PROJECT REPORT ON MICRO VENTURE INNOVATION FUND SUPPORT TO LEMONGRASS OIL

Submitted to A.E.S. Post Graduate Institute of Business Management Towards partial fulfillment of Masters of Business Administration ORGANIZATIONAL TRAINING-I AT NATIONAL INNOVATION FOUNDATION, AHMEDABAD

BY MANJEETSINGH AILSINGHANI

MAY-JULY, 2006

Preface
Wisdom and Education are two different words altogether. Education is gaining of knowledge imparted to us by our teachers, books or by any other means through which we can learn and imbibe their teachings. Wisdom, on the other hand, is the application of these learning to the places where it actually needs to be applied. College semesters provide us the Education Projects, the platform to test the Wisdom part of it.

In any field of education, the projects given to the students play a significant role in testing how much the students have been able to imbibe from the learning, training given to them and how much have they been able to apply those learning practically. Infact, the projects are equally important for the students since they provide them with a practical exposure to the industry and help them in analyzing their strengths, their weaknesses, where they are good and where they need to improve?

The fundamental purpose behind preparing project reports is, to put into words, the work we have done during our summer internship period, our learning and our experiences. This report is an attempt towards the same. It also helps in getting a better understanding of applicability of various financial theories in the non-government organization industry.

Acknowledgement
Study of business management is all about gaining knowledge from the corporate world. The experience one gets because of his exposure to the industry is apparently richer than what one gets from usual class room studies. Being students of Management, we are expected to gain knowledge from the corporates, to understand how they manage and succeed in coming at top time and again amidst the intense competition we are all aware with. It wont be emphatic to say that the same is the case with non government organizations that work day in and day out to justify their existence, putting in phenomenal amount of efforts to achieve their mission. We were given this opportunity by one of the best and one of the most renowned Non-government organization: National Innovation Foundation, more popularly known as N.I.F

I am obliged to National Innovation Foundation for providing me with an opportunity to undergo my summer training in their esteem organization. I put my sincere gratitude to the following persons, without whose support and encouragement this report would have been incomplete.

Prof. Anil Gupta- Vice Chairperson, NIF. Ms. Maitreyi Kollegal- CIO, NIF, Mr. T. S. Pramod- N.C. VARD, Mr. Mahesh Patel- GM, GIAN, Dr. Ravi Kumar- Fellow, VARD, Ms. Rashmika Shah- Fellow, VARD, Mr. Lalmuanzuala Chinzah- Fellow, BD, Ms. Ruchi Tripathi- Fellow, BD, Ms. Abha Ratnakar- Fellow, IT, Mr. Rajesh Patel- Fellow, S&D and Ms. Ranjan Vachchani.

I am also thankful to Mr. Taral Pathak, Faculty A.E.S. Post Graduate Institute of Business Management for his selfless guidance and support through the entire training period.

EXECUTIVE SUMMARY
Mr. Gurpreet Singh of Uttranchal is one of those rare farmers who is highly educated and who has applied his educational skills, along with his 10 years of experience in the tea industry, in developing a special variety of lemongrass-Hunar, a grass that is very high in the citral content as compared to any of its counterparts and has a very good potential market available to satisfy to.

The grass is anti-fungal, anti-viral and anti-dandruff, has a citral content as high as 82% during summers and 79% during monsoon, oil-recovery of 1% during summers and 0.7% during monsoon and it has a fresh lime note, a unique selling preposition that puts it way ahead of its competitive varieties of lemongrass that mainly have a metallic note.

Hunar has a very good potential market, not only at domestic level but even at international level, as the market of essential oils, the family of which lemongrass is an important member, has just begun to emerge. It is estimated that globally there is a lag of almost 8000 kg between the demand and supply of lemongrass with the supply not being able to meet the demand. Even in the domestic market, it has the fragrance, toiletries and the thai-restaurant industry to serve to.

Mr. Singh is very optimist about his Hunar and he has taken every precaution possible to ensure that his product succeeds in maintaining the standards, the parameters that he has achieved after putting in more than 5 years of toil. It wont be emphatic to say that Hunar indeed reflects Mr. Singhs Hunar.

TABLE OF CONTENTS
1. Introduction: About National Innovation Foundation 2. Micro Venture V/S Venture Capital 3. Micro Venture Innovation Fund Proposal For Lemongrass Oil i) ii) iii) iv) v) Brief Description Market Opportunity And Entry Strategy Project And Funding Details Funding And Repayment Plan Project Monitoring And Monitoring Team

4. Documentation 5. Conclusion 6. Bibliography

NATIONAL INNOVATION FOUNDATION

Genesis of NIF
The National Innovation Foundation (NIF) has evolved to meet a long felt need for recognizing, respecting and rewarding innovations and outstanding traditional knowledge at the grassroots. Honey Bee network had triggered a movement about fifteen years ago to scout, spawn and sustain unaided creative and innovative urges in unorganized sector of our society. Accordingly, the Department of Science and Technology, Government of India, set up NIF three and a half years ago under the chairpersonship of Dr R.A. Mashelkar, Secretary, DSIR and Director General, CSIR. NIF provides an institutional platform for the knowledge-rich, economically poor people. It is expected to help the unsung heroes/heroines of our society who have solved a technological problem through their own genius without any outside help. It is committed to making India innovative by documenting, adding value, protecting intellectual property rights of the contemporary unaided technological innovations, as well as outstanding examples of traditional knowledge on a commercial as well as noncommercial basis. NIF also seeks to develop a new model of poverty alleviation and employment generation by helping convert grassroots innovations into enterprises with or without value addition through institutional science and technology.

Evolution of Honey Bee Network

Honey Bee network found it totally unfair and unethical that the only resource in which poor people were rich, that is, their knowledge, is taken away from them without any attribution, accountability or reciprocity. Honey Bee network also believes that if many of these knowledge rich people are economically poor, it is not because their knowledge is of lesser consequence or that they are incapable of generating creative and efficient solutions (though, in some cases, this might well be the reason). Their conditions can also be explained by various policy and institutional factors, apart from the lack of supporting platforms for strengthening their problem-solving capabilities. The Honey Bee Network

has been making efforts all these years to develop a platform of this kind and has prepared a database of thousands of innovations and traditional knowledge, all with the name and addresses of the knowledge providers.

