Sramana Mitra has an informative post about Sequoia Capital, one of the leading Silicon Valley VC firms investing $11.5m in microfinance company SKS.

SKS currently provides loans to its 600K members in 7,200 villages in rural India. The company says that the new capital will go towards providing financial services to over 5 Million poor families by 2010. SKS estimates that its loans have a return on equity of 23%. That’s a high interest rate, but, it also makes it viable for a venture fund to invest in the company.

She adds that:

This is not philanthropy but pureplay capitalism.

SKS will be required to exit within 3-5 years, or else Sequoia will get out of the deal. Naoko Felder furnishes some examples of prior IPOs in the sector: “I just wanted to add 2 cases regarding IPOs related to MFIs 1) BRI of Indonesia,(Nov 2003) then a state-owned bank, released 39% of its shares to the public by listing in the Jakarta Stock Exchange. 2)In 2006, Equity Bank Limited listed in the Nairobi Stock Exchange (2006).”

There is, ofcourse, a fortune at the bottom of the pyramid. It just takes work to get to it.

Link to Sramana Mitra on Strategy » Blog Archive » Sequoia Enters Micro Finance

Is it a good idea to have VC firms invest in such companies? After all, their motivation is to make a lot of money and get out after about five years--that is not what SKS wants to do. How will SKS provide the VCs with an exit?

If VC firms want to portray themselves as doing something good, then they should do it some other way, such as providing pro bono services to help such organizations grow, imho.