Accel, one of India's most active e-commerce and marketplace investors, is making a contrarian move by shifting its focus to smaller towns and villages in search of future unicorns.
Venture companies on Wednesday argued that these regions, which they call “Bharat,” are important markets rife with opportunity for entrepreneurs, even as many startups struggle to make inroads in the region.
“There's a perception that rural areas are poor, but if you look at how much the top 20 to 30 percent of people are spending in rural areas, it's a significant amount. We estimate it's over $250 billion,” Anand Daniel, a partner at Accel, told TechCrunch in an interview. The firm claims that the top 20 percent of people in these untapped markets spend more each month than roughly half the urban population.
Daniel said the firm plans to take up this new focus as at least one of the key themes for its next early-stage investment program.
Accel's decision is notable because most other venture capitalists in India are chasing startups that serve major metros. Accel is an early investor in startups like Flipkart, Myntra, Swiggy, Zetwerk, Urban Company, Acko, Eruditus, Moglix and Infra.Market, and holds stakes in about a fifth of India's unicorns, though it hasn't deployed as much capital as its peers.
Accel's belief in rural India is driven by improving infrastructure in these regions. The widespread availability of smartphones and affordable internet has made digital services like mobile payments via UPI available to people across the country. Warehousing and logistics have also improved across the country, allowing for faster deliveries.
Accel says rural India is also seeing trends towards improving their lives, such as opting for 125cc bikes over 100cc models, double-door refrigerators over single-doors and second-hand iPhones.
While improved infrastructure will enable larger players like Flipkart to serve customers in these regions, Daniel believes that “there will be opportunities for new players as well because this is a very large market and it's not a zero-sum game.”
Many startups that have launched or expanded into smaller Indian cities have had little success: commerce startup Udaan, for example, largely failed in its attempt to serve merchants in smaller cities, even though the company has raised more than $1 billion in funding.
Some startups struggled on this front because they tried to force their urban strategies into these regional markets, while others struggled because they didn't prioritize the suburbs.
Another reason could be issues with the way these markets function: often family-run businesses have relationships with lenders and logistics providers in these regions that go back generations, and it can be difficult for start-ups to enter such markets on their own tech capabilities alone.
Daniel suggests that entrepreneurs looking to serve rural India should be mindful of these relationships and work to expand them. He gives the example of Accel portfolio company City Mall, which works with micro-entrepreneurs in small towns in India, allowing them to play a key role in and benefit from the growth of their companies.
Startups servicing rural India will need to look and operate differently from their urban counterparts — their business models, customer acquisition strategies and distribution will likely be very different, Axel said.
But the company is confident that these regions will produce large startups whose valuations will be on par with those of their urban counterparts, Daniel said.