NIF and Honey Bee Working in tandem

Today, NIF and the Honey Bee Network work in close cooperation on various issues. In fact, the basic building block of NIF is the Honey Bee philosophy evolved over the last 15 years. The honey bee collects pollen from the flowers, in the process linking one flower to another and thus enabling cross-pollination. Similarly, the Honey Bee Network strengthens people to people learning and networks by pooling the solutions developed by people across the world in different sectors and links. The network acknowledges the innovators, knowledge producers and communicators so that they do not remain anonymous. It also ensures that a fair share of benefits arising from commercial exploitation of local knowledge and innovations reaches the innovators and knowledge providers.

Benchmarks of progress
NIF (www.nifindia.org) began its first national campaign in March 2000 to scout innovations and outstanding traditional knowledge and has completed three national campaigns so far. It has achieved several major milestones in the last three years. Beginning with about 1600 innovations and traditional knowledge examples in 20002001, NIF scouted about 13,500 such creative examples during 2001-2002 and another 21,500 during 2002-2003. About 37,000 innovations and traditional knowledge examples were, thus, scouted from over 350 districts of the country The challenge before us is to help incubate these technologies to generate commercial and non-commercial opportunities for their diffusion to improve productivity, generate employment, overcome poverty and conserve environment. The interest on the corpus fund of Rs 20 crore, provided by the Department of Science and Technology, used for running the Foundation, is hardly sufficient to meet the challenge, given the declining interest rates and rising aspirations of the creative people of India.

Objectives of NIF
The main objectives are: To help India become an innovative and creative society and a global leader in sustainable technology by scouting, spawning and sustaining grassroots innovations and outstanding traditional knowledge. To ensure evolution and diffusion of green grassroots innovations in a selective, time-bound and mission-oriented manner so as to meet the socio-economic and environmental needs of our society To provide institutional support in scouting, spawning, sustaining, and scaling up grassroots green innovations and helping their transition to self-supporting activities; seeking self-reliance through competitive advantage of innovationbased enterprises; and/or application of people-generated sustainable technologies at the grassroots level To build linkages between excellence in formal scientific systems and informal knowledge systems and create a knowledge network to link various stakeholders through applications of information technologies and also otherwise To promote wider social awareness and possible commercial and non-commercial applications of the know-how generated as a result of the above and encourage its incorporation in educational curriculum, developmental policies and programmes.

Organization of NIF
NIF is governed by a Governing Council chaired by Dr R A Mashelkar, Secretary, DSIR and DG, CSIR and comprising many eminent persons. NIF has a Research Advisory Committee, with two sub committees, one including institutional scientists, designers and technologists, and another including informal grassroots innovators and traditional knowledge holders. Dr Pushpangadan, Director, National Botanical Research Institute, Lucknow, chairs the research advisory committee.

NIF has had to face several constraints in its functioning but it has relentlessly pursued its goal, regardless of the many bottlenecks. In fact, during the first year, we had no staff. For half of the second year, NIF had only two national coordinators. In the third year, we got a Chief Innovation Officer and within six months of that, the organization roped in other National Coordinators as well. However, the achievements could not have been possible without the support from SRISTI (Society for Research and Initiatives for Sustainable Technologies and Institutions) and other Honey Bee Network collaborators such as SEVA and CCD, Tamil Nadu; PEDES, Kerala; PRITVI, Karnataka; SRISTIGIAN Kendra, Uttaranchal; Chayan, West Bengal; Ama Akha Pakha, Orissa; Makhir, Himachal Pradesh, and individual farmer innovator collaborators like Shri Sunda Ram etc.

Organizational Framework

Green grassroots Innovators

Honey Bee Network State/Regional Collaborators, Nodal Officers, Volunteers from Educational, R&D Institutions, NGO, Students, Innovators Associations, GIAN

Scouting and Documentation

Dissemination and Information Technology

Value Addition and Product Development

Incubator, Business Development and Micro Venture

IPRs Management

Advisery Committee of expert grassroots innovators from informal sectors

National Cocoordinators

Advisery Committee of Science and Technology experts

Chief Innovation Officer

Executive Vice-Chairperson

Chairperson

Governing Council

Building the Value chain around Grassroots Innovations: A. Scouting and Documentation
Scouting and Documentation of the innovations is the first step towards the fulfillment of the mission of NIF. Scouting involves extensive fieldwork, travel in rural and urban areas, search for odd balls -- the experimenters and local community and knowledge experts in the society. The process aims at:

To coordinate with various governmental and non-governmental agencies to mount a national campaign to scout innovations with the help of grassroots level functionaries of education, agriculture, rural development, small scale industry, Panchayati Raj institutions, etc.

To screen, document and verify the claims about these innovations through various networks of scientific and other institutional initiatives as well as through Honey Bee collaborators, existing databases and field visits.

To generate and experiment with material and non-material incentive mechanisms for innovators and traditional knowledge holders. To provide assistance in forging decentralized networks of

inventors/knowledge experts to strengthen the Honey Bee Network. To obtain Prior Informed Consent (PIC) of the providers of knowledge. To share the innovations permitted by the knowledge providers to be put in public domain through Honey Bee newsletter and other media to enrich the repertoire of the local communities and informal knowledge experts and to support Shodh Yatras in different parts of the country.

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B. Value Addition and Research & Development

Most of the innovators and/or traditional knowledge experts need optimization in design and/or product formulation through blending with modern science and technology inputs. Market prospects for many innovations will be very low without proper value addition. Besides, creating technology networks can make phenomenal efficiency gains. Research and Development is a key focus of NIF. It provides a platform for the synergy between formal and informal science and technology, institutions and knowledge system. The tasks involved include: To coordinate with public and private sector R & D and educational institutions, peoples organisations and rural and urban innovators themselves to add value to local innovations. To develop product development plans and help the grassroots innovators mobilise funds from TePP and other such programs within and outside the country. To build product development teams on contractual basis to get the products and/or services developed through licensees ensuring appropriate benefit sharing arrangements. To set up and help coordinate GIANs in different regions along with other national coordinators. To obtain help of eminent scientists and technological experts from various fields as a part of the Research Advisory Committees, or otherwise which will guide the activities of NIF.

