Summary

The Problem

Entrepreneurship ecosystem that is taken for granted by entrepreneurs in metro cities is lacking in rural India. There are three major missing links – knowledge, incubation and finance.

Missing knowledge ecosystem

Rural people lack exposure to bright ideas for business promotion. That is one of the most common reason cited for not attempting to start new business. In a few instances, where candidates do get exposed, they lack the skill to conduct market research and assess whether particular idea will find its feet in local market. This problem is aggravated when, due to herd behaviour, more number of candidates start up same line of business leading to overcrowding and the eventual mortality.

Missing incubation ecosystem

The crux of a business doesn’t change whether it’s setup in a metro city or a village. The principles of profit making remain universal. Even the mistakes that first generation entrepreneurs make are universal. There are some avoidable mistakes that a first generation entrepreneur commits due to possible cognitive biases and lack of business acumen. It needs to be noted that first generation entrepreneurs typically lack the business history that second generation entrepreneurs are raised with. Business acumen, in case of first generation entrepreneurs, is developed from scratch. Since no one in their family possesses business experience, first generation entrepreneur depends on instinct and trial-and-error approach for survival. There is dire need of mentoring in the seed stage and the growth stage.

Entrepreneurs in metro cities have access to incubators, accelerators, investors, angels and other mentor networks. However, first generation entrepreneurs in villages lack such mentoring avenues and end up making common startup mistakes. This is one of the reasons for longer gestation period and mortality.

Missing financial ecosystem

It is inappropriate to startup trading and services businesses with a Term Loan, which is suitable for asset-intensive businesses only. In organized sector, first generation entrepreneur have access to equity finance – be it from friends & family, angels or investors. Relatively established businesses get access to cash credit limit (CCL) and overdraft facility. All in all, a first generation entrepreneur in organized sector has access to risk-based, need-based and cashflow-based financing. In case of new business, investment is structured to suit the growth pattern of business. In existing business, interest expense is optimized by drawing cash from overdraft facility only when it’s needed.

In unorganized sector in India, there are primarily two routes through which unsecured credit reaches the bottom of the pyramid. It is either through government promoted Self Help Groups (in rural areas) or through private microfinance institutions promoted Joint Liability Groups (in urban and peri-urban areas). If a rural entrepreneur is fortunate enough to be part of either of the two, one gets access to Term Loan – initially for consumption financing and later on for livelihood financing. Those who are not fortunate enough remain in clutches of informal moneylenders. The point is – even the fortunate ones have access to Term Loan only for starting up business and for growing their existing business. A term loan is not suitable for trading, retailing or services businesses that are working capital intensive. Further, it’s a recipe for disaster to startup new business with a Term Loan. Unfortunately, that’s what majority of rural folks end up doing. Not because of lack of awareness but because of lack of choice. By doing so, they block their working capital in unproductive activities and are unable to free up capital when its needed the most in high season. Working capital crunches not just have tangible effects on business but also intangible influences on entrepreneur’s confidence, self-esteem and dignity – which then make them look at entrepreneurship as a curse rather than an opportunity.

Process Followed 

Enterprise promotion

At any new location, the intervention starts out with Market Potential Assessment. All kinds of businesses and markets in a region are captured. The local intelligence collected from primary census, focused group discussions and stratified surveys are used in shortlisting all viable business opportunities at village/ panchayat level. With an approximate number of viable opportunities in each specific enterprise category at particular location, the Market Potential Assessment assists entrepreneur and Micro Venture Consultant (“MVC”) in informed decision making and discourage herd behaviour in first generation entrepreneurs.

It also helps phase out villages, as per ease of doing business in villages, for micro enterprise promotion. Market potential assessment determines, based on local context, whether the resources should be deployed in strengthening existing enterprises or in promoting new enterprises. Wherever existing base is strong, focus is on strengthening it rather than promoting a new base to compete with.

As a next step, based on entrepreneurship assessment, applicants are segregated into opportunity entrepreneurs and necessity entrepreneurs. Opportunity entrepreneurs are encouraged to startup large growth businesses while necessity entrepreneurs are encouraged to startup (community level) limited growth businesses. Applicants then undergo credit risk appraisal. Owing to multiplicity of livelihoods, intermingled cash movements and complex economics of poor families in unorganized sector, meticulous appraisal of repayment capacity and credit worthiness becomes a daunting task (thereby, forcing bankers to resort to collateral). The credit risk appraisal quantifies credit risk in an individual applicant.

In addition, due to cognitive biases like over-confidence and putting cart before the horse, the first generation entrepreneur ends up over-spending while starting up the business. Ideology of lean startup is seldom followed. The focus is therefore on lean startup methodology. The financial product is tailor-made for individual beneficiaries based on cashflow seasonality and risk appetite. Individual business plans are also generated to serve as ready reckoner to entrepreneurs and MVCs.

Enterprise handholding

Regular bookkeeping is encouraged with an objective of helping an entrepreneur in cashflow projections and in becoming bankable. The key financial data is collated on regular basis to process financial statements like profit-loss statement, balance sheet and cash flow statement. At any point of time, entrepreneur or MVC has access to simplified profitability, balance sheet and cashflow statements. The diagnosis is used by MVC to provide advisory to the village entrepreneur. The business data is then compared with local peers to see how an individual entrepreneur is performing. An alert is triggered if performance deviates significantly from local peers.