CASE: E-482A

DATE: 10/29/13

NOT FOR CIRCULATION BEYOND GSB F385, FALL QUARTER 2013 STUDENTS

VC DECISION-MAKING IN INDIA: AAVISHKAAR AND MILK

MANTRA (A)
INTRODUCTION

Vineet Rai, managing partner of Aavishkaar Venture Management Services—an early-stage Indian
venture capital fund—sat in contemplation as he reflected on life over the last decade. It was
October 2010, and after nearly ten years of fundraising and drumbeating, Rai felt that Aavishkaar
was finally on solid footing. Now that the fund was well capitalized and had begun to develop a
solid track record, he was eager to continue executing on his founding vision and bringing much
needed capital to underserved regions and sectors in India.1

An interesting opportunity had arisen to invest in the creation of a dairy operation in the heavily
rural Indian state of Orissa. In fact, when the opportunity first came to Rai’s attention in late 2009
via an unsolicited email, the investment’s potential merits caught Rai’s eye immediately and elicited
a response within two minutes of receiving the message. At the time, the dairy project—far from
operational—was effectively an idea on a napkin with a promising founder, Srikumar Misra. Given
the crucial moment in the fund’s life, whereby Aavishkaar would likely be disproportionately
judged on its initial investments, success was all the more critical. Initially, Rai was uncomfortable
investing in the venture until he could get a better sense of Misra’s character. However, over the
ensuing year, Rai had been impressed by the entrepreneur’s ability to secure commitments for the

1
Case material sourced from interviews with Vineet Rai, Noshir Colah, and Rishabh Kaul of Aavishkaar on July 23,
July 30, September 6, and September 25, 2013 respectively, as well as interviews with Srikumar Misra of Milk Mantra
on August 8, August 14, September 4, and September 26, 2013. Subsequent quotations are from the authors’ interviews
and conversations unless otherwise noted.

Justin Randolph (MBA’12) and Professor Ilya A. Strebulaev prepared this case as the basis for class discussion rather
than to illustrate either effective or ineffective handling of an administrative situation. Jonathan Chang (MSx ’13)
provided research assistance.

This case was made possible through the generous support of Mr. Kevin M. Taweel.

Copyright © 2013 by the Board of Trustees of the Leland Stanford Junior University. Publicly available cases are
distributed through Harvard Business Publishing at hbsp.harvard.edu and European Case Clearing House at ecch.com,
please contact them to order copies and request permission to reproduce materials. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means ––
electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate
School of Business. Every effort has been made to respect copyright and to contact copyright holders as appropriate. If
you are a copyright holder and have concerns, please contact the Case Writing Office at cwo@gsb.stanford.edu or
write to Case Writing Office, Stanford Graduate School of Business, Knight Management Center, 655 Knight Way,
Stanford University, Stanford, CA 94305-5015.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 2

debt and additional equity he would need to make his plans operational; he concluded it merited an
additional review and decision on the investment.

VINEET RAI

Born into a middle class family in Uttar Pradesh, Rai graduated from the Indian Institute of Forest
Management in 1994, just as a wave of economic liberalization was taking sway throughout the
country. After being recruited on campus, Rai began his professional career working for Ballarpur
Paper Mills for three and half years. The role included a posting in a remote part of Orissa where he
was exposed up close to the complex nature of absolute poverty. In 1998, the Government of the
state of Gujarat and the Indian Institute of Management at Ahmedabad launched the Grassroots
Innovations Augmentation Network (GIAN), a rural business incubator that sought to promote rural
innovation, development, and business. By what he cites as a series of accidents, Rai started as a
research associate at IIM Ahmedabad before being appointed CEO of GIAN at the age of 26.2

THE AAVISHKAAR VISION

At GIAN, Rai soon came to believe that, far from a shortage of skills, imagination, or initiative, the
main obstacles to decentralized, rural enterprise development were a lack of capital and risk-tolerant
investors. At one point, Rai met an ambitious and promising entrepreneur from a small village who
required $10,000 to license the technology rights for an innovative hydraulic mechanism used in
rural oxcarts—technology which Rai had encountered during his role at GIAN and which he was
hoping to transfer throughout India’s rural villages. Every bank he had approached had refused the
entrepreneur. As Rai reminisced:

At that time, traditional venture capital was just starting to take shape in India—
which had only truly opened up to the world in 1991. Virtually nobody was making
early-stage investments in small towns or rural states. I recognized what appeared to
be a wealth of ideas in basic, “brick and mortar” sectors and rural regions with a
market size of 700 million people. I felt by investing in these ideas—via
investments as small as $15,000—one could convert them into successful
businesses in response to the country’s rapid development.

By and large, people working to improve conditions in the underdeveloped, more rural parts of the
country considered microcredit—the practice of offering very small loans to individuals starting
small businesses—to be a successful tool. But to Rai, microcredit wasn’t well suited for individuals
with visions of larger and riskier ventures; instead, the funds needed for such ventures were often
substantially higher. Further, the more significant risk involved in early-stage startups would
inevitably lead to a greater default rate than the industry was accustomed to. The result was an
unavailability of financial products for high-potential ventures, high transaction costs, and
underdeveloped local capital markets.

Rai felt compelled to act, especially because he saw a large rung of India’s economy—a burgeoning
low income population in rural and semi-rural areas, representing hundreds of millions of people

2
Reddiff Business. “One Man’s Crusade to Bring Riches to Rural Areas.” http://www.aavishkaar.in/rediff-interview-
with-vineet-rai/. January 18, 2010.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 3

with aspirations of having access to basic human needs such as food, water, energy, education, and
healthcare—as vastly under-addressed (see Exhibits 1 & 2). With the recognition that latent
entrepreneurial talent existed to serve this population, but was held back by a lack of capital, Rai
held the simple belief that, “If I could only give risk capital to good people, amazing things would
come out of it that could bring about both commercial activity and positive social change.”

IN SEARCH OF FUNDS

Yet, as early-stage venture capital was altogether absent, and the notion of investing as a tool for
social development was an almost radical proposition, Rai faced a crowd of skeptics. As Rai
reminisced:

In 2001 with tech companies going bust and the global VC industry in a nosedive,
there I was, walking around with a high-risk idea. Almost nobody had that kind of
appetite, and I couldn’t point to comparables or success stories in India on which I
could predicate the model I envisioned.