R & D linkages
NIF has established linkages with several premier research and technical institutions at the national level for promotion and dissemination of the potential technologies. NIF has been working closely with various institutions like IIT Mumbai, IIT Delhi and IIT Kanpur to involve students and faculty to work for innovations having commercial potential.

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C. Business Development & Micro Venture

Value chain for green grassroots innovation will require financial support at different stages of product cycle. Support is required for improving the attributes of the innovative product/prototype through R&D linkages. This initial market assessment has to be followed by micro venture and innovation fund support for converting innovations into products, and products into enterprises. The various activities needed for the purpose are:

To coordinate with various entrepreneur/industry associations, management institutions and incubators to mobilise mentoring and management support for grassroots innovators and TK holder.

To involve private and public sector industrial and financial institutions and associations in linking innovations with investment and enterprise at individual or group level.

To help promote various innovations and outstanding TK through market and non-market channels. To encourage various industry associations and other developmental bodies to set up mechanisms for licensing innovations for business development and equitable benefit sharing with the innovators and TK holder.

To help raise resources for pursuing various activities and developing innovation value chain. To support the operations of the National Micro Innovations Fund through public and private participation and mobilize the incubation fund and venture capital for innovators and TK holders.

To develop business plans, market research plans, reports and training material as well self-learning material for GIANS and others involved in promoting innovation based entrepreneurship.

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Micro Venture Innovation Fund (MVIF)

In his budget speech in 2002, the Finance Minister had announced his decision to establish a Micro Venture Innovation Fund. A national level MVIF of Rs 40 millions has been instituted for ten years with the help of SIDBI. The National Innovation Foundation announced the launch of MVIF on the eve of Gandhi Jayanti. It is obvious that it is a case of a support, too little, too late and will hardly make a small dent on the problem. However, it is hoped that the experience of incubation in the last so many years and as well as through this fund in coming years will convince the policy makers about the need for supporting small innovators in a major way.

Objectives of the MVIF:

The broad purpose behind MVIF was to bridge the glaring gap in completing the Golden Triangle of Creativity by bringing in Investments to Innovations in order to create viable micro Enterprises at grassroots. However, specific objectives of MVIF are spelt as below;

Provide a means of finance for innovation and traditional knowledge-based micro-ventures, which are generally not given any priority by other Venture Capital Funds and Financial Institutions (FIs).

Provide a means of finance for managing the technology development life cycle that includes Prototype Development, Technical Validations & Benchmarking, Field Trials, Market Research, and Certification by Regulatory Authorities, Protection of Intellectual Property, Promotions and Dissemination.

Offer innovative and flexible Financing Options for the seed capital and working capital requirements. These could be tailor-made to the needs of grassroots entrepreneurs and enable them in minimizing the financial risk associated with their ventures.

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The MVIF operates within the guidelines and the framework prepared by NIF under the guidance provided by governing board and incubation committee. However the delivery functions like project appraisal, disbursement, monitoring & mentoring and recovery are being taken care by the regional arms of NIF e.g. Grassroots Innovation Augmentation Network (GIANs) and collaborators. The MVIF would invest in all domains and sectors, which are categorized as below in the NIFs National Register of Grassroots Innovations;

Agriculture Engineering Animal Science Forestry Transport Human Health Practices Energy Conservation/Generation Natural Resource Management Innovations from Artisans and Households Idea

Eligibility Criteria for MVIF Support:

Should be an Accepted entry at NIF, which means it should be an unaided, Green, Grassroots technological innovation or a traditional knowledge practice from a person having non-professional background with established ownership of knowledge.

The technology should be practically workable/demonstrable as per the original claims made by the innovator;

Should be a cost effective, overall efficient and effective (e.g. reduces drudgery) solution to any problem as compared to existing solutions/products

Should have foreseeable market demand and good commercial potential;

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Should have novelty either in Form, Function or Feature or all of the above, but may or may not be a patentable item;

Having high social impact would be advantageous Special preference would be given to technologies originating from and/or for women, handicapped, other marginalized sections of our society

Special preference would also be given to NIF awarded innovations.

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The Incubation Process:

The NIF and GIANs carry out following process of incubation with the potential intervention of MVIF as given in the following illustration

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Summary of Investments Table 1

Head Number project sanctioned and funds disbursed Number of projects under process Number of Projects to be taken in next six months Letters written to innovators for MVIF investment Number 35 07 08 26 39 (NIF) (GIAN) Amount (Rs.) Rs. 5, 80, 129 Rs. 12,29,896 Rs. 4,39,462 Rs. 13,27,500 (Disbursed) (Sanctioned) (Proposed) (Estimated)

Disbursed: Sanctioned: Under Process: Next Six Months: Hold: Closed

13 04 02 08 10 02

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MICRO VENTURE V/S VENTURE CAPITAL

A Micro Venture Fund investment strategy has some basic differences from the normal Venture fund strategy. The role that a Micro Venture Fund manager plays is closer to that of an angel investor but without the normal individual style of engagement associated with a angel investor.

Micro venture as an investment strategy looks at smaller investment at very early stage companies with emphasis on stability in revenues v/s expenditure rather then on growth. While growth is the most desired objective, a Micro fund initiative is looking at managing growth expectation so as to avoid creation of unsustainable cost structures as got created in the past by larger venture funds. A Micro Fund also looks at its venture initiative to tap its local market before its look at growth beyond the local geographical boundaries.

The sustainability of a Micro Venture Fund despite its small size and lack of large management fees is achieved by ensuring a very lean and low cost structure. While a Micro Venture Fund would look at four or five deployments in a year (sometime even more) geographical proximity of investment is a key investment criterion. In addition, the creation of a network of advisors, think tank members and interested volunteers helps create the rich profile to provide hands on guidance to these companies.

