends to distort orderly growth of companies. Typically, venture capital firms help establish medium scale enterprises with their investments ranging between USD 10 to 50 million. Venture capital firms tend to be sector-savvy, betting on sunrise and entrepreneurially driven sectors. India’s IT and pharmaceutical sectors in the 2000s benefitted from venture capital investments. Potentially, venture capital can support India’s drive into sunrise sectors such as biotechnology, nanotechnology, healthcare, education, alternative fuels and clean technologies, providing confidence to entrepreneurs move into such sectors. That said, unless the Western venture capital funds tie up with Indian groups the ability to take risks relevant to the Indian scenario could be weak.

(g) Global private equity model

While venture capital and private equity funding is seen to be synonymous, private equity funds tend to favor listed companies for their investments. Most private equity firms enter established firms through preferential allotment of new shares to themselves at prices that reflect market valuations or reflect specific premiums based on their insights into business plans. While venture capital firms provide growth capital, private equity players provide funding for a variety of purposes including growth capital, capital for retiring debt, mezzanine funding and acquisition war chest. With investment ranges from USD 50 to 200 million, private equity firms can truly shape medium scale enterprises become large corporations. However, the global economic downturn of 2008 and 2009 saw the weak foundations of organized venture capital and private equity industries.

The established private equity industry has global investors. Their investments are subject to returns to their investors, some of them extremely large and powerful ones such as global pension funds. In good times these private equity players are nation, and sector agnostic, seek a diversified investment portfolio and display a penchant for globalization of their portfolio firms. In difficult times, however, they tend to be extremely cautious. It is time that Indian financial institutions, gratuity and pension funds, mutual funds and provident funds as well as large public and private sector groups created India’s own private equity behemoths.

(h) State as super equity player

As large firms grow larger, many grow beyond the reach of even large private equity players. Large firms and private equity players manage the situation be creating subsidiaries for newer activities and channeling equity flows. In countries such as India where government owned public sector undertakings (PSUs) occupy commanding heights of the economy State has to assume the role of a super public equity player or venture capital player, with respect to the PSUs. Several corporations in infrastructure sector have emerged due to such public investments by the Government of India. These, in turn, have led to creation of new strengths in the economy, which the private sector or the overseas players would have considered to be either beyond their means or their risk profile.

While a school of thought questions the efficiency and appropriateness of a large PSU sector, there is no denying that but for such investments many mega corporations in oil, gas, refining, power, power equipment, locomotives and other investment intensive sectors would not have been established. The induction of new technologies and establishment of new industries with uncertain commercialization opportunities requires massive investments which only governments are willing to make. The Government of India’s disinvestment plans could unlock e easily USD 10 to 20 billion depending on the PSUs chosen for disinvestment and stake sale levels. Though the Government plans to dedicate the proceeds to social service programs it would be equally logical to channel at least 50 percent of the proceeds to setting up new PSUs in long gestation, high technology sunrise sectors. Such an approach would provide technological assurance and employment security to the nation. An alternative could be for the listed PSUs to issue additional shares at premium to strategic investors and initiate such new generation enterprises.

(i) Government policy liberalization

Indian Government has helped the growth of medium and large scale sector by the policies of economic liberalization initiated in 1992. Despite continued prevarication over the last few years, further liberalization is expected with a special focus on infrastructure sectors, supporting high capacity entrepreneurial investment by Indian and foreign corporations. Yet, liberalization policies in projects of social infrastructure continue to be bureaucratically governed with the objectives of supervising quality, eliminating exploitation and protecting public safety. Projects in sectors such as education, transport, healthcare, banking and retail are singularly affected by such policies. There is a need to find new liberalization formats that support entrepreneurial spread.

The new Companies Bill is expected to give a fillip to entrepreneurial activity with the One Person company provisions. This laudable reform in company law may not result in the desired boost to entrepreneurial activity if social infrastructure sectors are rigidly governed by bureaucratic barriers to entry. Much of the liberalization responsibility in this sphere rests on the State Governments as well. The governments need to establish single windows to facilitate setting up of One Person companies in a host of fields. The objectives of ensuring quality and safety are better served by establishing technology bodies to supervise quality and safety rather than by controlling entry.


Entrepreneurial energy can take shape in terms of entities with highly variable scale and scope. From nano to mega, enterprises can be positioned and grown depending on the applicable product-market scope in each case. While there are several financing models available to finance varied types of entrepreneurial ventures, the new Catamaran venture capital model being pioneered by N R Narayana Murthy, the founder of Infosys is of great significance. This model involves successful investors raising money by selling a small portion of their holdings to set up venture capital entities which will offer not only finance but mentorship by the successful entrepreneurs. Individuals and corporations can also play catalytic roles in enabling entrepreneurial ventures in different capacities. Also relevant are financing models of not-for-profit type and microfinance corporation type. At the other points of spectrum established venture capital funds and private equity players have to rework their models and become more entrepreneurial by themselves. Indian mutual funds, pension funds and provident fund organizations as well as corporate groups have to set up India’s own venture capital and private sector funds. At the apex level the Government has to rediscover its role as a super venture capital investor, gaining additional financial capability from the envisaged PSU disinvestment program. Financial entrepreneurship has to be seen as the trigger for emergence of a full spectrum of nano, micro, small, medium, large and mega entrepreneurial entities in India.

Posted by Dr CB Rao on January 14, 2010

1 comment:

MallieJane said...

Interesting post - you mentioned Mohammad Yunus and his microfinance method... and also the capitalist method in the US. Did you know Mohammad Yunus brought microfinance to the urban poor of the US? I just discovered there's a branch in New York City. There's a documentary premiering this week at Sundance about it - the film follows Grameen America's first year offering micro-credit to the poor in the US. Check it out if you're interested: