SME expansion funding thru Venture Capital (VC)

SME expansion funding thru Venture Capital (VC)

The requirement of working funding depends on following factors:

1. Size of Business

2. Length of production cycle

3. Seasonal variations in working capital cycle

4. Business cycle with upside and downside turnings

Factors Considered by VC before investing in a Venture:

1. An innovative project is essential but within realistic and logical area, venture capitalists seek any project which promises immense growth potential and competitive ability to succeed and sustain in the market.

2. Entrepreneurial personality, experience and his management team contribute towards the execution and success of the project, since they utilize the VC’s fund the venture capitalist make sure of their major role with managing, working, guiding, and co-coordinating the team towards the right path.

3. Good team work, the mantra for modern success stories in the market, holds good for venture capital funding too.

Market characteristics covers the marketability for the product and the competition it faces from other competitors. Returns in the short period depend on the market characteristics of the project hence it is criterion in decision making for capital funding.

Decision Matrix for funding:

1. Venture capital has become a part of the popular business in India. Venture capital has also become synonymous with investing in high risk technology businesses, that could be majorly IT and can spread across further domains like healthcare, agriculture etc.

2. The VC’s final decision on a proposed venture is based on many criteria and also it differs from one to other. All seek one common thing the right and proper way of documentation for them to analyse the projects faster and easily.

3. if the project is new, promising and has innovative features then VC’s seek to have more interest and are ready to help with more amounts because of its wide market characteristics and its ability to capture the market.

4. Many SME’s usually lack the right method and technique to approach the suitable VC and thereby they seek consultants to seek funds in the startup stage through financial institution.

5. SME firms in India believe that ownership of the company is compromised with the price paid for VC funds.

6. The preference for investing entire capital is given to start-up stage may be because of innovativeness of the project and a good team. It is found that less preferences is given for expansion and turnaround stage of the venture.

7. due to the formal structure of the VC operation and more stringent evaluation process, complete business plans are compulsory.

Thus it can be concluded that even though obtaining finance from Venture Capital is rigid, but the with kind of experts and resources available with the Venture Capitalist, success of the business in which Venture Capital has invested money is ensured.

by :

CA Yogesh Birla

Director
Birla WP Mgm
visit us at : www.YogeshBirlaCA.blogspot.com

SME in India…..Risk Funding Opportunities & Challenges

SME in India…..Risk Funding Opportunities & Challenges

SME (Small & Medium Enterprises) entrepreneurs and their small enterprises are responsible for almost all the economic growth in India. Managing SME is less hierarchical and in most of the cases, the buck stops at you. It doesn’t let one hide behind the pillars. The 3Ps of a large corporate are Performance, Posturing and Politics; though the mix may differ from one organisaiton to the other.

Wherein the 3Ps of an SME are Performance, Performance and Performance. There is much lesser room for mistakes, but much bigger room for pending governance and compliances. There is much more cohesion within the team as either they all float or all sink. I feel attracting and retaining talent is the biggest challenge that an SME faces. An SME manager finds it tough to attract the risk-averse talent pool. The stock market adage, “fear is always bigger than greed”, also holds true for job market. An SME is like a high beta stock, wehre the investor and the job aspirant think alike- fear the downside more than the promise of the potential upside.

Key risk involved in Funding to SME equity:

SMEs need robust risk management as they may not have where withal to manage and control non-operational risks due to their very size and several limitations. Some of the key risks faced by SMEs are listed below:

1. Commodity Price Risk

2. Receivable Risk

3. Leverage Risk

4. Currency Risk

5. Key Man Risk

6. Cash flow Risk

Having discussed some of the prominent risk factors that contribute to failure of SMEs, many of the failures are preventable. Excessive risks taken by SMEs are usually the outcome of improper planning and it may prima facie appear that by hedging all these risks, the margins in the business reduce substantially. However, these margins are the sustainable margins in the business and hence, all efforts should be made to retain and grow this. All other profits are temporary in nature and can easily translate into losses. Calculated risks are part and parcel of any business. SMEs being more prone to failures should make sure that the risks are consciously taken with complete knowledge and clear understanding. Keeping an open minded approach and giving a close look at the common reason of failure will pave way for more sustainable future for SMEs and in-turn will create value for them.

by :

CA Yogesh Birla

Director
Birla WP Mgm
visit us at : www.YogeshBirlaCA.blogspot.com