Choosing Your Investor: Lessons in Finance for the SME

Rising from the recession, with the economy getting back with strength, there are many new opportunities being churned and created, especially for the emerging SME sector. There is increased risk taking by the SMEs, which is spurning new areas of growth and development.

SMEs are increasingly becoming the backbone of the emerging Indian economy and one critical aspect of the entire chain is, funding/ investment.

The funding ecosystem in India for the SMEs
There are many sources of raising capital and funds for the SMEs in India, each with their own existence and functional methodology. SMEs may require funds at various stages of existence, from start-up to working capital and scaling up. Broadly classifying, the various ways of raising these funds are:

• Angel Investment
• Banks
• Venture Capital
• Private Equity etc.

But how do you choose your investor?

This is a major and critical step. Choosing your investor will always affect your business in more ways than one. As the stakeholders in the business increase, the responsibilities get more diligent and hence the ownership and also the decision making.

As you venture out on your entrepreneurial journey seeking funds, there will always be many good investors who would want to put money in your business. But it may not always be the best thing as an entrepreneur to give into all such offers and temptations.

Its like a marriage - a relationship of a man and a wife

The relationship between an investor and an entrepreneur is like the bond of matrimony. And any experience person would say that it is better to stay single, than to marry a wrong person, it is better to boot-strap your enterprise than to get stuck with the wrong investor.

Serious investors come on board with a thoroughly professional and experienced approach to investing and they have done it multiple times over years. They do their own due diligence before committing themselves/ their resources/ their money/ support to a budding enterprise.

A strong lesson for all emerging businesses is, while you are looking to raise funds, it does, in no way mean that you cannot have your say in choosing your own investor

What are the pointers that you must take into account while raising funds?

• Are you prepared to share ownership?

Letting go, is one lesson which the entrepreneur must learn and be prepared with, even before going in the market to raise funds. Anyone who parts his money to invest into your business, will surely ask you to part with some ownership of the company, and the ownership status and rights may change. This change at times is not something which the entrepreneurs are always mentally prepared for.

• Take help from experts

Raising funds is not an easy game. Valuations as a word in the English dictionary sounds very good, but not a word which would really be yours at all times and may not be music to your ears at all stages of your growth as a business.

The best way generally is to go to your successful entrepreneurial friends, who have been through the process, they are the best placed to share their insights and experiences.

Source: http://affordablehousinginstitute.org/blogs/us/wp-content/uploads/follow_the_money_small.jpg

• Funds don't come in a jiffy

Fund raising is not like a part time job. It is a full time activity which requires a lot of focus and effort from the entire core team of your enterprise. It requires rigorous planning, focus, host of meetings and presentations. There is no particular template which you present your Bplan in which fetches you the magical money! Be prepared to shelve off time from your daily schedule towards raising funds in a focused manner.

• Big words may not work big

Valuations, Equity, Shares, Projections, Net profit, Gross profit, P&L - these are all big words which you will encounter many a times during your process of raising funds, be sure of it. But what you must do is, to focus and ensure that the real thing is the transaction. The legal documents that you sign off. Read through each and every team and word carefully. Many a times you may or may not understand many terms, ensure you take help.

• Dont' over raise

Your investor at times may be over generous and offer you more buck for your bang and similarly at times you may wan to raise more bang for your buck. Just as they say under-commit and over achieve/ deliver, well, even while raising funds, ensure that neither of you over promise things. Keep your roles and understanding very clear.

• Investor's stake - is it only money?

Is your investor going to come on board with only money or is it the fact that he would bring in business as well? Ensure that your investor is someone who is as interested (if not passionate) in your business and has as much conviction in your execution capability, delivery, team, idea etc. that he adds value in the form of ideas, mentoring, advisory as well, other than just money.

Many a times, the actual value which a start-up needs other than money is, the right hand holding and mentoring.

Fund raising is critical to the growth of the business at the right times of the enterprise scaling up. Ensure that you are prepared well. To know more about raising funds, drop in a comment to this post and our team of experts will come back to you!