Vineet Rai, Aavishkaar Venture Management Services
The Aavishkaar India Micro Venture Capital Fund (Aavishkaar) is a venture fund founded to promote development in rural and semi-urban India. Vineet Rai is a founder and the CEO of Aavishkaar. Rai is responsible for overall management of the fund. Prior to Aavishkaar, Rai was a founder and the CEO of GIAN, an incubator for rural innovations and ventures based in Ahmedabad, Gujarat. At GIAN, Rai was responsible for identifying, evaluating, nurturing and launching grassroot-innovation-based micro-level enterprises for poverty alleviation.
Vineet Rai Chief Executive Officer, Aavishkaar Venture Management Services
Are you evaluating new business plans irrespective of the slowdown? How much money do you have for investment?
We have US$10 million committed in a micro-finance fund out of $18 million. We will do two to three more investments. We have a large part of a micro-credit fund that is still available. We could do around 25 more investments in the next couple of years.
Are most of the companies you invest in located in semi-urban and rural areas?
Not necessarily. Take the example of rangSutra Crafts. It is headquartered in Delhi, but 98% of its employees, staff, and owners live in remote villages of Bikaner. Aavishkaar does not really believe in investing in rural India just for the sake of investment. We invest in a company and the people working in it could be coming from anywhere. But it is their motivation, it is the product and the service that should be either sourced out of rural India or delivered in rural India.
What is your investment strategy? What do you look for before deciding to invest?
We have a fairly elaborate structure. One, we are very clear on the area and space we are looking at. Avishkaar started as a fund that would provide investments to those who don’t get them. However, there are a lot of people who do not get investments, and we can’t provide money to everybody. We provide investments at a very early stage, sometimes even when the idea is conceptual.
How is your investment strategy different from those of other VC funds?
We first look at whether we get along with the entrepreneur. Second, does the entrepreneur have a mindset that is not completely driven by money? We have a concept of greed management. We believe that venture capital, as a pure play activity, is completely driven by greed. Profit maximization is a very good idea but it does not normally create robust, long-term companies. I can be completely disputed because people have created very good companies despite getting venture capital. When promoters start their business, profit maximization at any cost is not their sole strategy. Most VCs are focused on profit maximization at any cost, but we believe that we are here to optimize the profits and not maximize it. While doing so, we also look at how the promoter is trying to optimize their returns and the returns to society. We don’t believe that we can build businesses exclusive of the society. They have to be inclusive.
We are looking at something called inclusive capitalism. We are looking beyond one promoter. We try to look at it as if everybody has an ownership in the company and that is not limited to some ESOPs given to two or five people. We are for ownership across a cross-section, including your vendor and supplier. So this way, your ecosystem is so strong that your chances of failure are much less. In the current environment what is clear is that greed as a co-driver cannot sustain even the capitalist model. It has taken us nine years and that is very unfortunate. You need to control greed at some point in time.
Can you give examples of some of the companies you have invested in that reflect the ideology behind the fund?
Servals Automation, the company that makes stove burners. These are used by people in the lower strata both in urban and rural India. This company was initially based in Chennai and used to produce and sell both in rural and urban India. Then it outsourced its entire production to villages. The promoter of the company said that he did not believe in mass production, he believed in production by masses. Thus, this company has created employment in places where none existed; it has found a way of including villages in its production sources, which cuts its cost of production. They continue to sell in both rural and urban India. So, here is a production mechanism that is coming out of rural India and selling in both urban and rural India, while the company is technically based in Chennai.
rangSutra has 26% ownership by artisans. They are based in Delhi, but in the villages in and around Bikaner is where it manufactures all its products. They put it together and then sell it in Delhi, and then it goes to Fabindia and many other places. It is sold in urban India and abroad, but it is produced in extremely remote areas.
Vatsalya has set up hospitals in tier-II and -III cities. They have a hub-and-spoke model where they set up clinics in small towns. Their idea is to provide high-quality service to people in the lower strata of the society; it’s like the high-quality service of Apollo at much lower prices.
What is the minimum ticket size of your investments?
