Is your MSME ready for private equity or venture capital? Heres what it would take to attract the money

Other than compounding their wealth in the long term, the private money brought in from the external investors has a few caveats, which cannot go ignored. Here are a few keynotes suggesting how to prepare a business for private investment and its optimal usage.

Mudit Pareek, CTO, Saraf Furniture believes the root problem from the domestic MSME sector is failure to attract the private capital into their business.

India's MSME sectors were highly affected by the wrath of Covid-19. Despite the steep fall in the new cases, the impact of destruction caused by the second wave still gives chills in the spine to many, especially to MSME business owners. 

According to CII, MSME sectors employ about 12 crore people and about half of the Indian exports. With the successful MSME sector, India can achieve its goal of being a US$ 5 trillion economy. 

The root problem from the domestic MSME sector is failure to attract the private capital into their business, leading to constant starvation for funds. MSME owners and entrepreneurs should thrive to rope in professional money. 

This capital, however, is entirely distinguished from the funds lent by the banks or NBFCs. Their expectations are entirely different from the business backbone of the country. 

Lenders give you debt, which is temporary whereas private players give you real capital for long term growth. One can repay the debt in a given 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 in the growth actively and give a professional structure to the business. They come with high expectations of returns on their investments. 

Private capital comes as the co-owners, even though the stake is minor, but their voice can not go unheard. Their money in the balance sheet may shoot the bottom line 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, the private money brought in from the external investors has a few caveats, which cannot go ignored. 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 data information 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 bottom line and it is impossible to remember everything. 

Restructure the Operations 

External shareholders are the co-owners and have every right to question you for the business decisions taken. You should formally structure and organize 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 the Business 

Without external funding, your funds are solely yours, whereas when an external party invests in the business, the assets become shares. So, money utilized 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 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 cosy 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.