From VC funding to skill development, the changing face of MSMEs in India
The term MSME often reminds us of traditionally-operated businesses. But this year brought significant transformation to the sector, ushering in a new era of evolution. As we bid goodbye to 2023, let’s take a look at what changed in the MSME sector this year.
The micro, small, and medium enterprises (MSMEs), which play a pivotal role in the Indian economy, are poised to elevate their GDP contribution from 30% to 40% in the coming year. However, this shift demands significant changes and developments within the sector.
In the past few years, especially after the COVID-19 outbreak, these enterprises underwent a significant restructuring that catalysed their evolution. Once recognised as traditionally operated, MSMEs have demonstrated resilience and growth by embracing the dynamics of the emerging business landscape. This journey marks a transformative phase for these enterprises, propelling them towards greater adaptability and growth.
In 2023, SMBStory explored some pivotal trends shaping the MSME sector positively. From Venture Capitalists (VCs) revolutionising MSME financing, one of the biggest challenges of the sector; to entrepreneurs developing their skills and taking coaching to grow their business, and the government initiatives, MSMEs have come a long way from their traditional methods of doing business and are poised for rapid growth in the coming years.
Here’s an overview of the MSME landscape that shaped the sector in 2023.
Venture capital for MSMEs
Venture capital (VC) is emerging as a significant source of funding for MSMEs in India. These businesses previously depended on banks for funds and credit, with banks often showing reluctance to extend loans due to concerns about Non-Performing Assets (NPAs).
Amidst this capital scarcity, MSMEs are turning to venture capitalists to fuel their growth ambitions. Having played an important role in propelling the growth of startups and contributing to the emergence of over 100 unicorns, VCs like Fireside Ventures, SIDBI Venture Capital, Aavishkaar Capital, Everstone Capital, and others are now actively looking at these small businesses which are profitable, possess a rich legacy and reputation, often being family-run enterprises.
In June this year, Koskii, based in Bengaluru, secured Rs 61 crore in Series A funding led by Baring Private Equity Partners India. Transitioning from a traditional family business, Koskii's co-founder Umar Akhter and his siblings are reshaping their father’s apparel legacy after securing funding. Akhter highlights the limitations of solely reinvesting profits in scaling the business.
Akhter explains that while they successfully built a profitable venture from ground up, reinvesting every earned rupee into the business has its limitations in terms of scalability.
This shift signifies a changing entrepreneurial landscape, where even seasoned entrepreneurs embrace private investments despite initial hesitance.
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Implementing lean model
The Union Ministry of MSME champions numerous initiatives to support small and medium businesses in the country. A standout is the MSME Competitive (Lean) Scheme, designed to supercharge production capabilities by refining processes, inventory, space management, and energy consumption.
Rooted in Toyota's efficient manufacturing methodology, Lean principles target waste reduction, gaining global acclaim. Launched in 2009 and revamped in 2013, India's Lean Scheme aims to elevate MSMEs to global competitiveness.
The scheme was again revamped in March 2023. Endorsed by Narayan Rane, Union Minister for MSMEs, it aims to focus on quality, productivity, and mindset transformation among manufacturers.
Talking to SMBStory, Shantanu Mazumdar from Mufront Technologies, which specialises in manufacturing testing equipment for electrical products, highlighted the scheme’s impact on their production efficiency, foreseeing a substantial 2.5X to 3X increase in output.
The journey of acquainting the MSMEs to the Lean scheme has just started, and experts believe that in the next 10 years, the industry map of India will change, and for good.
Embracing export scheme
On March 31, the Government of India announced a new foreign trade policy to strengthen exports from districts and attempts to address the issues faced by MSMEs accessing the global market, so that they can contribute significantly to the nation’s exports.
Through this initiative, the Government of India is collaborating with state governments to harness the potential of districts and transform them into export hubs. The new policy places emphasis on the execution strategy of the DEH (District as Export Hubs) initiative, as the government strives to increase MSMEs' export contributions and boost total exports to $2 trillion by 2030.
According to Vinod Kumar, President, India SME Forum, decentralising export promotion and giving states the freedom to build institutional processes at both the state and the district levels will allow them to strategise with a more nuanced approach. It means that districts will have the power to develop action plans and determine where to invest, he says.
Suman Sonthalia, Founder of Sahibabad-based Aakriti Art Creations, which sells handicraft, handcrafted furniture, and home décor products, has not prioritised exports till now. She currently exports 25% of her products to countries such as Italy, Malaysia, and Saudi Arabia. But now, with the help of the DEH initiative, she intends to expand to more international markets like the Europe and the Middle East. She hopes for better discoverability of her products with the DEH initiative.
Taking up business lessons
For decades, MSMEs have been running business in their own style, rarely veering from the tried-and-tested path. Their reluctance to adapt to changing times became their downfall, revealing their vulnerability.
But in the past few years, MSME owners have started taking business coaching to sustain themselves. Coaches aid entrepreneurs in skill development, fostering problem-solving abilities through self-discovery and goal-setting.
“The current market landscape demands agility and adaptability from businesses, making the guidance of business coaches invaluable,” says Ratish Pandey, Founder of Ethique Advisory, a management consultancy and business coaching firm.
There were over 71,000 professional coaches around the world in 2019, an increase of 33% compared to 2015, according to data from the International Coaching Federation. The estimated market size of the coaching industry worldwide was $20 billion in 2022, and this is expected to reach $25 billion by 2025, growing 7% annually.
Meghana Manay from SR Gopal Rao Opticians, a Bengaluru-based century-old brand, who took life and business coaching, says these sessions bolstered her people management skills for business scaling and preserving the family legacy.
Responsible lending
MSMEs in India face persistent challenges in accessing credit and securing working capital. Despite government initiatives, navigating these schemes remains arduous. Fintech companies leverage digital platforms to ease loan disbursal, yet they often present higher interest rates, posing a significant hurdle.
Mukesh Mohan Gupta, President of the Chamber of Indian MSMEs, highlights the concern of MSME owners relying on these 'suicidal loans' where he says that many fintech firms impose exorbitant interest rates. However, increased access to educational materials is fostering MSME awareness regarding their capital needs, aiding in informed decision-making.
Nirav Choksi, CEO, and Co-founder of CredAble, a working capital tech platform, also said that fintech startups are bringing agility to MSME lending. On the brighter side, the unbanked are finally gaining access to banking services through fintech solutions, he said.
Kinara Capital’s founder Hardika Shah also talked about high interest rates and pointed out that there is a need for responsible lending, but she also kept a different perspective. She recalled the times when fintech companies didn't exist, and MSMEs relied on chit funds, gold loans, and private money lenders, who charged interest rates as high as 60% or even more due to risk-reward considerations and highlighted that the fintech ecosystem provides a more verifiable financing method, it is helping MSMEs bridge the credit gap.
Edited by Megha Reddy