The visibility and acceptance of entrepreneurship has multiplied several fold in the past two decades. From a point where an entrepreneur was perceived as a “promoter with a scheme” to a point where most stu-dents in colleges outline entrepreneurship as their ultimate pit stop, India has come a long way in mak-ing entrepreneurship respectable and aspirational. The emergence of successful role models, who came without much family backing and yet managed to create leading global enterprises, has contributed immensely to this change in perception. At the same time, the inflow of institutional capital in the form of venture capital and private equity has provided the required ammunition.

However, the bulk of these success stories are still con-fined largely to the top 10 cities. Sixty per cent or more of private equity investments continue to be focused in the top five cities (Q1 2011: VC Circle). By the time one adds up numbers from the top 10 cities, precious little is left for even Tier II cities, let alone smaller towns. To understand this concentration, and how entrepreneurship may be fueled in smaller cities, we need to analyse the entrepre-neurship phenomenon in smaller cities.

Consumer demand and diversityIt is a well-recognised fact that India is going through a secular developmental path which is cre-ating considerable disposable income. This is leading to the demand for new products and services, as well as raising the standards of quality that an Indian consumer expects. This is a fundamental opportu-nity that Indian markets will offer over the next 50 years, if not more. This explosion in demand is hap-pening not just across the top 10 cities, but deep into the hinterlands. Thus, there are white spaces that need to be filled in addressing consumer sectors directly. There is also huge derived demand in indus-trial and other business sectors.

Also, sheer diversity is India’s most unique charac-teristic. There is a new flavour to India every few 100

kms—be it in terms of regions, lan-guages or cultures. Unlike the large developed countries, India remains a largely “non-standardised” market. Thus, there is an opportunity for entre-

preneurs to spring up in every part of the country, solving the same problems, but with unique socio-cul-tural flavours. Thus, unlike a top-down model of entre-preneurship, where one model is created and then replicated across a country, India will probably see a more organic bottom-up approach over the next sev-eral years. Specialised businesses will come up to tackle the unique needs across geographies and economic

HOMETOWN HEROES

India’s sheer diversity allows bottom-up entrepreneurship.But governments and institutions must pave the way for mainstream capital to reach smaller cities

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reach. Businesses in retail, vocational training and healthcare are classic examples where local tastes and preferences drive success.

Supply constraint in capitalAgainst the backdrop of exploding demand, the flow of venture capital and private equity remains supply-constrained. This is on two distinct counts. First, the absolute amount of dollars flowing into the market in the form of institutionalised private equity is too small—last year the $8 billion in private equity investments corre-sponds to about 0.5 per cent of GDP. In markets such as the US and UK, this number hovers in the 3 per cent zone. The second key supply constraint has been the accessibility of these funds to Tier II markets. Private equity as a form of capital tends to target companies that can be national and global leaders in future—in a diverse and fragmented market like India, this leaves many viable businesses at a regional scale out of the ambit of private equity. The fact that most private equity managers are thinly staffed in line with their business model compounds the problem. These managers tend to evaluate the “return on time”, which is optimal in larger high-concentration cities, rather than in smaller ones. In a classic Indian paradox, while penetration of private equity remains low, and there are “too few deals and valuation pressure” in the top 10 cities, in the smaller towns, deserving entrepreneurs continue to be strapped for capital. This actually represents a mar-ket failure in organising capital where it might be most productive.

Making capital accessibleI believe that governments, especially at state and city level, need to play an important role in bridging the capital divide outlined above. There are several measures, some short term and others long term, which need to be taken. One of the earliest sources of venture capital in the country have been state sponsored funds. Many of them have been successful in supporting businesses at state level—the few that come to mind include those from Gujarat, Rajasthan and Punjab. While some of these have been partially privatised over time, they continue to have a strong regional pres-ence. These initiatives need to be strengthened across states. While such funds may not necessarily employ the best talent or produce the best financial performance, the social return they generate must be factored into their contribution.

Several other government agencies are also taking steps to encourage entrepreneurship. For example, DST has a programme to put 1000 incubators across the country. There are technology funds available from TDB. The list goes on. Such initiatives must be focused to support entrepreneurship in Tier II cities—in fact, the quantum of funds themselves can be multiplied by extending such support.

Finally, the government should pave the way for mainstream capital to reach their cities and states over time. The incentives that state governments are willing to provide for large industries are well known. States which believe in the power of entrepreneurship, not just to create businesses but to solve the key problems of their people must develop programmes and incentives, be it setting up

of entrepreneurship development boards, incentives for develop-ing local angel investors, public-private partnerships around key start-up clusters, or facilitating expert resource groups. Over a lon-ger period, building entrepreneurial ecosystems in Tier II cities will have multifold returns.

It's not an accident that organised entrepreneurship is first showing its impact in larger metros. For decades, organised commercial activity has been concentrated around large cities in India and entrepreneurship is following the same path. How-ever, one can now see entrepreneurial ambitions bubble up from various other parts of the country. Like organic farming, organic entrepreneurship is harder, takes more investment and time, and involves short term trade-offs. And like organic farm-ing, organic entrepreneurship is more healthy and sustainable over a longer span of time. Not unlike other pieces of infrastruc-ture, it is time to start building the entrepreneurial infrastruc-ture in every corner of India.

Alok Mittal is the managing director of Canaan Partners, India. He is also a co-founder of Indian Angel Network, and is on the board of TiE (The Indus Entrepreneurs), Delhi.

Big Fish, Small Ponds Our hometown heroes are in good company. Some of the world’s largest companies were born beyond the usual hubs

Nestlé Vevey,

Switzerland

AirbusToulouse, France

Wipro Amalner, Maharashtra

Syndicate BankManipal, Karnataka

Nokia Tammerkoski Rapids, South Western Finland

HOMETOWN HEROES

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