Micro-Franchise For Venture Investment
For those of you who have read my discussion with Prof. Raj Reddy at Carnegie Mellon, you are familiar with our debate over MicroFinance, MicroEquity and MicroFranchise. We continued drilling down on this topic last weekend, following Sequoia’s investment in Micro-Finance company, SKS. I also wrote a piece referring back to some ideas from 2 years back.
Raj’s key objection to the Micro-Finance (synonymous with Micro-Lending) model is that most villagers do not have any concept of “Business”. They don’t know how to apply for a loan, or how to convince a bank to approve one. And they don’t have the language skills or the vocabulary to explore.
On top of that, the 23% interest rate, he thinks, is too high. And, while a $5 loan may suffice to buy a cow, it certainly doesn’t allow a village entrepreneur to buy a taxi, to operate a transportation service to the next major town. That would require more like $10,000.
These are valid observations. While Micro-Lending is good for a certain segment of the poverty pyramid, it fails to cater to the layer that’s a notch above. So let’s explore an alternative model: Micro-Franchise, financed by Micro-Equity / Micro-Venture Capital.
Let’s say, a group of MBA friends from IIM Kolkata get together, and decide that they would like to start a Floriculture Franchise. They will provide the idea, the business knowledge, the Venture Capital to a franchisee to get launched, the management guidance, the marketing and the sales channel into the urban flower markets. They will grow on roses, carnations, gladiolies, sun flowers, lilies, …
They go to Sumir Chadha at Sequoia, who will provide the capital. [Sumir: I have high hopes of you, my friend!]
And armed with that, we’ll see a 2-tiered venture capital model develop: (1) Sequoia finances our IIM guys’ Flower Franchise (2) The Flower Franchise finances the rural micro-entrepreneur franchisees.
The same Micro-Franchise model can be applied on taxi services, packaged food, village movie theater, village restaurants, retail chains, clothing stores, … your imagination is the limit!
Makes sense? Ready to go for it?
how is this model different from providing job opportunity to villagers? In this model flower guys contract village guys to buy their product and hence it creates jobs not entrepreneur.
same way ready-to-wear cloth makers outsource their job to village women.
However I agree with your view that not all villagers can be expected to be a businessman.
-Nishant
as someone who spent three years trying to set up enterprises for rural women, i support prof reddy’s argument. there are only few wealth creating opportunities through microfinance. certainly not at the village level. and certainly not at 24% interest rate. (is there a mistake here: a cow at 5$?)
however, your two tiered process is certainly a workable idea: distributed production (rural areas)/distributed sales (urban areas) with the entrepreneur as the key pin
there are few craft based ventures that use designers to come up with new products and the net to sell them, while the handicrafts are made in rural areas (with assistance from a local ngo)…
as the experiments of Tenet receive greater success, more and more rural areas will be available for such two-tiered operations. …
this process of development through business, as calvin says, is a magical world full of possibilities and lets go exploring…
Nishant,
Read the post carefully. The model offers venture capital to the villagers to set up their own franchise. To buy / lease land and set up a flower growing business, let’s say, the output of which will then be purchased by the Franchise.
Sramana
Suresh,
Haven’t bought a cow for a really long time
How much does it cost? $50? $250? I honestly don’t know the market price … however, as Ronald Raegan used to say, “The point of the story is to make the point.”
Sramana
There are a number of organizations that are starting to use the microfranchising model with success. You can see some of them highlighted and links to others at microfranchising.blogspot.com
Hi Sramana,
That does sound interesting…. btw do you know of somebody who might have tried this??
Incidentally I am one of your IIM Cal guys :)… and would like to try this model out preferably in my home state of Bihar
Amit
Amit,
If you want financing, I would not start this in Bihar.
Sramana
Dear all Members online,
I have been working with few NGO’s in United Nation. I have tools for running the Micro-Franching business.
Any one who is interested in learning then e-mail me back amer@pakistanisp.com
Interesting article. I need to read it again in order to digest all the information correctly!