Micro venture funds differ from a conventional venture fund in the fundamental thought process too. While a Venture Fund pool investors money to make investments in certain sectors in order to multiply wealth, a micro fund is at times driven by investment to create desirable technology or social impact while still ensuring a commercial viability.

The minor difference in objectives has long term and far reaching consequences in results. The Micro Venture Fund initiatives focused on sectors other then IT have been

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able to make impact in the social milieu by propagating the opportunity based entrepreneurship model. India as a society has been seen a huge base of need based entrepreneurship due to its social structure. However creation of Micro venture imitative has egged on the society to think in term of entrepreneurship where opportunity and innovations is seen as the bedrock for growth.

Micro Funds have also facilitated better potential for wealth creation at the base of the pyramid to create a better flow of money is the system thus enriching the nations economy.

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Proposal for MVIF Funding

LEMON GRASS HUNAR

(Developed for Mr. Gurpreetsingh)

Submitted by:
Business Development, N.I.F.

July 9, 2006

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Table of Contents
1. Brief Description 1.1 Background to the Innovation 1.2 Main Features of Hunar 1.3 Technical Details 2. Market Opportunity And Entry Strategy 2.1 The Market 2.2 Pricing 2.3 Entry Strategy 2.4 Promotion 3. Project And Funding Details 3.1 Product Cost 3.2 Project Cost 3.3 Working Capital Requirement 3.4 Scenario Development 3.5 Break Even Analysis 3.6 IRR Calculation 4. Funding And Repayment Plan 4.1 Funding Details 4.2 Repayment Plan 5. Risk Associated With The Project 6. Project Monitoring And Monitoring Team

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Innovation Reference No. Title of the Innovation Innovator Address (Contact Details)

41UT12A2665 High Yield Lemon Grass HUNAR Mr. Gurpreet Singh C/O Shakti Oil Corporation Nainital Road, Rudrapur U.S.Nagar, Uttranchal. 263 153 Phone: +91-5944-244575 Mobile: 09412091575 E-mail: hortishoppe@rediffmail.com

Brief Description
Background to the Innovation
Mr. Gurpreet Singh of Uttranchal, after a lot of endeavor has been successful in developing Hunar, a specific type of lemon grass that is rich in citral content and which provides a fresh-lime note, a note that is in high demand in the market as compared to its contemporary metallic note.

As the current competing genres of lemon grass do not stand the parameters set by Hunar, the innovator is quite confident that his product is more remunerative to the cultivators than any other.

Mr. Singh has been involved with the farming business for more than a decade now. He has worked for more than 10 years in the Tea industry itself. And it was only his quest for alternative agriculture and diversification that led to the development of hunar. It must also be noted that it has been a conscientious and a combined effort for at least 3-4 years now, by Mr. Singh and other government institutions that has resulted into hunar- a product that suits the best example of scientific farming.

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Main Features of the Product:

High Citral Contents High Yields Disease Resistant Pest Resistant Premium Quality Oil which is Anti-Fungal, Anti-Viral and Anti-Dandruff

Technical Details:
Recovery of oil is higher than any other variety known i.e. 0.7% recovery during rainy season and about 1% during summers. Citral levels during monsoon are 79% whereas during summers, the citral levels are almost 82%. This has been duly verified by GC method and these levels are very high as compared to contemporary genres of lemon grass. Yield per acre is also very high-350 quintals of herb per acre per annum have been recorded at a spacing of 1 ft X 1 ft. Note is fresh lime, which is very desirable, as against the metallic note of most of the varieties of oil available in the market. Oil has found to be Anti-fungal, Anti-Viral and Anti-Dandruff.

Market Opportunity and Entry Strategy

The Market
The market for lemongrass as well as for the lemongrass oil is phenomenal. In the fresh form, lemongrass is a thick green stalk, which can be eaten as a vegetable. Its main use is as a flavoring. However it has become more popular in developed countries in line with the growth in popularity of oriental, especially Thai, food in which it is used frequently. It is imported into these countries, for both the restaurant trade and for use by ordinary households cooking oriental food.1

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Besides, the Lemongrass oil that is extracted by steam distillation from the lemongrass is used extensively in fragrance, flavour and pharmaceutical industries. It forms the starting material for manufacturing of various fine chemicals, as well as Vitamin A, via the Beta-ionone mechanism. The oil is widely used in Aromatherapy and as Herbal Tea, this apart from the use of grass itself in Thai cuisines. Demand is generated from home market as well as export market. The source of demand is from end use industries, which are primarily personal care products, food products, pharmaceuticals. The demand for essential oil by fragrance industry is 60%, flavor industry 20% and pharmaceutical industry 20%. There is good demand from USA, UK, France, Germany and also far eastern countries like Japan, Singapore and Hongkong. The estimated demand for essential oils for the year 1996- 97 was 14,900 tonnes. The growth rates normally were of 9% and 25% for domestic and export market respectively. The demand supply gap is about 8000 tonnes.2

Pricing
The innovator has taken a conservative approach and he wishes to charge Rs. 350/- per kg of lemongrass oil. It must be noted that the innovator in the past has already sold 180 kg. Lemongrass oil at a price of Rs. 365/- per kg and he has provided a bill for reference of the same. Besides, the prices per kg of lemongrass oil in international market are quoted as high as Rs. 400/- to Rs. 500/- whereas the other producers quote Rs. 380/per kg. The innovator has knowingly adopted a conservative approach while pricing his product because in either of the cases, if he sells his product at a higher price, it would be in the best interest of both him as well as N.I.F.

Entry Strategy
The innovator has tied up with an exporter for exporting the lemongrass oil overseas. Besides he has also recently tied up with Mr. Lal, an MBA from IIM-A for sale

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of his Dried Herb on commission basis. He shall be guiding Mr. Singh with the technology required. This should provide a good platform to the innovator to make an entry into not only the lemongrass oil market but also the dried herb market.

