It needed a totally dysfunctional presentation to the board in the company that I was then working in, to kick me into entrepreneurship. Fifteen days of preparation for a 30 minutes pitch to the board, for a scale up of the business, was thrown into disarray. I faced extreme resistance from the board, which lacked a deep understanding of the field and I was unable to proceed past slide 2. Much to my frustration there was already a strong assertion that the business was not worth scaling up. It was that epiphanic moment which thrust me on the entrepreneurial path.
Brahmanand Hegde, who was also in the same company, and I then teamed up to start a company which focuses on the small businessman in the country. For us, the choice of the segment to tap became evident as we travelled across the country. At last count, there were over 50 million established small businesses with established cash flows and ambitions to scale up further. But barely 4% of them had access to capital from organized finance. The other 96% was our target segment. These were the customers we would address through our unique credit methodology which would depend not on the traditional balance sheet and bank statement which these customers did not have, but on the ‘non-traditional’ but so Indian ‘kaccha bills, notebooks, delivery challans’ et al, which to these customers were real documents. And thus was born Vistaar Finance.
In the early stages of the debates about the customer segment and the business model, we needed a fair bit of mental discipline to determine what we would do (small businessman’s business needs) but it needed even more discipline to determine what we would not do (the salaried employee of the small businessman is not our customer). It is very seductive logic to say that we should leverage our knowledge and local presence to branch off in different directions but our unique value stems from the single-minded focus with which we have pursued the small businessman, to the exclusion of all else. We must credit our early stage investors for shaping our thinking in this respect.
This brings me to our investors. We had reached out to many investors with our pitch and, given our unique model, we generated a fair bit of interest. We finally did have a choice to exercise and chose to go with Elevar, who then brought on Saama Capital as a co-investor. Looking back, there was perhaps no one reason why Elevar was our investor of choice. Sandeep shaped the business model of Vistaar Finance as much as he has shaped our own entrepreneurial journey. Unlike with other investors, we never felt the need to make it appear that we had our business all completely well thought through, down to the last nut and bolt. Elevar’s team participated with us actively to refine, align and fortify our business. The fact that we did not have all the answers was perfectly okay. And contrary to our general perception, we never had the investors ever push us to higher numbers than what we had presented. The tyranny of the Excel model was something which we never experienced.
There were many strategic choices that we needed to make at the start of the venture – Urban vs Rural markets, geographical concentration vs diversification, limited team vs strong second line, many products vs limited simple products. We made these choices (the second in all those listed above) with a common theme. We wanted to be the bellwether company for lending to the small businessman segment in the country. Our objective was not to be successful in a limited geography with a small set of customers. We would measure ourselves by whether Vistaar had succeeded in proving that it is indeed possible to sustainably and profitably lend to the small businessman, and in the process pave the way for another 50 Vistaars to bloom. And for this, we were comfortable with having a small share of a very large company rather than a large share of a small company.
I cannot over-emphasize the importance of equity and its distribution in the startup and early stages of the company. Equity is very precious, a fact that is not often well appreciated by entrepreneurs who are unfamiliar with it. It is to be treated as though it is cash in your hand, with 10 to 20 times the current value. Then you can give it out, with due deliberation, generously to those who will be fully employed in the growth of the company and sparingly or not at all to all the others who would not be there full time.
The raising of equity from investors also introduced us to the world of lawyers, documentation, clauses and animated discussions over specific wordings in the documentation. I have often seen entrepreneurs shy away from these discussions all together, leaving it to the lawyers. I believe it is necessary to gain a good understanding of the commercial clauses involved in these transactions. It is not acceptable to think that liquidation preference is a mis-spelt description of your choice of your favourite brand of whisky. A liquidation preference can significantly alter the attractiveness of a valuation and considering that we will devote a significant portion of our working lives to making our ventures a success, we took pains to gain good insights into such terms and their implications.
There is nothing like a good crisis to separate the men from the boys. As the first tranche of equity came into the company, Sandeep told us that there was a 99% chance that we would dump this business model and do something completely different in a year’s time! I found it difficult to believe him initially but indeed that is the way it played out, with the Andhra Pradesh Microfinance crisis forcing us to accelerate our move towards individual lending. While the crisis was definitely painful as we were going through it, in retrospect it helped us immensely in several ways. It helped us to sharpen our differentiation, away from the microfinance model, as a consequence of which we became a true MSME (Micro enterprise) lender. It also saw some of our early team members exit. And most importantly, it helped us to reinforce the relationship we had with our investors – Elevar and Saama – as they decided to put in more equity into the company at a time when equity inflows had virtually dried up. The quality of investors is known more by how they act in bad times than in good times. And in that respect we scored an Olympic Gold in our choice of investors.
“We made strategic business choices with a common theme aimed at establishing Vistaar as the bellwether company for lending to the small businessman in the country. And for this, we were comfortable with having a small share of a very large company rather than a large share of a small company.”Ramakrishna Nishtala, Vistaar Finance
It has been six years since that March morning in 2010, when we stepped out of a corporate life to the life of an entrepreneur. There have been many ups and some downs as well and it strikes me that the spirit that has sustained Brahmanand and me through this journey is best encapsulated by the Stockdale paradox. We have simultaneously retained an enormous optimism in our eventual success in building the finest MSME financing company in India, if not the planet, even as we keep our feet firmly to the ground with an ability to confront facts and situations with brutal honesty and then take action accordingly. This principle will continue to guide us in our journey ahead -a journey that I am sure will be sometimes exciting, sometimes challenging, but always fulfilling.