Niche retail start-ups are the flavour of the season for venture capital funds that invest in early stage companies.
From Printo Document Services Pvt. Ltd, a retail chain that offers on-demand print services, to Mango Digital Vending Machines Network Pvt. Ltd (Mango DVM, for short), which aims to sell digital music from 400,000 kiosks across the country by 2010, retail companies focusing on specific needs of customers are being wooed by venture funds that see a huge opportunity in building niche businesses.
For good reason. “Retail is not just a big boys’ game; small start-ups with a clearly defined product offering will do very well in the Indian retail market,” says Raman Mangalorkar, who heads the consumer and retail practice for Asia at consulting firm A.T. Kearney Ltd. For the third successive year, India has been ranked the top destination for retail investments by an index the firm uses to track retail activity in 30 emerging global markets.
Investors picking up equity in these start-ups have their eyes on a sector on the cusp of explosive growth. By 2010, the Indian retail industry is expected to reach revenues of $427 billion (Rs17.5 trillion) up from today’s $350 billion and, according to AT Kearney estimates, could nearly double to $635 billion by 2015.
With organized retail accounting for just 3% today, reckon investors, the expansion can only be rapid.
Printo, an 18-month-old business, is raising Rs25 crore funds this month from unnamed venture firms. Set up with an initial investment of Rs5 crore, including angel funding from Sridar Iyengar, former chairman of consultant KPMG International’s India unit, and Naresh Malhotra, former chief executive of retail chain Café Coffee Day, Printo now has a chain of six stores across Bangalore.
“As we focus on a business-to-business model, we are not on high-street locations; this keeps our real estate cost very low,” says Printo co-founder and chief executive Manish Sharma, who founded the business together withLalana Zaveri, an ex-XeroxLtd executive.
Loosely modelled on Kinko’s, a US retail chain that offers services such as printing, copying and stationery, Printo aims to move business customers away from the unorganized print segment.
“We had a batch of 20 booklets with 100 pages each designed and printed at Printo in two days,” says Anthony Fernandes, administrative manager at Cable & Wireless Ltd’s network management centre in Bangalore. He is now looking at using Printo as a supplier for printing orders from his firm’s UK parent.
“The opportunity for start-ups in the retail sector in India is so huge, Printo can easily have a chain of 300 stores,” says Malhotra, who has invested in three other retail start-ups such as Daily Bread, a chain of confectionery stores now acquired by Britannia Industries Ltd, Coffee Buns that was bought out by pizza chain US Pizza, and Café Coffee Day. Malhotra says that in a typical week, he receives calls from four entrepreneurs eager to launch a retail business.
Elsewhere in Bangalore, Erasmic Venture, a $10 million fund that focuses on early stage investments, is investing in design firm Dovetail Furniture Pvt. Ltd that sells furniture and accessories under the ‘DesignStore’ brand. “We see this as an investment in a design-led manufacturing company that fits into our non-sector specific approach,” Subrata Mitra, a partner at Erasmic Venture, says of his firm’s fifth investment.
Retail fundings are increasingly coming out of stealth mode. Earlier this month Nadathur Holdings and Aavishkaar Venture Capital were co-investors in the $3 million investment raised by Bangalore retailer Maya Organic Pvt. Ltd, an NGO-turned-for profit company that retails the MO brand of apparel, furniture and wooden toys. Mango DVM was backed by The Chennai Fund, a network of Tamil Nadu-based angel investors.
Earlier this year, the Band of Angels, a bunch of angel investors, funded MobileNXT, a pan-Indian mobile phone retailer with a 25-store presence. And, very soon, Matrix Partners will announce investment in a luxury retail project, says Avnish Bajaj, managing director of the firm.
Venture investors say niche-focused retail start-ups will be ideal takeover candidates or can sell shares through initial public offerings when they scale up in size.
“These start-ups can be acquired by larger chains as in the case of Kinko’s which was bought out by (cargo major) FedEx or if they build a large retail chain they can float an IPO,” says Iyengar, who is a board member at software bellwether Infosys Technologies Ltd.
Printo is Iyengar’s first investment in retail among his 12-strong portfolio companies.