Promotion
In the initial stages, the onus of promotion would lie more on the exporters and the domestic dealers who have tied up with the innovator. The word of mouth marketing, as well as the feedback by the end-users will play a pivotal role in the promotion of the product within the given industry. Besides, in order to cater to and to create awareness amongst the potential market, the product will have to be advertised effectively through respective industrial journals. For e.g. If the product has a potential in the pharmaceutical industry that doesnt have an idea about the existence of our product, then it must be advertised in the essential oils journal that appears every month in that particular industry. Similarly, the same must also be done for the fragrance industry, the restaurant and fooding industry and any other industry wherever it has a potential to be sold. The product is saleable only to very specific industries. Hence, direct marketing through Internet, through various websites that deal with the promotion of essential oils is also one of the options available to the innovator. Infact, the innovator has already started promoting his product on http://www.tradekey.com.

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Project and Funding Details

Product Costing
The cost of production per kg lemongrass oil is Rs 150/- as shown in the Bill of Material as given below:

Sr. No. 1. 2. 3 4

UNIT COST FOR PRODUCTION OF PER KG LEMONGRASS OIL Particulars Cost of Harvesting Cost of Distillation Cost of manure Irrigation and other miscellaneous costs (per day) Total Cost per kg lemongrass oil Profit Margin Cost to Exporter/Customer

Cost (Rs./kg) 70 50 20 10 150 200 350

The lemongrass requires only one time sowing of seeds and the yield is available for at least 5 years, which is the estimated economic life of the grass. Hence, the innovator has not included the cost of planting and cost of preparing the land for plantation which as per the details provided by him comes to Rs. 72000/- per acre @ cost of Rs. 0.72/- per slip for 1,00,000 slips per acre.

Per acre per annum cultivation results into 312.5 quintals of lemongrasss production that further produces 250 kg of lemongrass oil. So, effectively the cost of plantation for per kg per annum of lemongrass oil comes out to be = = = = 72000/250 kg Rs. 288/- per kg. 288/5 years 57.6 Rs. 60/- per kg per annum (Rounded of)

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The innovator has not included this cost in the unit cost of production because he considers this cost to be capital cost in nature, the benefit of which would be available over the period of next 5 years, the economic life of the lemongrass.

Project Cost
The total project cost is as given below:

Cost Head Farm Machinery (Tractor, MPV, Trailer etc.) Staff Quarter Lab Equipment [GC, Centrifuge compulsory for exports] Distillation Facility Drying Shed Office Building Wood Shed TOTAL PROJECT COST

Amount (In Rs) 1050000 250000 1000000 1000000 500000 200000 500000 4500000

Working Capital Margin

The total working capital requirement is Rs. 1500000/- and since it can be rotated twice a year, the actual requirement of working capital is Rs. 750000/-. The innovator has so far received no advance payments towards any order. He has received Rs. 200000/from one of his buyers, which he considers as an unsecured loan and plans to pay this amount back during the 1st year of commercialization itself. Hence, adopting a conservative approach, he estimates the working capital requirement at Rs. 1500000/- per annum for the next 5 years of operation. This can be rotated twice a year hence the actual working capital requirement arrives at Rs. 750000/-. Besides, he seeks for a financial support of Rs. 500000/- from N.I.F that will be utilised entirely towards meeting the working capital lag.

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The calculation of the working capital is based on the following assumptions:

1. 2. Total expected sales per annum is are expected to be 10000 kg lemongrass oil Orders from customers shall be booked on approval with no advances towards payment. 3. The cost of production is Rs. 150/- (this doesnt include Rs. 80/- per kg per annum cost of planting because the cost of planting has been taken as a fixed cost, an asset the benefit of which will be available over the next 5 years, the economic life of the lemongrass) and the manufacturers margin is Rs. 200/- per kg. 4. The delivery and the payment schedule shall be as given below:

The working capital requirement has been calculated as given below in the cash flow statement:
(All figures are in Rs.) Year 1 Sales (10000 kg @ Rs. 350/- per kg Cost of Plantation (Rs. 72000/- per acre*40 acres) Cost of Production (@ Rs. 150/- per kg for 10000 kg of lemon grass) Total Cash Outflow Total Cash Inflow Order advance Payment against delivery Total Cash Inflow Net Cash Flow 3500000 Year 2 3500000 Year 3 3500000 Year 4 3500000 Year 5 3500000

2880000

Nil

Nil

Nil

Nil

1500000 4380000 Nil 3500000 3500000 -880000

1500000 1500000 Nil 3500000 3500000 2000000

1500000 1500000 Nil 3500000 3500000 2000000

1500000 1500000 Nil 3500000 3500000 2000000

1500000 1500000 Nil 3500000 3500000 2000000

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Therefore, other than the first year, which takes into consideration the cost of plantation-a cost assumed to be capital in nature- the working capital requirement per annum throughout the economic life of the lemongrass is Rs. 1500000/-.

Scenarios
The prices of Indian lemongrass oil have been more or less stable within the range of Rs. 350/- to Rs. 500/- for most part of last 5 years. On the other hand, the prices of its competing Chinese Litsea Cubeba and synthetic citrals have varied significantly. Hence, it becomes important to develop certain scenarios so as to analyze the possible financial situations the product may face with no surety. These scenarios have been developed taking into consideration the variations in production of lemongrass per acre per annum by atmost 10% either ways as mentioned by the innovator. Similarly, the variations in prices have also been taken based on price trends available and prices at which the product is being sold by the innovator to existing buyers. The documented copies of these orders at different rates at which he has sold to the buyers are available. These scenarios are as follows:

TOTAL SALES 225*40=9000 250*40=10000 275*40=11000

POSSIBLE SCENARIOS UNDER DIFFERENT ASSUMPTIVE VARIABLES VARIABLE VARIABLE VARIABLE PRICE PROFIT PRICE PROFIT PRICE COST COST COST 300 150 350 150 400 150 (PER KG) (PER KG) (PER KG) (PER KG) (PER KG) (PER KG) 2700000 1350000 1350000 3150000 1350000 1800000 3600000 1350000 3000000 1500000 1500000 3500000 1500000 2000000 4000000 1500000 3300000 1650000 1650000 3850000 1650000 2200000 4400000 1650000

