While going through news updates at work, we often sit up and notice startups grabbing the spotlight for attracting multi-million dollar valuations and equity investments. What’s intriguing is that often such cases involve startups who currently may not have much to show to the investor community.
Isn’t it ironic that SMEs in India with a track record of success and growth still have to line up for Debt with Banks and Financial Institutions who ask for collaterals security, three years balance sheets and client POs?
Wonder why? Because SMEs in India being run by new generation entrepreneurs are still not aggressively exploring the equity route. The explanation is as simple as that. Entrepreneurs today have managed debt for long period of time and are more comfortable continuing to manage the same.
The question is that in the “New Normal” is it safe to continue to do what business owners have been doing.
Organisations can become unicorns if they are in the right business and have an ecosystem of investors, mentors and partners to create the model to reach their customers in a cost-efficient manner. Equity participation is a game-changer.
So What’s In Store For Entrepreneurs Behind Small Businesses?
Like every financial instrument, equity investment also has its positives and negatives. However, if managed well, it has immeasurable advantages for SME business owners and entrepreneurs, since it empowers them to take risks, innovate and grow. A group of investors are able to take a somewhat higher risk than an individual investor.
Additionally, equity can bring in more people who are invested in an SME entrepreneur/business owner’s success and are willing to guide this young generation with mentoring, industry knowledge and best practices. More so, entrepreneurs can access their collective experience- a priceless asset indeed.
Billionaires are made through the equity route. It has many advantages as a source of fresh fund infusion into companies.
- Right from creating a Fare Value for a company led by the perception of a larger number of investors, it facilitates M&A activities and also allows SMEs to attract very strong talent by using Employee Stock Options (ESOPs).
- It’s a serious reward program for employees and has the capability to create multiple millionaires in the company without affecting their own cash flows.
- At the corporate end, it improves terms and conditions for future financing opportunities and credibility with clients. SMEs in India have long struggled with getting the “foot in the door”. A listed company doing well on the bourses comes with “Trust” that clients look for in all relationships.
Markets are the only route to increase the value of SMEs multifold – by letting the market decide on the valuation of a company. Entrepreneurs can increase their personal wealth with every rise in their company’s market cap and live the dream for which many give up a corporate job!
For all this, entrepreneurs should be ready to be more transparent about their financial results; be willing to lower stake (not give up controlling stake) in their company and welcome investors- lowering stake by 15-20-30% doesn’t wrest away the control of an entrepreneur; believe that being the leader of a brilliant company gives them more credibility and wealth- as long as their holding is well over 51% (closer to 75% or so), a company can continue to be theirs.
Lastly, they should engage with investors for the long term, just like they engage with their customers for the long term.
From my two decades plus of experience, I believe business owners and entrepreneurs should keep the following goal chart in mind:
- Prepare for an IPO over 12-24 months – make financial books more transparent, build their company brand as well as the leadership brand
- Invest time, effort and money in building investor brand and engaging with the investors
- Post IPO, keep the investor interest going so that they trade in your shares and there is enough activity in your shares. Showcase to investors that there is merit in your company and that it will offer growth in the long term, not just on listing.
- Ensure that post the listing euphoria, you continue to share growth stories, that will enable you to go back to the market multiple times
- Create an ecosystem that will support you in this endeavour. These are unchartered waters which you must navigate. Get some experience to back you in areas which may have gaps.
There is a reason why all unicorns and corporates have equity investments in their financial structuring. SMEs need to adapt the same if they have to get out of the “SME” tag and create a growth story for which they became entrepreneurs in first place.