Choosing Right Business Model Can Create Success in Start-Up Ventures in Agricultural Sector


Rajat K. Baisya

It also should be pointed out here that those who have succeeded have gone through several failures before they could finally emerge successful.

Recently I was in a conference in Mumbai. The theme of the conference was – ‘Management in Turbulent Times’. There was one presentation in that seminar on new ventures. The gentleman started talking about the figures of successes and failures in new business. He said that everyday twenty-five thousand new businesses are registered in India and more than this number (he gave that also but I forgot) of businesses get closed down everyday. Initially, I thought that this figure could not be correct but later on I realized that in a huge country like India this could be possible. He, of course could not furnish the sector wise list of successes and failures but I am sure that failure in consumer goods industry would be higher. We hear a lot about businesses which are successful but know very little about failures although a great deal of learning is there from failures and a study should be done sector wise so that entrepreneurs don’t repeat the mistakes done by others. It also should be pointed out here that those who have succeeded have gone through several failures before they could finally emerge successful. One should have that stamina and power to withstand the impact (both financial and psychological) of failures. Not many people have that and therefore, the success rate is also so low. The success rate in food and agro sector is still lower than other sectors. And the reasons are numerous.

While lot of new ventures come up in IT. Telecom and Technology sector but there are very few who have found agriculture as a good sector to invest and then make it a success story. Agriculture still contributes about one fifth of our GDP and although growing at a rate much lower than desirable yet this sector is very important in the context of our national economy and growth. But new investment in this sector is not forthcoming. Risks perceived in this sector seems to be high although land price is growing. Those who have gone ahead with the investment in agriculture ended up holding large acreage but not made any success story. Even big businesses have not been able to make any remarkable success in this sector. Generally, those who have invested in agricultural projects attempted to cultivate select crop and then tried to find a market for the same and invariably they found that the project is not very attractive. Part of the reason of failure of the those projects is due to the poor infrastructure in agricultural sector in addition to uncertain crop yield and remunerative market price. But no one has seen that the reasons for failure could become an opportunity for success. Recently, I chanced upon a success story of a business which is a new start up entered into the agriculture sector. Lack of infrastructure seems to be the investment opportunity for them to create apparently a success story.

The company I am talking about is StarAgri Warehousing and Collateral Management started by four young entrepreneurs led by Amith Aggarwal. The four founders have put in Rs 5 lacs each from their own savings and created this start up venture. In two years time the business has grown to Rs 2.86 crores in sales and Rs 86 lakhs in profit with clients like ITC, Britannia and Adani. This is no small achievement. The business model is highly profitable. The company has four revenue streams of which procurement and warehousing contribute around half of the total revenue. This involves procuring commodities from farmers and then selling them to corporate. Large companies like Britannia normally has to buy say wheat directly from village markets and has to warehouse that at their own cost to be used in their production centers. StarAgri will now supply that to them and thus they have ready buyers. Like Britannia they have many captive buyers. The business therefore, will grow many times in coming years. The second is what they started with, on 50 hectres of land and today company owns 200 hectres.Warehousing capacity stands at 2 lac tonnes including both leased and owned which is set to grow many times. The company estimate is that warehousing capacity will grow to 20 lakh metric tonnes in next 3 years.

The company helps in improving the value by eliminating the middlemen exploitation of the farmers and thus helps the farming community as well. This was one of the objective of e-choupal of ITC. StarAgri’s business of collateral management is also growing. Here, if a farmer wants a loan he can pledge his produce to be stored in StarAgri’s warehouses for which he gets a receipt. The receipt is accepted by banks as collateral. Bank thus extends loan. The farmers get 75% of the loan and this has become quite popular making up 25% of StarAgri’s revenues. More importantly, they have practically put the traditional money lenders out of business by providing credit to the farmers at 11% interest. With a loan portfolio of Rs 500 crore and growing this can lead to a societal change in the farming community.

StarAgri has also ventured into the distribution of general and commodity insurance. Company has tied up with Oriental Insurance for this product. These four revenue streams have made StarAgri an integrated post harvest company. Today company employs about 175 people based out of Jaipur. Company’s business model helps the farming community both in terms of getting legitimate price for their produce and offering credit at reasonable rate and at the same time reducing the post harvest losses by providing adequate warehousing facilities. The company might need huge fund to increase the warehousing facilities from its current level for which they will have to raise the fund. The company also plans to set up agricultural marketing yards where farmers and buyers can come together for trading without the involvement of any meddling intermediaries making the middlemen totally redundant. And to enable the farmers get the best price they will have online commodity trading windows as well. Thus company can for example, buy from a farmer in say Bangalore or Jaipur and tie up with NCDEX, India’s largest electronic spot exchange for selling. At the end, company can even think of setting up their own commodity spot exchange. The company has a presence now in Rajasthan, Gujarat, Haryana, Punjab and Madhya Pradesh but have plans to extend to other states as well. The business that has started small three years ago is still small but it has a huge prospect to grow given the dimension the agriculture and commodity trading business is. The agricultural commodity market is huge and valued at Rs 6 trillion but it is diverse and spread over all regions. The other key issues that need to be managed is occasional fluctuation in crop production. Company will have to focus on a few commodities and production target of these in certain years may fall. Besides, sometime demand may also fall. For example, this year demand of soyabean has fallen drastically. Even inadequate rainfall also can reduce the supply which are the typical hazards of this business. But business model will take care of these rise and fall of demand by trading in other commodities. Besides, StarAgro has multiple revenue streams and have flexibility. The model also takes care of typical problems of this sector by getting rid of the shackles of the ubiquitous moneylenders that can provide peace and dignity to farming community. For three years old company this is a remarkable achievement. Business model and revenue model chosen is noteworthy for other aspirant in start up ventures.

-- This article was first published in "Processed Food Industry" monthly magazine.

 

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