PROFIT

2250000 2500000 2750000

Most conservative scenario

Most Likely Scenario Most optimistic scenario

The conservative scenario is based upon the assumption that production in a particular year per acre per annum is lesser by 10% as suggested by the innovator. Similarly, the price too is taken to be the bare minimum that we expect the product to be 29

sold at. It must be noted that since starting the commercial production, the innovator has sold his lemongrass at a rate as low as Rs. 335/- per kg. This again ensures that the approach adopted is a very conservative one. The most likely approach is based on the financial details provided by the innovator. It is estimated that the average per acre per annum production of lemongrass during its entire economic life will be 250 kg. And the innovator wishes to sell this production at an average price of Rs. 350/- per kg. The innovator has claimed that he has taken up all the necessary steps to ensure that the average per acre per annum production doesnt vary significantly. Hence, this has been taken up as the most likely scenario. If a client is not very much interested in the citral content, then this would enable the innovator to make more crops for a given year. And considering the way the market for lemongrass oil and essential oils is growing, we have taken up the most optimistic scenario based on the assumption wherein the yield is the highest and the rates charged are also comparatively high than the average rates he is willing to charge.

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BREAK-EVEN POINT
The break-even point is the point where a firm neither incurs a profit nor a loss. The firms position at this point is that of zero-zero. This is a very important position for any organization because the early it achieves its break-even, the easier it becomes for it to earn good profits. It is beyond this break-even point that any organization actually starts making profits because this break-even point resembles the position where each unit (in our case per kg) contributes sufficiently towards recovering its fixed costs fully. Hence, the break-even point under different scenarios has been calculated and shown here.

The breakeven point calculations are as follows.

BEP UNDER DIFFERENT SCENARIOS SELLING PRICE (PER KG) VARIABLE COST (PER KG) CONTRIBUTION PER KG TOTAL FIXED COSTS BEP (IN KG) = TOTAL FIXED COSTS/CONTRIBUTION PER KG 300 150 150 350 150 200 400 150 250

4500000 4500000 4500000 30000 22500 18000

Thus, as can be seen from the table above, if the innovator sells his produce at: Rs. 300/- per kg. The firm will achieve its break-even point at sales of 30000 kg of lemongrass oil. Considering that the innovator succeeds in achieving the average annual production of 10000 kg per annum, the firm would be able to achieve its breakeven point by the end of the 3rd year.

Rs. 350/- per kg. The firm will achieve its breakeven point at sales of 22500 kg of lemongrass oil. This is precisely what the innovator has quoted in the financial

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statements provided by him. He has suggested therein that a latent period of 2 years will be the time period by which the firm would be able to achieve its breakeven point. Accordingly, as per the calculations made, it would take the firm 2 years 3 months on an average basis to achieve its break-even point.

Rs. 400/- per kg. The firm will achieve its break-even point at sales of 18000 kg of lemongrass oil. Accordingly, even if the firm is able to achieve its expected average annual production for the first 2 years, it would achieve its break-even point within this time period. This is perhaps the most desirable situation for any firm.

IRR CALCULATION FOR THE PROPOSED PROJECT The internal rate of return (IRR) is the discount rate that equates the Net Present Value i.e. Present value of cash outflow Less: Present value of cash inflow to Zero. The IRR is one of the most reliable indicators of whether a given project must be accepted or not. The decision rule for IRR is as follows: Accept the project if the IRR is greater than the cost of capital Reject the project if the IRR is less than the cost of capital

IRR CALCULATION FOR THE PROJECT -4500000 1176037 1420137 1464237 1508337 1552437 IRR = 16.7209%

Considering the cost of capital at 10%, the effective rate that the innovator is paying to the banks towards the loans taken by him, the IRR of the project is greater than the cost of capital by 6%. Hence, apparently the project prima facie is very much acceptable.

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Funding and Repayment Plan

Funding Details
From the point of view of funding, the total project can be broken down into two phases Phase 1 The innovator has already started with the commercial production and sales of Hunar since last 6 months. He has very clearly stated in his financial documents provided by him as well as on the telephonic conversations that he doesnt take any advance payments from his customers towards any orders received. The payment is only received on approval of the product sold by Mr. Gurpreet to the customer. Besides, his total working capital requirement for a given year is Rs. 15,00,000/- that will be achieved by rotating Rs. 7,50,000/- two times during a given year. He has agreed to fund 1/3rd of this requirement on his own. Whereas for the balance working capital requirement i.e. Rs. 5,00,000/- he seeks support of funds from N.I.F. However, considering the risks associated with the project, it is proposed that N.I.F initially provides a support of Rs. 2,50,000/- to the innovator. The expected return on the support so provided is atleast 20% on the investment made. Therefore, it is proposed that M.V.I.F. in its phase-1 provides a support of Rs. 2,50,000/- to the innovator. Phase - 2 Phase-2 is expected to be the stage where the business of the innovator grows as per the projections made by the innovator himself. Obviously, this will be the stage where with the increase in the number of orders received, the innovator will require more working capital than usual. Hence, it is proposed that an additional support of Rs. 2,50,000 shall be provided by M.V.I.F to the innovator. It must be noted that this additional support shall be provided only if the innovator successfully repays the amount sanctioned earlier to him along with the returns expected on the completion of his first years operation.

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There are two possible outcomes of this scenario:

If the innovator successfully repays the support provided along with the returns expected, then the total support provided to him by M.V.I.F. will be effectively Rs. 2,50,000/- provided earlier

+ Rs. 50,000/- returns expected @ 20% p.a. + Rs. 2,50,000 additional support. This will make M.V.I.F.s share in the working capital @ 2/3rd of the total

requirement and the innovators share will be 1/3rd, which is precisely what the innovator wants. If the innovator fails to return the funding so provided along with the expected returns on the completion of his businesss 1st year operation, then this will give a clear view of the innovators profitability claims and M.V.I.F, after having recovered the principal along with the returns whatever available, shall move out of the project without further considerations. In this way, the funding of the project in two phases shall help M.V.I.F in hedging the risks associated with the project. Besides, this method of funding shall also help in funding the need of Rs. 5,00,000 sought for from M.V.I.F through Rs. 2,50,000/-. Funding Details Summary Phase Phase 1 Phase 2 Total Amount Rs. 2.5 lakhs Additional Rs. 2.5 lakhs Rs. 5 lakhs Approval Status Final Based on performance evaluation

Repayment Plan
Apparently, the cash inflow and the liquidity available to the innovator at the end of the accounting period are of much importance while deciding upon his repayment ability. Hence, the innovator when called for furnished the following information. It must be noted that the liquidity shown by the innovator, even after payment of all the variable

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expenses and the installments of two loans that he has taken, is more than 25% of his total cost of the project.