Nonetheless, in May 2001, Rai pitched the idea of a venture fund to a group of Indian expats,
business veterans, and colleagues living in Singapore. They were impressed by Rai’s vision of
venture capital and entrepreneurship as a sustainable mechanism for the country’s social
development. The group of nearly 10 individuals pledged initial, though limited, seed funding of
roughly $75,000 in total, largely as an “experiment in which they were prepared to write off the
investment.” For Rai, in spite of the modest fundraising sum, the Aavishkaar India Micro Venture
Capital Fund had been born. ‘Aavishkaar’—meaning ‘invention’ in Hindi—aspired to be the first
sizeable early-stage venture fund in India that specifically targeted fundamental market needs in the
country’s rural and semi-urban areas.3

In principle, while Rai sought to diverge little from the venture model championed by Silicon
Valley, a key departure involved a focus on small investment sizes to businesses with relatively
high levels of early-stage risk. By doing so, Rai hoped to create a sustainable model that could
demonstrate such an approach was indeed viable. By taking the initiative to place small amounts of
capital, Rai hoped to incubate a larger ecosystem of investments and commercial development in
areas that had traditionally been overlooked in the country. To make the idea work, Rai shied away
from businesses exhibiting high levels of technology or product-related risk in favor of those with a
higher element of execution risk. As he planned to make investments in “brick and mortar” sectors,
he built his model with expectations that his most successful investments would yield returns of
10x.

Shortly after raising seed capital, Rai realized that mere financial capital wouldn’t be sufficient.
While Rai viewed the provision of capital as Aavishkaar’s key value proposition, he also saw the
fund as a valuable mechanism for delivering operational support and guidance to entrepreneurs as
they transitioned from early stage to scalable growth businesses. There needed to be a broader
ecosystem of innovation and support—what Rai terms “intellectual capital”—to back up the
financial capital provided by VCs like Rai. As such, Rai founded a consulting and research firm

3
Ibid.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 4

called Intellecap, which he imagined could eventually evolve into an investment bank capable of
providing debt financing to relevant rural companies. Rai also envisioned developing a strong
network to support and mentor entrepreneurs as they inevitably dealt with the challenges of scale,
and created the Sankalp forum—meaning ‘Pledge’ in Hindi—to serve in the role of enabler,
connector and conversation starter, and to offer mentoring opportunities to a select set of enterprises
each year (see Exhibit 3).

EARLY DAYS AT AAVISHKAAR

Rai now faced perhaps his most difficult task—proving and building out the venture model. He
knew he would need to raise substantially more capital to effectively manifest his vision and would
need to point to powerful success stories as references for support.

At the end of 2002, Rai identified Servals Automation as his first investment—a Chennai-based,
kerosene-burner manufacturer that promised to reduce kerosene consumption, which represented
one of the largest expenses for many rural Indian households, by 30 percent. Aavishkaar arranged a
49 percent stake in Servals for $20,000. While he strove to remain focused on sourcing additional
promising opportunities—investing in five additional startups over the next three years—the
fundraising environment remained challenging.

By 2006, Rai could point to tangible progress within his portfolio companies. Servals, for instance,
had made slow but substantial progress. It exhibited annual revenues of nearly $200,000 and had
started to turn a profit. Potential LPs slowly began to warm to Rai’s pitch of early-stage investing
and rural development in India. The wait eventually paid off as Rai persisted. In 2007, six years
after receiving seed capital, he arrived at a first closing of the fund at a modest $6 million and a
fund life of ten years. In 2008, he received additional commitments of $5 million, and by January
2009, Rai arrived at a final close amounting to his $14 million target. Subscriptions came primarily
from global financial and development institutions such as Cordaid, CARE Enterprise Partners,
India’s National Bank for Agriculture and Rural Development (NABARD), the Oasis Fund, FMO,
Dreilindin GmbH, George Avenue CV (a PE fund tied to Noaber Foundation), and Enam Capital.4

THE FUND GAINS TRACTION

By 2010, in spite of the fund’s relatively small amount of capital (at least when compared to
western venture capital funds), Aavishkaar stood as one of the five most active VCs in India and
overwhelmingly the most active in non-tech, ‘brick and mortar’ sectors throughout the country’s
underserved regions.5 It had invested in a total of 14 companies—half of which had reached
profitability. While the fund’s first seven investments took five years to source and finalize, it
placed its next seven all within the 2009 calendar year. Moreover, at a fund size of $14 million,
Aavishkaar’s investment model changed in favor of larger investment sizes, given the insight that,
though “micro venture” investments were value accretive, many portfolio companies were still
undercapitalized and unable to truly get off the ground. Whereas investments of between $12,500
and $125,000 were typical of the fund’s initial investments, by 2010 the fund strove for investments
of between $100,000 and $1 million.

4
VC Circle. “Aavishkaar Raised Funds.” http://www.aavishkaar.in/vccircle-aavishkaar-raised-funds/. October 9, 2007.
5
Ibid.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 5

FUND SPECIFICS

In order to gain greater insight as to Aavishkaar’s relevance within India’s entrepreneurial

ecosystem, it is helpful to focus on the fund’s mechanics:

Overview
Aavishkaar’s thesis is premised on the notion that India’s poorer, more rural regions —with a
population of 700 million— will continue to go through a political and developmental renaissance,
and will likely exhibit the highest relative growth indicators in the country and will offer attractive
investment valuations. The fund seeks a target return to its LPs of 15% net of fees—for which it
applied a minimum expected IRR threshold of 25-30% for each prospective deal—and sought to
acquire equity stakes of between 20 and 45 percent in its portfolio companies. In general,
Aavishkaar screened prospective investments based on four primary criteria:

1. The quality of the entrepreneur and management team;

2. The extent of a rural and underserved economy focus;
3. The potential for scale that the business may achieve;
4. The sustainability of the business model.

Deal Sourcing
Over the years, Aavishkaar has developed a significant reputation through aggressive, direct deal
sourcing efforts—which have included substantial remote travel, partnerships, and networking with
not-for-profits, incubators, and academic institutions—and has become the most well-known
investor in India within the sectors in which it participates. Owed to its significant word of mouth
following, nearly 90% of Aavishkaar’s investments have originated from inbound requests, as the
fund is often the first (and sometimes the only) port-of-call for entrepreneurs seeking capital for
rural, early-stage, “brick and mortar” ventures.

Every week, the fund typically sees between 3 and 6 potential deals and rejects approximately 80
percent on receipt either because of a lack of fit with the fund’s rural mandate or sector focus, or
because the nature of the opportunity appears excessively premature.

INVESTEES AND AAVISHKAAR’S DUE DILIGENCE APPROACH

To Rai, in order to be a ‘catalytic’ investor, one needs to “invest when the risk profile doesn’t
permit mainstream investors to participate in the business.” In many cases, the fund has decided to
invest either before a prospective business has started commercial operations or has formally
organized itself—an approach that often places the fund in the tongue-in-cheek category of “napkin
investor.” As of 2009, roughly 90 percent of its fund’s investments were merely “plans on paper” at
the time of investment.

