Is India's Small Business Ready For Private Equity, Venture Capital?
India's Micro Small and Medium Enterprise sectors were highly affected by the wrath of Covid-19. Despite the steep fall in the new cases, the impact of destruction caused by the second wave still gives chills in the spine to many, especially to MSME business owners.
According to CII, MSME sectors employ about 12 crore people and about half of the Indian exports. With the successful MSME sector, India can achieve its goal of being a $5 trillion economy.
The root problem from the domestic MSME sector is failure to attract the private capital into their business, leading to constant starvation for funds. MSME owners and the entrepreneurs should thrive to rope in professional money.
This capital, however, is entirely distinguished from the funds lended by the banks or NBFCs. Their expectations are entirely different from the business backbone of the country.
Lenders give you debt, which is temporary whereas private players give you real capital for long term growth. One can repay the debt in a given time period for the pre-agreed interest rate but the private capital seeks the exit for their investment at a later stage.
Lenders are not active participants of your business, whereas PE funds or VCs participate in the growth actively and give a professional structure to the business. They come with high expectations of returns on their investments.
Private capital comes as the co-owners, even though the stake is minor, but their voice cannot go unheard. Their money in the balance sheet may shoot the bottom-line in the long run but they seek accountability even from the promoters or owners who become 'managers' of the business.
Other than compounding their wealth in the long term, the private money brought in from the external investors has a few caveats, which cannot go ignored. Here are a few key notes suggesting how to prepare a business for private investment and its optimal usage:
Go for Growth
Without any predetermined rate of interest, private investments are the most expensive form of capital for a business. One should use this capital in the areas where the return on investments is higher than the cost of capital. Investing this capital judiciously in the needed business areas can fetch much higher returns than the actual cost.
Bring in Transparency
Some of the small businesses fail to maintain the complete records, which lets the private players down. Businesses must keep the proper, periodic and accurate records of their operations. Clear data information is a necessity for all related parties. If there is a mismatch in the data or information, one may lose faith in the other. Incorrect numbers can impact the top line and bottom-line and it is impossible to remember everything.
Restructure the Operations
External shareholders are the co-owners and have every right to question you for the business decisions taken. You should formally structure and organise the business before you knock on their doors. This can be a blessing in disguise for you as you can rope in some professional hands into your business for KRAs, SOPs and KRAs. Delegation of authority to the next in line leaders creates supportive and transparent structures.
Don't mix the Personal Expenses with the Business
Without external funding, your funds are solely yours, whereas when an external party invests in the business, the assets become shares. So, money utilised from personal reasons shall be excused from the business-related expenses. The new investors may not appreciate the mixing of funds, and this happens most of the time. So, if you are partying on the evenings of the business trips, it shall not be treated as a business expense.
Business of 'Dynasty' is nasty
A Family owned business prefers the succession to the true heir of the owner, which is his son/daughter. This is a concession taken by the majority of small businesses. However, when private funds are involved in the business, things must take a professional turn. Only qualified, eligible and tested personnel should be elevated to the higher management, even if they are blood relatives of the owners.
Conflicts of Interest
When you are operating and running a business, keep the bloodline at the doorstep of the office as having personal relationships within may affect the business, in particular, if the third-party funds are also involved. The business must not feel the heat of your personal sweet-bitter relationships. A cosy relationship may hurt the business, whereas bitterness has a higher toll on it. It should not be a trick-or-treat game in business operations.