In this piece by Saraf Furniture CTO Mudit Pareek, he talks about ways to attract private investment in small business ventures.
India’s MSME sector was affected by the wrath of covid 19. Despite the steep fall in the new cases, the impact caused by the second wave continues to bother many, especially the MSME business owners.
According to CII, MSME sector employs around 12 crore people. With a successful MSME sector, India can achieve its goal of being a $5 trillion economy. The root problem for the domestic MSME sector is failure to attract private capital into the business. It leads to constant starvation for funds.
Private investment is entirely different from the funds lent by the banks or NBFCs. Their expectations are different. 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 can not 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 can not 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 MSMEs 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 topline and bottomline 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 organize 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 utilized 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 MSMEs. 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 cozy 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.
Authored by – Mudit Pareek, CTO, Saraf Furniture