Understanding the essentials of fundraising for MSMEs

An important thing to keep in mind is the level of risk & reward a prospective investor is comfortable with. Very few investors (early stage VCs) are comfortable with a high degree of risk.

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Like most things in business, fund-raise comes down to teamwork, loads of pre-planning and a bit of luck.
By Amit Saxena

Fund raising sounds like an exciting piece of work but the truth is, it can be pretty excruciating and long drawn. The process has a lot of challenges and needs a lot of teamwork, preparations and great storytelling skills to overcome them. The success for a fund raising exercise also depends upon timing - market sentiments and sector outlook can play as big a role as your business credentials.
A founder or promoter can usually bootstrap a company only so far. After a point, any flourishing MSME starts seeking an external cash injection to grow their business. Every business must prepare a few basic collaterals before they showcase themselves to the probable investors:
Once these basics are in place, one must next decide on the investor profile who might be the best fit, as it’s a long term and a very consequential decision. Every business must target investors who meet the set of objectives for the fund raise. In some cases, a business just needs cash. Promoters value their independence and want to preserve their ability to shape the business. In that case, a silent partner from outside the industry may be the best fit. In other cases, the MSME might be looking for investors with a strategic fit who bring in additional value. This value could come in the form of industry expertise from veterans, or institutional partners who bring complementary capabilities or ready access to markets.


Once the ideal investor profile has been locked down, comes the actual access to such investors. Most MSMEs will not have the in-house expertise to reach out to investors en masse. So an initial effort may have to be made to hire intermediaries who can help source leads. The business should ensure that the external professionals are accepted as part of the larger team. The internal team should be open with the professional and should give a clear mandate for their fund-raising plans. They should support him by providing timely information and helping him prepare the briefs for probable investors.

The most difficult step is the actual pitch. Most fund raise exercises find this to be the stumbling block. To prepare for it, professionals start out by preparing pitch documents that showcase the business story and the investment opportunity. The following key pieces of information must be part of the pitch:
  • Requirement of funds in the business
  • Objectives of raising funds
  • Risk and problem statements
  • Investment Opportunities : Returns , Visibility and Liquidity
  • Constraints, if any : should be highlighted
  • Business Valuation Models and its Key assumptions
  • Market Assessment
An important thing to keep in mind is the level of risk & reward a prospective investor is comfortable with. Very few investors (early stage VCs) are comfortable with a high degree of risk. Most investors will not deploy their funds unless they see a reasonable chance of earning returns. So a business pitch should be very clear on the risk-return profile of the investment opportunity. In fact, the same pitch is often calibrated to fit the audience on a given day.

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Another aspect is the participation of the actual business teams in the fund raising exercise. While an intermediary is often indispensable, investors derive additional comfort if the business executives are part of narrative and the negotiations. Investor comfort can prove to be the difference in conclusion of the raise in a favourable manner.

All in all, like most things in business, fund-raise comes down to teamwork, loads of pre-planning and a bit of luck.

(The writer is MD & CEO Unimoni India.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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