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Food for Thought at Suminter India Organics

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Sameer Mehra watched as the recently loaded ship disappeared over the horizon, bound for Europe. Its cargo included fresh, delicious organic food products from India that would be sold at a premium to health and taste conscious buyers.

Mehra was proud that his venture, Suminter India Organics, was creating value for more than 7,500 Indian farmers across five states while building up the brand reputation of the country’s agriculture sector. In the five years since the company was launched in 2004, it had grown into a multi-million dollar enterprise that is a classic example of “doing well by doing good.” Now, as the summer of 2009 approached, Mehra needed to ponder how best to develop an enterprise with so many potential growth paths that it was difficult to choose just one or two.

Sameer Mehra was born and brought up in Mumbai in what he describes as a “traditional business family.” “My grandfather was an entrepreneur in the 1930s and 1940s, and migrated to Japan for seven years,” he relates. “He was the first entrepreneur to bring screen printing into India and we were in the textile business for almost fifty years.” Mehra learned about entrepreneurship first hand by being involved in an engineering company the family started in 1994 to manufacture wind turbine generators in collaboration with Enercon, a German company. After graduating from Narsee Monji college of commerce and economics, he earned an MBA from Emory University in the USA and worked in a New York hedge fund for a time before returning to India.

The unique selling proposition in the organic business is quality. You are promising the consumer a product that is void of any toxins, and that originates at the farm stage.

- Sameer Mehra
Suminter India Organics

Mehra’s international travels fueled his entrepreneurial imagination. He comments, “I frequently visited Germany and I trained in the German company for a bit. I saw the same thing in Europe and the US: a surge in the popularity of stores such as Trader Joe’s and Whole Foods that tap into consumer preferences for food without chemicals or preservatives. I was looking for the next big idea and I thought organic foods would give me an opportunity to build a global business with massive scale. I got interested in the space as a pure business opportunity, but continue to remain in it because of its triple bottom line: for communities and stakeholders, it is extremely positive environmentally, economically and socially.”

Mehra’s idea was to build an Indian-owned supply chain from the farm through to overseas distribution in order to capture more of the value, not only for his company but also for farmers. He soon realized that it was necessary for his new Mumbai-based firm, which he dubbed Suminter India Organics, to operate and control the supply chain end-to-end. He explains, “The unique selling proposition in the organic business is quality. You are promising the consumer a product that is void of any toxins, and that originates at the farm stage. I studied various business models of food companies from around the globe and realized that the way forward was to maximize the arbitrage from owning the whole value chain. Just owning the product or sales end would not cut it—we have to provide an end-to-end solution.”

Mehra decided to focus initially on cotton and non-perishable food such as seeds, pulses, cereals, herbs and spices. Suminter’s approach was to source organic food from certified farmers, then test, steam sterilize, pack and hold products from a central processing unit in the middle of India. Cotton was processed in a facility in Gujarat. Cargoes were shipped out of the ports in Mundra and Mumbai.

Mehra chose different levels of vertical integration for his two main markets, Europe and the US. He explains, “In Europe, the organic industry is very fragmented: you have many different countries where different languages are spoken and the consumer base is diverse. Many buyers could not import raw products directly from India because it is too much hassle, so our company gives them what they require at their factory door.” Suminter exports to its wholly-owned Netherlands subsidiary which stores products, breaks them into smaller amounts and sells them to local middlemen, packers and distributors throughout Europe. However, says Mehra, “In the US, four or five big players have enough volume that they can import themselves, so we export directly to these middlemen. Their customers, the organic food stores, have strict inventory management policies, so it is best for us to work through distributors there.”

Suminter’s approach was to source organic food from certified farmers, then test, steam sterilize, pack, and hold products from a central processing unit in the middle of India

Mehra soon realized, however, that converting a farm that had been operating with pesticides into a certified organic farm required a three-year conversion process, which would seem risky to many farmers. Therefore, he established connections with the Aga Khan Rural Support Program in Gujarat, which had been promoting sustainable agriculture for five years. “We said the farmers were not getting premium pricing and we could create an ecosystem for them, because we had access to a consumer base.” Mehra recalls. “They tried us out for a year and saw that our work pays off in dollars that go to farmers. Things matured and we grew from there.”