At such an early stage, Aavishkaar’s decision to invest is based primarily on two factors: (1)
whether a large-enough, addressable market exists, and (2) whether the entrepreneur has the
capability to address the market. For the former, very little publically available data typically exists
to support the fund’s diligence, which obligates the team to conduct in-depth, in-the-field primary
research. Such data collection represents an extremely time intensive process. As an example, Rai
noted, “For an aquaculture investment, we start with the price of fish. Since this data is typically
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 6

either absent or unreliable, we go straight to the fish markets and fishermen to get a feel for price
dynamics.”

Rather than investing in ‘groundbreaking ideas,’ Rai’s investments have been in what he calls ‘low-
key geographies and sectors’—regions and industries either completely overlooked or those
exhibiting very little innovation in terms of cost-effective delivery of products and services. For
instance, as he explained:

We invested in a doctor who sought to take the kind of medical facilities that would
be available only in large towns and cities to smaller towns and to areas where such
facilities didn’t exist. We viewed the opportunity as taking something that already
worked and applying it an underserved geography in an innovative way, so as to
deliver quality medical services at an affordable price. We never took on technology
risk or true behavior change risk. Rather, we view innovation through the lenses of
frugality, cost effectiveness, and high-quality delivery at low price points—you
could call it the ‘Indian way’ of viewing innovation.

Given that Aavishkaar’s investment strategy hinges largely on execution and implementation rather
than the novelty of an idea, the qualities and temperament of the entrepreneur and the founding
team are “supremely important” and represent the biggest constraint to the fund’s growth and its
most critical point of diligence. To Rai, “There simply aren’t enough patient entrepreneurs to back.
We see people all the time who’ve come up with excellent products and ideas, but just have not
been able to judge and articulate how they would be able to commercialize their visions or lack the
patience to deal with the inevitable challenges of seeing their visions through.” As such, Aavishkaar
limits investments to entrepreneurs who have “a risk-taking temperament, a desire to work in
difficult areas, and a clarity of business vision”:

We fundamentally believe in understanding the motivation of the entrepreneur while

making our investing decision. We only invest in entrepreneurs who seem to have
the capability to build institutions, have a genuine desire to work in rural India, and
are accepting of the challenges that come with it.

The personality of the entrepreneur is especially important to Aavishkaar’s investment process

given the specific nuances of operating in India. As Rai elaborated:

There are a lot of people who thrive in the perfect. So if you give them perfect
everything—as in Silicon Valley—they will do very well. But if you put them in
India, which is inherently a complex and very challenging environment to launch a
startup, they often struggle. If they don’t understand or can’t cope with the ground
realities, they can have the best design or the greatest technology, but the attempt to
scale will be doomed to fail. So we’ve learned we need entrepreneurs with the
ability to stay the course—people bull-headed or even stubborn enough to stand up
to anything—and we look for perseverance, patience, and the ability to deal with the
ground realities. Our fund’s strength therefore lies in identifying such an individual
and making a judgment on the entrepreneur. If we invest in the wrong entrepreneur,
then we’ve invested in the wrong business.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 7

Only after being comfortable with the entrepreneur and his/her understanding of the business and its
operational plan does Rai transition to financial due diligence and a discussion of valuation. In order
to evaluate the entrepreneur’s capability, the fund probes the entrepreneur extensively on various
details with an eye to whether he/she has thought through the various challenges and is flexible
enough to handle the inevitable yet unanticipated events. This generally involves scrutinizing the
operations or operational strategy of the company. By doing so, Rai develops a better sense for how
much a particular entrepreneur understands his/her business and relevant markets, the eventual
scope of the potential business, and the business strategy’s staging. In part so as to get clearer
insight into an entrepreneur’s capabilities, the fund typically adopts a ‘wait and see approach’—
extending investments out in relatively small installations.

On average, the diligence process lasts roughly two months, though in the rare instances when
reliable data is available, diligence can move as quickly as a few weeks. Such a diligence timeline
is extremely fast compared to other funds, whose decision makers typically require more time to
understand the relevant product and market. Rai and his colleagues are frequently on the road in
rural areas—often clocking 50,000 kilometers every year in road travel.

Relationships with entrepreneurs

While Aavishkaar’s due diligence process is “respectfully inquisitive,” Rai is deliberate to develop
a positive rapport with prospective investees and is adamant to avoid “pushing founders too hard” to
acquire information. As Rai noted:

If you challenge founders to the point that they become defensive, they may
withhold certain facts. As such, we typically spend very little time discussing term
sheets and negotiating, because we see an investment as a long-term partnership
rather than a purely financial transaction, and we’re dependent on goodwill between
our entrepreneurs and us. It’s a very fine line; once you overstep your bounds, the
relationship will suffer and it will be nearly impossible to amend.

Rai emphasizes that a lot of the ‘human intelligence’ that goes into understanding entrepreneurs is
informally collected in settings far from an interview seat—in long car rides to the field or in
informal lunches, for example.

Management Rights, Board Participation and Operational Support

Aavishkaar’s belief has always been that control is defined less by ownership and more by an
investor’s relationship with entrepreneurs. Aavishkaar rarely has a majority ownership or majority
representation on portfolio companies’ boards. Typically the boards of Aavishkaar’s investees
comprise a board of three—one from Aavishkaar and two from the company. Most decisions are
taken informally and not during board meetings, even in the case of companies involving multiple
investors. As Rai notes, “In India, investor control is extremely subtle and depends on one’s
alignment with an entrepreneur, rather than the percentage ownership in a portfolio company.” In
spite of this, the fund does retain an extensive list of affirmative rights and/or vetoes over important
decisions that could affect the valuation and strategic direction of its portfolio companies. However,
these rights are meant to allow the fund to “exercise caution, rather than control.”

While the Aavishkaar team spends approximately 50% of its time ‘in the field’ conducting diligence
and sourcing new deals, it typically spends the remaining time supporting portfolio companies.
However, as a general rule of thumb, Aavishkaar is hesitant to get deeply involved in the
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 8

management and operations of any portfolio company, instead typically limiting support to strategic
advice, financial planning and fundraising, corporate governance, aiding in M&A transactions, and
preparing the company for an exit. As Rai notes, “If we go and tell our investees explicitly how they
must do something, it’s not going to work. All we attempt to do is lay out options—pros and
cons—and then let our investees reflect and make a decision.”

