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HANDBOOK FOR SME ACCESS TO ALTERNATIVE SOURCES OF FINANCE IN ASEAN
NOVEMBER 2018
This publication was produced by Nathan Associates Inc. for review by the United States Agency for International Development. P a g e | 2
HANDBOOK FOR SME ACCESS TO ALTERNATIVE SOURCES OF FINANCE IN ASEAN
SUBMITTED TO ASEAN Coordinating Committee on MSME (ACCMSME) and the ASEAN Business Advisory Council (ABAC)
DISCLAIMER
This document is made possible by the support of the American people through the United States Agency for International Development (USAID). Its contents are the sole responsibility of the author or authors and do not necessarily reflect the views of USAID or the United States government. P a g e | 3
ACKNOWLEDGEMENTS
This handbook was prepared by Dr. Hazik Mohamed, Managing Director/Head of Business Intelligence & Strategic Advisory, Stellar Consulting Group Pte Ltd, Singapore. Hazik is a business strategist with substantial market research, operation management and start-up experience. The handbook was prepared during April – June 2017, with a draft version submitted in May 2017 for the consideration of the ASEAN Coordinating Committee on Micro, Small and Medium Enterprises (ACCMSME). We thank the ASEAN Member States and the ASEAN Secretariat who reviewed and provided helpful comments to the draft handbook.
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CONTENTS
1. INTRODUCTION ...... 5 1.1. BACKGROUND ...... 5 1.2. TYPES OF ALTERNATIVE FINANCING AVAILABLE IN ASEAN ...... 6 1.3. RECENT INFORMATION AND DATA ON ALTERNATIVE FINANCING IN ASEAN ...... 12 2. FINDING LENDERS AND INVESTORS IN ASEAN ...... 17 2.1. FINANCIAL AND NON-FINANCIAL NEEDS OF ASEAN MSMES ...... 17 2.2. COMPILATION OF PE/VCS PLATFORMS ...... 19 2.3. COMPILATION OF SOCIAL IMPACT INVESTOR PLATFORMS ...... 28 2.4. COMPILATION OF EQUITY CROWDFUNDING PLATFORMS...... 29 3. ACCESSING ALTERNATIVE SOURCES OF FINANCE ...... 32 3.1. FINANCING OPTIONS ...... 32 3.2. THE BUSINESS PLAN ...... 37 3.2.1. Key Elements of a Business Plan...... 38 3.2.2. Sample Business Plans ...... 40 3.2.3. Particular Information Emphasis by Funders (Pitch Material) ...... 62 3.2.4. Investors' Assessment of Value ...... 63 3.3. UNDERSTANDING THE LANGUAGE OF LENDERS AND INVESTORS ...... 64 3.3.1. Financial Projections and Performance ...... 66 4. FINANCIAL MANAGEMENT ...... 70 4.1. ENTREPRENEURS : QUESTIONS TO ASK YOURSELF (PLANS FOR NEW CAPITAL) ...... 70 4.2. MANAGING WORKING CAPITAL ...... 73 4.2.1. Sources of Working Capital ...... 73 4.2.2. Key Elements to Capital Management ...... 74 4.2.3. How to Calculate Your Business and Trade Cycles ...... 75 4.2.4. Working Out Your Working Capital Lines for Your Business ...... 76 4.3. MANAGING CAPITAL EXPENDITURE ...... 77 4.3.1. Case Study 1: A Village Artisan Enterprise ...... 78 4.3.2. Case Study 2: A Contract Manufacturing Company ...... 78 4.3.3. Lessons for Entrepreneurs ...... 79 5. FUTURE OF ALTERNATIVE FINANCE ...... 81 5.1. DEVELOPING AND EXPANDING THE LENDING AND INVESTING NETWORK ...... 81 5.2. POLICY AND REGULATORY IMPROVEMENTS TO ENABLE ACCESS TO ALTERNATIVE CAPITAL ...... 83 5.3. FINANCIAL LITERACY AND ALTERNATIVE FINANCING AWARENESS PROGRAMS ...... 91 GLOSSARY OF FINANCIAL TERMS ...... 93
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1. INTRODUCTION
1.1. Background
Micro, small and medium sized enterprises (MSMEs) are the backbone of most economies in the world. In this region, they account for 96 per cent of all enterprises and between 50 and 85 percent of domestic employment outside the agricultural sector in ASEAN Member States (AMSs). Compared to the larger firms, MSMEs have long been significantly under-served financially, with very limited access to the traditional funding from formal banking institutions. Some 85 per cent (or 365 million to 445 million) of MSMEs in emerging markets have suffered from credit shortage, estimated in the range of US$2.1 trillion to US$2.5 trillion within the developing world. Of this, 45 per cent (US$900 billion to US$1.1 trillion) is estimated to occur in East and Southeast Asia.
One of the challenges in MSME financing is that their financial requirements are too large for microfinance, but are too small to be effectively served by corporate banking models. Another factor that limits MSMEs access to credit is their large geographical dispersion around the region. ASEAN's growth story thus far has been centred in its capital cities and financial centres such as Bangkok, Jakarta, Kuala Lumpur, Manila, and will likely revolve around developing capitals of Ho Chi Minh City, Naypyidaw, Phnom Penh and Vientiane as well. While 13-22% of MSMEs are still concentrated in the capital cities, the remaining are fragmented across other cities in the rest of the country. These 'secondary' cities play an equally important role in contributing to the country's economic growth and development. The lack of access to financing is constantly cited by MSMEs as one of the main barriers to growth. With MSMEs still considered by commercial banks and traditional financial institutions as risky and costly to serve, they remain underserved when it comes to basic financial services.
Ensuring improved and adequate access to finance for MSMEs has long been a concern in ASEAN hence the directive of the ASEAN Strategic Action Plan for SME Development 2016-2025 to encourage greater access to more diversified sources of financing. An ancillary goal to improve financial inclusion and literacy becomes imperative in order for MSMEs’ increased engagement in the financial system. Indeed, financial inclusion is one of the three strategic, finance-related objectives in the “AEC Blueprint 2025” which is an integral part of the ASEAN Community blueprint “ASEAN 2025: Forging Ahead Together”. Such inclusion is to be achieved through expanding the number and scope of financial intermediary facilities to benefit a wider circle of underserved communities, including MSMEs. Several key factors impede MSME lending and results in poor financial inclusion of MSMEs: P a g e | 6 i. Low MSME coverage by credit bureaus/registries increases the cost of MSME credit risk assessment ii. Inadequate reach limits traditional banks to service MSMEs in the physical and digital spheres iii. Internal banking regulations dictate higher risk weights to MSMEs loans which in turn raises lending costs iv. Lack of cash flow visibility compels traditional banks to adopt strict collateral- based credit risk models which hinder lending to MSMEs without collateral v. Information asymmetry between demand and supply sides An analysis of individual countries in ASEAN reveals that the support MSMEs receive from financial institutions to help finance their businesses does not reflect their contributions to their country's GDP and employment, despite being the critical drivers for growth. With the exception of Thailand, MSME loan volumes in the region are less than 60% of their contribution to GDP, and constitute less than 20% of total loans. This actually presents a sizeable opportunity to alternative financiers in the MSME market segment as well as an untapped resource for the MSMEs with regards to their financial needs.
Currently, there is very limited information tailor-made to MSMEs in their search for, and access to, investment finance in ASEAN. Of the available information, the focus is largely on the traditional sources of finance on the supply side. There is virtually no information on alternative sources of loan and equity funding potentially suitable to the financing needs and requirements of the regional MSME. Additionally, no information (such as guidebooks and checklists) exists on how, when, and where ASEAN MSMEs can access alternative sources of finance.
1.2. Types of Alternative Financing Available in ASEAN
While the big traditional banks remain broadly averse or unable to offer credit to SMEs, the alternative financing industry has been growing by leaps and bounds, but all this growth has turned the industry into an evolving mix of non-traditional lenders, accessible platforms, and innovative products.
Today, just about any non-bank lender technically qualifies for as “alternative finance”. As increasing numbers of small business owners seek non-traditional funding platforms, the alternative financing industry keeps expanding with new, yet similar-sounding products. The most popular forms of alternative financing available to small business owners can be segmented to: 1. Non-bank Financial Institutions, such as credit unions, Community Development Financial Institutions (CDFI) and micro-lenders like the Grameen Bank. 2. Asset-Based Financing, i. Factoring Accounts Receivables means an MSME would receive 70-90% of the total value of the outstanding receivable up front, the rate is generally dependent on the age of the account. P a g e | 7
Financing Accounts Receivables means an MSME would use its outstanding invoices as collateral for financing, but would still be responsible for collecting payment from customers. ii. Business Cash Advances (also known as a merchant cash advances) is a form of alternative financing based on future credit card sales. In this set up, the cash advance provider purchases some of a business’ future credit card receipts at a discount, which generally ranges between 20%-30% of the amount funded. In exchange, the business receives a predetermined amount of instant cash which can be used as working capital. The cash advance company then collects a set daily percentage of future credit card sales until the full amount funded has been paid off. iii. Revenue Based Financing allows borrowers to get up front funding, usually in the form of a cash advance, and then pay off the amount funded via a monthly allocation of the revenue their business generates. But, unlike the cash advance, a business’ whole revenue stream is considered. While interest rates are again on the higher side, this finance product allows business owners to maintain ownership of their companies while not being forced to borrow against their homes and possessions. iv. Purchase Order Financing (also called inventory financing or PO funding) is a short-term, commercial finance option that provides capital to pay suppliers upfront for products or inventory so the MSME does not have to deplete its available working capital. The products or inventory then serve as collateral for the loan if the business does not sell its products or otherwise cannot repay the obligation. Inventory financing is especially useful for businesses that must pay their suppliers within a short payment cycle or a longer period of time than it takes them to sell off their inventory. It also provides a solution to seasonal fluctuations in cash flow and can help a business support a higher sales volume by, for example, allowing a business to purchase bulk orders of inventory to sell later on. v. Lease-Back Programs (also known as a “sale and leaseback”) allow the MSME owner of a property or other valuable asset, such as equipment or vehicles, to “sell” it to a lender and then lease it back during a set period of time. Under this arrangement, the original MSME property owner can quickly free up working capital while retaining possession and use of the property. Some leaseback arrangements allow the lessee the option to buy back the property at a future date. During the life of the leaseback, however, the buyer derives tax benefits from the arrangement, such as being credited for depreciation of the property. 3. Peer-Based Alternative Financing, i. Peer-to-Peer Lenders, or P2P lending is a form of financing that occurs directly between individuals or “peers” without the involvement of a traditional financial institution. Loan amounts are typically small, a maximum of US$10,000. Loan terms are also pretty short, from 1 to 5 years. Much of the success of P2P lending is a result of the social networking power and infrastructure of the Internet. P2P lending sites offer an online marketplace where borrowers and lenders can come together. Often, there will be several private lenders per borrower who each share in partially funding a given loan amount. These sites typically provide identification and verification services as well as an assessment of the borrowers’ creditworthiness and the risk P a g e | 8
involved in lending to them. Clear, precise documentation covers the loan’s terms and conditions as well as the repayment schedule and tax payments as determined by both parties. ii. Crowdfunding allows business owners and entrepreneurs to raise funds by requesting a small amount of money from many different people online. By tapping into the power of the internet, entrepreneurs can pitch their ideas to a large group of people, who, if interested will respond by donating a small portion of the money they need to help them reach their target. Unlike more traditional forms of business capital, the money raised through crowd funding is not directly repaid. Recipients may instead offer their investors some specified item or service in return for their financial support, such as a free sample of their product. The more common crowdfunding models can be characterised as donation-based, equity-based and reward-based depending on its different structure and objectives.
The wide range of alternative financing available can be daunting for MSMEs to consider. As such this Handbook will restrict focus to four primary alternative financing, namely: (a) venture capital, (b) angel funding, (c) social impact investment, and (d) equity crowdfunding. The following are some simple explanations of the forms of alternative financing that this Handbook will be concerned with:
Venture Capital (VC) (often used interchangeably with private equity) is a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, or both). Venture capital is a type of funding for a new or growing business. It usually comes from venture capital firms that specialize in building high risk financial portfolios. With venture capital, the VC firm gives funding to the startup company in exchange for equity in the startup. This is most commonly found in high growth technology industries like biotech, fintech and software. The firm typically has one or more investment portfolios that are owned by a limited partnership. The venture capitalist is often a general partner in the portfolio, and individual investors or other institutions (particularly university endowments and pension funds) are limited partners in the limited partnership. With a loan, a lender gives a company money, and the company has a contractual obligation to pay back that amount plus interest over some period of time. Sometimes the loan is backed by assets (like equipment or inventory) or receivables. In the case of many small businesses, the loan is backed by a personal guarantee from the business owner. This backing allows the lender to recoup some of its investment in case the borrower defaults (fails to make payments). With venture capital, the startup company issues private shares in exchange for money.
