Many entrepreneurs find themselves in a dilemma when it comes to raising funds and deciding between equity and debt. There are lot of common concerns regarding equity with respect to losing control and giving up equity stake which leads them towards debt funding, ignoring the risks inherent with that strategy. Although sometimes viable and effective, taking on debt at the wrong time can be a death wish to most startups and put them on a path to failure. Most importantly, many MSMEs are not very enthusiastic and aware of the various other financing options available.
Private equity funding from a credible investor has many positives for MSMEs such as increasing the Net worth and strengthening the books, guidance to better endure the volatile business environment, flexibility in structuring return of investment, access to high-level intellectual capital, etc. Further, raising private equity is easier as compared to raising money from public issue with respect to regulatory compliances. An easy way to deal with the misconception of dilution through equity funding is this – owning 35% of 100 Crore built overtime through value-add private equity management is better than 90% of a 1 crore firm through your own sweat, blood and tears.
This article will breakdown the different stages of a startup and where the PE comes in as a strategic investor, the various funding rounds, and the current PE scenario (including the ME IPO landscape) along with emerging ecosystems for MSMEs
Every large business was once a small business. Understanding the capital lifecycle of the small business right from self-funding to the eventual IPO stage is useful to find the right solutions for your business.
A typical investment lifecycle can be illustrated below with the typical investment strategies used
Capital acquired from this round goes towards developing a startup’s founding team, funding product development, and in some cases, even facilitating early revenue generation.
Wrapped-up within seed investment are expectations that strong signs of Product/Market Fit, and some degree of traction (in the form of a growing wait list, or month-on-month revenue growth) will begin to emerge, paving the way for later fundraising.
Traditionally, seed rounds were the reserve of angel investors, but the proliferation of cash-rich VC funds and a huge range of startups to invest in has attracted more venture capital firms into seed round investment.
Unitus Seed invests in Predible
Ankur Capital Leads $500K Seed Funding Round In Agritech Startup Agricx Lab
Algorithmic trading platform Kuants raises seed funding
Revenue growth is the name of the game in Series A. By this point, a startup is expected to have clear and growing evidence of Product/Market Fit, translating into significant revenue growth from new customers and increasing ARPA (Average Revenue per Account).
It’s here that marketing and sales become more important. Until this point, growth has often been driven by a single (and not always scalable) channel.
To keep growing at a rapid rate, it’s necessary to develop new sales and marketing processes, identify new channels, and get to grips with your target customer.
Healthtech startup eKincare secures Series-A funding
Backpacker Panda Raises $1.4M in Series A Funding
Pratilipi raises $4.3 million in funding round led by Omidyar Network
In Series B, investors are looking for the next stage of growth: the ability to take everything you’ve learned, and make it work at scale.
In practical terms, Series B investment might allow a startup to make expansive hires (across business development, strategic accounts, marketing and customer success), expand into different market segments or experiment with different revenue streams, and in dramatic instances, even buy-out businesses that offer a competitive advantage.
MedTech Startup Axio Raises $7.4 Mn Funding
Edtech Startup AEON Learning Raises $3.2 Mn Funding
Fintech Startup EarlySalary Raises $15.7 Mn Series B Funding
Series C rounds are raised to fuel large-scale expansion, like moving into a new market (commonly international expansion), or to fuel acquisitions of other businesses.
After Series C, there’s theoretically no limit to the number of investment rounds a startup can raise: some companies will go on to raise investment through Series D, E and beyond.
Given the relatively low number of startups that make it to this point, there’s also a huge amount of variance in the amounts raised, with investment determined on a case-to-case basis.
Zoomcar raises $40 million in Series C funding led by Mahindra
BigBasket raises $300 million from Alibaba, others
The funding rounds can be summarized as follows:
Data in the above table has been collated from the article https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp
NSE Emerge – The SME IPO platform
Small and medium enterprises (SME) have outrun their bigger rivals in the race to raise funds, with their stocks often faring significantly better than those with more fancied names. This shows a good option for SMEs looking to raise capital through a reliable and effective platform.
Spurred by investor interest, 132 small and medium enterprises (SMEs) raised a record Rs. 1,785 crore through initial public offerings (IPO) in 2017, which was more than three times the funds raised in the preceding year.
Funds raised were used for business expansion plans, working capital requirements, and other general corporate purposes.
