Aakash is the limit

Aakash - the sky in Hindi, is the name of the new andriod power low cost tablet built by DataWind. It is supposed to be cheapest in the world at $35. Aakash has Wifi connectivity, GPRS access point and USB ports. Most importantly the tablet has the blessings of the Government of India. There are talks of the device being made available in schools and colleges across the country. There have been lots of comments and review about the device in the media, people have rubbished the minister who launched the product and have generally relegated the tablet to the thrash bin.

For any technology product to become ubiquitous it needs to have universal acceptance which means that it has to be in the hands of the common man who is NOT digitally savvy.  The last time something like this happened was when mobile telephony came into India. It is not uncommon for the lowest denominator on the street to have a prepaid connection and use the cell phone ( assembled in China ) and consume content.

The government has made a good start by earmarking a bulk of the tablets for school kids. My point is that there is hope on two fronts:

1. The dismal education system in India needs a boost and the tablet can do that by making technology, internet and content available to the kids who have to otherwise wait till they get to the college levels to have access. Self learn modules using the touch screen would let the children explore the topics they want from their syllabus and around them. This would mean that there can be teacher less classrooms and a uniform quality of knowledge that gets imparted.
2. Eventually the tablet screen can become personal infotainment option leading to the broadcaster directly being able to talk to the audience without the interference of the middle men. It creates a new dynamic two way relationship which only a true consumer friendly organisation would understand.

It is not going to be easy to get the first point going, with mutiple languages and cultural biases, it is a complex situation. But not impossible. There are several experiments in the past like the 'hole in the wall' project by NIIT's Sugata Mitra that have shown that if given a free hand the children from varied backgrounds can evolve into expert users even when they do not have a clue about the tech behind the device. The kids are not scared of experimenting like us adults and learn very quickly. Now think what is possible with self learn modules being provided via a wifi or a USB drive to the government sponsored tablet. In ten years we might actually have a whole generation of free thinkers instead of the 'rote learning' mass produce that the school system churns out every year. The returns of the investment will be its weight in gold. The problem is that there are too few who are focussing on this area. Most investment in education in India is aimed at the moneyed top end of the market while the middle India languishes with indifference. And this creation of solutions cannot be based on the aided models - those are normally shoddy and lack definitive edge that paid models have. Maybe the solution lies in creating something that is funded by media or ad funded. I am not sure at this point what that model is, I lack the imagination of a startup in this space, but logic makes me think it is possible.

An educated market is far ahead of a semi literate or illiterate market. The aspirations of the people who are aware are more aggressive than that of those that live closeted. The market that would get created by the Aakash tablet is likely to drive consumption far beyond what we can imagine. The sectors impacted would most probably be banking, ecommerce and entertainment. Imagine a 5 million market base that has access to this tablet, to education and then imagine what it would be to communicate with them in their language. The only way this can happen is if there is a paradigm shift in ad spends in India. And not for the luxury car segment but for day to day use fast moving, small pack size items - soaps, toothpaste, oils, masalas, banking services. I get a feeling that this new medium would be the equivalent of the wall painted ads that one sees across rural and semi urban India.

If I were the deciding factor on the business side of things at a broadcaster ( I work for a broadcaster!!!), I would try to get out there and embed apps that provide my content to this market that has access to the tablet on an ad funded model. Short format meaningful 3 minute episodes that can be created out of the existing soaps on TV or source content / create content for this category. Trust me when I say this - there are enough people out there who watch videos on their mobile phone using the crappy 2G connections using youtube or aggregators like Vuclip.

There will always be a savvy English speaking, willing to pay top rupee for subscription model in India for quality content. A tablet like Aakash can change the equation drastically. Hopefully there are enough of us to start preparing for the massive tsunami coming our way.

Exploring Chit Funds

This Diwali, my father in law finally decided to take me seriously.  He wanted to discuss a new business he was planning on investing into - a chit fund as a major promoter of the business. I was a bit surprised at the nature of business, because for me chit funds were what women did at kitty parties. It was the investment method of choice for hundreds of Gulf widows in Kerala. They joined 'chitties' with small amounts saved from the money sent to them by their expat husbands from the deserts of Arabia and bought flashy appliances and gold with the money they saved or paid dowry for their daughters.

In her working paper for Institute for Financial Management and Research, Small Enterprise Finance Centre, Preeti Rao classifies Chit funds as the Indian equivalent of the Rotating Savings and Credit Associations
(ROSCA) that are famous throughout the world. ROSCAs are a means to ’save and borrow’ at the same time. It is considered one of the best instruments to cater to the needs of the poor.

