Sequoia Enters Micro Finance

Those of you who read this blog regularly, know that I am a huge proponent of MicroFinance. Last week, an important piece of news item surfaced: Sequoia Capital has invested $11.5 Million in a Microfinance company called SKS. At the heels of Dr. Yunus’ Nobel Prize, this is a great development for the advancement of poverty eradication via capitalism.

SKS is now one of the fastest growing Microfinance institutions in the world. The company grew by 160% with a 99% on-time repayment rate last year. SKS currently provides loans to its 600K members in 7,200 villages in rural India. The company says that the new capital will go towards providing financial services to over 5 Million poor families by 2010. SKS estimates that its loans have a return on equity of 23%. That’s a high interest rate, but, it also makes it viable for a venture fund to invest in the company.

SKS Microfinance is based in Hyderabad, India, and was established in 1997. At the end of the financial year in March 2006 it reported a gross loan portfolio of USD 20,596,150 and a debt to equity ratio of 636% to the Mix Market, the microfinance information clearinghouse. SKS also reported a return on assets of 2.8% and a return on equity of 27.08%.

Sequoia, like many of SKS’s previous investors, (Unitus Equity Fund, Vinod Khosla, Ravi Reddy, Odyssey Capital, and SIDBI) of course hope to make a good return on their investment, and whilst doing so, help the poor in India.

This is not philanthropy but pureplay capitalism.

SKS will be required to exit within 3-5 years, or else Sequoia will get out of the deal. Naoko Felder furnishes some exmples of prior IPOs in the sector: “I just wanted to add 2 cases regarding IPOs related to MFIs 1) BRI of Indonesia,(Nov 2003) then a state-owned bank, released 39% of its shares to the public by listing in the Jakarta Stock Exchange. 2)In 2006, Equity Bank Limited listed in the Nairobi Stock Exchange (2006).”

There is, ofcourse, a fortune at the bottom of the pyramid. It just takes work to get to it.

Normally, I make fun of VCs because they tend to have a herd mentality in rushing into the same types of ventures that their peers do, thereby corrupting the market. However, in this case, I would be delighted to see VCs rushing to invest in more and more microfinance ventures. The scale of the global poverty problem is enormous, and it is one that can absorb an immense amount of capital.