The IPO chart in the year is led by Zota Healthcare which raised Rs. 58.50 crore, followed by Euro India Fresh Foods Ltd, which mopped up Rs. 51.26 crore. Geographically, Gujarat continued to dominate the IPO space by contributing 51 firms on SME bourses, followed by Maharashtra (39), Madhya Pradesh (11), Delhi (8), Rajasthan (6), Telangana (4), West Bengal (3) and two companies each got listed from Andhra Pradesh and Punjab.
The companies which got listed during the period under review represent diverse industry base such as media and entertainment, manufacturing, textiles, engineering, finance, chemicals, agriculture, food processing and construction.
The typical listing requirements can be better understood when compared to the Main Board listing requirements as follows:
Current Private Equity scenario in India
2017 has seen mostly late-stage deals take off with concerns raised with respect to early stage, which remains under stress, even as funding remains concentrated in Bengaluru, Delhi-NCR and Mumbai. 2017 closed with a record $13.7 billion being invested into the Indian startup ecosystem across 820 deals.
The value of investments is higher this year compared to 2016 and 2015, when funding was at $4.06 billion and $8.4 billion respectively. However, 2016 and 2015 saw a larger number of deals, at 1,034 and 913 respectively.
Note: Emerging Ecosystems
Several fintech startups have leveraged technology to build scalable solutions to connect SMEs to potential lenders for tailored requirements.
In addition to connecting lenders to SMEs, these marketplaces provide several value-added services like primary underwriting, risk assessment, rule-based matching, and seamless payment-settlement engine to enable a win-win for MSMEs and investors.
PE and SME: How can they work together
Indian SMEs and startups can be said to have a typical behavior such as:
Take systems and processes very lightly
Promoter-driven SMEs tend to score high in the skill set which can be closely related to the promoter itself. The promoter’s core competency becomes the company’s
Clients are acquired through a close network, sometimes these are few clients acquired in the initial phase of growth
Scaling the operations beyond the base level of clients tend to be limited which ultimately stagnates the growth of the company
Building on the base level of growth is where PE can be effective. Potential value creation is what is needed at this stage which can have an incremental effect on all aspects of the organization.
Thus, it is clear that for such SMEs, significant element of value creation happens through:
Acquiring new clients to add to revenues
Systems and processes that are efficient, which ensure optimum utilization of organizational resources
Aligning employees through motivation and defining clear goals
This is where the expertise of operational private equity funds can act as a significant value creator for SMEs.
Technology interventions that bring cost leadership, HR intervention to ensure the hiring of the best possible talent in the industry and demand generation through cost-efficient marketing mediums are some examples of how value creation is possible through private equity.
MSMEmitra.com provides financial consultancy and business advisory to start-ups and businesses which do not have an in-house financial management mechanism in place. For such businesses, MSMEmitra.com offers assistance in assessing the actual funding requirement, finding out the most suitable funding option available – debt or PE or a combination of both, and in sourcing funds. MSMEmitra.com also provides assistance to start-ups and MSMEs in identifying and availing the benefits of the applicable schemes and subsidies.
If you are a business owner, and need our assistance for the funding requirements of your business, connect with us at [email protected]
Make an informed decision about the best funding options available for your business, and find out how to avail the benefits of the schemes and subsidies applicable for your business, by visiting https://msmemitra.com
About the Author: Alastair Pavrey is a Finance and Investment professional experienced in transaction-based financial advisory to buy-side and sell-side participants, with a keen interest to understand and contribute to the Indian Private Equity, Venture Capital and SME ecosystem. You can follow Alastair Pavrey on Twitter – @alastairpavrey.
The views expressed in the article are the author’s own. This write-up has been collated from various publicly available materials and secondary data, and MSMEmitra.com cannot guarantee the accuracy of the content. The opinions and expectations arrived at in this article, are based upon the analysis of the Industry by the author and the editorial team at MSMEmitra.com. Readers are requested to check the authenticity of the data at their end, before making any decisions with inherent financial risks.
"Equity Funding for Startups and SMEs: A Primer" A thorough analysis of the Equity Funding ecosystem in India by @AlastairPavrey for MSMEmitra.com #StartupFunding #PrivateEquityFunding #IPO #MSME By Alastair Pavrey Many entrepreneurs find themselves in a dilemma when it comes to raising funds and deciding between equity and debt.
