The official records put the number of MSMEs existing in India at over 500 lakhs approximately. The numbers may appear frightening for budding entrepreneurs and other existing SMEs as it may present an exaggerated picture of competition. However, it also needs to be understood that these 500 lakh business units are spread over different states, different sectors, different industries dealing in different categories of products and services. But that does not rule out competition from business either. And one such area of business competition is attracting investments which can be a painstakingly lengthy and tiresome process starting right from its planning, finding the potential investors to actually getting the investors on board. This article will attempt to chart out a few disciplined ways which can help the SMEs improve their odds of reaching out to and attracting investors and investments.
Know Your Capital Structure
The capital structure of a business entity mainly comprises of debt, equity or a combination of both. Some of the common debt instruments include loans, bonds and debentures. In equity financing, a company raises funds by selling its shares (ownership interest) to retail and institutional investors. Before seeking out for potential investors, it becomes imperative for the SMEs to first understand their capital structure and their capital requirements. Once they know the nature and quantum of capital requirement, it will help them to identify the doors they should be knocking or the options they should consider exploring like IPO.
Before seeking out for potential investors, it becomes imperative for the SMEs to first understand their capital structure and their capital requirements
Identify Your Potential Investors
To attract investment, SMEs must first identify the potential investors. Potential investors for a business enterprise can include venture capitalists, angel investors or financial institutions that invest or have invested in similar businesses/SMEs in the past. Identifying these potential investors may involve developing some amount of business networking and market research. Knowing and knocking the right doors will save a lot of time, money and efforts for business enterprises seeking investment. It is also important to take into consideration the terms and conditions of investment which may vary from investor to investor.
Potential investors for a business enterprise can include venture capitalists, angel investors or financial institutions that invest or have invested in similar businesses/SMEs in the past
Reflect Your Financial Health
Before taking a decision to invest or not to invest in a business enterprise, potential investors would be very much interested to know and assess the financial health of their investment destination. Although the profit and loss statement and the balance sheet of the recent years is a good place to start off with potential investors would also be interested in other financial aspects of a business entity like fund utilization, revenue generation, sales, profitability, costing, inventory turnover, break-even analysis, financial reporting, accounting standards, credit rating, audit reports, financial ratios etc. Thus, it becomes necessary for the SMEs to be in good financial health to attract investors.
Potential investors would be very much interested to know and assess the financial health of their investment destination.
Keep Your Business Plan Ready
When a business enterprise pitches for investment for its business project, investors would like to know about that project in which the investment would be utilized. Investors would like to assess if the project is viable, would take off and generate the desired or promised returns. Therefore, it becomes imperative for the SMEs to present to the investors a powerful summary of the project feasibility (financial, marketing, operational, logistical, economic, technological etc) and an overview of the business plan to successfully execute the project.
Investors would like to know about that project in which the investment would be utilized, Investors would like to assess if the project is viable, would take off and generate the desired or promised returns
No prudent investor would put a dime into a business which is not regulatory compliant. Investors would rather park their money in banks that invest in a venture or a project that risks itself of punitive regulatory actions. It increases the risk of investment by many fold times. It is of utmost importance for businesses to invariably remain regulatory compliant.
Bring Your Core and Best Team Forward
Investors need to know whose hands they are entrusting their money into; who these people are and if they have the suitable professional background and whether or not they exhibit professional commitment and the desired leadership. Thus, it is very important for the SMEs to bring their core and best team forward to interact and deal with the investors, address their concerns and convince them to make an investment.
It is very important for the SMEs to bring their core and best team forward to interact and deal with the investors, address their concerns and convince them to make an investment.
Demonstrate Exit Plan
There’s no steadfast necessity for an exit if both the owner and the investor are content with the growth of the business, the return on investment and everything else going smoothly. But that always may not be the case. No investor would prefer to put their money into a rabbit hole. In the future, they may seek to pull their investments back if the circumstances warrant them to. Providing an option of exit route to the investors can give them some breathing space and can make them feel a whole lot safer than without one.
Providing an option of exit route to the investors can give them some breathing space and can make them feel a whole lot safer than without one.
In a country with millions of MSMEs, attracting investments can be a daunting task but not an impossible one. Before reaching out to the potential investors, pitching for investment and hoping to attract them, it is important for the SMEs to map their business plan, understand their capital requirements and assess their financial health. At the end of the day, it’s the responsibility of the core leadership team to get the investors on board.
Chief Finance Officer