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India: poor entrepreneurs get royal treatment

Venture capital meets microfinance at the innovative nonprofit Be! Fund.

Shankar krishnappa 1 2012 10 11Enlarge
Shankar Krishnappa. (Courtesy)

BANGALORE, India — In front of his tiny garment factory in Nagawara, a village 10 miles from Bangalore's center, 29-year-old Shankar Krishnappa smiles dismissively when asked about problems he faces at work.

Since opening his tailor business last December, he's already had to fight city hall when the electricity board cut off his power. And, because he's been confined to a wheelchair since he contracted polio in the first grade, he still has to get somebody with strong arms to carry him inside and set him down across the desk from potential customers when he bids for a new order.

But that doesn't bother him. "Before, many people used to avoid talking to me," Krishnappa said, speaking in his native Kannada. "They thought I might ask them for money because I am disabled. Now that I have my own business, they know me and have a new respect for me."

Krishnappa has the Be! Fund to thank for his recent success. The start-up nonprofit, which combines the balance-sheet acumen of a venture capital firm with microcredit's faith in the industrious poor, invested about $6,000 in Krishnappa, allowing him to open his business.

The Be! Fund — started by Lisa Heydlauff, a former teacher from the UK who runs a New Delhi-based nonprofit called Going to School — aims to create “heroes” like Krishnappa, people who could inspire poor kids from India's villages and slums to stay in school.

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“What we do at Going to School is we tell stories to inspire kids to stay in school and use their educations to transform their lives,” Heydlauff said. “What we realized after a while was that we didn't have the stories we needed to change the world. We didn't have stories of young people who lived in poverty who started a business to solve a problem.”

“We tried working with a bank," she said, "working with a microcredit organization — everyone, basically — to try to say, 'Will you fund a young person who lives in poverty, age 18 to 29, who doesn't have a track record, with a new idea to start a business?' It didn't fit any of their risk profiles.”

With no other choice Heydlauff — who had about as much experience with venture capital as she had with skydiving — decided to try her hand at it herself.

Here's how she made it work:

With outreach programs and advertisements on radio and TV, it attracts business plans from some of India's poorest — and boldest — people. Then the fund treats them just like India's venture capital firms treat the latest tech start-ups.

Volunteers screen as many as 5,000 applications to make sure they really are economically disadvantaged, and that their business ideas really do address social problems. They choose 500 would-be entrepreneurs, and invite a couple hundred in for a three-level interview process during which experts evaluate their plans and suggest revisions. Finally, 15 of the most promising candidates are chosen.

Be! Fund staffers visit the project sites — from a farm with a broken down tractor to a one-woman candlemaking unit — to conduct due diligence. Even though investments can be as small as $1,000, the entrepreneurs get to spend hours with volunteer bankers from DeutscheBank and UBS Warburg, as well as iGate-Patni founder Phaneesh Murthy and Leapstart founder Dev Roy, two prominent Indian businessmen who provided Heydlauff with her seed capital of around $50,000.

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“It's not just volunteering time [for something] such as painting a wall or cleaning up a park or reading to the elderly. It's not just time intensive, it's intellectual capital intensive. And that takes this project to another dimension,” said Reshma Ghoshal, vice president in charge of corporate social responsibilty at DeutscheBank.

Unlike microfinance organizations, which rely on community peer pressure to secure their loans, the Be! Fund provides capital to individuals rather than groups, which ensures that creative risk-takers aren't held back by their more conservative peers. Where microcredit loans tend to max out around $1,000 for a group of five, Be! Fund investments range from $1,000 to $10,000 for a single entrepreneur.

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Where microfinance tends to focus on traditional businesses, the Be! Fund finances innovative ideas that will create employment or solve other social problems through creating green energy, recycling waste or providing market access to isolated communities.

At the same time, though the fund operates like a venture capital firm in some ways, the investments are too small to generate significant returns. All nominal profits are funneled directly toward financing new entrepreneurs.

“All of us try to have quote-unquote charity dollars, and I've always felt that these charity dollars are traditionally used in fairly conservative models,” iGate's Murthy said. “The way I looked at it was, here is a powerful, grassroots movement ... for ideas which are created from within the community, by community people, for the benefit of the community.”