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Sequoia Enters Micro Finance

Posted on Tuesday, Apr 3rd 2007

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.

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I’m not sure that VC money is a good thing in such cases. The motivations of the VCs are not allied with that of SKS. If the VCs want to do some good then they should provide pro bono services to help SKS grow, the capital can be provided by others. How will SKS provide an exit?

tom foremski Wednesday, April 4, 2007 at 12:55 PM PT

VCs don’t enter to do good, Tom. They enter to make money. But in the process, some good happens.

SKS will either go public in the Indian exchange, where it is quite a bit easier to do so, or, I presume, get acquired by a larger bank. All the big banks have microfinance interests, and a consolidation play would be plenty viable for Citi or HSBC.

Sramana Mitra Wednesday, April 4, 2007 at 1:31 PM PT

Dear Sramana,

I personally am a strong supporter of microfinancing over the flawed aid model, and am in agreement that should the VCs wish to flock to one venture, then make it microfinancing.

Eliza

Eliza Lee Wednesday, April 4, 2007 at 2:50 PM PT

Top tier VC investing on Top class Microfinance institutions will do a lot of good. But I am worried about also ran VCs investing in a commitment-less MicroFinance institution. Here there is a very high risk of institutionalization of the traditional ‘Evil moneylender’. It will typically take 10-12 years to wake up to the damage done as there will be a lot of opportunities to dress up the ground reality.
Also, VCs are good at creating walled gardens that skews the success rate of ventures inside and outside their ‘club’. This works well in the technology. It might be counter productive in the BOP space.

-Balaji S.

Balaji Sowmyanarayanan Saturday, May 26, 2007 at 11:17 PM PT

A group of retired professionals from finanace, administration and academics are desirous of forming a non-profit Society for empowering poors through sustainable livelihood programmes including provision of microfinance. They are looking for a white angel who will provided seed capital and technology. Can any body provide information and contact addresses of such angels !

Chitta Ranjan Mangaraj Monday, August 20, 2007 at 2:35 AM PT