According to her paper the concept of chit funds originated more than 1000 years ago.2 Initially it was in the
form of an informal association of traders and households within communities, wherein the members contributed some money in return for an accumulated sum at the end of the tenure. Participation in chit funds were mainly for the purpose of purchasing some property or, in other words, for ’consumption’ purposes.

She explains that a chit scheme generally has a predetermined value and duration. Each scheme admits a particular number of members (generally equal to the duration of the scheme), who contribute a certain sum of money every month (or everyday) to the ’pot’. The ’pot’ is then auctioned out every month. The highest bidder (also known as the prized subscriber) wins the ’pot’ for that month. The bid amount is also called the ’discount’ and the prized subscriber wins the sum of money equal to the chit value less the discount. The discount money is then distributed among the rest of the members (or the non-prized subscribers)
as ’dividend’ and in the subsequent month, the required contribution is brought down by the amount of dividend.

To illustrate the above, let us take the example of a chit scheme with the following characteristics. Chit Value = Rs.500000, Duration = 50 months and Members = 50. The contribution in this case would be initially Rs.10000 per month per member. In the first month, the collection would, therefore, be Rs.10000 multiplied by the number of members i.e. Rs.500000. This amount is called the ’pot’ which is auctioned out at the end of the month. Now let us assume that the highest bid in the first month auction is Rs.100000. This is called the ’discount’. The highest bidder now gets the amount equal to the chit value, Rs.500000, less the discount, Rs.100000, i.e. Rs.400000. The discount amount of Rs.100000 is then divided among the other 49 members equally (the dividend for the 49 members work out to roughly Rs.2040 each). For the subsequent month, therefore, the contribution of these members reduces by the amount of dividend (i.e. the contribution in the second month for the 49 members would be Rs.10000 less Rs.2040 which is equal to Rs.7960). This process gets repeated for all months till the end of the scheme.

My father in law thinks that there is a need for a Chit Fund that caters to the huge very small enterprise sector. MIDC Bhosari is home to almost 100000 plus such fabrication and job work establishments which do not qualify for institutionalised support in the form of loans or line of credit. My maternal uncle is one such fabrication shop owner who over the last 25 years has done well to establish a series of 'factories' all over Pune district. He says when he started, it was difficult to get a loan and the only way to buy equipment was to join a chit fund and bid for the 'pot' right at the begining and repay it over a 12 to 24 month period. To date there are small operators who run unauthorised chit funds. Many are fly by night operators and people get conned into losing small sums that they invest.

The reputation of the chit fund depends on the ability of the person managing the business. While there have been large organisations like Peerless and Sahara in India which have run chit funds and have used the money to spin themselves into multi crore companies, it is the small fly by night operators that have given the business a bad name. The personal integrity of the team and the adherence to systems and timely audits are the key to the success. The new chit fund that is being proposed is supposed to be a private limited company with some big names in Pune as promoters, a good audit firm on board and a desire to follow the rules.

The economics of the business are sound. When they reach 10000 members who participate with an average of Rs 2000 per month they expect to start making money. They plan to expand into other industrial cities which have similar needs.

The second market they plan to target are the women who want to save but do not get good return due to low rates on FDs and do not have the knowledge to explore other options. These women use the chit fund route to fund their immediate needs and sometimes to support small home based businesses to suppliment their home expenses. A market that RangDe has been successful with.

I was expected to look at the business plan and suggest changes and whether something like this can attract an investor. My honest answer was that I am not sure. I see not differentiator to allow the business to scale up. The business is very locality based and cannot reach a large audience without legs on the ground. To scale up the investments are very large. Having said as much, it potential is mind boggling. Back of the envelop calculations say that they can be profitable within a year of operation in Pune itself. If they use technology - internet and mobile to make payments easy, the target market can move from the lower end to bigger ticket customers. The entire middle east is open to a tech savvy option where the tech savvy Indian can log into and invest without having to involve money transfer and impossible to verify operators.

A few friends on Twitter called Chit Funds a form of Ponzi scheme. My take is that any money related scheme can turn into a Ponzi scheme, there are enough respectable businesses that one reads of who inflate valuations for an IPO and then go bust within few months of the gulliable retail customer investing their saving in the scrips. Fiscal discipline and the ability to play a neutral and honest role in the management team is important. But then this applies to any business.

I will update this blogpost as the business matures, not because I have anything to gain from this venture but because I feel that ventures of this kind if run well have the ability to bring about crucial social change by making capital available when one needs it.