The venture capitalist's partnership fund actually becomes a partial owner of the startup. Additionally, venture capital is usually only used with high growth industries, where risk is much higher. In these cases, there are little or no assets to back the loan in the event of default so the likelihood of obtaining a loan is much lower, and the potential payouts must be drastically higher to result in a successful investment.
The primary differences between VC versus angel investing are timing in the company's lifecycle, monetary size, and deal structure. And the primary difference between VC and crowdfunding is simply equity — venture capitalists acquire equity P a g e | 9 in the startup; crowdfunders do not. Instead, crowdfunding is much more like a high- risk pre-order platform, where there is a reasonable probability that the startup may fail to deliver whatever it is that they set out to do.
Timing. Venture capital is typically used at the Series A round and after (all happening after the Pre-A or seed rounds). Although VC are high risk investments, it is less risky compared to angel investing which usually happen in the earliest stages of a startup when the risk is ultra-high.
Funding Amounts. Venture capital also usually starts with companies that are slightly more mature (although not necessarily profitable), with higher valuations, and higher funding amounts. Funding amounts in venture capital is usually millions, tens of millions, or even hundreds of millions of dollars.
Deal Structure. VC deal structures vary a lot and it depends on what the funds are set out to achieve. Different parties could arrive at very different structures for the same deal. The important point is that, as far as is possible, everyone’s needs are met, and all the parties see the transaction as ‘fair’. After all, the completion of the deal is only the start of a long relationship. In venture capital, the agreed equity in the company is transferred to the investor once the deal is done and money exchanged. The following are some common examples of VC deal structures:
Table 1. Common Types of Deal Structures of Private Equity and Venture Capital (PEVC) Firms
Types of Transaction Description
Seed Very early stage finance that allows a business concept to be developed
Start-up and Early Stage Used to develop the company's products and fund its initial marketing (early stage finance is for companies that have commenced operations but are probably not yet profitable)
Expansion Used to grow and expand an established company (also known as development or growth capital)
Bridge Financing Short-term venture capital funding provided to a company generally planning to float within a year
Secondary Purchase A PEVC firm acquires existing shares in a company from another venture capital firm.
Rescue / Turnaround Enables a company to resolve its financial difficulties or be rescued from receivership
Management Buy-out Enables the current operating management to acquire, or purchase a (MBO) significant shareholding in, the business P a g e | 10
Management Buy-in (MBI) Enables a manager or group of managers from outside a company to buy into the company
Institutional Buy-out (IBO) Enables a PEVC firm to acquire a company, following which the incumbent and/or incoming management is given or acquires a stake in the business (the deal differs from an MBO in that it is driven by the institution(s) rather than the management)
Leveraged Build-up (LBU) A PEVC firm acts as principal to buy a company with the aim of making further relevant acquisitions to develop an enlarged business group
Angel Funding is a method used to raise monetary contributions from a private investor who is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. They are also known as a business angels, informal investors, angel funders, or seed investors.
Timing. Angel funds comes at extremely early funding. Instead, these rounds are often called "Series AA," or "Pre-A" or "seed" rounds, and include funding from friends & family, angel investors, and seed stage financing syndicates and firms.
Funding Amounts. Venture capital also usually starts with companies that are slightly more mature (although not necessarily profitable), with higher valuations, and higher funding amounts. Funding amounts in angel & seed investing typically range from a couple thousand (US) dollars through to one million (US) dollars, while venture capital is usually millions, tens of millions, or even hundreds of millions of dollars.
Deal Structure. A variety of deal structures are available to angel investing but they may be different to those employed in a VC. This is primarily to reduce legal costs, cut transaction overheads, and rapidly accelerate the rate at which the startup and angel investor can agree on terms. Some of these alternative structures include convertible notes and "simple agreement for future equity". Unlike venture capital, convertible notes and 'simple agreements' do not actually transfer equity in the company to the investor until a later date, and in the case of failed startups, sometimes not even at all.
Social Impact Investment focuses on investing in companies or organisations to create a measurable societal benefit and generate a financial return. Impact investing is typically centred around addressing a social issue, such as poverty or education, or an environmental issue, such as clean water, agro-industrial projects, renewable energy, health care and education. They provide both debt and equity financing to businesses and institutions, with an emphasis on alleviating hunger and poverty problems, fostering entrepreneurship, establishing food production and education programs, and working on climate change issues. These include small business loans for the purpose of growing a business, expanding staff or increasing energy efficiency. Just as the formation of the VC industry ushered a new approach and mindset toward funding innovation within the private sector, social impact P a g e | 11 investment has started to bring opportunities to harness entrepreneurship and capital markets to drive social improvement.
Micro-lending specifically refers to the financial help to low-income households in poverty areas and countries that do not have well-developed banking systems. Many of these loans are used to help finance medical bills, small businesses, education, and agricultural development. The most popular online micro-lending institution is Kiva which is able to loan to an entrepreneur across the globe starting from as little as US$25. Kiva Micro-funds is a non-profit organisation that allows people to lend money via the internet to low-income entrepreneurs and students in over 80 countries. Kiva's mission is “to connect people through lending to alleviate poverty”. In Asia, the Banking with the Poor Network (BWTP) works with NGOs, commercial banks and policy institutions from nine countries in Asia to promote and develop micro-financing services in Asia through research, dialogue, advocacy and capacity building.
A unique co-investment platform which deserves special mention is the Sustainable Finance Collective (SFC) Asia. An industry first for the region, SFC Asia aims to accelerate the funding of sustainability projects in the areas of circular economy, sustainable energy and positive social impact in Asia. It will provide financing access through a platform comprising ING Bank, Credit Suisse, FMO (a Dutch development bank) and the UNDP Social Impact Fund. On this Funding Panel, entrepreneurs, philanthropists, and capital market investors can use blended financing models to create both economic and social dividends while facilitating the transition from grant- only project-based development to blended financed market-based development.
Equity Crowdfunding is a method used to raise monetary contributions from a large number of people to support a specific project or a business rather than to provide individuals with loans as done by traditional bank-lending or money-lenders. Historically, crowd-funding has been used for political campaigns, disaster relief, governmental support, and public projects. More recently, it refers to equity-based crowdfunding which provides a return on the investors' equity, unlike reward-based crowdfunding, or donation-based crowdfunding (such as Kickstarter or Indiegogo) where the investors usually receive the finished product, gifts, or discounts instead of return on equity. Some examples of equity-based crowdfunding platforms operating in ASEAN are: 1. Funding Societies, Modalku, Kapital Boost (HQ: Singapore) Category: SME unsecured loans Key markets: Indonesia and Singapore 2. Akseleran, KitaBisa, Investree (HQ: Indonesia) Category: Invoice financing and employee unsecured loans (partnered companies only) Key market: Indonesia 3. Ata Plus, Crowdo, Eureeca, FundedByMe, PitchIN and Propellar Crowd+. (HQ: Malaysia) Category: Equity Crowdfunding Key markets: Singapore, Indonesia, Malaysia P a g e | 12
4. Asiola / Dreamaker Equity / Phoenixict (HQ: Thailand) Category: Equity Crowdfunding Key market: Thailand 5. Simplex (HQ: Philippines) Category: Unsecured personal and business loans Key market: Philippines 6. Loanvi (HQ: Vietnam) Category: Unsecured personal loans Key market: Vietnam
1.3. Recent Information and Data on Alternative Financing in ASEAN
The market data available for alternative financing are usually broken down separately between the categories that we have defined. Hence our analysis for the recent trends and information of alternative financing are done as such.
Private Equity (PE) and Venture Capital
PE in Southeast Asia was historically focused on Malaysia and Singapore, followed by the emergence of Indonesia. These three markets have dominated PE activity, reflected by the fact that they accounted for over 85% of all investments across the past five years. Increasingly we are seeing PE diversify from these core markets with a significant amount of time and resources being spent investigating the opportunities in markets such as the Philippines, Thailand and Vietnam. These markets, which have been dominated by local funds such as Lombard and VinaCapital to date, are being actively targeted by regional PE houses at a level far greater than before. As these economies continue to evolve, the number of opportunities of sufficient size is increasing. Investments into regions such as Cambodia, Laos and Myanmar remain limited and focused on building infrastructure such as banking and communications. That said, a number of PE investors have publicly stated their ambition and see these markets as a long-term potential.
In 2016, Indonesia and Singapore have recorded the highest investments in-flows among the ASEAN nations. Brunei too has experienced an increase in incoming foreign direct investment. Hengyi Industries Sdn Bhd, a joint venture investment between Damai Holdings Limited, a wholly owned subsidiary of Strategic Development Capital Fund, a Brunei government trust sub-fund and Hongkong Tianyi International Holding Company Limited, a wholly owned subsidiary of Zhejiang Hengyi Petrochemical Co. Ltd – a public listed company from People’s Republic of China, attributed the largest with confirmed investment worth USD$3.445 billion for the 1st Phase of their crude oil refinery and petrochemical projects located on Pulau Muara Besar. Private equity and venture capital deals in Philippines and Cambodia were low given the hype they have received about their respective economies. P a g e | 13
Figure 1: ASEAN 2016 - PEVC Investment Values Figure 2: ASEAN 2016 – Deal Count (US $m)
* No data were available for Lao PDR and Myanmar at time of print.
Malaysia and Thailand lagged Singapore in terms of number of deal counts and invested dollars even though they are much larger nations. Deal counts were lowest in Brunei. Figure 1: Quarterly Investment Activity Trends in ASEAN
In 2014 and 2015, start-ups in ASEAN are drawing increasing attention from venture capital firms and several countries have put in place measures to encourage such activities. The appetite for venture capital investments has seen a growth in both the number of deals and aggregate value transacted between 2014 and 2015. On the other hand, buyout activity has yet to match the peak seen in 2014. In 2014-2015, there were in excess of 400 venture capital deals completed in ASEAN, totalling more than US$2.2 billion in aggregate value. When looking at buyout activities in the same timeframe, more than 80 private equity-backed buyout deals were transacted exceeding US$10.1 billion. Singapore accounted for more than half of the aggregate value in both venture capital financings and private equity-backed buyouts.
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Figure 2: Proportion of Private Equity Deals in Figure 3: Proportion of Venture Capital Deals in ASEAN by Industry (2014-2015) ASEAN by Industry (2014-2015)
Online Equity-based Crowdfunding
The volume of online alternative finance across South East Asia (including Singapore, Malaysia, Thailand and Indonesia) accounted for US$47 million in transactions in 2015. To put the volume in perspective, East Asia (Japan, South Korea, Taiwan and Hong Kong) grew rapidly, from US$123 million in 2014 to US$412 million in 2015, and Oceania — which includes Australia and New Zealand — accounts for both the largest combined share and fastest growth in volume of online alternative finance transactions in the Asia-Pacific region, totalling more than US$621 million in 2015. Survey responses in South East Asia from a recent study1 (March 2016) were received from online finance platforms operating in Singapore, Malaysia, Thailand, Indonesia and the Philippines. Between 2013-2015, a total market volume of US$83.99 million was raised in the region. In 2013, US$10.94 million was raised, which grew to US$26.47 million in 2014 — a year-on-year growth rate of 142%. In 2015, a total of US$46.58 million was raised, which registered a slower growth rate of 76% compared to the previous year. The average growth rate between 2013-2015 was 109%. Interestingly, with regard to total market volume by sector, equity-based real estate crowdfunding is the largest market segment across South East Asia with 37% of total market share between 2013-2015, predominately driven by activity in Singapore. The second largest model by total volume was invoice trading, with 20% of total volume between 2013-2015. Both equity-based crowdfunding and marketplace/peer-to- peer business lending accounted for just over 13% each of total market volume in South East Asia over the last three years, with over US$11 million raised for both models. Donation-based crowdfunding accrued 12% of the total market volume with almost US$10 million raised, whilst reward-based crowdfunding
1 This benchmarking research is the first comprehensive study of the Asia-Pacific online alternative finance market. It has been conducted by an international research team from the Cambridge Centre for Alternative Finance at Cambridge Judge Business School, the Tsinghua University Graduate School at Shenzhen and The University of Sydney Business School, in partnership with KPMG and with the support of the ACCA and CME Group Foundation. The report is called "Harnessing Potential - The Asia-Pacific Alternative Finance Report" and was published in March 2016. P a g e | 15 accounted for the smallest proportion of alternative finance activity in the region, accounting for 5% of total regional market volume and US$3.8 million raised between 2013-2015.
