Is your MSME ready for private equity, venture capital? 6 things to keep in mind

India's MSME sector was highly affected by the wrath of the COVID-19 pandemic. Though the second wave is now in history, the impact of the destruction caused, especially to MSMEs, needs to be urgently addressed.

According to CII, the MSME sector employs about 12 crore people and about half of the Indian exports.

India’s goal of becoming a $5 trillion economy cannot be achieved without the success of the MSME sector.

The domestic MSME sector’s root problem is the failure to attract private capital, leading to constant starvation for funds. This capital, however, is entirely distinguished from the funds lent by the banks or NBFCs. Their expectations are entirely different for the business backbone of the country.

While lenders offer temporary debt, private players give you real capital for long-term growth. One can repay the debt in a given time period for the pre-agreed interest rate but the private capital seeks the exit for their investment at a later stage.

Lenders are not active participants of your business, whereas PE funds or VCs participate actively in the growth and give a professional structure to the business. They come with high expectations of returns on their investments.

In private capital, investors become co-owners, even though the stake is minor, but their voice can not go unheard. Their money in the balance sheet may shoot the bottomline in the long run but they seek accountability even from the promoters or owners who become 'managers' of the business.

Other than compounding their wealth in the long term, private money brought in from the external investors has a few caveats, which can not go ignored. 

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Here are a few keynotes suggesting how to prepare a business for private investment and its optimal usage:

Go for growth

Without any predetermined rate of interest, private investments are the most expensive form of capital for a business. One should use this capital in areas where the return on investments is higher than the cost of capital. Investing this capital judiciously in the needed business areas can fetch much higher returns than the actual cost.

Bring in transparency

Some of the MSMEs fail to maintain the complete records, which lets the private players down. Businesses must keep the proper, periodic, and accurate records of their operations. Clear information and transparent data is a necessity for all related parties. If there is a mismatch in the data or information, one may lose faith in the other. Incorrect numbers can impact the topline and bottomline, and it is impossible to remember everything.

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Restructure operations

External shareholders are the co-owners and have every right to question you for the business decisions taken. You should formally structure and organise the business before you knock on their doors. This can be a blessing in disguise for you as you can rope in some professional hands into your business for KRAs, SOPs, and KRAs. Delegation of authority to the next in line leaders create supportive and transparent structures.

Don't mix the personal expenses with business

Without external funding, your funds are solely yours, whereas when an external party invests in the business, the assets become shares. So, money utilised for personal reasons shall be excused from the business-related expenses. The new investors may not appreciate the mixing of funds, and this happens most of the time. So, if you are partying on the evenings of the business trips, it shall not be treated as a business expense.

Business of 'dynasty' is nasty

A family-owned business prefers the succession to the true heir of the owner, which is his son/daughter. This is a concession taken by the majority of MSMEs. However, when private funds are involved in the business, things must take a professional turn. Only qualified, eligible and tested personnel should be elevated to the higher management, even if they are blood relatives of the owners.

Conflicts of interest

When you are operating and running a business, keep the bloodline at the doorstep of the office as having personal relationships within the company may affect the business, in particular, if the third-party funds are also involved. The business must not feel the heat of your personal sweet-bitter relationships. A cozy relationship may hurt the business, whereas bitterness has a higher toll on it. It should not be a trick or treat game in business operations.