Contracts and the Legal System

While the fund includes rights in all of its contracts akin to those found in Silicon Valley—
liquidation preference, anti-dilution, tag along, drag along, preemption, etc.—the enforceability of
many of these features in India, especially by a VC fund, is challenging. Compared to other
markets, India’s judicial system and legal framework is slow and drawn-out. As Rai jokes, “The
fund would be closed down and we’d still be fighting a court case if we ever actually disputed a
contract in the Indian legal system. Thus, the fund’s business model emphasizes trust and informal
means of influence; a deal’s legal document is more of a signal of that trust, rather than an actual
arbiter of it. As such, the fund avoids conflict resolution through the Indian legal process, in favor
of private negotiations when required. Regardless, Aavishkaar still chooses to include “standard,
Silicon Valley VC rights” for two primary reasons: (1) the regulations could change and the rights
could then become enforceable, (2) in the case of a secondary sale, the incoming investor may wish
to have such rights present.

Competition
As very few participants invest in the sectors and regions that Aavishkaar pursues, the fund rarely
finds itself in a competitive situation. Since Aavishkaar is a very early-stage investor and almost
always the first VC investor, Rai recognizes that the fund takes on a high level of risk. He justifies
doing so by not having to enter into bidding wars and by effectively being compensated through
favorable valuations. However, if a prospective investee does obtain a competing term sheet,
Aavishkaar almost without exception walks away. By not stretching itself on initial valuations, Rai
believes the fund is able to support its portfolio companies in subsequent rounds—even when they
substantially underperform their targets—without compromising the fund’s targeted financial
returns.

Strategic Partnerships, Liquidity, and Exits

While the fund’s investments are meant to get portfolio companies through their difficult initial
years to the point where they have validated their business models, Aavishkaar’s limited funds
require that its portfolio companies ultimately reach a point of interest to growth-stage private
equity investors and banks. As public markets and IPOs are largely out of reach to companies
within Aavishkaar’s sectors, a sale to a private equity buyer or an Indian corporate represents
Aavishkaar’s most viable exit strategy. As such, during subsequent fundraising rounds, Aavishkaar
often solicits co-investments from strategic investors and/or major venture funds and banks so as to
develop a pipeline for strategic acquisitions. Most of the fund’s exits to date have been through a
secondary sale to a growth-stage PE firm or a strategic sale to an Indian corporation.

Fund Administration
The fund is on a standard management fee + carried interest model. Owed to its relatively small
capitalization, the fund charges a 3.5% management fee for its first six years (as opposed to the
standard 2% often found in the venture industry)—afterwards it drops to 2.5% of invested capital—
and levies a 15% carried interest (compared to the typical 20%). Rai required a large investment
team to manage the fund’s relatively large number of investments—especially given the nature of
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 9

the fund’s investments, which involve difficult operating environments and a significant amount of
‘hand-holding’ of portfolio companies. However, with modest fees, on an absolute basis, Rai found
himself forced to engineer frugal management practices within the fund’s administration. As he
proudly notes, “I can guarantee Aavishkaar is the world’s cheapest fund on total cost ratios.” While
a typical $150 million venture fund often has as few as 3 to 5 personnel as part of its management
team (including support staff), Aavishkaar has close to 20.

Social Impact
In creating Aavishkaar, Rai dreamed of a true, for-profit, social impact, investing model
independent from grants and philanthropic capital so as to allow such charitable resources to instead
support causes that do not have business solutions. While Rai has never claimed to be a “social
impact investor,” he acknowledges that some LPs are galvanized by the notion that they are
“participating in a pioneering experiment that has the potential to impact millions of people.” To
Rai, in a country like India, where three‐fourths of the population lives in rural areas and 38% of the
population is classified as poor, investing in enterprises that either source products and services
from low income populations, provide effective products to low income populations, and/or enable
such a socioeconomic segment to share in the ownership of those businesses inherently provides a
positive social impact.

THE MILK MANTRA OPPORTUNITY

Overview
It was at the beginning of 2010 that Rai began thinking broadly about the Indian dairy industry as a
prospective industry in which to invest. To Rai, there were a number of compelling reasons to get
more involved in the sector. India represented the world’s largest dairy market by volume, yet the
majority of production was highly decentralized and concentrated in smallholder farmers—resulting
in a fragmented landscape of informal dairy producers. Given the commoditized nature of milk, Rai
saw the potential for the dairy industry to scale and formalize significantly if effective back-end
solutions were put in place in the areas of milk collecting, processing, and distribution. In addition,
the rural nature of dairy production aligned well with the fund’s underlying thesis. Furthermore,
later-stage private equity firms and corporates had begun showing interest in the dairy sector, which
Rai saw as a sign of an initial ecosystem forming around the dairy industry that could be beneficial
from an investment exit perspective. The Carlyle Group, one of the world’s largest private equity
firms, had just acquired a stake in Tirumala Milk—a manufacturer of dairy products for distribution
in the Indian states of Andhra Pradesh and Tamil Nadu.

At such a time, almost fortuitously, Rai received a cold email from Srikumar Misra who was
soliciting capital for a company called Milk Mantra. Misra sought to provide the Indian dairy sector
in the rural state of Orissa with a serious makeover. His plan of forming strong farmer relationships
via ethical and transparent dairy sourcing, creating an efficient dairy processing and distribution
operation, developing an innovative packaging format, and launching an engaging and endearing
consumer challenger brand, was certainly ambitious—perhaps overly so at Rai’s first glance, given
that Misra had no previous experience in the dairy sector. However, Rai’s intrigue had been piqued.
Upon finishing reading Misra’s email, he immediately responded, arranging for a meeting.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 10

Srikumar Misra
Since graduating with an MBA from India’s Xavier Institute of Management in 2001, Misra had
spent eight years in a number of managerial roles for the Indian conglomerate, the Tata Group.
After beginning within the Tata Administrative Service (TAS), which served as a fast-track
leadership program within the company, Misra transitioned to Tata Global Beverages and the
conglomerate’s consumer tea brands—Tata Tea & the Tetley Group—where he helped launch the
company’s tea brands and arranged joint ventures in new markets, including South Africa, Central
Europe & Central Asia, and China. Misra eventually was promoted to Director of M&A of Tata Tea
& Tetley—the youngest in the company’s history to hold such a position—and headquartered in
London. Eventually, Misra became unfulfilled by the corporate work he oversaw. As he reflected:

I just realized that I kept scaling up the corporate ladder; I wasn’t creating anything
that was going to truly change peoples' lives going forward. As I became unfulfilled,
and with all the change and development activities taking place in India, I couldn’t
help but feel like I was on the outside. With my branding hat on, I began to look at
the Indian marketplace and recognized that a huge gap existed among the consumer
brands that were serving the needs of Indians.