In general, it appears that as a country's per capita GDP rises, the alternative finance volume per capita also rises, possibly reflecting growth of both financing needs and higher disposable income per person for alternative funding and investment activities.
Figure 4. Total Alternative Finance Volume per Capita versus GDP per Capita in Asia-Pacific (US$)
Also, there are several trends that will shape the landscape of alternative financing in ASEAN. These market forces and key enablers that will together influence this are:
1. Investment diversification key to growth and resilience Trade prospects and business opportunities are strong within the ASEAN economies. Meanwhile, the increase in cross-border investments suggest that ASEAN business leaders are laying the groundwork for regional expansion and long term growth. They see the necessity to target growth in their home and new markets or risk losing market share.
2. Navigating China’s shifting economy through increased and stronger partnerships China’s transition from an industrial and export driven economy to one that is consumer driven opens up new demand and business opportunities, risks as well as competition. Tapping on the experience and insights of trusted local partners through stronger collaboration is vital to navigating the country’s extensive and unique market.
3. Accelerating digital connectivity and addressing data security risks Digital complacency is not an option for businesses as the proliferation of new technologies such as Internet of Things (IoT) revolutionises the global economy, driving new business models and forging closer relationships with customers and P a g e | 16
business partners. ASEAN CEOs are already investing in connected devices and data collection to not lose out in the competition. With many organisations in the region at the nascent or adolescent stage of the digital curve, ASEAN business leaders tend to look to regulations as a safeguard and guide to manage data-related risks.
4. Balancing policy and market factors in cross-border investment decisions The regulatory environment matters more to business leaders looking at cross- border expansion. Gone are the days when fast growing markets were enough to entice investors to make big bets. Ongoing global economic uncertainty, coupled with increasing scarcity of underpenetrated markets, are calling for more stringent calculations on the projected risks and rewards from investing in a foreign market. Regulatory conditions matter as a prerequisite in business leaders’ investment decisions.
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2. FINDING LENDERS AND INVESTORS IN ASEAN
2.1. Financial and Non-financial Needs of ASEAN MSMEs
ASEAN's diversity is also reflected in each country's economic levels. According to the World Bank, Singapore and Brunei are the only ASEAN countries that are considered high income. Malaysia and Thailand are categorised as upper-middle income economies, while Indonesia, the Philippines, and Vietnam are lower-income economies. Cambodia, Laos and Myanmar, on the other hand, are low-income. Among the ASEAN countries, Singapore is the only one that is innovation-driven. Malaysia is moving towards an innovation-driven economy, but like Thailand, it is still an efficiency-driven economy. Indonesia is a mix of efficiency-driven and factor- driven2 being the largest market in ASEAN, while the rest are still very much factor- driven. The economic level of a country, to a large extent, reflects its MSME sectors and characteristics. Despite the characteristic differences in the nature, size and composition of MSMEs in ASEAN countries, they share common financial as well as non-financial needs.
2 A factor-driven economy relies on basic factors such as low-cost labour and unprocessed natural resources for their competitive advantage. P a g e | 18
Table 2: Common Financial and Non-Financial Needs of ASEAN MSMEs
Indonesia Malaysia Philippines Singapore Thailand • 31% of MSMEs • 39% of MSMEs • Majority of • 72% of MSMEs • Some MSMEs Cash Flow / stated that they underscored the MSMEs struggle require funds to struggle to to manage manage cash Working faced challenges in need for better manage their maintaining cashflow adequate cash working capital and flow and Capital adequate cashflow management flow and working cashflow working capital capital
Management • 13% of MSMEs • 55% of MSMEs • Majority of • 46% of MSMEs • 58% of MSMEs External prefer banks to require a larger MSMEs find require cheaper have no access Financing relax their lending amount of loans for lenders loans to external restrictions business operations overemphasise • 25% of MSMEs financing • 82% of MSMEs on the need for are unable to come • 49% of MSMEs require some collateral up with required felt that they external financing collateral were unserved / underserved • MSMEs receive late • 32% of MSMEs • MSMEs find slow • MSMEs receive • MSMEs receive Payments / payments 22-26% cited delayed fund late payments 35% late payments
Common Financial Needs Common Financial Factoring / of the time payments as a disbursement a of the time. 28% of the time • Most of them have challenge challenge when • Complex payment Invoice difficulty collecting • Factoring volume dealing with procedures and an lenders Management invoices tripled in the last 3 inefficient banking years system are cited as key reasons • 55% MSMEs were • 74% MSMEs are • 23% MSMEs • 31% MSMEs were • High production Input Cost concerned with looking to mitigating cited rising concerned with costs were cited Mitigation rising business rising costs with business costs as high rental costs, as a key costs increased key constraint to and 19% with challenge productivity and growth material costs profit margins
• MSMEs labour • 78% of MSMEs are • 10% of MSMEs • Manpower issues • The minimum Cost and productivity is 10 labour intensive cited the difficulty were the top wage in Thailand Quality times lower than and face substantial of finding cheap concern for was increased financial Needs that of large labour shortage quality labour as MSMEs while the growth - Labour enterprises • 70% cited skilled key constraint to • 87% of MSMEs in productivity • 29% of MSMEs labour as key growth are looking to slowed cited lack of quality challenge and need improve labour labour for human capital productivity development
Common non • MSMEs prefer less • 16-18% of MSMEs • Intense business • Most MSMEs are • 85% MSMEs Business- complicated felt that regulators competition, happy with overall reported being friendly licensing processes were too stringent unstable demand business negatively and lower tax and want more pro- and government environment affected by the Climate compliance costs business regulations political unrest in government Thailand initiatives Source : 2012-14 Southeast Asian National Surveys, National Statistical Offices and World Bank Enterprise Survey.
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Brunei Cambodia Lao PDR Myanmar Vietnam • 60% of MSMEs • All of MSMEs • 50% of MSMEs • 60% MSMEs Cash Flow / stated that they underscored the struggle to struggle to faced challenges in need for better cash manage adequate manage cash Working cash flow and flow and
maintaining flow management Capital adequate cash flow working capital working capital Management • 50% of MSMEs • 40% of MSMEs • 60% of MSMEs • Availability and • 80% of MSMEs External require some require loans and find lenders access to external have no access Financing external financing access to funding overemphasise financing is the to external for business on the need for most obvious need financing operations collateral • 20% of MSMEs • 10% of MSMEs • MSMEs receive Payments / have difficulty cited delayed late payments Common Financial Needs Common Financial Factoring / collecting invoices payments as a 40% of the time challenge Invoice Management • 40% MSMEs were • 70% MSMEs are • 10% MSMEs • MSMEs believe • 60% MSMEs Input Cost concerned with looking to mitigating cited rising government must were concerned Mitigation rising business rising costs with business costs as solve high rent, and with rising costs increased key constraint to high business cost business costs productivity and growth profit margins
• 20% of MSMEs • 70% of MSMEs are • 30% of MSMEs • 60% of MSMEs Cost and cited lack of quality labour intensive cited the difficulty cited the Quality labour and face substantial of finding cheap difficulty of labour shortage quality labour as finding cheap
financial Needs
- Labour key constraint to quality labour as growth key constraint to growth • Half of MSMEs • 80% of MSMEs • 70% respondents • MSMEs want more • 80% MSMEs Business- prefer less prefer less claim more can supportive and prefer less friendly complicated complicated be done to clear government complicated Common non licensing processes licensing processes promote better rules and regulation processes, lower Climate and lower tax and lower tax business for locals and tax compliance compliance costs compliance costs environment foreign investors costs and better • 40% indicated business support needed environment from government
Source : 2017 Small Sample Size Survey Questionnaires for this Handbook Project (10 respondents per country).
2.2. Compilation of PE/VCs Platforms
To date, there are over 200 VCs/PEs, social impact investors and equity crowdfunding platforms all over Southeast Asia, most of which are active in Singapore and Malaysia while taking advantage of the large market size of Indonesia. Others are counting on the emerging economies of Vietnam and growth P a g e | 20 economies of Philippines and Thailand in strengthening their investments in Asia Pacific.
Stage of Minimum Maximum Operational Target VC Name Website Sectors Investment (US$) (US$) since Geographies 1337 Ventures Early Stage, Pre- 10,800 30,000 www.1337accelerator.com 2009 Malaysia, Consumer, Entertainment, seed and Seed Southeast Asia Gaming, Hardware, Music, Social Networking
500 Startups (500 Early stage 26,000 70,000,000 500.co/ 2012 in Asia Malaysia, Biotech, Consumer, Data & Durians / 500 Singapore, Analytics, Design, TukTuks) Philippines, Ecommerce, Education, Vietnam, Finance, Mobile, Music, Thailand, India, Software, Travel United States of America, Taiwan, Hong Kong, Japan, Bangladesh, Australia, China
8capita Early Stage, Pre- 600,000 12,800,000 8capita.com/ 2013 Singapore, B2B/Enterprise, Consumer seed and Seed Thailand, United , Software States, Indonesia Abraaj Group Early Stage, Seed 30,000,000 60,000,000 www.abraaj.com/ 2002 Africa, Asia, Latin B2B/Enterprise, America, Middle Ecommerce, East and Turkey Transportation
Accel Partners Early Stage, Pre- 1,000,000 1,000,000,000 www.accel.com/ 1983 India, Australia, Software seed and Seed Israel, Singapore, United States of America, United Kingdom, China, New Zealand, Canada
Accion Capital Seed 25,000 250,000 www.accionasia.com/ 1961 South-East Asia Technology, Healthcare, through Accion and China Natural resources-related Asia Growth Fund services and infrastructure, Renewable energy and environmental protection, Hospitality & lifestyle, Education Logistics, Consumer- related Alpha JWC Seed, Early Stage 50,000 50,000,000 2015 SouthEast Asia Agnostic www.alphajwc.com/ Ventures and Later Stage ANGIN Seed, Early Stage 25,000 150,000 angin.id/ 2013 Indonesia Agriculture, Consumer, Data & Analytics, E- commerce, Education, Finance, Food & Beverages, Health/Medical, Internet of Things, Mobile, Social Enterprise, Software, Startups
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Stage of Minimum Maximum Website Operational Target PEVC Name Sectors Investment (US$) (US$) since Geographies AppWorks Seed, Early Stage 100,000 5,000,000 appworks.tw/ 2009 Taiwan, Mobile Internet, Internet of and Formative Southeast Asia Things Stage Arbor Ventures Seed, Early 3,000,000 5,000,000 www.arborventures.com/ 2012 Hong Kong, Data & Analytics, Finance Stage, Later Stage China, Japan, Singapore and ASEAN Ardent Capital Seed to Series A 350,000 15,000,000 www.ardentcapital.com/ 2013 South East Asia E-commerce
Aria Group Seed to Series A 10,000,000 100,000,000 www.aria-group.com/ 2012 India, Southeast Retail / Food & Beverage, Asia, Greater Healthcare, China Lifestyle/Services, Consumer Technology Ascent Capital Seed, Early Stage 10,000,000 30,000,000 www.ascentcapital.in/ 2001 India Technology, E-commerce, Healthcare, Financial Services, Consumer Brands, Infrastructure
Asia Pacific VC, Early Stage 100,000 2,500,000 www.apdgroup.com/ 2007 Melbourne, Digital Strategy, E- Digital Sydney, commerce, Digital Shanghai, Kuala Solutions, Customer Lumpur, Acquisition, Customer Auckland, Manila, Retention & Management, Singapore Business Intelligence
Asia Pacific Early Stage Undisclosed 4,500,000 www.asiapacificinternetgroup.com 2014 South East Asia Online Services for Internet Group consumers and (APACIG) businesses Asia Venture Early Stage 500,000 550,000 asiaventuregroup.com/ 2013 South East Asia Group Aspada Seed, Early 1,600,000 3,300,000 www.aspada.com/ India Agricultural supply chains, Stage, Later Stage Logistics, Financial services, Education, and Healthcare.
