Micro Venture Capital: The Commercial View Point

Micro Venture Capital : The Commercial View Point

Venture Investment ideally helps a small company to scale up its proven concepts. The success of venture capital has demonstrated
that capital infusion with a management bandwidth dose helps a company grow at the desired pace. The behavior of venture
investments in Indian context has left many a scar despite the many positives it has brought out for some of the companies.
The late nineties was a period of over eager investors trying to look at venture investment as a panacea for all ills. There was a mad
scramble to invest in all kind of start-ups. The quality mantra was replaced with quantity and fund managers were put under pressure to
invest rather than perform their much needed due diligence and wait for the right opportunity.
This was also the period where venture capitalist shunned their oft-touted role as a hand holder in an Investee Company in favor of
large number of investments. The bubble did not last and changing realties forced the funds to withdraw from second stage investments
crippling the companies and thus ushered in catastrophic waves of many start ups going under.
The crumbling of the edifice resulted into venture funds withdrawing in a shell. The mantra now is consolidation and investing in larger
companies, more stable, scaling up is the focus area.
The sudden decline in the interest of venture funds to continue funding supporting left the start-ups gasping for liquidity. The earlier flow
of money had created infrastructure support in India such as technology incubators. There were now some good technology initiatives
coming out of these incubators, which needed funding support.
The events of the late nineties allowed the emergence of new concept called the micro venture funds. While a parallel can be drawn
between these micro venture initiatives and the seed funds (in some case angel investments) in USA, there was lot of uniqueness in
these funds.
These funds were not focused on Information Technology alone, but on areas such as social product development, rural ventures and
the new technology area such as IT, Media etc.
The Micro Venture Initiatives does not necessarily mean a micro fund (that is a fund of small size). However, having been a witness to
the late nineties disaster, the micro venture funds continue to look at a fund size of a million USD to 3 million USD.
One needs to differentiate micro venture financing from micro credit financing. Micro venture capitalists finance small start-ups and
companies for capital growth while micro-creditors lend cash to low-income households for interest earnings. Micro venture capital
(MVC) financing is more effective than micro credit financing (MCF) in improving developing economies.
According to a recent research report by Goldman,Sachs & Co, MVC financing has a 10 per cent higher return and a five per cent lower
default rate than MCF. MVCs have 10 per cent less overhead cost than micro credit banks. The cost structure for MVCs is flexible while
the cost structure for micro credit banks is fixed.
Micro Venture Capital: The Commercial View Point

Investment Strategy
A Micro Venture Fund investment strategy has some basic differences from the normal Venture fund strategy. The role that a Micro
Venture Fund manager plays is closer to that of an angel investor but without the normal individual style of engagement associated with
a angel investor.

Micro venture as an investment strategy looks at smaller investment at very early stage companies with emphasis on stability in
revenues v/s expenditure rather then on growth. While growth is the most desired objective, a Micro fund initiative is looking at
managing growth expectation so as to avoid creation of unsustainable cost structures as got created in the past by larger venture funds.
A Micro Fund also look at its venture initiative to tap its local market before its look at growth beyond the local geographical
boundaries.

The sustainability of a Micro Venture Fund despite its small size and lack of large management fees is achieved by ensuring a very lean
and low cost structure. While a Micro Venture Fund would look at four or five deployments in a year (sometime even more)
geographical proximity of investment is a key investment criterion. In addition, the creation of a network of advisors, think tank members
and interested volunteers helps create the rich profile to provide hands on guidance to these companies.

Micro venture funds differ from a conventional venture fund in the fundamental thought process too. While a Venture Fund pool
investor’s money to make investments in certain sectors in order to multiply wealth, a micro fund is at times driven by investment to
create desirable technology or social impact while still ensuring a commercial viability.

The minor difference in objectives has long term and far reaching consequences in results. The Micro Venture Fund initiatives focused
on sectors other then IT have been able to make impact in the social milieu by propagating the opportunity based entrepreneurship
model. India as a society has been seen a huge base of need based entrepreneurship due to its social structure. However creation of
Micro venture imitative has egged on the society to think in term of entrepreneurship where opportunity and innovations is seen as the
bedrock for growth.

Micro Funds have also facilitated better potential for wealth creation at the base of the pyramid to create a better flow of money is the
system thus enriching the nation’s economy.