Venture Capital, Venture Debt, Or Debt Financing: What B2B Startups, SME Should Go For In 2019

Being an entrepreneur is not easy. As a serial entrepreneur who has also led the India operations of global venture capital firms, I have been on both sides of the investment table and know that entrepreneurs face several challenges.

To name just a few, there are go-to-market strategies, market dynamics and competition, regulations and compliance, business growth, day-to-day operations. But there is nothing which is as prominently and as constantly on the minds of business owners as capital.

Capital is one of the primary concerns for emerging businesses, regardless of the industry in which they operate. From driving growth and managing day-to-day operations to vertical/horizontal expansion, new product/services launch, and marketing, every aspect of business requires money.

Money which B2B startups and SMEs often don’t have, and can’t get easy access to.

I have been closely associated with B2B startups and SMEs for a number of years. This insider access enables the mapping, in extensive detail, of the credit and financial lifecycle of businesses in these segments. And the insights drawn all point to the largely unaddressed challenge of financing that exists for these business ventures.

Starting Up B2B Startups

To an outsider, the Indian startup ecosystem might resemble the Promised Land. Success stories and big investments come in thick and fast. According to NASSCOM, startup funding in India increased by 108% in 2018, growing from $2 Bn in 2017 to $4.2 Bn in 2018. The number of startups in the country also increased to 7,200, marking a robust growth in new startup activity.

If one looks beyond the hype, however, one realises that the picture isn’t as rosy as it seems. Startups, especially those in the early stages of their growth, require constant access to capital to sustain their operations. Securing this access isn’t easy. Between June 2014 and June 2016, more than 1,000 startups shut down their operations due to insufficient capital.

So how do entrepreneurs find the money to fulfil their business’s capital requirements? Many turn to venture capital firms, dipping into growth funds secured an equity investment to sustain their operations. Others end up choosing the option of venture debt, taking capital from VC firms as a large business loan with interest rates of 17-18%.

But, if the end-objective is securing enough capital to meet working capital requirements, neither of the two are preferable – especially for an early-stage venture. Investments dilute the startup’s equity at a very nascent stage of its growth, while venture debt investments put an additional financial burden, without addressing the actual challenge: meeting daily operational expenses.

There is another alternative, however. Players in the fintech spaces have realised the potential of this massive white space in the startup ecosystem and are using technology-enabled tools to address it. Take, for instance, the invoice-based working capital loans offered by leading online lending companies. These unsecured loans offer loans against unpaid corporate invoices raised by start-ups to large corporate enterprises.

This helps young startups seamlessly meet their day-to-day cash flow requirements, without taking on the additional financial burden or derailing their plans to scale. Using these invoice-based lending products along with strategic VC investments or venture debts can help entrepreneurs find that ‘right mix of capital’ to give a 10X boost to their ventures’ chances of success.

Small Is Big

The SME industry is one of the key pillars of the Indian economy. The sector contributes more than 40% to the country’s total manufacturing output and exports, in addition to being one of the largest creators of direct and indirect jobs. And yet, World Bank data estimates that businesses in the SME domain currently have an unmet credit demand of over $380 Bn.

This credit deficit exists because SMEs are tricky for traditional banks and NBFCs to provide working capital loans to. The absence of consolidated records of financial transactions and tax returns makes it difficult to gauge the creditworthiness of SME businesses through conventional methodologies.

The lengthy loan application, documentation, and approval process also discourage many would-be SME borrowers. And in the time all of this happens, their day-to-day expenses – inventory purchases, staff salaries, marketing, etc. – pile up.

New-age fintech solutions such as ecosystem-based lending have emerged as a viable solution to this working capital conundrum. Small businesses are inevitably linked to a much larger business ecosystem and are either buying from or selling to bigger enterprises. Top online lending platforms use this dynamic when partnering with large corporate organisations for ecosystem-based lending.

Using data from pre-existing supply chains, fintech players are able to accurately underwrite SMEs and provide them personalised lending solutions at their point of need as a part of the financial transaction itself. Such seamless access to capital also means that SMEs don’t have to go out of their way to avail loans, bolstering their credit consumption appetite.

It also enables better growth and business opportunities for all stakeholders within the supply chain and stimulates greater economic activity.

In India’s digital-first future, SMEs and B2B start-ups will be major growth drivers for the economy. But achieving that growth will require ready availability of capital for such businesses, and that is exactly where new-age fintech solutions are stepping in.

The fintech space is already catering to the white spaces that traditional BFSI players have been unable to address. Tomorrow will belong to entrepreneurs who find the perfect balance of traditional and new-age capital solutions, using the old with the new to drive their businesses to success.