Private Equity and Venture Capital
Instead of funding new factories to manufacture for other countries, smart economies will fund the growth of entrepreneurs. Such is the power that lies in the Private Equity (PE) and Venture Capital (VC) industries. Traditionally, Venture Capitalists and PE players in India have shied from the MSME sector.
The non-corporate structure and small size of the majority of MSMEs in India make the Venture Capitalists and Private Equity Players unwilling to invest in them due to higher transaction costs and difficulties in exiting such investments. However, the VC-PE interest in the Indian MSME sector has witnessed a steady rise in recent times.
A recent Dun & Bradstreet survey was conducted which indicated that 82 percent of the Indian MSMEs got negatively impacted by the disruptions caused by the COVID-19 pandemic. It is no news that the sector to be worst hit by the pandemic was the MSME sector.
Thus, taking into account the intricacy and severity of the situation, last year, the Modi government announced a Rs 50,000 crore Fund-of-Funds. According to the Modi plan, Rs 10,000 crore investment was to be made by the government to facilitate the flow of equity to 25 lakh MSMEs.
However, it is to be noted that the government had expected the remaining Rs 40,000 crores of equity capital to get invested by venture capital (VC) and private equity (PE) firms. Such a move was welcomed by the business diaspora and appreciated by experts as promoting external participation in a fund like this is a smart move.
This is due to the fact that such external participation ensures the professional and transparent disbursement of funds. Thus, perennially capital-starved MSMEs were eager to attract investors willing to infuse monies to fuel business growth. However, all is not as presentable and profitable as it might sound as such kind of money has different commitments and expectations.
MSMEs have been traditionally dependent on banking finance for expansion and working capital requirements. It can be rightfully stated that PE-VC funds are vastly different from advances taken from a bank or NBFC. At the outset, banks or NBFCs provide temporary capital in the form of overdraft facilities, term loans, or invoice discounting options. Thus, once your goals, for which you had raised money, are met, you can safely return the borrowed capital with the pre-agreed interest rate.
However, with the Private Equity option, the lucidity of the temporary nature of capital and easy borrowing would not be easy. Private Equity investors provide permanent capital by buying equity into the business. Thus, the option of raising temporary capital is no longer available as investors usually continue to exist even after you may have achieved the goals for which you had raised this financing. The only exit that can take place is the exit of last resort when a private equity investor accepts an exit for a pre-agreed return.
Although banks have been slowly trying to bridge this gap, stringent reforms from the government are required. The reality hereby is that although this sector plays a vital role in giving a boost to the overall Gross Domestic Product (GDP), it is still overlooked by the government, corporate sector, and the financial sector. Thus, the commendable efforts and support of this sector do not receive the required attention.
But not all is as gloomy as the aforementioned situation might suggest Private Equity investors bring in a lot of good things to the table despite the seemingly dark and dubious picture. Private equity investors actively participate in growing the MSME business and act as a sounding board for the business challenges.
Additionally, PE investors can formalize structures to streamline business operations. How? When required, investors can open doors for business or new rounds of financing. Thus, much good can be reaped from the option of PE investments and VCs.
How can your business attract more private equity investing?
However, it is to be noted that private equity should be used in a profitable way. Private equity should be used for chasing growth as it is the most expensive form of capital for the business. It should not be used in areas that will provide an ROI lower than the cost of this capital which can be detrimental to the business. Thus profitable investment and use of capital wisely in different business verticals are essential as it would give higher returns than the cost of that capital.
As aforementioned, such kind of investment is a daunting task as every external shareholder of the company can question how you run your business. Thus institutionalization of your operations.
Reportedly, a common issue that irks many private investors and keeps them from investing in MSMEs is their dubious recordkeeping. Thus, transparent recording is a rudimentary requirement for better business opportunities and investors’ trust. Providing accurate and periodic reporting to the investors in a mutually agreeable format can go a long way.
It is to be remembered here that further financing can be provided if and only if, the business is clear of any dubious activities. Thus operations require a systematic record-keeping process which should be given paramount importance.
Another way to entice investors is the meticulous and transparent maintenance of business accounts that distinguish personal from professional expenses. Running the show independently and without external ownership, utilizing a company asset for personal reasons is acceptable even if not advisable. However, these activities must stop for the very mere reason that the company assets are co-owned by its shareholders. Using co-owned assets for personal use is not acceptable to private PE and VC investors.
Companies can benefit from viewing partnerships with a social enterprise not only as a way to strengthen the societies where they operate but as a financially and strategically valuable investment. These partnerships have the potential to generate economic benefit for both parties involved, via insights into innovation, access to new markets, and opportunities for risk management.
Tags: msme equity, venture capital, private equity, corporate venture capital, venture capital financing, venture capital firms, private equity fund, venture capital fund, private equity firms