Note: The views & opinions expressed in these essays are strictly my own, and not those of any entity I may be associated with as an employee, consultant, promoter, investor, etc.ARCHIVES
Technology Entrepreneurship in India - Teams
Technology Entrepreneurship in India - Generating Revenue
Technology Entrepreneurship in India - Raising Capital
Equities, ETFs, F&O
Oct 2011: Equity Risk Premium for India
Jun 2011: Investing in Indian equities
Technology Enterprises in India
Nov 2010: Technology investment in India - WATER
Aug 2010: Technology enterprises in India - 3 avatars
Risk Capital for MSMEs
Mar 2010: Risk mitigation for investors in MSMEs
Mar 2010: Why don't (Indian) MSMEs get risk capital?
Feb 2010: Angel investing - Will it work for Indian MSMEs?
Feb 2010: What's so special about innovative MSMEs?
Feb 2010: Where do Indian/NRI (V)HNIs invest?
Feb 2010: Funding options for innovative MSMEs in India
Jan 2010: Innovative MSMEs in India
Funding Options for Innovative MSMEs in India
(Last revised 19-Feb-2010, Send comments to email@example.com)
(Thanks to @arjunashar for feedback.)
In my previous essay, I guesstimated that there may be ~ 10,000 innovative (M)SMEs in India, worthy of risk capital in the Rs 20 lakh to 2 crore range.
Let us look at the various sources of funding available to these MSMEs today:
Personal savings, friends, family & the like
This is by far the largest source of funds for MSMEs in India. Tapping into personal savings and trying to get a business up & running at the same time is not good for stress. Believe me, I have 'been there & done that' - at Moneyoga. And if that wasn't enough, our business involved day-trading futures & options! As for using family/friends money for risk capital, I won't even bother listing the sorts of trouble you can get into.
What is it they say about a banker? 'A banker is a fellow who lends you an umbrella when the sun is shining, and takes it away from you when it rains'. There is no shortage of reasons why banks are reluctant to lend to MSMEs, including:
It helps MSMEs in a variety of ways - direct finance, bills/receivables finance, letters of credit, sector-specific loans, etc. Of course, most of these are short-term, collateralized loans - not risk capital in the form of debt/equity.
There are ways in which SIDBI promotes 'riskier' lending to MSMEs, such as:
SIDBI Foundation for Risk Capital (aka SIDBI Risk Capital Fund)
This is a relatively new effort - a Rs 2000 crore fund that provides long term-risk capital to MSMEs, using structured, convertible, collateral-free debt. This is big - it actually understands the need of Indian MSMEs w.r.t. how much & in what form do they need/want risk capital. It seems SIDBI is still testing the waters - but let's hope this takes off in a big way. The challenges are in evaluating each MSME and creating a customized ('structured') debt instrument.
Angels & angel networks (eg. Indian Angel Network & Mumbai Angels) are the de-facto targets for 'seed stage' tech startups. What is worth noting is how few deals get funded through these channels. Despite 100+ angels in these formal networks, each year sees only tens of deals. These angels - in turn - have their own HNI/VHNI networks to tap into, yet few startups get funded. Compare that with the US, where angel funding is more than all VC funding. Of course, there's variety of reasons for this: tax benefits, mature ecosystems, risk-seeking, etc.
There are 137 VC firms operating in India. However, in a boom year, there are only a few hundred deals. That's ~ 3 deals per VC firm per year, on average! Is this really so? If not, what am I missing?
OF course, there have been reports of VCs investing in publicly listed stocks / PIPE deals, etc. - but that's a bit far from their mandate as VCs, one would think. Essentially, there are behaving like Private Equity (PE) companies in India. And why not? If you've raised $100M in the US, brought it to India (~ Rs 500 crore), have a target IRR of 30% and need to put in tens of crores in each investment - where do you invest? Certainly not tech startups - the deal flow is more of a deal trickle! Oh and by the way, you need to justify your '2 & 20' compensation to the LPs. As they say - 'nice work if you can get it'.
Networks / Forums
Several organizations are trying to leverage the Internet for helping MSMEs, eg:
Looking Ahead ...
No doubt, there are many folks trying to address this gap in risk capital, for example:
Despite these initiatives, most MSMEs continue to lack access to risk capital, because
Of course, MSMEs have their own set of biases that hamper their access to risk capital, such as
Bottom-line: Despite various sources of financing, most innovative MSMEs in India lack access to the correct amount, form, speed & quality of risk capital.