Bangalore: Gunjan Kumar’s business proposition is simple. The 28-year-old buys traditional art and craft products from artisans in villages and sells these in metro cities.

Stumbling blocks: Helion Venture Partners’ managing director Kanwaljit Singh says due diligence is difficult with small-town firms. Madhu Kapparath / Mint

Kumar started Amethia Apparelz and Co. in Patna 18 months ago with Rs6 lakh. In its first year, the firm earned Rs33 lakh in revenue and expects to end fiscal year 2010 with Rs1.65 crore.

In another part of the country, Nafisa Radiatorwala’s start-up, Nature’s Glow, is clocking 10 times the revenue it made two years ago. The Vadodara-based firm in Gujarat exports herbal beauty and treatment products to the US, UK, and the United Arab Emirates, and hopes to end 2009-10 with revenue of Rs5 crore.

Kumar and Radiatorwala are among several profit-making entrepreneurs in India’s small cities and towns keen to attract venture capital (VC) investment as they look to expand.

Deal contribution from smaller cities and towns increased to about 15% in the previous year from below 5% earlier, according to estimates by four investors Mint spoke with, but not many start-ups from these regions have been able to raise capital from VC funds.

“Investors like glamorous business models," Kumar says in crisp Hindi. “Ours is a very bottom-of-the-pyramid model but a highly profitable business. Our products are sold from four times to 10 times of their production cost."

Traditional crafts made for Rs200 by an artisan in a village in Bihar or Uttar Pradesh could fetch as much as Rs1,500 in Bangalore or New Delhi, he says.

Kumar is looking for VC funding to open 10 ethnic-wear stores across the country in a year—he will open his first store in Patna this week and another in Bangalore in March. He also wants to export Madhubani paintings (traditional paintings from Bihar’s Mithila region) to the US and Europe.

Investors say reaching out to these firms poses several challenges.

“How does one discover what is happening there? Also, due diligence becomes a difficulty while dealing with these firms," says Kanwaljit Singh, managing director, Helion Venture Partners, one of India’s biggest and most active investors. “Secondly, post-investment ability to work closely with them is not easy."

Shradha Sharma, founder,, a website focused on start-up firms, says entrepreneurs from small cities and towns are not Internet-savvy and do not know how to make business propositions even “if they do get a chance to meet investors".

Radiatorwala, for example, has heard of VC firms but isn’t sure about how they work. She is looking to raise money to start selling over-the-counter products in India in six months and expand to Africa but isn’t sure whom to approach.

“I am still working out if I should go to banks or other investors for funding my future plans," she says.

Entrepreneurs in metro cities, unlike Kumar and Radiatorwala, are well-networked and more visible as they have a choice of intermediaries, such as start-up events, boutique investment bankers, bloggers, and the investors’ network of friends and associates.

The lack of VC funding hasn’t deterred small-town entrepreneurs from cashing in on the market potential of tier II and III markets.

Nagpur-based Mobile Magic Pvt. Ltd, for example, caters to one of the biggest markets in semi-urban India, selling Indian and Chinese mobile phone brands at its 30 outlets. Vivek Palod, the firm’s director, says small cities and towns offer a good advantage. “Rentals are very low in these places...and tier II and III towns are the biggest telecom markets in the country today."

Mobile Magic also sells songs, videos, movies and other applications for cellphones off the shelf. “Our content is the best alternative for Internet surfing in these places, where broadband is still a luxury," says Palod.

The firm started with revenue of Rs60 lakh in 2004 and recorded Rs8 crore in revenue in 2009. It is also looking for VC funding to increase the number of its stores.

Investors say it’s imperative for an entrepreneur to measure the quantum of opportunities available to them before seeking institutional capital.

“Rs100 crore revenue can be good for an entrepreneur but not for a VC," says T.C. Meenakshisundaram, founder and managing director of IDG Ventures India. “The deals can become unattractive if there are challenges of broader vision. A company should be addressing a large market."