Rural ventures become a big attraction for VC/PE players

The sluggish global economy hasn?t stopped investors from cherry-picking opportunities in India?s rural growth story. Sensing immense untapped market, venture capitalists (VCs) and private equity (PE) players are parking their funds in business models designed to meet the specific needs of rural population.

According to data from Venture Intelligence, in the last six months, 22 rural business ventures attracted funding amounting to a total of $97 million. In May, Lok Capital and Acumen Fund invested R7 crore in Karnataka-based Hippocampus Learning Centres, a rural education services provider. In the same month, Equitas Micro Finance India received funding of $20 million from International Finance Corporation (IFC), the private investment arm of the World Bank. IFC also invested $12 million in MAS Financial Services and $10 million in Ujjivan Financial Services during the period. Similarly, in March, Lok Capital and Proparco, the private sector investment arm of the French development agency AFD, invested $5 million in IFMR Rural Channels and Services.

Experts point out that mainstream products and services are not specifically designed to cater rural markets and hence there is an opportunity to create viable market segments targeted at both rural consumers and producers.

?The increasing interest of mainstream commercial players like telcos, FMCG companies and other national distribution players have only bolstered the confidence in the rural businesses and we are seeing increasing investor interest,? says Vishal Mehta, co-founder and partner, Lok Capital, a venture capital firm focused on the bottom-of-the-pyramid market. End of last year, the fund invested $3 million in RuralShores, a BPO firm operating in the rural space.

The Bangalore-based BPO firm plans to establish 500 centers, one in each rural district of the country by 2020. ?We are looking to have 20 centers and employ 3,000 by the end of this year. We plan to do this by scaling up our BPO work and entering the business enablement services space, especially in banking, financial services and insurance,? says Murali Vullaganti, CEO, RuralShores, adding that the BPO space is set to explode in the next three years with thousands of rural educated but unemployed youth getting an opportunity to work in the sector. HDFC is also an investor in RuralShores.

With the government?s increasing focus on inclusive growth, rural areas and financial services are an integral part of growth interventions. Over 700 million people in the country not being under the formal financial system offers a huge opportunity for business ventures catering to the financial needs of the rural households. IFMR Rural Channels and Services, which recently received funding, operates as a Kshetriya Gramin Financial Services model. It is a full service rural financial institution providing financial products and services.

?The opportunity that rural India presents is still intact and makes a compelling proposition when coupled with unmet demand. The giant strides made in the space of technology, especially in terms of connectivity and authentication devices, are making it possible to take financial services with associated processes to these unserved markets in a viable and sustainable way,? says S G Anil Kumar, CEO, IFMR Rural Channels and Services.

The company has already set up operations in Uttarakhand, Orissa and Tamil Nadu, and has 110 branches with about 200,000 customers.

Investors feel the recent crisis in the microfinance space has impacted fund flow into the sector. ?However, we have now started seeing healthy investment activity, especially from impact investors. Lok itself has closed three investments since the start of the calendar year. What we are increasingly seeing is that this space is attracting investment from focused impact investors who have longer investment periods as well as greater sensitivity to social objectives,? says Mehta of Lok Capital, which is focusing on investments in health, education, livelihoods and financial inclusion.

?We are looking for further investments in unique business models that aim to establish sustainable social impact while being commercially viable and scalable,? he says.

On the profitability of rural businesses, investors point out that margins in these ventures are low yet promising to build a sustainable and commercially viable business in the long term.

The social VC funds in this space include Proparco, Omidyar Network, Acumen Fund, Gray Matters Capital, and others.

Companies feel funding by way of equity from VCs or PEs has lesser challenge than loans through bank funding for a high growth company in a sunrise sector.

?VCs/ PEs understand that investing in such companies has its risks but is the best avenue for very good rewards. However, the challenge is in convincing that the business model is highly scalable, profitable and sustainable; and that the management is capable of delivering these to the investors,? says Vullaganti of RuralShores.