Atomico Ventures Seed, Early 100,000 5,000,000 www.atomico.com/ 2006 Europe, Latin Curated Web, Mobile, E- Stage, Later America, US, Asia commerce Stage and Private Equity August Capital Seed up to $1m 100,000 5,000,000 www.augustcp.com 2012 Singapore, Big Data, Partners ASEAN and US Social Networking & Communication, Crowdsourcing, General Software, Health, Supply chain & Logistics Technology Aurum Equity Early Stage 200,000 1,000,000 www.aurumequity.com/ 2012 India, Asia Healthcare & Partners Pharmaceuticals, Consumer Markets & Food, Technology & Internet, Industrials, Infrastructure & Real Estate, Banking & Finance, Supply Chain & Logistics and Education Axiata Digital Seed, Series A 100,000 2,500,000 www.intrescapital.com/funds.html 2012 Malaysia, Ecommerce, Location- Innovation Fund and Series B Singapore based services, Big Data (Axiata & Analytics, IoT, Traditional MAVCAP) to Cloud services, Online Billing & Payment systems
B Dash Ventures Seed, Early Stage 300,000 2,000,000 bdashventures.com/en/ 2011 Japan, Asia Mobile, News, Games and Later Stage Pacific and US
BAF Spectrum Seed and Early 60,000 800,000 www.bafspectrum.com 2006 India, Singapore Hardware + Software, E- Stage Commerce, Travel
Baidu Early Stage 1,000,000 500,000,000 ir.baidu.com/ 2000 China, Asia Search Engine for website Pacific, Worldwide Beenext Seed to Series A 100,000 5,000,000 www.beenext.com 2015 India, Southeast Marketplace, FinTech Asia, Japan, United States Beenos Partners Seed, Early 5,000,000 60,000,000 beenos.com/en/ 1999 India, Phillipines, B2B/Enterprise, (also known as Stage, Later Stage Indonesia, Manufacturing, Mobile, Beenos Plaza) Singapore, Japan Software
Bertelsmann Seed, Early Stage 1,000,000 10,000,000 www.baifund.com/en/ 2008 China, Southeast New Media, Internet and Asia Investments and Later Stage Asia Mobile Internet, Online (BAI) Education, New Technology, Outsourcing and Services
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Stage of Minimum Maximum Website Operational Target PEVC Name Sectors Investment (US$) (US$) since Geographies Cherubic Seed, Early Stage 300,000 3,000,000 www.cherubicvc.com 2010 United States, Consumer Web, Games, Ventures China, Southeast Video and Entertainment Asia Coent Venture Seed, Early 100,000 10,000,000 www.coent.sg/ 2014 Japan, Southeast Across all sectors Partners Stage, Later Stage Asia, Africa
Convergence Seed, Early 1,000,000 8,000,000 www.convergencevc.com 2014 Southeast Asia Advertising, Ventures Stage, Later Stage B2B/Enterprise, Consumer , Media, Mobile, Travel Cradle Fund Pre-Seed and 27,000 1,000,000 www.cradle.com.my 2003 Malaysia, B2B/Enterprise, Consumer Seed, Early Singapore , Design, Education, Logist Stage, Later Stage ics/Supply Chain, Net Infrastructure, Social Networking, Travel, Web Credence Seed, Early 2,400,000 16,000,000 www.credence-investment.com 2008 Asia Pacific Unavailable Stage, Later Stage
Crystal Horse Seed 16,000 480,000 ch-investments.com.sg/wp/ 2010 South East Asia Consumer Web Investments Crystal Stream Seed and Early 800,000 8,000,000 www.crunchbase.com/organization/crystal- 2012 China, Messaging, E-Commerce, Capital Stage stream#/entity Hongkong, Consumers Singapore, Indonesia CyberAgent Seed, Series A 500,000 10,700,000 www.cyberagentventures.com/en 2014 Asia, Indonesia Travel, Hospitality Ventures and Series B
IdeaRiverRun Seed, Early 300,000 700,000 www.ideariverrun.com/ 2014 Malaysia, South Consumer products, (IRR) Stage, Later Stage East Asia education, transportation, cultural DeNA Venture Seed and Series 100,000 10,000,000 dena.com/intl/services/strategic-investment- 1999 Globally Focus areas include A office/ marketplaces Digital Currency Early Stage Undisclosed 250,000 dcg.co/ Unknown Israel, India, Fintech, Marketplaces & Group Singapore, Japan Platforms, Music & Entertainment, Software as a Service (SaaS) Digital Garage Seed, Early Stage 100,000 10,000,000 www.garage.co.jp/en 1995 US, Singapore, Marketplaces & Platforms, Japan, India, Enterprise Solution, Video, Indonesia Travel, E-commerce
Digital Media Seed, Early Stage 600,000 3,200,000 2011 Emerging Consumer Internet Partners DMP www.digitalmedia.vc Markets
DSG Consumer Seed, Early 100,000 2,000,000 www.dsgcp.com 2013 Singapore, India, Consumer, Finance, Food Partners Stage, Formative South East Asia & Beverages, Internet of Stage Things DST Global Seed, Early 20,000,000 1,000,000,000 dstglobalsolutions.com 2005 Global Ecommerce, Finance, Stage, Later Stage Logistics/Supply Chain
East Ventures Seed, Early 100,000 4,000,000 east.vc 2010 Indonesia, Ecommerce, Gaming, Stage, Later Stage Singapore, Software, Web Japan, SouthEast Asia
eBay Seed, Early Stage 30,000,000 1,200,000,000 www.investing.com/equities/ebay-inc 1995 India, China, E-commerce, Israel, Korea, Marketplaces & platforms, Japan, US, Developer Tools, Fintech, Indonesia, Recognition Tech Singapore Electric Sheep Early Stage 500,000 2,000,000 www.funderbeam.com/investors/electric- Unknown Singapore Consumer Services / Capital sheep-capital Consulting / Marketing and Advertising
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Stage of Minimum Maximum Website Operational Target PEVC Name Sectors Investment (US$) (US$) since Geographies Elixir Capital Seed, Early Stage 100,000 10,000,000 www.elixircap.com/ 2016 US, Malaysia, Anything tech-related Indonesia Felicis Ventures Seed, Early 100,000 10,000,000 www.felicis.com/ 2006 United States, Mobile, Ecommerce, Stage, Later Stage Brazil, Canada, Consumer Enterprise, Estonia, Israel, Education, Health, Finland, and Consumer Internet with a Germany. focus on mobile, gaming, software-as-a-service, internet applications in education, security, machine learning, healthcare, energy conservation, personalized medicine, 3D imaging, bio- informatics, and connected devices Fenox Venture Seed, Series A, 100,000 6,400,000 fenoxvc.com 2011 California, IT, Health IT, Artificial Capital Series B Singapore, Intelligence, IoT, Robotics, Indonesia, Big Data, Virtual Reality, Japan, Korea, Augmented Reality, Middle East, FinTech and Next Bangladesh, Generation Technologies Vietnam, Thailand, Philippines Fidelity Growth Seed, Early 8,500,000 15,000,000 eightroads.com/en 1946 Asia-Pacific, Consumer, Ecommerce, Partners Stage, Later Stage Europe, the Logistics/Supply Middle East, and Chain, Real Estate South America Formation 8 Seed, Early 600,000 12,800,000 formation8.com 2011 Korea, China, B2B/Enterprise, Data & Stage, and Later Asia and Analytics, Ecommerce, Soft Stage Singapore ware Foxconn Early Stage 2,000,000 119,000,000 www.foxconn.com Unknown China, India, Design , Hardware, Taiwan, Logistics/Supply Singapore, Chain, Manufacturing, Hongkong, US Software Galaxy Ventures Seed and Early 100,000 500,000 www.galaxyventures.co.th 2012 Thailand, Entertainment, Gaming, Stage SoutheEast Asia Media, Software Platforms, E-Commerce, Payments, Data Analytics GAPVC Early Stage 100,000 1,000,000 www.gapvc.com/ Unknown Asia, US and Light Manufacturing, Europe Distribution, Telecommunications, Healthcare and Outsourcing. Garena Ventures Early Stage 100,000 10,000,000 corporate.garena.com/ 2013 Southeast Asia Ecommerce, Messaging, Mobile, Payments General Atlantic Seed, Early Stage 100,000 10,000,000 www.generalatlantic.com/ 1980 New York, Consumer, Finance, Healt Amsterdam, h/Medical, Internet of Beijing, Things, Retail, Software Greenwich, Hong Kong, London, Mexico City, Mumbai, Munich, Palo Alto, São Paulo and Singapore Get2Volume Seed, Early Stage 200,000 480,000 www.g2vaccelerator.com 2004 Singapore, Global Smart Grid, Semiconductors, Clean Energy
GGV Capital Seed, Early 2,000,000 65,000,000 www.ggvc.com 2000 China, United China, Mobile, Internet, E- Stage, Later stage States Commerce, Consumer Internet, Digital Media, SaaS, Enterprise, Internet of Things, Social, Marketing, Travel, Music, Gaming, Cloud, Security, Frontier Tech GIC - Government Seed, Later Stage Undisclosed 104,000,000 www.gic.com.sg/ 1981 Worldwide Energy Equipment & of Singapore Services, Oil, Gas & Investment Consumable Corporation FueChemicals, Construction Materials, Containers & Packaging, Metals & Mining, Paper & Forest Products, Industrials, Consumer Discretionary, Healthcare, Financials, IT, Real Estate, Telecommunication Services, Consumer Staples
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Stage of Minimum Maximum Website Operational Target PEVC Name Sectors Investment (US$) (US$) since Geographies Global Brain Early Stage 800,000 12,800,000 globalbrains.co.jp 2001 US, Japan and Ecommerce, Disruptive (KDDI) Asia Technologies, Game, Media, Kids/Education, Cloud, Advertising, IoT, FinTech, Others Global Mobile Early Stage Undisclosed Undisclosed en.gmgc.info/ 2012 Southeast Asia, Consumer, Gaming, Mobil Game Global e, Web Confederation (GMGC) Globis Capital Seed, Early 500,000 4,000,000 www.globiscapital.co.jp/en/ 1996 Japan, South Software, E-Commerce, Partners Stage, Later Stage Korea SaaS
GMO Global Seed, Early Stage Undisclosed 15,000,000 gmo-vp.com/gpf 2005 Asia, South East Payment companies, Payment Fund Asia fintech GMO Venture Seed, Early Undisclosed Undisclosed www.gmo-vp.com/en/ Asia, South East Advertising, Consumer, E- Partners Stage, Later Stage Asia commerce, Web
Gobi Partners / Seed, Series A 250,000 15,000,000 www.gobivc.com/ 2002 Malaysia, Advertising, Photography, Gobi MAVCAP Indonesia, Travel ASEAN Singapore SuperSeed Golden Gate Fund I did Seed 40,000 1,600,000 goldengate.vc 2012 Southeast Asia Digital Ventures ($50-600k); Fund II will do Series A
Goldman Sachs Seed, Early Stage 100,000,000 500,000,000 www.goldmansachs.com/ 1869 Asia, Canada, Computer Venture, Later Europe, United Security, Mobile, Software Stage Venture, States Private Equity, and Debt Financing Investments GREE Ventures Pre-A and Series 300,000 2,000,000 www.greeventures.com/en/ 2014 Indonesia, Mobile, Internet A Southeast Asia, Japan
Hatcher Early Stage Undisclosed 100,000,000 hatcher.com 2014 Africa, Asia, and Business Enablement, the Middle East. Financial Services, Interactive Media, and Marketplace Platforms Helion Venture Seed, Early 2,000,000 30,000,000,000 www.helionvc.com/ 2006 India Advertising, Media, Mobile Partners Stage, Later Stage, Private Equity Hera Capital Seed, Early 1,200,000 12,800,000 hera-capital.com 2009 South East Asia Fashion, Health/Medical, M Stage, Formative edia, Retail Stage, Later Stage
Hillhouse Capital Early Stage, Later 40,000,000 65,000,000 www.hillhousecap.com 2005 Asia, Globally Consumer, Internet, Management Stage, Private Media, Retail, Healthcare, Equity and Post Energy and Advanced Ipo Equity Manufacturing Investments
Horizons Seed, Early 1,500,000 300,000,000 horizonsventures.com/ 1999 Global Mobile, Apps, Search Ventures Stage, Later Stage and Private Equity Hubert Burda Later Stage 5,000,000 20,000,000 www.hubert-burda-media.com 1903 Southeast Asia, Consumer internet, B2C, Media Series B and up www.burdaprincipalinvestments.com 1998 Europe, Asia, Fashion, Digital United States Technology and Media Ideosource Seed and Early Undisclosed 22,000,000 www.ideosource.com 2011 Indonesia, Games, E-commerce, Stage Singapore Mobile
IDG Ventures Seed, Early 200,000 4,000,000 www.idgventures.com/ 2001 China, India, Media, Technology, Stage, Later Stage Vietname, USA, Telecommunications, and Korea, North Consumer America, Asia
iGlobe Early Stage 400,000 6,400,000 www.iglobepartners.com/ 1999 Asia, Singapore E-commerce