To Misra, the dairy sector specifically stood out as an interesting area to pursue. At nearly $40
billion, dairy represented the country’s largest food sector segment, yet only $5 billion was being
provided by the formal, private sector. As such, the industry was rife with inefficiencies and there
was a persistent lack of innovation throughout the category. Misra felt confident that, with some
innovation and effective marketing, an opportunity to create an exciting and engaging dairy brand
existed. His experience in international markets and observations of large dairy companies in
Western markets only supported this hypothesis. As he noted:

Dairy products were still being sold in the same kind of pouches and packaging that
they had been for more than 30 years, without any significant functional innovation.
So to me it just seemed astounding that India, one of the fastest-growing economies
with the largest proverbial middle class in the world, would have a food which is
basic to the consumer and which hasn’t changed materially in three decades.

The public also had very little confidence in the quality of the existing formal dairy brands due to
several adulteration and contamination issues. According to a national survey in 2010 by The Food
Safety and Standards Authority of India (FSSAI), 70 percent of the milk samples tested failed to
meet its required standards of food safety. The majority of Indians had gotten accustomed to
boiling the milk they consumed so as to remove any adulterations.

What is more, Misra was originally from the Indian state of Orissa—one of the most backward and
tribal states in the country—and knew first-hand how undeveloped the region was and how nascent
many of its industries still were. He also recognized that the region had significant access to dairy
but exhibited few organized players. The practice of keeping cows was an inherent part of Orissan
culture, particularly in the 'Milk Belt' that spans from Puri on the coast to the border with West
Bengal. However, organized collection of milk in Orissa as a proportion of total milk produced was
as little as 10%, primarily owing to the lack of branded, organized, private players, hence leading to
a lack of cold-chain and logistics infrastructure.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 11

As Misra dug deeper, he began formulating a vision for a dairy company that would work across the
dairy supply chain—from sourcing to processing to marketing. Misra turned to family, friends, and
informal angel investors in the UK for funding to further explore the market and identify the
specifics of any potential opportunity. However, while many people evidenced a basic interest in
the opportunity, he was unable to receive any notable commitments. Misra determined that in order
to gain traction among prospective investors, he would need to leave the cushy environs of London
and the safety net the corporate role provided, ‘go out on a limb’ and be on the ground to further
formalize the concept. As he recalled:

After a certain period of time I was convinced that there was a calling that I had to
follow. I felt that if I pursued it properly and smartly, though it may not pan out the
way I envisioned it, something would work out in the end. Overall, I believed the
pursuit was absolutely important and was worth the fear and risk of the unknown.

Energized to create a company of his own that would positively impact India’s development, by
mid-2009 Misra decided to leave London, Tetley, and a successful corporate career, and to launch
wholeheartedly into India’s dairy sector and the concept of Milk Mantra full-time, regardless of his
limited knowledge of the dairy sector and insufficient capital to fully implement his vision.

THE INDIAN DAIRY INDUSTRY

Overview
India has the world’s largest dairy herd and represents both the world’s largest producer and
consumer of dairy products by volume, with more than 13% of world’s total milk production. A
recent survey revealed that, on average, an Indian family allocates 17 percent of its household food
expenditure on milk and milk products, with rural families allocating 15 per cent and families in
urban areas allocating 18 percent.6 Of the total milk distributed jointly by both the organized and
unorganized sector, around 46 percent of the milk is consumed in fluid form and the rest is
processed into various milk products such as butter, yogurt, cottage cheese, and milk powder (see
Exhibit 4).7 Domestic consumption is split roughly 50/50 between urban and nonurban areas.
Consumers of the dairy industry include fast-food chains and food and non-food industries using
dairy ingredients in a wide range of products.8

Milk production in India has developed significantly in the last few decades, from a low volume of
17 million tons in 1951 to 110 million tons in 2009 (see Exhibits 5 & 6). In 2010, the government
and the National Dairy Development Board formulated a National Dairy Plan (NDP) that proposed
to double the country’s milk production by 2020. Despite the increase in production, a demand-
supply gap has manifested due to the changing consumption habits, dynamic demographic patterns,
and rural India’s rapid urbanization.9 Indian dairy production is growing at a rate of about four

6
IUF Dairy Industry Research. “Indian Dairy Industry.”
http://cms.iuf.org/sites/cms.iuf.org/files/Indian%20Dairy%20Industry.pdf
7
Ibid.
8
Karmaker, K.G. and G.D Banerjee. “Opportunities and Challenges in the Indian Dairy Industry. Technical Digest.
Issue 9, 2006. http://tinyurl.com/l32meh9.
9
IUF Dairy Industry Research. “Indian Dairy Industry.”
http://cms.iuf.org/sites/cms.iuf.org/files/Indian%20Dairy%20Industry.pdf
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 12

percent per year, yet consumer demand is growing at approximately double that rate. 10 The
demand-supply gap has only been aggravated by an increase in the cost of dairy production caused
by increased cattle feed costs and the low availability of dairy farm labor in many of the country’s
rural areas.

Market Structure

Overview
Marginal, smallholder farmers—the country’s core milk-production sector—own more than 67
percent of the country’s dairy animals. The majority of dairy production in India runs on a low
input‐low output system, in which individual producers typically own fewer than five cattle and
source locally-available feedstock. While yield levels are below international averages, production
costs are some of the lowest in the world. As dairy product prices and income from milk collection
continue to increase, farmers are slowly growing herd sizes and increasing their specialization.
However, India’s organized milk processing industry is still small compared to the large amount of
raw milk produced every year. Currently, producer households consume nearly 55 percent of the
milk produced in the country. Of the remaining 45 percent, two‐thirds is sold in informal markets—
which include local milk vendors, wholesalers, retailers, and the producers themselves—while the
formal channels, consisting of dairy cooperatives and the private sector and the sale of packaged
milk and other dairy products, processes the residual one-third.11

Consumption Trends
Consumption of processed and packaged dairy products is increasing in urban areas. Owed to
enhanced competition from and within the private sector, several national and international brands
have entered the market and broadened consumers’ expectation of quality—though such activity is
still limited to a small proportion of the population. In many regions of the country, preferences for
unpacked and unprocessed milk—delivered by a local milkman—remain, because of perceptions of
its enhanced taste and freshness.12

Informal Sector
The informal sector consists of a host of small-scale, village milk vendors and dealers who procure
loose milk or minimally processed products such as paneer or separated cream from farmers and
subsequently distribute and sell it in urban and suburban areas. Venders generally sell directly to
households, while dealers supply milk to private processors or hotels. Generally, the quality of the
vendors’ and dealers’ milk and milk products is not guaranteed, and is often adulterated with a host
of additives to control spoilage.13