This relationship was crucial to kick-start the first link in the chain, the source of raw materials. Says Mehra, “We had a lot of difficulties in the initial years until we were able to get trust by partnering with NGO’s who had credibility with farmers. They helped us get into groups of farmers. Once farmers were able to see the benefits of going organic, it became an easy sell. In fact, now more and more farmers want to align with us and we are telling them to go slow because we can only add so many farmers per year.”

Eventually, Suminter hired its own force of agents who work directly with farmers. Explains Kanu Anand Gupta, who joined Suminter in 2009 to head business development, “We contract with farmers and help them through the three year process it takes to certify an organic farm. The field staff constantly advises the farmer and there is a lot of testing and hand-holding involved. The value proposition for the farmer is that he can reduce his input costs by 20-30% while improving price realizations by 10-20% if they convert to organic farming. Our objective is to achieve yield parity with conventional farming over time and we think that can be accomplished just by using the right inputs and know-how.”

By late 2007, Suminter had gained significant traction and was ready to look for venture investors. Mehra explains, “A startup needs to take money when people want to give it to you, not the other way around. You don’t look for money when you need it, or your negotiating power will be much lower. In December, 2007 global markets were peaking and valuations were at an extremely high level. There was a lot of liquidity in the system and investors were actively looking for good opportunities. We had proof, that our business would work, and a model in place, so we were inclined to get external funding. That let us bring in people, processes and equipment we needed to scale and go to the next level. We were looking for growth just at the time when valuations were highest and two or three different venture capitalists were chasing us to invest.”

Mehra eventually chose to work with Nexus India Capital, which had closed its first fund of $100 million in mid-2007. With offices in Mumbai and Silicon Valley, Nexus focused on earlier stage enterprises, preferring to be the first institutional fund to invest in its portfolio companies. Mehra decided to work with them because he felt the partners would fit well with him and his business. He elaborates, “The critical decision an entrepreneur needs to make for series A financing is about relationships. Your relationship with an early-stage venture capital firm is nothing short of a marriage and a bad partner means serious trouble. I was able to secure good reference checks on the people behind Nexus and they had good pedigrees. Others offered us better valuations, but the people backing Nexus are the reason why we chose them.”

One key scaling constraint was the need for field staff to work intensively with farmers.Due to Indian land laws, farmers have between two and five acres of land, so it’s really tough to manage day-to-day inputs.  It takes a lot of work.

Deciding how much money to raise was a delicate balancing act. Mehra states, “I did a lot of research on why startups fail anywhere in the globe and the most important reason seems to be that they are often under-capitalized from the start. I was very clear in my mind that if I had to dilute my holdings, I would try to capitalize the company so it could survive for two or three years and become a sustainable business that could build itself up. We added up how much we wanted for capital expenditures, working capital and the right debt-to-equity ratio and originally looked for that amount. However, we realized we would have to dilute ourselves a lot more to raise that kind of money, so we scaled down the amount. Still, you have to dilute a lot; industry benchmarks suggest that series A venture capitalists won’t take less than 30-40% of the equity.” Accordingly, in December, 2007, the series A round closed at $3 million.

At about the same time, late in 2007, a small investment bank that Suminter had discussions with while raising their Series A financing recommended him to the managers of the newly-established India offices of Endeavor, a US-based nonprofit organization founded to support high-impact entrepreneurship in emerging markets. Endeavor had developed a solid reputation and had a glittering international board of advisors and partners. In each country in which it operates, Endeavor is funded by a local board, which in India includes Hari Bhartia, Managing Director of Jubilant Organosys; Ashish Dhawan, Founder and Senior Managing Director of the well-known private equity firm ChrysCapital; and Sanjay Nayar, CEO and Country Head for Kohlberg Kravis Roberts & Company.

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