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Stage of Minimum Maximum Website Operational Target PEVC Name Sectors Investment (US$) (US$) since Geographies iMercury Capital Early Stage Undisclosed 500,000 www.mercurycapital.com.au/ 2010 Australian and Software as a Service New Zealand (SaaS), Real Estate, Fintech, Design IMJ Investment Seed, Series A 100,000 2,000,000 imj-ip.com/en/ 2013 Southeast E-commerce partners Asia,Japan
Incubate Fund Series B and up 1,000,000 10,000,000 en.incubatefund.com 1999 Malaysia, Gaming, Media, Social Singapore, Japan Enterprise
Incuvest Asia Early Stage 200,000 480,000 www.incuvestasia.com Unknown Singapore, E-commerce, general United States software, enterprise solution, lifestyle and gaming Indosat Early Stage 100,000 4,000,000 www.indonesia- 1967 Indonesia Infrastructure, Utilities & investments.com/business/indonesian- Transportation, companies/indosat-ooredoo/item200? Telecommunications Infocomm Seed 800,000 4,000,000 www.infocomminvestments.com 1996 Asia, Europe and Analytics, Big Data, Investments Pte America FinTech, Incubators Ltd. (IIPL)
Infoteria Seed Undisclosed Undisclosed www.infoteria.com/jp/en 1998 Japan, Indonesia Web Corporation Development, Software Innosight Half a million to 400,000 1,600,000 www.innosight.ventures 2008 Asia Pacific ICT Ventures 2m
Intel Capital VC 800,000 16,000,000 www.intelcapital.com 1991 Global E-commerce, General Software, Enterprise Solutions, Lifestyle and Gaming InVent Early Stage Undisclosed Undisclosed www.inventvc.com 2012 Thailand, Information Technology, Venture and Later Southeast Asia Telecommunications, Stage Venture Media, Digital Content Investments
JAFCO Asia Seed, Early Stage 2,400,000 6,400,000 www.jafcoasia.com/ 1990 Australia, India, E-Commerce, Mobile, Venture, and Israel, Games Later Stage Singapore, Taiwan JFDI Asia S$25k for a 5- 8,000 40,000 jfdi.asia 2012 Asia Pacific All Digital 20% stake
Jungle Ventures Fund I did Seed 40,000 1,600,000 www.jungle-ventures.com 2011 Southeast Asia New Media ($50-600k); Fund II will do Series A Kathrein Ventures Seed Undisclosed Undisclosed www.kathreinventures.com 2013 Southeast Asia, Software Latin America Kickstart Seed and Series 30,000 5,000,000 www.kickstart.ph 2012 Philippines Any Ventures A (since 2nd fund)
Kima Ventures Seed, Early Stage 100,000 8,000,000 www.kimaventures.com/ 2010 Worldwide, B2B/Enterprise, Design , E Europe & US ducation, Energy & Cleantech, Finance, Hardw are, Logistics/Supply Chain, Media, Social Networking, Software KK Fund Seed Stage 200,000 550,000 kkfund.co 2015 Southeast Asia, Online marketplace, HongKong, Fintech, Logistics, Media & Taiwan Entertainment Lilly Asia Early Stage and Undisclosed Undisclosed www.lillyasiaventures.com/en/ 2008 China, Asia transport, Ventures Later Stage telecommunication, technology, medicine and healthcare Majuven Early Stage, 500,000 2,000,000 majuven.com 2012 Singapore, B2B/Enterprise, Banking & Formative Stage, Thailand, China, Accounting, Biotech, Later Stage Indonesia, India, Computer Networking, USA Computer Security, Consumer, Ecommerce, Energy, Cleantech, Hardwa re, Health/Medical, Logistics/Supply Chain, Medical Devices, Mobile, Net Infrastructure, Productivity & CRM, Robotics, Sharing Economy, Smart Cities, Social Networking, Telecommunications, Transportation
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Stage of Minimum Maximum Website Operational Target PEVC Name Sectors Investment (US$) (US$) since Geographies MediaCorp / The Seed and Early 800,000 16,000,000 www5.mediacorp.sg/themediapreneur Unknown Singapore Advertising, Media, Mediapreneur Stage Software, Telecommunications Monk's Hill Series A (US$1m 1,000,000 5,000,000 www.monkshill.com 2014 Southeast Asia Technology Ventures to 5m for 15-30%) New Asia Early Stage 800,000 12,800,000 www.newasiainvestments.com 2012 Asia Water and Energy Investments
Nova Founders Seed, Early Stage 100,000 25,000,000 www.novafounders.com/ 2012 Asia FinTech Capital Venture, Later Stage NSI Ventures / Series A and B 2,000,000 10,000,000 www.nsi.vc 2014 South East Asia Marketplace, Fintech, Northstar Group Hardware, E-Commerce, SaaS Ookbee Early Stage VC Undisclosed Undisclosed ookbee.com 2010 Thailand, Japan, Mobile Solution and Vietnam Application Development OPT SEA Seed, Early 500,000 2,000,000 www.optsea.com/ 2014 Thailand, Japan, Consumer, Internet of Stage, Later Stage Indonesia, Things, Marketing, Media, Singapore Mobile Telecommunication s
Pinehurst Micro VC, Seed, 450,000 1,100,000 www.pinehurstadvisors.com 2012 Taiwan, China, Ecommerce, Education, Advisors Early Stage Singapore Media, Mobile, Social Networking, Software Plug and Play Seed and Early 25,000 500,000 singapore.plugandplaytechcenter.com 2006 South East Asia Anything tech-related Stage PT Insights VC Undisclosed Undisclosed i-invest.co.id/v3/ 2003 Jakarta, Unavailable Investments Indonesia Raffles Venture Later Stage 800,000 4,000,000 www.rafflesventurepartners.com Singapore Search&Discovery, Partners Recognition Tech, Gaming
Rakuten Ventures Seed, Early 800,000 12,800,000 global.rakuten.com 2013 Globally. Curently e-commerce, eBooks & Stage, Later Stage - Asia, Europe, eReading, travel, banking, the Americas, securities, credit card, e- and Oceania. money, portal and media, online marketing and professional sports Rebright Partners Early Stage, 200,000 400,000 www.rebrightpartners.com 2008 Southeast Asia Internet, Software, Mobile Series A Red Dot Ventures Seed Stage 200,000 480,000 www.reddotventures.com 2012 Asia, US Data & Analytics, Education, Energ y & Cleantech SBI Ven Capital PE 800,000 12,800,000 www.sbivencapital.com.sg 2007 Asia Financial Services, Fintech
Segnel Ventures Pre-Seed and 10,000 500,000 www.segnel.com 2015 South East Asia, Marketplace, Mobile based Seed South Asia applications, E- commerce, Media, Ed-tech
Sequoia Capital VC 1,000,000 100,000,000 www.sequoiacap.com 1972 India, Energy, Enterprise, Southeast Asia Financial, Health Care, Internet, Mobile
Siemer Ventures Seed and Early 500,000 2,000,000 www.siemervc.com US, Philippines, Music & Entertainment, Stage, VC Singapore, Enterprise Solution, HongKong, Japan Fintech, Adtech, E- commerce Simile Ventures Hatch stage (co- 50,000 4,000,000 simileventure.com 2012 Europe, Consumer Internet, Digital founding of the Southeast Asia, Media, E-Commerce, business) to Brazil, Turkey, News, Marketplaces Series A and Russia.
Sinar Mas Digital Seed to Series A 100,000 6,000,000 www.sinarmas.com 2014 Indonesia, Agriculture, E- Ventures (SMDV) Japan, Thailand commerce, Finance, Gami ng, Real Estate, Retail, Software, Te lecommunications Singapore Angel VC 150,000 700,000 www.sgan.sg 2012 Singapore, India Education, Hardware, Soci Network al Networking SingTel Innov8 From Seed to 80,000 16,000,000 innov8.singtel.com 2001 Asia and US Ad tech, general internet, Series B hardware, analytics, big data, general softwarem social networking and communication, security, lifestyle, gaming, fintech, enterprise solution Sovereign’s Seed and Early 200,000 2,500,000 sovereignscapital.com 2012 United States, Healthcare, SaaS, other IT, Capital Stage Indonesia, other consumer Southeast Asia products/services SparkLabs Global estimating Seed 100,000 3,000,000 www.sparklabsglobal.com 2013 California Hardware + Software, Ventures and Series A Social Media, SaaS P a g e | 27
Stage of Minimum Maximum Website Operational Target PEVC Name Sectors Investment (US$) (US$) since Geographies SPH Media fund Early Stage 800,000 16,000,000 www.sphmediafund.com 2014 Asia All Media Venture and Later Stage SPRING SEEDS up to S$1m 60,000 800,000 www.spring.gov.sg/Entrepreneurship/ 2010 Singapore All sectors TA Venture Seed Stage to 100,000 500,000 taventures.vc/ 2010 USA, Europe, Deep Tech, Online Holding Limited Series A Global Marketplaces, SaaS Temasek Seed 40,000,000 250,000,000 www.temasek.com.sg 1974 Singapore, Asia, Telecommunications, North America, Media & Technology, Australia & New Financial Services, Zealand, Europe, Transportation, Africa, Central Industrials, Life Sciences, Asia & the Middle Agriculture, Consumer, East, Latin Real Estate, Energy, America Resources Tembusu PE, Early Stage 4,000,000 10,000,000 www.tembusupartners.com/ 2006 Asia, South East Education, Healthcare, Partners Asia Technology, Oil & Gas, Engineering Services, Resources and Manufacturing Tencent Seed, Early 8,300,000 3,000,000,000 www.tencent.com/en-us/index.html 1998 All/Any All/Any Stage, Formative Stage, Later Stage
Tiger Global / Hedge Fund that 2,000,000 75,000,000 tigerglobal.com 2001 China, Southeast E-Commerce, Curated Tiger Asia Fund does Early Stage Asia, Latin Web, Online Shopping Venture, Later America and Stage Venture, Eastern Europe. and Private Equity
Tigris Capital Seed, Early 50,000 300,000 tigriscapital.com.sg 2003 South East Asia B2B/Enterprise, Consumer Stage, Formative , E-commerce Stage TNF Ventures Seed stage 100,000 600,000 www.tnfventures.com 2012 Asia Consumer Technology, Mobile, Travel, E- Commerce, Transcosmos Seed, Early Stage 1,860,000 10,000,000 transcosmos.com 1998 Japan, B2B/Enterprise, Consumer Indonesia, , E-commerce Singapore, Philippines, Thailand, Vietnam
Unitus Impact Early Stage 500,000 2,000,000 www.unitusimpact.com India, Indonesia, Agricultural supply chain Vietnam, China Velos Partners Venture Capital 1,000,000 10,000,000 www.velospartners.com 2013 Southeast Asia Consumer Technology, that does Early Mobile, Travel, E- Stage Venture Commerce, Retail and Private Equity Innovation, Media, Investments Entertainment, Fintech
Venturetec Seed 25,000 50,000 www.venturetecaccelerator.com 2013 Australia, Hong Enterprise Accelerator Kong, Singapore Venturra Capital Seed, Series A 1,200,000 12,000,000 venturra.com 2015 Indonesia, E-commerce, and Series B Malaysia, Marketplaces & Platforms, Southeast Asia Lifestyle, Search & Discovery, Enterprise Solution Verlinvest Seed, Early Stage 26,000,000 250,000,000 verlinvest.com 1995 United E-commerce, Food & States, China, Beverages, Health/Medical, South East Asia Marketing, Media, Mobile, Retail, Software Vertex Ventures Seed to Exit, 1,000,000 10,000,000 vertexmgt.com 1988 Singapore Information Technology Usually $2m+ and Healthcare
Visionnaire Seed, Early Stage 100,000 20,000,000 visionnaire.vc/ 2013 United States, E-Commerce, Ventures Venture, and Singapore, Consumers, Mobile, Later Stage Japan, Worldwide Internet of Things, Big Data, Digital Media, Advertising
Vy Capital Seed, Early 120,000 60,000,000 www.vycapital.com Unknown Global Web Browsers, Enterprise Stage, Later Stage Software, Online Portals
Walden Seed, Early Stage 800,000 6,400,000 www.waldenintl.com 1990 Global, Focus on E-Commerce, International Asia Consumers, Mobile, Software Development, Telco, Travel
Warburg Pincus PE, Seed, Early 50,000,000 284,000,000 www.warburgpincus.com 1966 Asia, China, Software, Biotechnology, E- Stage, Later Stage India, Japan, Commerce Vietnam Wavemaker Seed to Series A 120,000 1,500,000 wavemaker.vc 2012 Singapore, Hong Mobile, Internet and Partners Kong Software
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2.3. Compilation of Social Impact Investor Platforms
As for social-impact investing, although they were late starters, HNWIs in Asia excluding Japan (AxJ) were more active than similarly wealthy individuals in other parts of the world, allocating 37.3 percent of their portfolios to social-impact investments, in comparison to the 31.6 percent allocated by HNWIs in the rest of the world.