10
Singh, Ritambhara. “India: Dairy and Products Annual – 2011.” USDA Foreign Agricultural Service. Global
Agricultural Information Network. October 11, 2011.
http://agriexchange.apeda.gov.in/marketreport/Reports/India_Dairy_report.pdf
11
Goswami, Bhaskar. WTO Public Forum 2007. How Can the WTO Help Harness Globalization. .“Can Indian Dairy
Cooperatives Survive in the New Economic Order.” October 4-5, 2007.
http://www.wto.org/english/forums_e/public_forum2007_e/session11_goswami_e.pdf
12
Punjabi, Meeta. Food and Agriculture Organization of the United Nations. “India: Increasing Demand Challenges the
Dairy Sector.” http://www.fao.org/docrep/011/i0588e/I0588E05.htm
13
Ibid.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 13

Organized Sector
Traditionally, dairy cooperatives have served as the central and dominant players in the formal dairy
sector. Cooperatives typically are organized via a three-tier structure—primary societies operate at
the village level, unions at the district level, and federations at the state level. The majority of dairy
coops in India are based on the principle of maximization of farmer profit and productivity through
collaborative efforts.

The basic cooperative unit—the village milk producer cooperative—represents a voluntary

association of milk producers in independent villages who seek to market their milk collectively.
Every milk producer can become a member of the cooperative society by buying a share and
committing to sell milk only to the society. Each producer’s milk is generally tested for fat
percentage and is paid on the basis of the quality of the milk. Village milk producers’ cooperatives
in a district are members of their district cooperative milk-producers’ union. The Union buys all the
societies’ milk, then processes and markets fluid milk and products (see Exhibit 7). Most Unions
also provide a range of inputs and services to the village societies—feed, veterinary services,
artificial insemination, and other services—and have milk-processing plants to convert seasonal
surpluses of liquid milk into milk powder and other conserved products. 14 Today there are 22 state
federations in India, with 170 district-level unions, and nearly 100,000 village-level cooperative
societies, with 11 million milk-producer members in the different states. These cooperatives collect
an average of 15 million liters of milk each day. Fresh liquid milk, packed and branded, is marketed
in over 1000 cities and towns in India by these cooperatives; annual sales turnover exceeds 80
billion Indian rupees (roughly $2bn USD).15

While exceptions exist, cooperatives are generally managed by civil servants, function largely as
government bodies, and are widely perceived to be weak representatives of farmers. 16 Of the 14
major state cooperatives in the country, 10 have state government equity—with 6 in excess of 51
percent—and 12 have government officers as managing directors who are appointed by the state
government. It is not uncommon for these officials to change up to three times a year. 17 Some
private dairies have established village societies for milk collection that follow the cooperative
model. However, as the cooperative model requires large amounts of investment and cooperatives
receive considerable support form the government (such as feed subsidies), such an arrangement is
not always economically feasible.

Regulation and Liberalization Trends

The dairy sector in India has traditionally been highly regulated and affected by the public sector.
State cooperatives are instructed to base the price paid to farmers on the fat content of procured
milk. In practice, however, village cooperative presidents and civil servants often wield substantial
power in determining the price for political reasons—independent of the fat content—and thus
create an operating environment that is not always transparent nor deemed fair by smallholder

14
Mohanty, Samarendu and K. Rajendran. Journal of Food Distribution Research. “Dairy Co-operatives and Milk
Marketing in India: Constraints and Opportunities.” Issue 35(2).
http://ageconsearch.umn.edu/bitstream/27233/1/35020034.pdf
15
Ibid.
16
Punjabi, Meeta. Food and Agriculture Organization of the United Nations. “India: Increasing Demand Challenges the
Dairy Sector.” http://www.fao.org/docrep/011/i0588e/I0588E05.htm
17
Ibid.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 14

farmers. Moreover, as cooperatives establish the de facto benchmark price for other buyers
(vendors and private dairy agents), few incentives exist in practice for farmers to sell to non-
cooperative buyers.18

While India’s dairy cooperatives have not historically faced significant competition from the private
sector, swept by a wave of liberalization throughout the country and seeking to encourage private
participation, the Indian government in 2001 allowed state governments to grant a one-time license
to the private sector. In 2003, the government further reduced licensing requirements and
restrictions on setting up milk processing and milk product manufacturing plants and eliminated the
concept of “milk-sheds,” thereby injecting competition by private players into the cooperative
sectors’ traditionally-insulated zones of procurement. The handful of reforms has weakened the
power of dairy cooperatives and benefitted the private sector.19

THE MILK MANTRA PLAN TAKES SHAPE

After returning to India in mid-2009, Misra began to formalize his vision of a dairy brand that could
become Eastern India’s leading, private dairy company, and which would sell to urban and semi-
urban consumers in and around Bhubaneswar (Orissa’s capital and most notable city) and Calcutta
(India’s third largest metro area with a population of 15 million) (see Exhibits 8 & 9).

A cornerstone of Misra’s strategy hinged on product differentiation and a departure from the
country’s traditional “pouch packaging”, which represented the only available format for fresh milk
products and was synonymous with the quality issues that had plagued the dairy sector. Though
untested, Misra sought to redesign dairy packaging to provide consumers with a differentiated and
improved consumer-product experience. Although doing so would likely come at a slight price
premium and limit Misra to the “premium mass market” segment, he believed the innovations
would justify the added 10-20 percent cost. After all, his preliminary market research indicated that
consumers who feel they don’t need to boil the milk out of quality concerns are willing to pay a
slight premium for the convenience. Misra began canvassing the packaging technologies to co-
develop a functionally innovative packaging format that would eliminate the need for boiling (see
Exhibit 10). He began referring to be the brand as ‘Milky Moo.’

Moreover, to establish a compelling, differentiated brand that would be able to compete with large
state-controlled dairy cooperatives, Misra believed he would need to develop a strong and
sustainable dairy sourcing, “back-end” network among smallholder farmers in rural Orissa. Doing
so would require Misra to develop strong relationships with Orissa’s farmer community as a
comparative advantage so as to build a long-term, stable dairy supply network. Misra planned to
develop and roll out a structured “Ethical Milk Sourcing” (EMS) program to ensure that farmers
received fair and reasonable prices, and sought to operate with perceptibly higher levels of
transparency and quality norms. The envisioned EMS program was unique in the sense that, while
most dairies would look at farmer development at a much later stage of profitability, at Milk Mantra
such an initiative was planned for even before the processing plant was complete.

