Venture capital funds explore backing small-town startups

BengNew Delhi: For years, venture capitalists have talked about backing entrepreneurs who can build products and services for people in smaller towns. For the most part, that talk hasn’t materialized into actual deals.

Now, some VCs are looking to back entrepreneurs in cities such as Jaipur and Kochi in order to find these products and services that can unlock the vast but scattered potential of small-town India.

ShareChat, a content and social networking app that offers interaction in local languages, is one start-up that has understood and tapped the small town audience well. Consumers in smaller cities have a strong value-for-money orientation, local cultural affinity, and a more conservative financial outlook, according to a 2017 Boston Consulting Group report.

Reports differ on exact numbers but by all accounts India is likely to have more than 500 million internet users by 2021, up from 300-350 million now. But because India is a diverse nation, there is a debate around whether entrepreneurs working out of Bengaluru or Delhi can understand the consumer psyche of people living in smaller cities.

“The number of reachable consumers has gone up by another 300 million and now suddenly you need to create products and services for these consumer,” said Rehan Yar Khan, founder of VC firm, Orios Venture. “You can’t expect urban-bred entrepreneurs to cater to this market.”

Orios has launched an initiative called FindingMisfits to help entrepreneurs based in smaller cities and towns expand their ventures. It received 400 applications from such entrepreneurs, of which it has shortlisted 20. From these, the firm will choose three or four entrepreneurs who will get benefits such as free access to cloud infrastructure and travel credits. Khan wants to back entrepreneurs who are either based in smaller cities or have spent a large part of their lives living there. He said Orios may also provide funding of up to ₹ 7 crore to the companies.

“Within a year you will see a dozen (such companies receiving funding). We want to get there before the big funds do,” Khan said.

Sanjot Malhi, vice-president at VC firm Matrix Partners, said there has been a gradual rise in the number of start-ups based outside the metros.

“Where the start-up is based is less relevant, as long as founders are tracking real consumer problems. We are trying to look in all places and not just Bengaluru, Delhi, and Mumbai,” Malhi said.

ShareChat, which has become the latest investor darling for its popularity with users in tier 2 and 3 cities, was launched by founders who grew up in small-town India.

Still, there are formidable practical challenges in building start-ups from smaller cities—even ShareChat is based in Bengaluru.

Kushal Agarwal, partner and chief financial officer at Aspada Investments, said that the number of entrepreneurs coming from tier 2 cities was increasing but the fund has so far avoided backing these companies primarily because it doubts if they can find quality engineers and marketers.

“From a headquarters perspective you need high quality marketing talent, finance talent, sales talent and the most difficult to find--tech talent. It gets very difficult to set up the headquarters in Tier 2 and 3 cities. Cash burn is much lower in these cities in the sense of running a business compared with let’s say from a Bombay, but only once the talent pool is created,” Agarwal said.

Satish Mugulavalli, director of technology at YourNest Venture Capital, said another problem for entrepreneurs in smaller towns was the lack of access to quality mentorship.

Case in point is WoodenStreet Pvt. Ltd, a Jaipur-based start-up that makes customized hand-crafted furniture and has received $1 million in funds from Rajasthan Venture Capital Fund.

“The current ecosystem in Rajasthan is not very mature for startup or funding. There is definitely potential in Jaipur but it needs to be supported. For talent, we hire freshers and then train them and not look for people beyond 4-5 years of experience. Because it’s a small city, it’s difficult to find talent but it generally also means that they don’t leave the organization soon,” WoodenStreet chief executive Lokendra Ranawat said.