The highest portfolio allocations for social-impact investment were made by wealthy individuals in Indonesia (45.8 percent), Malaysia (43.6 percent) and China (40.8 percent), according to a 2015 CapGemini Asia-Pacific Wealth Report.
Impact investors distinguish themselves from traditional investors not from its investment vehicles or products they employ, nor the markets or the sectors they concentrate, but rather through the motivations behind their investment behaviour and the factors they consider when making their investment decision. They are flexible in capital provision to suit the needs of the investee. An impact investor may invest in equity in one entity, while providing credit or guarantees to another. They are willing to provide soft funding to entities that lack asset sizes or revenue streams that traditional investors may shun.
Social Impact Maximum Operational Minimum (US$) Website Target Geographies Sectors Organisation (US$) Since ARUN 30,000 70,000 www.arunllc.jp/en/ 2009 Cambodia, Southeast Small farmers, Asia Employment for Women and Students, Marginalized communities
Avantage Ventures 500,000 1,500,000 csip.vn/en/content/avantage-ventures 2008 China, Southeast Asia Healthcare, Rural Development, Education, Clean Energy, Disenfranchised Community EcoAsia Southeast 1,500,000 15,000,000 www.ecoasiafund.com/ 2011 Southeast Asia Agricultural Value Asia Agriculture Fund Chain, Food Security, Climate Change issues
Gandeng Tangan 3.85 3,850 www.gandengtangan.org/ 2015 Indonesia All social enterprises
IIX Growth Fund 250,000 5,000,000 iixglobal.com/iix-growth-fund/ 2009 Bangladesh, Indonesia, Climate Change, Philippines Women Empowerment in Clean Energy, Climate-Smart Agriculture, Water, Health, Sanitation, Green Technology Insitor Management 300,000 1,200,000 www.insitormanagement.com/ 2001 Mekong Region and Poverty Alleviation, Indian subcontinent Access to Energy across India, Vietnam, Laos, and Myanmar KIVA 10,000 50,000 www.kiva.org 2005 Worldwide All social enterprises
Sustainable Finance 15,000,000 (for Undisclosed http://www.sfc-asia.com/funding 2016 Asia Circular Economy, Collective (SFC) Asia Circular Economy Sustainable Energy and and Sustainable Social Impact : Energy Proposals) all sectors except for nuclear power, the 5,000,000 (for weapons industry, coal Social Impact mining, coal-fired Proposals) power plants, and the tobacco industry
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2.4. Compilation of Equity Crowdfunding Platforms
There are several types of crowdfunding platforms, like rewards-based and donations-based platforms. Here we focus on equity crowdfunding which target the Southeast Asian market, and its lending-based variations which include securities and unsecured loans for MSMEs and solo-entrepreneurs.
Equity Minimum Maximum Operational Category Website Target Geographies Sectors Known investments Crowdfunder (US$) (US$) Since Akseleran Invoice financing and 7.50 Undisclosed www.akseleran.com/ 2016 Indonesia Consumer, employee unsecured Entertainment, loans (partnered Gaming, Hardware, companies only) Music, Social Networking Alix Global (JV with Equity Crowdfunding, SME 110 110,000 www.alixglobal.com 2015 Singapore, Indonesia, Malaysia Any FundedByMe) unsecured loans and personal secured loans
Amartha Micro-lending 115 1,540 amartha.com/ Unavailable Thailand Any Asiola Equity Crowdfunding Undisclosed Undisclosed www.asiola.co.th/en Unavailable Thailand Any
Ata Plus Equity Crowdfunding, SME 75,000 300,000 www.ata-plus.com 2015 Singapore, Indonesia, Malaysia Any unsecured loans and personal secured loans
Crowdo Equity Crowdfunding, SME 150 150,000 www.crowdo.com 2015 Singapore, Indonesia, Malaysia Any unsecured loans and personal secured loans
Dreamaker Equity Equity Crowdfunding 550,000 1,100,000 www.dreamakerequity.com/ 2015 Thailand Any
Eureeca Equity Crowdfunding, SME 250,000 1,000,000 eureeca.com 2013 GCC, UK, Malaysia, Southeast Any unsecured loans Asia
First Circle SME unsecured loans 5,000 12,000 firstcircle.ph 2015 Philippines Any
FundedHere Equity Crowdfunding, SME 3,500 3,500,000 www.fundedhere.com 2015 Indonesia and Singapore Any unsecured loans and Short-term bonds Funding Societies SME unsecured loans 30,000 100,000 fundingsocieties.com/ 2015 Singapore, Indonesia, Malaysia Any fundingsocieties.com.my/ Investree SME unsecured loans and 450 75,000 www.investree.id/ 2015 Indonesia Consumer, personal loans Entertainment, Gaming, Hardware, Music, Social Networking Kapital Boost SME unsecured loans 800 30,000 www.kapitalboost.com 2015 Indonesia, Malaysia, Singapore Asset-backed MSMEs Koinworks SME unsecured loans 7.70 Undisclosed www.koinworks.com/ 2015 Indonesia and Singapore Any
Mekar SME unsecured loans 75 2,000 mekar.id/en 2013 Indonesia Consumer, Entertainment, Gaming, Hardware, Music, Social Networking Loanvi Unsecured SME and 220 4,500 huydong.com/?locale=en 2014 Vietnam Any Personal Loans Modalku SME unsecured loans 10,000 40,000 modalku.co.id 2016 Indonesia and Singapore Any
PitchIN Equity Crowdfunding, SME 1,100 1,100,000 equity.pitchin.my 2015 Singapore, Indonesia, Malaysia Any unsecured loans and personal secured loans
Propellar Crowd+ Equity Crowdfunding, SME 22,000 220,000 www.crowdplus.asia 2015 Southeast Asia, Malaysia, Any unsecured loans and Vietnam, Hong Kong, Guangzhou personal secured loans Phoenixict Equity Crowdfunding 1,500 15,000 www.phoenixict.biz 2013 Thailand and Singapore Any
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Before you start approaching any prospective investor, here are some advice from investors themselves: 1. Review portfolio companies of investors before reaching out to them • Review extent of fit to the Focus, Expertise and Competencies of the funder - Relevance of seeking funding from a group of investors which suits the expertise and experience of the prospective funder. • If you reach out to an investor with a competing portfolio company, your proposal data will be shared with them. So be selective if you do not wish to. • Conversely, they may make introductions to potential clients, strategic partners, future acquirers, etc. even if they do not invest in you. Maintaining good relationships is always good for business. • Make sure you fit their industry focus (e.g. electronics, energy, etc.) or business type focus (e.g. B2B / B2C) 2. Review investment criteria of Angels / VCs before reaching out to them • Review extent of Fit to the Expected Returns on Investment and Exit Strategy - Congruence of strategic goals and investment horizon between the entrepreneur and the funder. 3. Check the size of capital they invest (US$250 k? US$1 mil? US$3 mil+), the company stage (Startup/Early Stage/Growth Stage, etc.), or required financial metrics requirement (e.g. minimum US$1 mil in Revenue / EBITDA)
Top PEVC Investor Questions
These are some of the most relevant questions asked by investors to their prospects over and over again, broken up to two focal points; the company and pertaining to raising capital:
Company Questions by PEVC : • What is the history of the company? When did you start operating? • Why did you create this company? • How did you meet/find your team members? Why are you/team the right people to execute this business? • What is your target market size? What is your projected market penetration in year three? • What is your traction to date? MVP3 done? User/Revenue growth? Key milestones met? • Why will you fail? What are your biggest challenges to succeed? • Why will you succeed? What are your unique/unfair/sustainable competitive advantages? • Are you a starter or finisher? • Show me how you achieve the magic ratio: Life-time Value / Cost to Acquire and Maintain a Customer, i.e. LTV / CAC > 1
3 In product development, the minimum viable product (MVP) is a product with just enough features to gather validated learning about the product and its development. MVP also serves as a workable proof of concept. P a g e | 31
Capital Raising Questions by PEVCs : • What is the capital raising history of the company? How much and on what terms? • When did you start raising this round? What investors have hard-committed versus soft-committed? • Have you invested any of your own money? • Are your advisors or board members investing? • What is your valuation? Terms? • How much cash is in the bank? What is your monthly burn rate (expenses not covered by operating cash flow from revenues)? • What is your runway (how many months do you have before you run out of cash?) given cash in the bank and after this next round? When will it get you to profitability? • What are your use of proceeds (how are you planning to spend the capital?) and expected results/milestones? How will it accelerate the growth and sales of the company and what does the ROI looks like, based on past performance numbers? • Who will be funding the next round, e.g. Series A, B (which PEVC firm or partners) and what are the hurdles that need to be cleared to get next funding? Example: in the areas of R&D, Tech, Sales, Revenue, or sequential quarterly growth. P a g e | 32
3. ACCESSING ALTERNATIVE SOURCES OF FINANCE
3.1. Financing Options
There are generally three stages to a company's development where they require funding:
Table 3. Funding Requirement at Different Stages of Company Development
Start-up Growth Expansion Completing or has A profitable business with Track record of profitability. completed product stable customer base. Successful in the local development and initial market. Businesses in this marketing. Requires more capital to stage often see rapid growth support growing sales. The in both revenue and cash flow Has little revenue but is funds are typically used to as the blueprint has now been building customer base. increase production established capacity, strengthen Not yet profitable. Requires branding and systemise Exploring overseas funding to sustain critical business opportunities through joint development or gain traction processes. ventures, mergers and with customers. acquisitions, and strategic alliances with overseas partners.
Generally, most entrepreneurs rely on a combination of debt and equity financing to grow their business. Debt financing refers to interest-bearing loans that have to be repaid over a period of time. Equity financing refers to share capital from investors who are looking at capital gains and possibly dividend returns. There are also hybrid products in the form of convertible loans that allow the holder to convert to equity at a later time.
a) Sources of Finance at Different Stages of Business
These are the traditional sources of finance for companies at the different stages:
Table 4. Traditional Sources of Funding at Different Stages of Company Development
Traditional Sources of Finance — Commercial Banks and Finance Companies Start-up Growth Expansion Has limited access to Financial institutions offer Financial institutions offer commercial banks. Finance many products to help many companies are unlikely to growing avenues to help established provide funding as they are companies in these areas : companies internationalise required by law to provide Purchases: Letters of their operations. For example, loans on a secured basis. credit Project financing facilities: P a g e | 33
and trust receipts These are term loans Financial institutions usually Sales: Bills discounting structured over the tenure provide unsecured facilities and factoring of the project. up to a certain amount. The Fixed assets: Loans Syndicated loans: These company is required to are structured loans provide The type of facility, quantum provided by participating six months of bank and condition of loans vary financial institutions to co- statements with each SME’s balance share the risk. to show the frequency of sheet business activities. position and credit risk Restrictions on finance rating. companies’ activities may For companies with prevent them from providing confirmed orders, it is Finance companies provide structured products and possible for financial such facilities on a secured syndicated loans. institutions to offer letters of basis. credit and trust receipt facilities to enable them to purchase raw materials to complete the sale.