18
Ibid.
19
Ibid.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 15

Misra also believed he would need to own all dairy assets across the dairy supply chain—from
collections and storage to processing, distribution, sales and marketing—so as to be able to ensure
consistent and efficient operations (see Exhibit 11). What is more, as Orissa’s state-controlled dairy
cooperative dominated the region’s dairy retail channels, Misra believed he would require a direct
sales team to distribute the company’s milk and dairy products directly to consumers (see Exhibit
12).

IN SEARCH OF CAPITAL

Energized by what he felt was a significant opportunity to launch a line of dairy products, Misra
capitalized Milk Mantra with approximately $80,000 of his own savings. However, he recognized
that his ambitious, vertically-integrated strategy would require substantial capital. He calculated that
he would need at least $5 million in total funding over the next two years to reach breakeven and to
establish a dairy sourcing network, build the business’ initial manufacturing and processing
capacity—estimated to process 50,000 liters a day—arrange a packaging partnership, put together a
sales and direct distribution program, and hire an accomplished senior team.

Misra first approached some of the larger banks in India and quickly realized that, while many of
the private banks proclaimed to be in the business of funding entrepreneurs, “They just made a lot
of sound bites and were essentially lending strictly to family businesses and corporates.” With
banks’ risk-aversion and unwillingness to lend substantially to an inoperative startup without assets
that could be collateralized, Misra determined that he would require at least 50%—or $2.5
million—of the capital structure in the form of equity.

However, at the time, no food or agriculture startup in India had raised Series A venture funding,
and the angel investing community within the country was altogether nascent. While Misra was
optimistic that he could round up a consortium of high net worth individuals to provide a sizeable
chunk of angel capital—in fact, both his father-in-law as well as an ex-colleague from Tetley had
indicated they would be willing to invest $100,000 each—Misra would still need an anchor investor
willing to write a seven-figure check to fill out the round. However, Misra found the VC
fundraising landscape challenging:

When I returned to India and began reaching out to potential VCs and some of the
angels who I had spoken to back in London, I realized that most of the VCs—or at
least funds that had positioned themselves as VCs in India—were not really
providing genuine, startup capital at all. Everyone was interested in my plan and
evinced interest in taking it to the ‘next step’ via numerous meetings, yet I eventually
realized that they were primarily investing in tech businesses that had already
achieved multi-million dollar run rates at the time of an initial investment.

What is more, every VC and angel investor interested in India with whom Misra was able to
identify was either based in Bombay, Delhi, Bangalore, London, or the US. For such investors,
Orissa and Eastern India were completely off the radar. By early 2010, after learning about
Aavishkaar from a colleague, Misra decided to send a cold email to Rai along with a brief overview
of the Milk Mantra concept and a line of branded diary products that he began referring to as
‘Milky Moo—Truly Pure.’
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 16

Initial Conversations With Aavishkaar

Rai’s rapid response to Misra’s email raised the entrepreneur’s confidence. However, Rai’s eventual
answer after meeting in person was disheartening. Though the timing of Misra’s email was
fortuitous given Rai’s interest in India’s dairy sector, Rai was initially uncomfortable with the fact
that Misra had been living abroad and away from Orissa for many years, and that he had only a
superficial understanding of the Indian dairy sector. While Misra had demonstrated himself
impressively throughout his corporate career, Rai felt the challenges of implementing the Milk
Mantra vision—from the need for permitting from the government to operationally organizing a
distributed network of farmers, chilling units, and processing plants—were enormous, and
Aavishkaar had yet to make an investment as large as the one Misra was requesting.

What is more, although Rai wasn’t averse to writing a larger check, the fund wasn’t in a financial
position to make a $2.5 million investment. Thus, while he endorsed Misra’s vision and encouraged
him to continue along the path he had charted, Rai indicated that Misra would need to obtain the
remaining equity and debt financing before making a commitment to serve as Milk Mantra’s anchor
investor. Assuming Misra was able to do so, Rai promised to give the opportunity a deeper look
and diligence more thoroughly.

The Search Continues

Though Misra was encouraged to meet an investor in Aavishkaar who understood Milk Mantra’s
vision and who was generally supportive of the idea, he was frustrated by the chicken and egg
dilemma he found himself in. Nobody seemed to want to make an investment commitment first, and
with very little capital hard-circled and unable to begin development on the project, Misra found it
difficult to demonstrate considerable progress.

Given that he would need millions of dollars of capital to merely install Milk Mantra’s
manufacturing operations, he found it difficult to stage funding. As he reminisced, “It’s not like
they could just make a bet on the project by putting in $500,000 and see if I reached the next
milestone like most scalable business models.” Misra had hit a roadblock. While he had hoped to
piece together a full round before proceeding with the plan, by January 2010 he decided to use the
initial $200,000 in commitments from his father-in-law and ex-colleague to acquire the land rights
and get the permitting in place that would be needed for Milk Mantra’s production plant—
challenging tasks in their own right given India’s cumbersome administrative process.

As he concurrently proceeded with fundraising, he continued to solicit the opportunity to friends,

colleagues, second-degree referrals, and professional angels. A significant angel from the UK, who
was a professional investor that Misra had met during his time in London, was enthused with
Misra’s idea of creating a premium brand and impacting lives. He committed $100,000, subject to
the first round coming together. In addition, though Misra had previously set an investment floor of
$50,000, a number of people expressed interest in smaller investments between $5,000 and $20,000.
Misra recognized that ‘crowd-funding’ across a group of twenty ‘smaller ticket-size’ angels could
indeed yield nearly $500,000. Shortly thereafter, Misra was fortunate enough to be introduced by a
close friend to Mumbai Angels—one of the few, but prominent, angel investing networks in the
country. Though the angel network had previously limited its investments to the technology sector,
the reference certainly worked in getting noticed and being taken seriously. Misra was short-listed
and asked to pitch to the group in Mumbai, which ultimately yielded interest from two professional
angels who each committed $50,000.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 17

In spite of the hard-fought effort to cobble-together an angel investor group, which had produced
just shy of $1 million in signed term sheets, Misra still fell short of the capital required. He decided
to start familiarizing consumers with the prospective Milky Moo product line, and after getting
introduced to some entrepreneurially-oriented members of OTV—the leading TV channel in
Orissa—he pitched the Milk Mantra vision to its management team and convinced them to allow
him to advertise on the channel for free, in exchange for equity.

