Tuesday, May 9. 2006
Micro-credit lenders typically provide entrepreneurs with small, short-term loans; on the small or “micro” scale for which they are intended, these loans are quite effective at allowing rural and urban poor in developing nations to establish sustainable businesses. At a certain point, however, these micro-loans are ineffective in stimulating further growth. The small size of the loans cannot support growth beyond a certain scale, and the short duration does not allow the capital to work for an extended period of time. Enter the Aavishkaar India Micro Venture Capital Fund.
Founded in 2001, Aavishkaar targets businesses in rural and semi-urban India. Typically, these organizations require less than the US$1 million threshold of conventional venture capital, but would be unable to grow under the restrictive terms of micro-lending. Aavishkaar invests between US$20,000 and US$100,000 in its portfolio companies, with 75% of its deals structured as equity investments.
The use of equity financing, as opposed to debt, is an important distinction from typical microfinance practices. Debt is often considered advantageous to a company because the lender has no claim to the business’ profits beyond the fixed interest payments. This allows all profits to be reinvested in the business. The caveat to this is that the borrower’s operations can be restricted by the terms of the loan.
In contrast, the upside of equity investments is limited only by the business’ performance. To this end, the company has much for flexibility and discretion as to how it deploys the capital; and the investor must share in losses as well as gains. In private equity and venture capital investments, this works to the company’s advantage as the capital can be put to work over an extended period (Aavishkaar’s target investment horizon is seven years or more) until the company achieves some form of liquidity event for its investors. Exit options can include trade sales, buybacks, mergers & acquisitions, or other more innovative options.
Aavishkaar’s portfolio is currently made up of nine investments, diversified across a number of different business sectors. Each of these investments supports the venture capital fund’s vision of nurturing creative thought and innovation in rural and semi-urban India . In addition, the fund has recently been identified as a recipient of the World Business Award as one of the top ten business models of the world contributing to the fulfillment of the Millennium Development Goals.
Additional Resources
1) Aavishkaar Micro Venture Capital Fund
2) United Nations Development Programme
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