At more advanced traditional levels of funding, we list conventional ways of subsequent funding available to businesses. These are usually used by bigger and more savvy businesses and corporations who are familiar with the different financial instruments available on public trading platforms. Entrepreneurs are advised to seek a capital market expert to advise them accordingly, and be made aware of the consequences (e.g. of control and dilution of share-holding) and implications (e.g. of public access to financial information/records) of issuing such forms of fund-raising.
Table 5. Advanced Traditional Sources of Funding at Different Stages of Company Development
Advanced Traditional Sources of Finance — Stock Exchange and Trading Platforms Start-up Growth Expansion Over-the-Counter (OTC) Initial Public Offering (IPO) Initial Public Offering (IPO) Capital Companies can apply for Unlisted companies can apply Singapore Exchange has listing in ASEAN or for listing on the stock launched Bond Pro, the first elsewhere as long as they exchanges in ASEAN or Over-The-Counter (OTC) satisfy the listing elsewhere. trading venue dedicated to requirements. Asian bonds. Phillip Bonds and Commercial Securities Pte Ltd had For example, although Papers previously launched the first companies do not need to More established companies OTC trading platform in have a track record of can issue bonds and Singapore, so SMEs can profitability, they have to commercial papers to raise now raise up to S$5 million achieve a minimum profit monies. without issuing a after tax of S$2 million to get prospectus. an underwriter to sponsor a Share Placement and Rights SESDAQ listing in Issue Singapore. Companies can raise funds either through share placement exercises to new shareholders or rights issue exercises to existing shareholders.
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In this handbook, however, we focus on the alternative sources of funding that are available to MSMEs at the different stages of the companies' development. We define the different rounds of funding according to investment terminology (like seed, Series A, etc.) and relate to entrepreneurs of what investors normally think and do at the different stages of funding rounds.
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Table 6: Alternative Sources of Funding at Different Stages of Company Development
Alternative Sources — Angel and Social Impact Investors, VCs and Equity Crowdfunding Start-up Growth Expansion Mostly angel investors. Corporate or private Companies can enter joint These are typically investors keen to provide ventures with listed corporate successful businessmen new investments and investors to co-share the risks with an appetite for start-up usually demand an equity and rewards of overseas companies with higher risk. stake in the company. It ventures. Or they can choose provides earlier stage to grow inorganically by The funding stage is usually investors an upside to their acquiring other similar or called seed or pre-Series A initial investment. They can symbiotic enterprises to funding. choose to hold or invest quickly gain market share in more, or sell off their current unfamiliar markets. equity to new investors. The funding stage generally The funding stage is usually starts from Series B and called Series A funding. progresses to Series C and so on until exit — get merged, sale or IPO.
Choosing the right financing option is critical to a business. Entrepreneurs need to plan carefully, weigh the pros and cons of the various options, and choose those that are most suited to their stage of business cycle.
As funds provided by financial institutions are integral to the overall funding structure of an SME, it is important to understand the language of financial institutions. The next section elaborates more on the common evaluation criteria that financial institutions generally use for approving loans or equity investments.
b) Criteria to Assess Fundability of MSMEs
These are some of the criteria that alternative funders may assess when funding MSMEs :
i. Scalability / Technology Innovation Innovation of any new product with the right intent clarifies a strategic directional mandate on how a company is going to finish first in the race using a steady performance engine and articulated by organisational leaders. The growth factor of a company is driven by innovation and its scalability: o Innovation — strength of inventiveness, uniqueness of idea, and any other strong element of a product or process which makes replication difficult for competitors. o Scalability — the ability to expand quickly locally, regionally and internationally from the original setup or platform.
ii. Competitive Advantage P a g e | 36
Identification of competing solutions and products and how and why your technological idea or product has the potential to better address the problem, or better yet, address problems which competitors cannot. The ability to show that you are 10x better not just better. • Current Competitive Advantages • Sustainable Competitive Advantages • Patents • Key Relationships / Partnerships • Barriers to Entry for New Players • Money, Time, Expertise, Relationships • Competitor’s Competitive Advantages / Weaknesses iii. Strategic Business and Market Opportunities Identify target market and target market segments that have not been addressed or inadequately addressed. Show how you fit into the Market Landscape. Your biggest competitor is the status quo (what exists and is already accepted), so why will customers switch to you? iv. Revenue Model • How do you make money? Key revenue streams? • Pricing model? Flat fee or percentage-based? Why that rate? • Recurring revenue frequency? • Is there a big variance between Gross vs. Net Revenue reporting? • High Volume vs. Low Volume Business – i.e. do you have foreseeable peak and low selling seasons; what is the reason; and what is the variance between peak and low season in percentage terms? • Example showing basic math: o 100 Clients x A Units x B Fee = $C Revenue o Easy to apply multiples: 100x, 1000x clients • Cash collections: Immediately? 30-90 Days? • Expected conversion rate to get a paid client • Expected ARPU (Average Revenue Per User) • Life-time Value of Customer (LTV)
v. Expense Model • Key Expenses; Time-Effort Needed To Generate Revenue? • Channels: How to reach (market to) customers? • Strategy: How to convert, acquire or close clients? • Unique Strategic Relationships / Partnerships? • Potential for leverage or scalability to grow fast economically? • How long is sales cycle to get a client? • Average Cost to Acquire a Customer (CAC)? • Cost to Maintain a Customer & Build Recurring Sales? • Monthly burn rate, now vs. after funding? VC Favourite: Show your LTV / CAC multiple (higher the better) and explain how you plan to increase LTV and decrease CAC overtime. P a g e | 37
Every great company is a machine where you put money in on one side (expenses) and more money comes out the other side (revenues), to become profitable, scalable, and sustainable.
vi. Growth and Diversification Potential Include commercialisation plans on the business and the expansion of product lines from original product in the different target markets. vii. Quality and Credibility of Entrepreneurship and Management Team Relevant technical as well as business experience and qualifications must be included for the key team members (including project members to be hired) who will work on your project. If you have an advisory board or advisors with strong credentials and/or are known to the investment community, you should also list them. viii. Business Governance Structure Business governance structures and principles identify the distribution of rights and responsibilities among different participants in the organisation (such as the board of directors, managers, shareholders, creditors, auditors and other stakeholders) and includes the rules and procedures for making decisions in business affairs. ix. Proposed Uses of Loan or Equity Fund Proceeds Allocation of required spending from the specific objectives of fund-raising, and their projected outcomes.
3.2. The Business Plan
Entrepreneurs are often wild-eyed optimists, an often-necessary attitude to get their ventures off the ground. They may overstate the uniqueness of their product, project an over-optimistic revenue calculation and underestimate the threat of competitors, however, the real world could be quite different.
The truth is that no new business succeeds without a detailed and thorough business plan that recognizes where you are today, where you want to be tomorrow, what problems might arise, and how you are going to resolve them. The value of a business plan is that you are forced to think about your potential business critically, challenge your assumptions, and research when you’re not sure of your facts. A complete plan identifies and quantifies the capital that is likely to be required to reach break-even and beyond. It is absolutely essential when soliciting investors.
While planning is often tedious and time consuming, executing a plan means several things:
You will get a better understanding of the target market and the competition you face You may avoid costly disastrous mistakes in the future You will have a realistic view of the capital needed to start your business and keep it alive until it can stand on its own P a g e | 38
You have checkpoints and timelines to re-evaluate your original plan and determine what needs to change in order for you to meet your objectives without starting all over
Furthermore, bankers and potential investors generally evaluate entrepreneurs and the potential of their ability to deliver success on the quality and completeness of their business plan. A point to note is that they can tell, right away, if your plan is realistic and stands a decent chance to succeed.
3.2.1. Key Elements of a Business Plan
A good business plan has ten key components, all of which are necessary if you want your business plan to be a success.
1. Executive Summary. The Executive Summary provides a succinct synopsis of the business plan, and highlights the key points raised within. The Executive Summary must communicate to the prospective investor the size and scope of the market opportunity, the venture’s business and profitability model, and how the resources/skills/strategic positioning of the Company’s management team make it uniquely qualified to execute the plan. The Executive Summary must be compelling, easy-to-read, and no longer than 2-4 pages.
2. Company Analysis. This section provides a strategic overview of the company and describes how the company is organized, what products and services it offers/will offer, and goes into further detail on the company’s unique solutions in serving its target markets.
3. Industry Analysis. This section evaluates the playing field in which the company will be competing, and includes well-structured answers to key market research questions such as the following: What are the sizes of the target market segments? What are the trends for the industry as a whole? With what other industries do your services compete?
4. Analysis of Customers. The Customer Analysis section assesses the customer segment(s) that the company serves. In this section, the company must convey the needs of its target customers. It must then show how its products and services satisfy these needs to an extent that the customer will pay for them. If you have done research on this, provide an interpretation of the data to support your conclusion.
5. Analysis of Competition. This section defines the competitive landscape of your business. It identifies who the direct and indirect competitors are, assesses their strengths and weaknesses and delineates your company’s competitive advantages.
The first five sections of a business plan are critical because in most cases, investors will not read the full plan. As such, capturing the investor’s interest P a g e | 39 early is critical. In addition to providing background on the full business opportunity, these sections provide the market research to back up the business’ potential, another critical factor in securing the investment.
The remaining five components of the plan focus mainly on strategy, primarily the marketing, operational, financial and management strategies that that firm will employ.
6. Marketing Plan. The marketing plan details your strategy for penetrating the target markets. Key components include the following: A description of the company’s desired strategic positioning Detailed descriptions of the company’s product and service offerings and potential product extensions Descriptions of the company’s desired image and branding strategy Descriptions of the company’s promotional strategies An overview of the company’s pricing strategies A description of current and potential strategic marketing partnerships/ alliances
7. Operations and Development Plans. These detail the internal strategies for building the venture from concept to reality, and include answers to the following questions: What functions will be required to run the business? What milestones must be reached at different stages of the venture? How will quality be controlled and outcome be achieved?
8. Management Team. The Management Team section demonstrates that the company has the required talent and capabilities to be successful. The business plan must answer questions including: Who are the key management personnel and what are their backgrounds? What management additions will be required to make the business a success? Who are the other investors and/or shareholders, if any? Who comprises the Board of Directors and/or Board of Advisors? Who are the professional advisors (e.g. legal, accounting firm)?
9. Financial Model and Projections. This Financial Plan involves the development of the company’s revenue and profitability model. It includes detailed explanations of the key assumptions used in building the model, sensitivity analysis on key revenue and cost variables, and description of comparable valuations for existing companies with similar business models.
In addition, the financial plan assesses the amount of capital the firm needs, the proposed use of these funds, and the expected future earnings. It includes Projected Income Statements, Balance Sheets and Cash Flow Statements, broken out quarterly for the first two years, and annually for years 3-5. Importantly, all of the assumptions and projections in the financial plan must flow from and be supported by the descriptions and explanations offered in the other sections of the plan. The Financial Plan is where the entrepreneur P a g e | 40
communicates how he/she plans to “monetize and profit” the overall vision for the venture.
10. Appendix. The Appendix is used to support the rest of the business plan. Every business plan should have a full set of relevant documentation which includes technical drawings, research data, partnership and/or customer letters, expanded competitor reviews and/or customer lists.
Expertly and comprehensively discussing these components in their business plan helps entrepreneurs to better understand their business opportunity and assists them in convincing investors that the opportunity may be right for them too.
3.2.2. Sample Business Plans
The real value of creating a business plan is not in having the finished product in hand; rather, the value lies in the process of researching and thinking about your business in a systematic way. The act of planning helps you to think things through thoroughly, study and research if you are not sure of the facts, and look at your ideas critically. It takes time now, but avoids costly, perhaps disastrous, mistakes later.
The business plan consists of a narrative and several financial worksheets. The narrative template is the body of the business plan. It contains a series of inter-related set of questions divided into several sections. We present in this section, a usable template of a business plan for MSMEs to start with. Work through the sections in any order that you like, except for the Executive Summary, which should be done last. Skip any questions that do not apply to your type of business. P a g e | 41
Table of Contents
I. Executive Summary...... 2
II. General Company Description ...... 3
III. Products and Services ...... 4
IV. Marketing Plan ...... 6
V. Operational Plan ...... 15
VI. Management and Organization ...... 20
VII. Startup Expenses and Capitalization ...... 23
VIII. Financial Plan ...... 24
IX. Appendices ...... 27
X. Refining the Plan...... 28
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I. Executive Summary
Write this section last.
