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BW Businessworld

The Bargain Hunter

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Jerome Mahesh runs a Rs 5-crore wood craft and design enterprise in Delhi. He buys close to 50 litres of paint and multiple cans of adhesive every month for his small workshop. But distributors give him a measly 5 per cent discount on his purchases while big companies buying in bulk get 30 per cent. This irks Mahesh no end, but he knows that he is at the mercy of distributors and wholesalers and cannot do much about it. 
 
Mahesh is not alone. Small and medium enterprises (SME) like his across India do not have the bargaining power to wangle discounts on their orders. With so many SMEs facing  similar problems, why weren’t their concerns finding a platform? 
 
This was precisely what R. Narayan set out to address a couple of years ago when he founded Power2SME, an online and offline platform that aggregates SME purchases. The business generates about Rs 10 crore in revenues, though Narayan is targeting revenues of Rs 200 crore in a couple of years. His investor, Inventus Partners, is aiming higher — $1 billion by the end of the decade. 
 
“I had worked with SMEs when I set up the sales and distribution networks for two IT giants (Microsoft and Oracle) in the mid-1990s,” says Narayan. The idea to start such a business was born out of an understanding of SME needs. “SMEs often do not get a fair price. Everything — be it steel, chemicals or paint — is discounted for large companies. But it is the small guy, the one who needs cash, who is actually losing money,” says Narayan. 
 
The idea for setting up an SME order aggregator came to Narayan in 2007, while he working for his other business venture, Denave, which sets up marketing teams for companies. A computer maker wanted to sell its laptops with an MRP of Rs 50,000 at Rs 30,000 to big companies, and at Rs 42,000 to SMEs. “This made it obvious that these small businesses did not have the faintest clue to prices,” says Narayan.
 
At Denave, Narayan, in the course of working with over 300,000 SMEs, had often wondered whether an aggregating model would work. He set out trying to figure out the standard set of
POWER2SME
YEAR OF FOUNDING: 2011 WHAT IT DOES: Aggregates orders from SMEs to get them discounts
USP: Strong network; has about 10,000 SME clients and 60 partners
FUNDING: $2 mn from Inventus Venture Partners and Kalaari Capital COMPETITORS: Online and offline B2B businesses
REVENUES: Rs 10 crore NUMBER OF EMPLOYEES: 100
products that SMEs purchased. The items most in demand were ink, paint, adhesive, polymers and steel. 
 
Narayan got SMEs to place orders for these products. Then, he aggregated the orders for each product line and, based on the now large orders, got a discounted rate from large suppliers. The more the SMEs that join Power2SME, the better the discounts. “It’s about scale. If I order 500 tonnes of steel one month, I get a discount. The following month, if I order 700 tonnes of steel, the rate comes down further.” 
 
Pick-up Line
What about logistics, especially warehouses, which can eat into margins? “The company does not maintain any warehouse. This is partly how the benefit is passed on to the SMEs,” says Parag Dhol, managing director at Inventus Venture Partners. A decade ago, some entrepreneurs had tried an information arbitrage model for SMEs in the steel segment, he says, “but they failed. This business (Power2SME) works because of third- and fourth-party logistics.” 
 
In fact, a decade ago, the logistics industry itself was in a nascent stage. But now, third-party logistics players own or rent out large warehouses and run fleets of trucks to deliver goods. “The small truck boom and the logistics industry getting organised allow this business model to scale up,” says Narayan. 
 
He adds that all inventory is on the SMEs’ books and not on his or the supplier’s. However, there is no credit given to the SMEs. “The company is in the process of creating credit terms with banks for SMEs,” says Vani Kola, managing director at Kalaari Capital. 
 
In the startup’s current business model, once the client pays or raises a purchase order, the product is despatched to it; the SME gets assured delivery and a price benefit, and Power2SME, its commission. “This business cuts out the many middlemen in the chain,” says Kola. 
 
This is what convinced Inventus and Kalaari Capital to invest $2 million in the company. “If this business was launched a few years ago, it would have failed because the logistics piece would not have fallen into place,” says Narayan.
 
How did investors home in on this business? Both the VCs were quick to realise Power2SME’s potential. “In a three-month pilot two years ago, Narayan had about 100 SMEs giving him positive testimonials. Being a salesperson, he had single-handedly built up proof of concept,” says Mukesh Jain, founder of Zanskar Capital Advisors, an investment banking firm. “He had good credentials as a businessman as he had already built a Rs 100-crore company.”
 
Narayan has achieved his goal of scaling up to 10,000 registered SMEs, and is now in the process of increasing product categories. At present, his network is limited to Maharashtra and Delhi regions. He is building one in the south by working with suppliers. Narayan also has plans to tap the automobile cluster in and around Chennai. 
 
But for a pan-India presence, he will have to convince SMEs to link their ERP systems with his company’s. “The company is entirely on the cloud, and the next task is to improve the online ordering model,” says Narayan, adding that only about 20-30 per cent of his clients use the online platform. 
 
As Kola of Kalaari Capital says, the country needs systems that can turn a fragmented ecosystem into an organised market. The goods and services tax (GST) could further fuel an SME revolution in India. If that happens, Narayan’s $1-billion dream may not be that distant.

vishal(dot)krishna(at)abp(dot)in
vishalskrishna(at)gmail(dot)com
Twitter: (at)vishalskrishna 

(This story was published in BW | Businessworld Issue Dated 01-07-2013)