The financial details as furnished by the innovator are as follows: PARTICULARS Total Sales (@ Rs.350/- Per Kg.) Less: Total Variable Cost (@ Rs. 150/- per kg) Gross Profit Less: Interest paid on Term loan UCO Bank Less: Interest paid on Term loan Nainital bank Total Interest Cost Profit After Interest Before Tax Less: Principal Repayment to UCO Bank Less: Principal Repayment to Nainital Bank Total Principal Cost Profit Before Tax Less: Unsecured Loan Profit Before Tax Less: Tax Total Cash Inflow Available For Disbursement* 420000 420000 420000 420000 420000 280000 280000 280000 280000 280000 203963 159863 115763 71663 27563 135976 106576 77176 47776 18376 2000000 2000000 2000000 2000000 2000000 67987 53287 38587 23887 9187 YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 3500000 3500000 3500000 3500000 3500000 1500000 1500000 1500000 1500000 1500000

1796037 1840137 1884237 1928337 1972437 140000 140000 140000 140000 140000

1376037 1420137 1464237 1508337 1552437 200000 Nil Nil Nil Nil

1176037 1420137 1464237 1508337 1552437 Nil Nil Nil Nil Nil

1176037 1420137 1464237 1508337 1552437

* Cash available for repayment

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Hence, as can be seen from the table, the projected cash inflows are phenomenal. The innovator has shown his willingness to compromise on the citral content of the crop and instead have a higher yield for his crops. He believes that the prices earned on higher yield would make up for the losses due to lower citral content. And the above table has been prepared taking into consideration the same. Besides, as calculated above, the firm even under an average scenario is likely to achieve its break-even sales within a period of 2 years and 3 months, which is well within the expected period of 2 years proposed by M.V.I.F. Even then, taking a conservative approach towards granting the support, it was suggested that the innovator should be given Rs. 2.5 lakhs as financial support towards the working capital requirement and the additional amount should be disbursed provided the innovator returns the initial lending alongwith the expected returns by the first years of its operation. Accordingly, the following table proposes the schedule towards recovery of the investment made:

May 2007 September 2008

Rs. 3 lakhs Rs. 6.6 lakhs

Rs. 2.5 lakhs plus the profits @ 20% of our initial investment Rs. 3 lakhs plus additional Rs. 2.5 lakhs (Provided the investment made in 1 is received back in full along with the returns expected) plus the profits thereon @ 20%. On achieving BEP sales

Total

Rs. 9.6 lakhs

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Risks Associated with the Project

Risks There is a possibility that the production may not be as per projection due to lesser rainfall or any other environmental factor

Mitigation Strategy The crop is anti-fungal, anti-viral and antidandruff. Besides, Mr. Singh has dug up 4 tube-wells to meet with risk of lesser rainfall. Besides, he has also set up 2 distillation units for extracting oil from lemon grass which mitigates the risk of low production due to any contingencies like distillation units going on strike etc.

Price-Sensitivity??

It must be noted that lemongrass oil is an essential oil and the international market for essential oil has just begun to grow. Even the trends since last 10 years show that the prices of Indian lemongrass level are more stable than the prices of its competitors like Chinese litsea cubeba and other synthetic citrals.3, 4

Are there any products that are likely to provide competition to Hunar in terms of citral levels?

At present, none of the class of lemongrass oil has citral content as high as that of Hunar i.e. 82% citral content. Besides, Hunar has a fresh lime note, which is highly desirable as compared to metallic note of various varieties that are available in the market. Only Chinese Litsea Cubeba is somewhat near to Hunar with respect to citral content,4 but then Litsea Cubeba is synthetic oil whereas Hunar is natural. So, even on this front Hunar is safe.

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Project Monitoring and Monitoring Team

It is proposed that given the high investment proposed in the project and the nature of the project, a project monitoring team comprising of GIAN, NIF (BD) and a mentor be formed which would review the status with the innovator on a regular basis. The mentor could either be an individual from industry having experience of Essential oils marketing or some faculty from the Agricultural Department, IIM-A.

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Documentation Verification Part Of The Project

Documents form the basic minimum requirement to validate the authentication of any project. Whether its a technical aspect, financial or any other aspect, it must be supported by a document. And when it is related to venture funding of a risky project, what we do here at N.I.F. the documentation verification becomes all the more important.

And this was exactly what I was supposed to do. At this point, I must also mention about the Research Advisory Committee Meet, which met at IIM-A. This meeting involved experts from various fields who had come over to decide finally the projects, the products that were to be awarded at the biennial award function held by N.I.F. Obviously, being an expert the first thing they asked for a valid project was its authentic documents.

There are basically 6 documents that N.I.F. asks for. They are: 1. Project Proposal 2. Recommendation 3. Sanction letter 4. Utilization of the fund thus granted 5. Activity Status 6. Completion Certificate.

Depending on the situation, the documents are asked for. i.e. if the product is in the prototype development stage, then only the documents till activity status are asked for. And if the project or the prototype has been developed fully then, in such cases a completion certificate is issued to the innovator by N.I.F. provided he provides all the relevant documents that must be reproduced by him before the institute to avail the certificate.

So, this itself became a micro project for me as I was supposed to go through the original documents of 70 odd projects to verify whatever documents were available or otherwise

39

for a given project. In writing this may take me 4 lines to explain the work done by me, but practically it was a work that took me almost 2 weeks to compile the final report. It was a hectic process going through various files, getting the relevant documents Xeroxed and verifying and cross verifying what so ever documents are missing, preparing a list of the same, meeting various staff members in respective departments to check if they have some idea about the missing documents? In short, it was easier said than done experience especially for me.