We do investments as small as Rs 15 lakh, and in the first round we normally stop our investment at Rs 2 crore. We can do more than that, but we will never cross Rs 5 to 6 crore. That is the largest we will do. In the first round we normally invest Rs 2 to 2.5 crore.
What percentage of your investments have failed? Isn’t there a higher risk to the investments that you make?
We have two companies out of 20 that have failed. One has actually failed, while the other may still recover.
Technically, a higher degree of risk does exist, but actually higher degree of risk in what? How you define risk is the first challenge. The type of risk depends on what outcome you are looking for. If the outcome you are looking for is a Rs 10,000 crore company, then it carries a very high risk. We have small companies that have the potential to reach Rs 100 crore or Rs 200 crore or Rs 400 crore, but if you actually define reaching Rs 100 crore, then may be two of our companies will reach it or may be five. Of the 20 companies, I may have five that may reach Rs 100 crore. But a large number of our companies will be between Rs 20 and Rs 80 crore after five to seven years. This according to a mainstream fund would be a failure. A large number of these people would not be able to do an IPO. For us, it is not a failure because we have created these companies when we invested in the pre-revenue stage, in geographies and areas and businesses that are not mainstream. These are not businesses that can follow a hockey stick growth.
We are working at creating small enterprises that we believe have a much higher level of job creation. Plus with the kind of model our investee companies have, they are also making a difference to the lives of the people. For us, it is more important than getting a Rs 1000 crore company.
Are you reassessing your business strategy? How is the slowdown affecting it?
We have increased the stress on some of our companies. Special emphasis is on artisan companies because the export market has gone down. Pressure on the top line and bottom line has gone up immensely. Micro-finance companies have seen tremendous pressure because banks are not lending to them, equity market valuations have gone down, and investing in the pre-revenue stage is looking much more difficult than it was eight months back. We are also becoming cautious of investing into pre-revenue stage companies.
How are your companies reacting to the slowdown? Are you in touch with them all the time and telling them how they should handle things?
They know business better than we do. We can help them in certain areas that they don’t understand but we do; or even if we don’t know, we may reach out to people. If there is a strong demand or desire for someone to understand something, we make an effort. The impact has not been dramatic. We follow a conservative approach irrespectively. We are not the kind of investors that Subhiksha is seeing, push people from 500 to 1,000. We are the kind of investors who look at pushing a company which is at 500 to 700. We believe that pushing from 700 to 1,000 may build a kind of risk that we don’t understand. This is also about size differences because we do small investments as we are more conservative. We don’t have deep pockets.
There is a perception that when investors come in they try to have their way. Have you seen your companies getting skeptical about this?
All the companies we have invested in are very worried about investments. All investors are equally worried about companies they invest in. Investors are born skeptics. Otherwise they will never make good investments. The art is actually to not demonstrate to the companies that you are a skeptic. Unfortunately, not many VCs actually understand that not showing your skepticism actually helps you in doing a better deal. Otherwise, the other guy loses confidence in you. He thinks you are always trying to run him down.
We believe that the company you invest in knows best what is to be done. At the same time, in case they don’t, we don’t hesitate in telling them, politely as well as harshly, depending on the level of resistance to what we are saying. If it becomes a fight then I don’t think there is a winner. Both sides stand to lose. Thus, we try to avoid a fight. Even though we have a social mandate, we don’t believe it is the reason for us to actually be polite all the time. We are not pushy, we are not very hard. We try to be very considerate. Our legal agreements are not offensive. We hear our companies out to the extent they can tell us that they are seeing problems.
What is the time horizon for investments?
We have a six-year investment horizon. We look at an exit after the seventh year. It varies. Today I am looking at five to six years for exit. Two years down the line, I will be looking at four years.
As an investor, what are some of the challenges that you face?
The companies we invest in feel they are challenged. They are actually raising money only once or twice. We are investing money every day. We are skeptical on a daily basis. The investors are also skeptical about your ability to deliver. And then you don’t have the capability to either be the rich guy (the core investor or the limited partner) or actually run the company. Your ability to really influence changes is very limited. In that case, it is a balancing act. There is a ‘God and Dog Theory’. The venture capitalists feel like God till the time they send the check; after that they are treated like the dog.
