India Rides the VC Wave

U.S. venture capital firms are broadening their scope and investing in Indian companies that are helping the country's poor

The fishermen from the Indian village of Chidambaram live a hard life. They sleep most of the day, then spend the night out on the water. For light during those dark hours, they have long depended on wobbly kerosene lamps that were easily blown out or, worse, toppled by the wind, risking deadly fires on their boats.

But these days, the kerosene lamps have been replaced with MightyLights, $50 solar-powered fixtures. "I save 100 rupees [$2.50] a month on kerosene alone," says K Kanimuri, a fisherman's wife, who also uses the MightyLight in her makeshift kitchen. With her savings, she now makes and sells candles.

Kanimuri and her fellow villagers may not know it, but the change in their fortunes is rooted in global finance. MightyLight is the brainchild of New Delhi-based Cosmos Ignite Innovations, a Stanford University-incubated startup by Matthew Scott and Amit Chugh that aims to provide simple products for the world's poorest people. And Cosmos got its start with backing from Vinod Khosla, a veteran Silicon Valley venture capitalist. Now Cosmos is in talks with other groups, including London-based 3i Group (TIGRF) and eBay (EBAY) founder Pierre Omidyar, for a second round of funding. "For us, it's not just the light, but using a sustainable model to affect social change," says Scott, chief executive of Cosmos.

Going Beyond Tech

Just a few years ago, most venture capital funds focused on pure technology companies operating in industrialized countries. But now, VCs are starting to look for opportunities in the developing world. They believe that it isn't just the tech plays that are scalable and sustainable. What was earlier shunned as small is suddenly a potential business opportunity.

For U.S.-based Matrix Partners (with $150 million under management), the low-hanging fruits in India now include companies in consumer services, health care, financial services, travel, media, and entertainment. Avnish Bajaj, managing director of Matrix Partners India, says the fund is interested in bottom-of-the-pyramid ventures in two potential areas—rural credit and finance, and agriculture-related industries including retail services.

"The base of the pyramid is often ignored, but offers a tremendous opportunity," says Katie Hill, the India representative of Acumen Fund, an $8 million fund backed by the Cisco Systems (CSCO) Foundation and the Rockefeller Foundation. Acumen has put $1.5 million into Ziqitza, a Mumbai-based ambulance company that offers deep discounts on its service for residents of the city's vast slums. Shafi Matther, the founder of Ziqitza, says the funds will be used to stretch the company's ambulance fleet of two dozen vehicles to 70 in the next two years, and roll out service across India. It is already operational in the south Indian state of Kerala.

New Investment Waters

The trend is due in part to the amount of money chasing deals. VCs these days are forced to "invest in less-fished areas," says Sumir Chadha, managing director of U.S.-based Sequoia Capital India, an arm of the famed Silicon Valley VC firm. It was the 25%-to-30% profit potential of Hyderabad-based SKS Microfinance, which gives loans to poor entrepreneurs across India, that attracted Sequoia to invest $11.5 million in March, 2007.

A clincher was also SKS founder Vikram Akula's plan to leverage the microfinance distribution network to sell a range of products from insurance to consumer goods, mobile phones, and even home loans. "This is the next big thing for us," says Chadha. He claims that they are now actively looking at bottom-of-the-pyramid projects.

Or take IT-rural, set up by a group of software engineers from the south Indian state of Tamil Nadu. A clutch of U.S.-based VCs are circling the startup technology venture, which develops solutions for rural India. The company doesn't just provide a bunch of computers and conduct basic-training classes, but has a Web site to educate farmers, giving them information about crop patterns, nature of soil, crop diseases, and remedies. IT-rural also has established backward and forward linkages, from buying the seeds to branding and retailing products.

The company has just finished a pilot project in the 30 villages of the Pulivendala district in Andhra Pradesh. According to Ramakrishna Thiruchelvam, the brain behind IT-rural, the project has covered about 30,000 people and 6,000 farmers cultivating more than 20,000 acres, "raising the GDP of the villages substantially." Some of their fruit has even made it to the shelves of Singapore's retail stores. IT-rural is currently negotiating with the state government to undertake similar IT-related projects in other villages.

Good Business, not Goodwill

But don't mistake such investments as charity. Clearstone Venture Partners, based in Santa Monica, Calif., has put $5 million into DigiBee Microsystems, which expects to pocket handsome profits by selling low-end mobile phones to poor Indians. "We are excited about consumers choosing differentiated products," says Rahul Khanna, a Clearstone director.

And two California VC funds—Walden International and New Enterprise Associates—are considering a $5 million investment in Novatium, a Chennai-based company that has developed a $100 personal computer. The machine uses microprocessors similar to those found in cell phones, and Novatium hopes to offer a suite of products including Internet connectivity, application software, and services for $10 a month, according to founder Rajesh Jain. Novatium expects to sell 3 million machines, with the potential to reach 40 million households by 2010. Says Alok Singh, CEO of Novatium, "We have always been market-driven."