It must also be mentioned that N.I.F. being an N.G.O. at times had to go beyond what had been stated in their memorandum. i.e. in order to help the grassroots innovator achieve the fruits of their labor, of their technological innovation and to help them in getting some recognition the institute also at times prepared certain basic documents on behalf of the innovator to ensure that there was no blockades for them in getting an award for their efforts.

This mainly included the preparation of the proposal and the recommendation for a given project. The idea of doing this was pretty simple.

1. To help the innovator in getting recognition due to him, which otherwise could not have been possible because of some document being missing due to careless back-office work. 2. To standardize the way a proposal was submitted henceforth to the institute as well as the way in which it was recommended for sanctioning by the concerned authority.

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A proforma of the two documents has been attached here for reference.

Proposal for Project Funding

NIF From: VARD

Ref: VARD/FS/06Date: th March 2006 To: CIO

This has reference to the project proposal entitled --------------, submitted by -------------.

It is recommended to sanction the amount proposed in three phases. Expenditure breakup for the project execution is
S.No. 1.0 2.0 3.0 Description of Activity Part Salary compensation to the Research Assistant Chemicals/kits/filters/disposables Primary Chick Embryo Cell Culture from National Cell Culture Institute Amount (Rs)

Total Project Cost Rupees Fifty Thousand only

Mode of Payment: 1) 50 % advance payment after approval of project by NIF Rs. ---2) 25% advance during the course of project after midterm evaluation Rs. ---3) 25% final payment on submission of trial report Rs. ------Remarks:

. NC - VARD

National Innovation Foundation-AHMEDABAD

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Recommendation for Project Funding

NIF From: VARD

Ref: VARD/FS/06Date: 21st Sept. 2002 To: CIO

This has reference to the project proposal entitled Micro Windmill, submitted by Jibananda Khuntiya National Coordinator, VARD

The submitted proposal is reviewed and examined thoroughly for its methodology and work plan. A field visit was made to verify the claim reported by the innovator Mr. N V Satyanarayana In view of this, the project is recommended and the total amount Rs. Five Thousand only (Rs. 5000/-) may be sanctioned.

Remarks: Debshish Ray Choudhari CEO GIAN N Jibananda Khuntiya NC - VARD

Documentation word itself seems to be related with work usually done by people of lower cadre. So being a management trainee, initially it was a bit uncomfortable to accept that I was given the work of documentation. But as my senior Mr. Devdatt had once said in a meeting Management, M.B.A intoxicates our mind and it was now that I realized how true he was.

Thus, overall it was a very important and phenomenal learning experience for me. And the importance of it was not understood till the time the R.A.C. meeting was held.

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CONCLUSION
Being a management trainee, and a student willing to take up finance as his major during specialization, venture capital and venture capitalist have always fascinated me and somewhere down the line I see myself in some venture organizations within next 5 years time. And at times, when I am a bit worried by the very idea of how I would handle the corporate work pressure, which takes out every possible energy out of you, I, at that point of time, think of joining some non-government organization, serve the community and earn some good money along with the mental satisfaction. This has still some time left to turn, either into a beautifully realty or a nightmare.

Before this happens, I had to undergo my summer internship for 2 months in any of the corporates or non-government organization so as to get some industry exposure. And I am really thankful to god as I ended up joining National Innovation Foundation. National Innovation Foundation more popularly known as NIF is an NGO that scouts for and promotes the grassroot level innovations. The idea is to identify the grassroot level people who have made an attempt to contribute to the society through some technological innovations of theirs and felicitate them for the same. This doesnt end here as, if the technological innovation so made has a potential to be commercialized then the NGO also works towards making the innovator capable of making commercial production of the same and if this is not possible, then allow for technology transfer of that product and thereby enable the innovator in getting a due reward for his efforts by the way of royalties.

And this is exactly where the role of Micro Venture comes into picture. Obviously, Micro Venture is very different from the typical Venture capital. But then it helped me in getting a foray into what I could expect from a venture capital firm when I would join it.

My preparation of the micro venture innovation fund proposal literally tested all of my financial fundamentals and the word of applause by my immediate heads- Mr. Chinzah and Ms. Ruchi Tripathi, for my proposal gave me a feeling that is hard to define. 43

Besides, the last 2 months of my training will stay in my memory for a very long time as NIF gave me a very good idea of how an NGO works. The perception that the work pressure in NGOs is low and you can take things for granted was put right within the first two weeks of my summer training and one thing was pretty clear, you need to work and work sincerely if you want your salary, stipend or even for that sake, your summer training certificate with no adverse remarks against your name. The most peculiar and noticeable experience of my summer training that has had some impact on me is that, most of the staff members of NIF are people with great degrees written against their names, right from doctors to engineers. Yet the co-operation they provided and more importantly their humbleness has been a great and a true learning for me.

NIF is a big name among the entrepreneurs association through out the country and even overseas. A lot of inquiries for their various products pour in daily on their websites and to their offices. The work undertaken by NIF is very important in its own sense and for me it is their true contribution towards making India a super-power by 2020. As said above, I have been lucky to have my summer training at NIF and I believe that they must continue with the great work they are doing currently.

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BIBLIOGRAPHY
1. Uses of lemongrass in various industries:
http://www.foodnet.cgiar.org/market/Tropcomm/chap1_4.htm

2. Demand supply gap: http://www.nrdcindia.com/pages/essntial.htm 3. Rates per kg for lemongrass: http://agmarknet.nic.in/agmgrachg.htm 4. Prices and competitive comparison with Litsea Cubeba:
http://sadl.uleth.ca/nz/collect/faodocs/import/www.fao.org/docrep/v5350e/V5350 e09.htm

5. PRASANNA CHANDRA (2005) FINANCIAL MANAGEMENTTheory & Practice, 5th Edition - BREAK-EVEN ANALYSIS AND IRR CALCULATION,

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