A current Dun & Bradstreet survey indicated that 82 per cent of Indian MSMEs got negatively impacted by the disruptions triggered by COVID-19. Even with the steep decline in the quantity of new COVID-19 situations, the psychological effect of the second wave will be more profound and broader than the 1st one, specially on MSME organization owners. Last year, the Modi government had announced a Rs 50,000 crore Fund-of-Funds, with a Rs 10,000 crore investment by the government to facilitate the flow of equity to 25 lakh MSMEs. CII information credits MSMEs for 45 per cent of our exports and offering employment to more than 12 crore persons. Undoubtedly, making sure their survival and results is a critical element of the $5 trillion financial dreams promoted by the Prime Minister.
The Fund-of-Funds announcement was met with enthusiasm by all sections of the organization diaspora. However, the government anticipated the remaining Rs 40,000 crores of equity capital to get invested by venture capital (VC) and private equity (PE) firms. Promoting external participation in a fund like this is a clever move as it guarantees the experienced and transparent disbursement of funds.
In an atmosphere exactly where MSMEs are perennially starved of any type of capital to fulfill their development ambitions, MSME owners would be eager to bring in experienced cash. However, I wonder if MSME owners would appreciate the bells and whistles such capital brings with it. It is vastly distinctive from the debt they may have received from a bank or an NBFC. This cash has quite distinctive expectations.
For starters, banks or NBFCs provide “temporary capital” in the type of term loans, overdraft facilities or invoice discounting alternatives, and so on. Once the targets for which you raised this cash are met, you can return this capital with the pre-agreed interest price and move on to larger and far better points. However, private equity investors provide permanent capital by obtaining equity into your organization, consequently continuing to exist even soon after you may perhaps have accomplished the targets for which you had raised this financing. A private equity investor accepting an exit for a pre-agreed return on investment is the exit of last resort, that is, the bare minimum expectation of this investor. They want more, a lot more – as a lot as probable.
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Therefore, whilst we are as greedy as can be with our expectations of ROI, private equity investors bring a lot of very good points to the table in spite of the dark and dubious image I may have just painted of our type. We (VCs and PEs) actively participate in expanding your organization and act as a sounding board for your organization challenges. Besides, we bring in structures to professionalize the operating of your organization, and when expected, we use our Rolodex to open doors for organization or new rounds of financing. There is a complete lot of very good, but not just about every firm can accept our capital.
While we are co-owners in your organization, we are not co-operators in your organization (in most situations). Therefore, the introduction of our cash in your balance sheet brings in the segregation of owners from the organization managers. The manager reports to the owners even if the manager is sitting on each sides of the table. The manager could get removed but continue as an owner and take pleasure in the business’s earnings in spite of not operating it on a day-to-day basis. This segregation of the owners from the managers is a basic one due to the fact the introduction of venture capital. Still, it continues to confound entrepreneurs, even these that are on their fourth or fifth venture or what one would contact a “serial entrepreneur”.
Not understanding the caveats brought on by external investors, nevertheless, does not let you to ignore it. So right here are some pointers on working with this equity and how to prepare your organization for private investment.
- Use private equity for chasing development: Remember that this is the most high-priced type of capital for your organization. Using it in places that will provide an ROI reduce than the expense of this capital will be detrimental for your organization. Invest this capital wisely and in the organization verticals that would give larger returns than the expense of that capital.
- Institutionalise your operations: Every external shareholder of your firm can query how you run your organization. It could be a jarring expertise for you if you or your organization are not ready. Instead, use this chance to bring in experienced management, run the organization on SOPs, KPIs, and KRAs. Create and empower a second line of leadership by building reporting clear structures to showcase that you are not a one or two-particular person show.
- Transparent reporting: A typical situation that irks private investors and keeps them from investing in MSMEs is their dubious recordkeeping. You ought to provide precise and periodic reporting to your investors in a mutually agreeable format. The information is vital in our reporting to our investors (don’t forget we handle third-party capital). Therefore, we stand to shed their faith in us if there is an error in your reporting. Also, it is virtually not possible for us to provide precise or sincere guidance, feedback, or assist if the numbers finding analysed are incorrect.
- Separate your individual costs from your organization costs: When operating the show independently and without having external ownership, utilising a firm asset for individual motives was acceptable (even if not advisable). However, these activities ought to quit for the reason that firm assets are co-owned by its shareholders. Using co-owned assets for individual use is not acceptable to private equity investors. Therefore, that vehicle in the name of your firm but is utilised for driving about your family, ought to go.
- Removing any conflicts of interest: A family-owned organization will make specific concessions on its earnings if it “sets up” an extended family member or buddy to assistance their respective households. With external ownership, these relationships ought to be kept at arm’s length or ought to be reported to the investor when conducting their due diligence. Most private investors would not want to upset your organization flow unless (in the investor’s eyes) the cozy relationship is substantially hurting your organization. However, you ought to be open to make adjustments to the relationship or modify the relationship if it becomes a difficult point amongst you and your investor(s).
Anirudh A Damani is the Managing Partner at Artha Venture Fund. Views expressed are the author’s personal.