Finance and transactions as a key driver of sustainable and scalable growth
In the journey of entrepreneurship, business leaders are bound to face plenty of challenges. It differs from entrepreneur to entrepreneur how he seeks to address these challenges. Challenges have a lot to do with perspectives and these perspectives evolve with time and with the growth stage of an organization. The perspectives of an entrepreneur are considerably different at the start-up stage of an entrepreneur and layer when he gradually moves to the MSME/SME phase.
As a start-up, the entrepreneur’s pressing concern will be a lot to do with raising capital for the company which is typically called as an “Equity Fund”. It’s typically when an entrepreneur is still starting out and hence is relatively small. At this time, banks may not lend the entrepreneur money in the form of capital. Hence, the entrepreneur may require to seed capital which can come from his personal sources which could be in the form of family and friends to begin with.
At an MSME/SME phase, the challenges may differ slightly. At present, India has almost 5 crore MSMEs and they have led to almost about 30% of India’s GDP. Typically, SMEs/MSMEs have fund requirements of about Rs. 20-26 lakh crore. Let us take a look at the banking system along the same lines. The entire banking system gives about Rs. 26 lakh crores out of which 21 lakh crores is currently already earmarked and given out to large corporates leaving us with only Rs. 5 lakh crores for SME’s which means only 40% of your requirements. The reasons why they are funding the MSME’s is largely meant to meet their working capital needs of a capital expenditure needs which are limited because of the perceived risk in terms of payment default. This is very difficult to reach out to the last mile or the smallest person in terms of reaching out to MSME’s and recovery. So, these are essentially the concerns as far as the MSME’s and the startups seconds are.
Factors to consider while raising funds:
Proof of concept
An entrepreneur must work towards showing the proof of concept. This basically entails gathering the acceptance of customers towards a certain product or a service and showcasing that a company has successfully been able to show the financial and operational viability of a business model.
The entrepreneur must instill some sort of management stability so that he can demonstrate his openness to scaling up while considering fundraising and interactions with investors. It is important to note that it is very difficult for start-ups to raise funds from a bank and hence for him fundraising could arise from internal sources. This could mean that he could raise funds from customer advances (this would mainly be that customers pay advance for the goods and service he would consume seek supplier’s credit.) To give an example, instead of buying office space, the entrepreneur could opt for leasing out of office space, land, equipment etc.
Explore the right avenues to raise funds
For an entrepreneur who is still in the nascent stages of business growth, he must pay attention to which avenues would he want to tap into while fundraising. For most SME/MSME businesses, internal funding would be a better option for an entrepreneur as opposed to external funding. The challenge with external funding would be that the entrepreneur would have to interact and deal with essentially strangers and here there are high chances of mismatched expectations. Hence in my opinion, an entrepreneur should first look at exploring all internal options in the form of family and friends. After these options have been exhausted, entrepreneurs should then aim at angel investors instead of jumping to the PE/VC wagon. This is because, entrepreneurs should reach a certain point of scale in their businesses before reaching out to investors. As opposed to a PE/VC investor, an angel investor could be family member or friend and could also play the role of a mentor to the entrepreneur.
Another key factor when it comes to financing is with the advent of data and initiatives such as Digital India, entrepreneurs are able to leverage this technology to forecast and budget finances better. We are seeing a lot of companies have payment backgrounds and companies are able to identify and understand who their final customers and consumers are for the product and services they have to offer. Therefore, today thanks to advancement and analytics, there are a lot of funds waiting to be deployed to the MSME’s and entrepreneurs. With the help of technological advancements in the form of IOT or visibility of profits entrepreneurs are able to understand where and how can he look to deploy his capitals. In the absence of such forecasting avenues, the entrepreneur may have to constantly seek borrowings and would have to keep depending on funds lent from banks or external investors. There could be chances that these investors may not share the same vision as the founder.
Show Track record
Another key factor is that it is very important that even when an entrepreneur is at the startup phase or even at the SME phase, he should be able to show some record of profitable track record and must be able to generate enough revenues to sustain the organization hence driving operations efficiently and deploying capital correctly is vital.
After an entrepreneur has been able to demonstrate proof of concept and the initiatives towards scaling up, entrepreneurs must be clear to that they cannot do everything by themselves and they must learn to delegate. A company must at all times be ready in terms of talent, systems and processes or other aspects of running an enterprise. This is important because if an entrepreneur is going to approach an investor to invest in his enterprise, it is the duty of the entrepreneur to ensure that the company is ready for growth and profitability. A report by ASCENT on the 7 drivers of scalable growth mentioned that only 20% of entrepreneurs are looking today for strategic partners. Only 25% of these 20% entrepreneurs had the systems and processes on place to scale-up. On these numbers, entrepreneurs may find it difficult to attract an investor and hence it is essential that entrepreneurs have the systems properly layered out to be highly efficient.
Fundraising can be a challenging process and hence it is important that entrepreneurs find the best “tutor”, highlight the efficiency, delivery and growth of the company, demonstrate a healthy repayment track record, some degree of proof of concept and highlight the high degrees of customer acceptance.