For Misra, by the beginning of 2011, after almost a year since first contacting Aavishkaar and
nearly two years since returning to India to found Milk Mantra, things seemed to be finally
converging. With land permitting in place, and nearly $1 million in equity commitments among a
diverse group of angels, Misra decided to reach back out to Rai in hopes of obtaining the anchor
capital—a request of $1.25 million at a pre-money valuation of $2.5 million—that he needed to
consummate Milk Mantra’s fundraising. 20

A Second Look
Rai was certainly impressed with Misra’s progress to date. In many ways, requiring him to obtain
significant additional equity and equity-contingent bank financing, as well as arrange land and
permitting for the company’s processing plant, was a test to observe the entrepreneur’s ability to
overcome significant obstacles and challenges. Misra had proven himself resilient, scrappy, and
determined over nearly 18 months of fundraising. He was clearly not ready to give up easily. Yet,
Rai hadn’t promised anything to Misra, and in spite of Misra’s drive, as Rai and his team began a
deeper due diligence process, Rai had considerable reservations about the implementation of the
ambitious Milk Mantra plan.

For one, Rai was concerned about Misra’s ability to aggregate dairy supply at a suitable level and
speed. Notable economies of scale existed in processing, and the proper sizing and ultimate
utilization of Milk Mantra’s processing plant would be critical to the financial feasibility of the
project; if Milk Mantra invested heavily in processing capacity but was unable to adequately fill it,
the resulting unused capacity would be a large financial burden. While Rai calculated that plenty of
milk existed within the processing plant’s catchment area, Orissa generally did not display a culture
of milk production. The majority of milk production was on a micro-scale and consumed directly by
smallholder farmers. As Rai reflected:

Orissa’s dairy sector has historically been extremely backward. Far from an industry,
the typical person kept one or two cows for religious purposes. Whereas if you were
to go to the state of Gujarat, a dairy collection center could have easily aggregated
1,000 or 2,000 liters at a time, but in Orissa, given the distributed nature of
production, simply collecting 100 to 200 liters represented a huge challenge.

Milk Mantra promised low-income farmers an assured market, higher prices than the government
dairy cooperative, timely payment, and technical assistance in order to boost productivity in hopes
of luring farmers to Milk Mantra. However, Rai worried whether such an approach would be
sufficient to entice farmers to change allegiances, as well as whether a small dairy operation—a
mere fraction of the size of the cooperative—could successfully take on an entity that, owing to its

20
At the proposed valuation, Misra would retain roughly a 50% ownership stake in Milk Mantra.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 18

state ownership, was not pressured to operate profitably. As the cooperative effectively controlled
distribution in Orissa’s retail channels and had threatened to block distribution points of any Milk
Mantra products at the region’s largest organized retailer, Reliance Markets (even though organized
retail paled in comparison to Orissa’s larger, unorganized general trade), Misra would need to
effectively develop the direct-to-home (D2H) distribution platform that the entrepreneur determined
he would require—an expensive and logistically-challenging task.

Rai also still held concerns as to whether Misra would be able to successfully execute the project
according to its elaborate plan. After all, the project was not yet operational and Misra had yet to
build out a senior team. Milk Mantra’s implementation involved successfully organizing many
moving parts across a complex supply chain—thousands of farmers, collection and cooling units as
well as considerable back-end logistics, processing plants, and a sales and distribution network.
While Milk Mantra would not be the first of its kind in India, such a complicated operation involved
significant resources and often took a substantially long time to scale.

The back-end infrastructure in almost every aspect of the supply chain was quite undeveloped. The
plan called for milk to be transported over extremely poor roads that, during the monsoon, were
likely to be flooded and cut off from collection and processing points. Bulk milk chillers to keep the
milk refrigerated would need to have generator backups—which are headaches to maintain—given
that electricity in the region was unreliable. Every can of milk that arrived at a collection point
would need to be tested for quality and accounted for. Moreover, high quality cattle feed, which was
necessary to ensure farmers could supply the quality of milk required by Milk Mantra—wasn’t
readily available in the state.

Little operational or financial due diligence was available to Rai in making a decision; rather, it was
truly a decision on the entrepreneur’s ability to execute the venture. Given that Misra was a first
time entrepreneur, Rai had limited information off of which to go. Operating in rural Orissa was a
complete contrast to the comfortable, corporate world Misra had become accustomed to in London.
Misra would need to be traveling around the countryside and fighting a turf battle with local traders
and the cooperative. While Misra appeared to be driven, Rai harbored doubts as to whether Misra
would have the fortitude to make it through the long-haul in a very difficult operating environment
and on a low salary. While Rai believed that some of these concerns could be mitigated by
providing the financing in the form of convertible notes—whereby a conversion “floor” and “cap,”
based on actual Milk mantra sales volumes, could be established for conversion and valuation
purposes—Rai recognized that such a structuring would provide very little security in a downside
scenario.

DECISION TIME

As Rai reflected on the Milk Mantra investment opportunity, he felt a mix of excitement and
trepidation. The Milk Mantra thesis was the kind of opportunity that epitomized the vision and
dream of the fund. However, there were a number of issues on which Rai would inherently need to
take the proverbial “leap of faith” if he were to make the investment. He debated whether the risk
was worth the potential benefit, and if so, what he could do to mitigate his risk.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 19

Exhibit 1
Aavishkaar Rural Investment Thesis

Source: Aavishkaar.

Exhibit 2
Aavishkaar Sector Focus

Source: Aavishkaar.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 20

Exhibit 3
Aavishkaar Supporting Services

Source: Aavishkaar.

Exhibit 4
Indian Dairy Product Mix, by Volume (2009)

Source: FAO.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 21

Exhibit 5
Indian Dairy Sector – Key Statistics (2010)

Source: FAO.

Exhibit 6
Growth of Indian Milk Production

Source: Department of Animal Husbandry, Dairying & Fisheries, Ministry of Agriculture.

VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 22

Exhibit 7
The Indian Dairy Sector Value Chain

Source: Journal of Food Distribution Research, http://ageconsearch.umn.edu/bitstream/27233/1/35020034.pdf

Exhibit 8
Map of Orissa

Source: FAO.
VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 23

Exhibit 9
Milk Mantra Business Vision – Investor Presentation (2010)

Source: Milk Mantra.

VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 24

Exhibit 10
Milky Moo Brand Proposal (2010)

Source: Milk Mantra.

Exhibit 11
Milk Mantra Supply Chain

Source: Milk Mantra.

VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 25

Exhibit 12
Milk Mantra Channel Strategy – Investor Presentation (2009)

Source: Milk Mantra.

VC Decision-Making in India: Aavishkaar and Milk Mantra (A), E-482 p. 26

Exhibit 13
Milk Mantra Strategy Outline – Investor Presentation (2010)

Source: Milk Mantra.