Why the Seven Sisters of India's North East could be the next big startup hub

India’s northeast is not humming with entrepreneurial activity. It’s not the growth engine of India’s new economy. We are not saying that, the numbers are. The seven states that make up the northeast, collectively called the ‘Seven Sisters’ have 200,000 micro, small and medium enterprises (MSMEs), accounting for less than three percent of the country’s total MSMEs, according to a report by the International Finance Corporation.

The region’s contribution to the country’s GDP is 2.6 percent compared to the 26 percent for India’s seven low-income states. These low-income states had a debt demand last year of $60 billion while the seven northeastern states had a demand for $4 billion. Moreover, MSMEsin the northeastern states receive only one percent of the debt financing made available to the sector whereas the low income states receive 16 percent.

And here is the defining characteristic. While there is a demand for private equity and venture capital investment, the first notable investment by a venture capital fund in the region happened only in April this year.

Padmaja Ruparel, President, Indian Angel Network (IAN), says that there is a wide gap between the northeast and India, which no one can deny. “The region has remained disconnected from the rest of the country in many aspects for a number of years,” she laments.

Mark Kahn, Founding Partner of venture capital firm Omnivore Partners, says that one of the biggest challenges for ventures in the region is getting outside talent. He echoes Ruparel’s view that the region has been so disconnected from the rest of India that people don’t knowa lot about it and as a result, don’t think much about going there to work.

“People have a 1980s view of the northeast even now. The image in people’s mind is that the region is ridden with insurgencies, which is not the case anymore,” says Kahn, whose fund was the one involved in the aforementioned April funding-the firm invested in Guwahati-based pork integrator Arohan Foods this year.

Kahn, who claims he has been bullish on investing in this region for a while now, says that it took a bit of thought before they looked east. At first, in 2011, the firm hired anintern from the IIM-Ahmedabad to scout the region for agri-business ventures that Omnivore could invest in. It is how the firm and Kahn came in touch with Arindom Hazarika, Anabil Goswami and Ranapratap Brahma, co-founders of Arohan Foods.

Back home
In 2005, Hazarika and Goswami were classmates at the Indian School of Business in Hyderabad. While both entered the corporate world after graduating, they were always itching to beback in the northeast to start a venture of their own.

In 2011, after working at Kotak Mahindra Bank for a number of years, Hazarika came back to his hometown of Guwahati. Goswami and Brahma, colleagues at Mumbai’s Don Bosco Institute of Management, joined him.

The three got together to probe what businesses they could start in Guwahati. “We realized that there was no one working with pork commercially in India. A lot of people don’t look too positively at the business and at pork in general in many parts of India,” says Hazarika.

Kahn says that they found that there are big markets in the northeast for a number of products that were untapped as these weren’t big markets in the rest of the country. “The demand for pork products in the northeast is one such example,” he says.

The three co-founders started working with the National Research Center on Pig in Assam to learn about the available technologies in pork processing. After receiving training, the team began producing pork products commercially from the government facility in December 2011.

In January 2012, they took their product to the market. “Communities in the northeastern states are pretty homogenous. We worked on producing flavors that would be popular acrossthe region,” Hazarika says of their product development.

Such was the demand that Arohan eventually hit a bottleneck in terms of production capacity since the government center was only a research facility. The facility allowed them to produce 500 kilograms of pork products in a month, which was about Rs 5 lakh in termsof business. The team however continued production from this facility until March 2013 because a lack of resources prevented them from setting up a facility of their own.

Dr. Rajendra Thomas, a scientist at the National Research Center on Pig says that it is not easy for companies to set up their own production facilities in the region. “So besides Arohan, we also have two or three other ventures using our facilities.”

In April, after Arohan received funding from Omnivore, the team set up its own pork processing facility in Sonapur, about 25 kilometers from Guwahati. This new facility can produce 10 tonnes of products in a month.

According to the founders, the company has been selling 700 kilograms a month on an average so far. In fact, it had the highest sale in a month of about two tonnes in October thisyear. The team currently sources their pork from local farmers in the region and is now putting a contract farming model in place, which Hazarika says has been possible because of the funding they received.

Needle in a haystack
Citing the reason as to why the region hasn’t attracted a lot of investor interest yet, Kahn says that he does not blame the entrepreneurs. “VCs don’t look there for ventures. In fact, many investors would dismiss even a good company if it was based in the region.”

This, however, is starting to show signs of change, he opines. Kahn is also a guest lecturer at the IIM-Shillong. “Like all business schools in the country, the institute too has a lot of interest amongst students in entrepreneurship,” he says.

The institute’s entrepreneurship cell ‘i-Cube’ in fact partners with incubator and accelerator Freemont Partners, which provides seed funding to early stage ventures to support aspiring entrepreneurs in the northeastern states.

Earlier this year, the Indian Angel Network too established a base in Kolkata to focus on the eastern region, which includes an increased focus on the northeastern states.

Ruparel of the IAN says that though it’s true that the eastern region hasn’t bubbled yet the way it should, this is not the only region in India where many investments haven’t been directed - most are concentrated in cities like New Delhi, Mumbai, Bengaluru, Pune, Hyderabad, and Chennai.

“Entrepreneurs in the region need more handholding to create investible ventures,” she says. “Most of the innovation in the northeast has happened based on natural resources like bamboo. Scale and nationwide plays have been missing because of this. It is important to think about whether these innovations will be of use in other regions of India as well.”

While the founders of Arohan are taking their products to West Bengal, Jharkhand and Orissa by this year, they have noticed another set of challenges. “Despite being an ex-banker myself, I had trouble getting financing for the company from a bank. We finally mortgaged the house of one of the founders to get some money before we received funding,” says Hazarika.

There are also on-the-ground challenges in terms of infrastructure. “There are no cold chains. We had to set up our own logistics. Because our products have to remain in cold storage, we use ice packs and thermocol packaging to transport the products,” he adds.

Ruparel though is confident that challenges in the region can be surmounted with a little support from local governments, who she suggests, could partner with organizations like the IAN to help more ventures grow and get funded.

“The region has been growing rapidly on other parameters and this and the next decade will be very good for the northeast,” says Kahn, pointing out that overall, the region has been growing economically at the rate of 8 percent for the last decade.

This, therefore, would be a good time for investors to look east.

This article first appeared in Entrepreneur India magazine.