There are 63 Mn MSME businesses in India. Even if we ignore 90% of the micro-businesses, out of the 6.3 Mn medium and mid-size businesses (SMEs), around 16% of businesses close every year, much before the payback period, which is 2-4 years, causing huge capital destruction. Only around 6000 of these businesses have progressed enough to get listed on the stock exchanges indicating the level of stagnation. In contradiction to the popular perception in the economy, in most instances, SMEs don't fail on account of technical, operational or market problems, but due to lack of awareness of its management in the funding domains!!! SMEs are mostly led by first-generation technocrats who know how to make and how to sell with the visibility of a profit. But they suffer stagnation or financial distress because this much ability is not enough to transform a business into a professional, profitable, growing, stable & sustainable entity eligible for sufficient equity funding.
Funding gap - SME
There is a conservative funding gap of 0.6 trillion USD for the SMEs in India alone and a large fraction of that can be met through equity funding. This is a largely uncatered demand due to various reasons – the most crucial being: legacy, misconceptions about equity, lack of awareness, lack of education, lack of communication, lack of documentation, lack of consulting infrastructure, the complexity of the process, cost of the process, interference by the brokers. Similarly, the advantages for an investor to invest in a private limited company vis-à-vis a listed company are innumerable. Despite immense demand pressure and supply pressure, equity funding for SMEs is rare due to many structural gaps and especially a scalable consulting infrastructure.
To ensure near 100% success of a transaction and restrict losses on account of traditional inefficiencies, there is a need of developing a scientific screening process for the selection which will help in selecting only those SMEs that are led by established technocrats who have tremendous operational and marketing strengths through an elaborate process which should be digitized on the web platform. There are various equity funding delivery fintech platforms to address this huge problem. The current online platforms available in market are mostly in the debt space and the ones in equity space are very cluttered and they are mainly brokerage platforms or netwrorking platforms. They have no elements of any business advisory to ensure the closure of the transaction. Hence, only one in 10,000 queries result in a truly successful transaction in the SME space.
Technology Intervention
There is a need for semi-automated, end-to-end and customized equity funding solutions right from identification of the financial problem/growth aspiration of a businessperson, analysis of all available options of solutions, formulation of the strategy, preparation of fund requirement schedule, identification of the investor, risk analysis, the study of internal documents & data, preparation of transaction documentation, business valuation, investment contract, due diligence, deal closure to handholding.
A typical transaction involves screening of a business and an investor on multiple parameters, collection of a wide variety of data from various departments, analysis of the data, exchange of the data with multiple stakeholders, management of confidentiality and anonymity, preparation of a shortlist of suitable investors, communication of information with the investor in a gradual manner, structuring of the deal and negotiations, etc. In the traditional model, all these things happen haphazardly with multiple iterations. Using the emerging technology stack, this process can be carried out in a scientific, systematic, efficient, fast, and cost-effective way of using low-cost human resources.
Is consulting infrastructure available?
Though equity funding consultancy is a very common service for large corporates, equity funding consultancy for SMEs is equally rare because it is extremely challenging. The SME promoters have “mere observations” on strategic problems; not even well-defined problem statements or aspiration statement. Also, they can’t represent themselves in front of the investors as they lack skills on the transaction front irrespective of 15-20 years of the vintage of business. Traditionally, it also requires an “extremely” high engagement from any consultants which is not the norm in India.
The business brokers make a false promise of investor connection, form a long broker chain, waste a lot of time as they don’t know anything about the complex transaction process. The business brokers have caused a huge sense of frustration & disappointment among SMEs.
Large MNC strategic advisory firms, investment banks don't engage with SMEs due to small ticket size, risk perception, lack of documents & misconceptions of promoters. Online brokerage platforms are doing the work of connecting stakeholders online which forms only 3-5% of the total work.
In a nutshell, there is a wide scope of technology development that can overcome with cost efficiencies, quality of service, high success rate, speed of delivery and helping deserving SMEs with timely equity funding.
About the Author
Shailesh Waghmare Co-founder & Director, Apohan Corporate Consultants Pvt. Ltd.
Shailesh Waghmare is a Business leader with 20 years of experience of impacting organizations through strategic decisions across M&A / equity funding, Financial Services, Consulting Services, MSME advisory, Skill/Education Management, social impact & livelihood and Marketing & Management Consulting. Passionate about contributing to society & organizations and dedicated to the cause of transforming lives &business through solutions and be a change maker. Shailesh could be reached at shailesh.waghmare@apohanconsultants.com