We suggest that you keep it to one page.
Include everything that you would cover in a five‐minute interview.
Explain the fundamentals of the proposed business: What will your product be? Who will your customers be? Who are the owners? What do you think the future holds for your business and your industry?
Make it enthusiastic, professional, complete, and concise.
Always have a second and/or third pair of eyes, other than the author(s) of the business plan, to review and improve the plan.
If applying for a loan, state clearly how much you want, precisely how you are going to use it, and how the money will make your business more profitable, thereby ensuring repayment.
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II. General Company Description
What business will you be in? What will you do?
Mission Statement: Many companies have a brief mission statement, usually in 30 words or fewer, explaining their reason for being and their guiding principles. If you want to draft a mission statement, this is a good place to put it in the plan, followed by:
Company Goals and Objectives: Goals are destinations—where you want your business to be. Objectives are progress markers along the way to goal achievement. For example, a goal might be to have a healthy, successful company that is a leader in customer service and that has a loyal customer following. Objectives might be annual sales targets and some specific measures of customer satisfaction.
Business Philosophy: What is important to you in business?
To whom will you market your products? (State it briefly here—you will do a more thorough explanation in the Marketing Plan section).
Describe your industry. Is it a growth industry? What changes do you foresee in the industry, short term and long term? How will your company be poised to take advantage of them?
Describe your most important company strengths and core competencies. What factors will make the company succeed? What do you think your major competitive strengths will be? What background experience, skills, and strengths do you personally bring to this new venture?
Legal form of ownership: Sole proprietor, Partnership, Corporation, Limited liability corporation (LLC), Private Limited? Why have you selected this form?
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III. Products and Services
Describe in depth your products or services (technical specifications, drawings, photos, sales brochures, and other bulky items belong in Appendices).
What existing problem or shortage will your products and services resolve?
What factors will give you competitive advantages or disadvantages? Examples include level of quality or unique or proprietary features.
What are the pricing, fee, or leasing structures of your products or services? How does it compare with the current market practices, if any?
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IV. Marketing Plan
Market research - Why?
No matter how good your product and your service, the venture cannot succeed without effective marketing. And this begins with careful, systematic research. It is very dangerous to assume that you already know about your intended market. You need to do market research to make sure you’re on track. Use the business planning process as your opportunity to uncover data and to question your marketing efforts. Your time will be well spent.
Market research - How?
There are two kinds of market research: primary and secondary.
Secondary research means using published information such as industry profiles, trade journals, newspapers, magazines, census data, and demographic profiles. This type of information is available in public libraries, industry associations, chambers of commerce, from vendors who sell to your industry, and from government agencies.
Start with your local library. Most librarians are pleased to guide you through their business data collection. You will be amazed at what is there. There are more online sources than you could possibly use. Your chamber of commerce has good information on the local area. Trade associations and trade publications often have excellent industry‐specific data.
Primary research means gathering your own data. For example, you could do your own traffic count at a proposed location, use the yellow pages to identify competitors, and do surveys or focus‐group interviews to learn about consumer preferences.
Professional market research can be very costly, but there are many books that show small business owners how to do effective research themselves.
In your marketing plan, be as specific as possible; give statistics, numbers, and sources. The marketing plan will be the basis, later on, of the all‐important sales projection.
Economics
Facts about your industry:
• What is the total size of your market? • What percent share of the market will you have? (This is important only if you think you will be a major factor in the market.) • Current demand in target market. Growth potential and opportunity for a business of your size. • Trends in target market—growth trends, trends in consumer preferences, and trends in product development.
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Features and Benefits
List all of your major products or services.
For each product or service:
• Describe the most important features. What is special about it?
• Describe the benefits. That is, what will the product do for the customer?
Note the difference between features and benefits, and think about them. For example, a house that gives shelter and lasts a long time is made with certain materials and to a certain design; those are its features. Its benefits include pride of ownership, financial security, providing for the family, and inclusion in a neighbourhood. You build features into your product so that you can sell the benefits.
What after‐sale services will you give? Some examples are delivery, warranty, service contracts, support, follow‐up, and refund policy.
Customers
Identify your targeted customers, their characteristics, and their geographic locations, otherwise known as their demographics.
The description will be completely different depending on whether you plan to sell to other businesses or directly to consumers. If you sell a consumer product, but sell it through a channel of distributors, wholesalers, and retailers, you must carefully analyse both the end consumer and the middleman businesses to which you sell.
You may have more than one customer group. Identify the most important groups. Then, for each customer group, construct what is called a demographic profile:
• Age • Gender • Location • Income level • Education • Other (specific to your industry)
For business customers, the demographic factors might be:
• Industry (or portion of an industry) • Location • Size of firm • Quality, technology, and price preferences • Other (specific to your industry)
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Competition
What products and companies will compete with you?
List your major competitors:
(Names and addresses)
Will they compete with you across the board, or just for certain products, certain customers, or in certain locations?
Will you have important indirect competitors? (For example, video rental stores compete with theatres, although they are different types of businesses.)
How will your products or services compare with the competition?
Use the Competitive Analysis table below to compare your company with your two most important competitors. In the first column are key competitive factors. Since these vary from one industry to another, you may want to customize the list of factors.
In the column My Company, state how you honestly think you will stack up in customersʹ minds. Then check whether you think this factor will be a strength or a weakness for you. Sometimes it is hard to analyse our own weaknesses. Try to be very honest here. Better yet, get a trusted third-party to assess you. This can be a real eye‐opener. And remember that you cannot be all things to all people. In fact, trying to be causes many business failures because efforts become scattered and diluted. You want an honest assessment of your firm's strong and weak points.
Now analyse each major competitor. In a few words, state how you think they compare.
In the final column, estimate the importance of each competitive factor to the customer. 5 = critical; 1 = not very important.
Factor Competitor A Competitor B MyYour Company Price Products Service Quality Selection Reliability Location/Accessibility Expertise Credit Policies Advertising Appearance /Image
Now, write a short paragraph stating your competitive advantages and disadvantages.
Niche or Unique Selling Proposition (USP)
Now that you have systematically analysed your industry, your product, your customers, and the competition, you should have a clear picture of where your company fits into the world. In one short paragraph, define your niche, your unique corner of the market.
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Strategy
Now outline a marketing strategy that is consistent with your niche.
Promotion
How will you get the word out to customers?
Advertising: What media, why, and how often? Why this mix and not some other?
Have you identified low‐cost methods to get the most out of your promotional budget?
Will you use methods other than paid advertising, such as trade shows, catalogues, dealer incentives, word of mouth (how will you stimulate it?), and network of friends or professionals?
What image do you want to project? How do you want customers to see you?
In addition to advertising, what plans do you have for graphic image support? This includes things like logo design, cards and letterhead, brochures, signage, and interior design (if customers come to your place of business).
Should you have a system to identify repeat customers and then systematically contact them? What is your customer-retention strategy?
Promotional Budget
How much will you spend on the items listed above? Before startup? (These numbers will go into your startup budget.) Ongoing? (These numbers will go into your operating plan budget.) Pricing
Explain your method or methods of setting prices. For most small businesses, having the lowest price is not a good policy. It robs you of needed profit margin; customers may not care as much about price as you think; and large competitors can under- price you anyway. Usually you will do better to have average prices and compete on quality and service.
Does your pricing strategy fit with what was revealed in your competitive analysis?
Compare your prices with those of the competition. Are they higher, lower, the same?
Why?
How important is price as a competitive factor? Do your intended customers really make their purchase decisions mostly on price?
What will be your customer service and credit policies?
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Proposed Location
Probably you do not have a precise location picked out yet. This is the time to think about what you want and need in a location. Many startups run successfully from home for a while.
You will describe your physical needs later, in the Operational Plan section. Here, analyse your location criteria as they will affect your customers.
Is your location important to your customers? If yes, how?
If customers come to your place of business:
Is it convenient? Parking? Interior spaces? Not out of the way?
Is it consistent with your image?
Is it what customers want and expect?
Where is the competition located? Is it better for you to be near them (like car dealers or fast food restaurants) or distant (like convenience food stores)?
Distribution Channels
How do you sell your products or services?
• Retail (multi-brand B2C e-commerce platform) • Direct (mail order, web/mobile, catalogue, B2C e-commerce platform) • Wholesale (traditional, B2B e-commerce platform) • Your own sales force • Agents • Independent representatives • Bid on contracts
Sales Forecast
Now that you have described your products, services, customers, markets and marketing plans in detail, it is time to attach some numbers to your plan. Use a sales forecast spreadsheet to prepare a month‐by‐month projection. The forecast should be based on your historical sales, the marketing strategies that you have just described, your market research, and industry data, if available.
You may want to do two forecasts:
1. a 'best guess', which is what you really expect, and 2. a 'worst case' low estimate that you are confident you can reach no matter what happens.
Remember to keep notes on your research and your assumptions as you build this sales forecast and all subsequent spreadsheets in the plan. This is critical if you are going to present it to funding sources.
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V. Operational Plan
Explain the daily operation of the business, its location, equipment, people, processes, and surrounding environment.
Production
How and where are your products or services produced?
Explain your methods of:
• Production techniques and costs • Quality control • Customer service • Inventory control • Product development • Shipping and distribution
Location
What qualities do you need in a location? Think about the facilities and convenience your target market would appreciate.
Physical requirements: • Amount of space • Type of building • Zoning • Power and other utilities
Access: Is it important that your location be convenient to transportation or to suppliers? Do you need easy walk‐in access? What are your requirements for parking and proximity to freeway, airports, railroads, and shipping centres?
Include a drawing or layout of your proposed facility if it is important, as it might be for a manufacturer.
Construction? Most new companies should not sink capital into construction, but if you are planning to build, costs and specifications will be a big part of your plan.
Cost: Estimate your occupation expenses, including rent, but also including maintenance, utilities, insurance, and initial re-modelling costs to make the space suit your needs. These numbers will become part of your financial plan.
What will be your business hours? This can be tweaked once operational but it is good to study your target consumers' behaviour beforehand.
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Legal Environment
Describe the following:
• Licensing and bonding requirements • Permits • Health, workplace, or environmental regulations • Special regulations covering your industry or profession • Zoning or building code requirements • Insurance coverage • Trademarks, copyrights, or patents (pending, existing, or purchased)
Personnel
• Number of employees • Type of labour (skilled, unskilled, and professional) • Where and how will you find the right employees? • Quality of existing staff • Pay structure • Training methods and requirements • Who does which tasks? • Do you have schedules and written procedures prepared? • Have you drafted job descriptions for employees? If not, take time to write some. They really help internal communications with employees • They really help internal communications with employees. • For certain functions, will you use contract workers in addition to employees?
Inventory
• What kind of inventory will you keep: raw materials, supplies, finished goods? • Average value in stock (i.e., what is your inventory investment)? • Rate of turnover and how this compares to the industry averages? • Seasonal build-ups? • Lead‐time for ordering?
Suppliers
Identify key suppliers: • Names and addresses • Type and amount of inventory furnished • Credit and delivery policies • History and reliability
Should you have more than one supplier for critical items (as a backup)?
Do you expect shortages or short‐term delivery problems?
Are supply costs steady or fluctuating? If fluctuating, how would you deal with changing costs?
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Credit Policies
• Do you plan to sell on credit? • Do you really need to sell on credit? Is it customary in your industry and expected by your clientele? • If yes, what policies will you have about who gets credit and how much? • How will you check the creditworthiness of new applicants? • What terms will you offer your customers; that is, how much credit and when is payment due? • Will you offer prompt payment discounts? (Hint: Do this only if it is usual and customary in your industry.) • Do you know what it will cost you to extend credit? Have you built the costs into your prices?
Managing Your Accounts Receivable
If you do extend credit, you should do an aging at least monthly to track how much of your money is tied up in credit given to customers and to alert you to slow payment problems. You will need a policy for dealing with slow‐paying customers:
• When do you make a phone call? • When do you send a letter? • When do you get your lawyers to issue a legal demand?
Managing Your Accounts Payable
You should also age your accounts payable, what you owe to your suppliers. This helps you plan whom to pay and when. Paying too early depletes your cash, but paying late can cost you valuable discounts and can damage your credit. (Hint: If you know you will be late making a payment, call the creditor before the due date.)
Do your proposed vendors offer prompt payment discounts?
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VI. Management and Organization
Who will manage the business on a day‐to‐day basis? What experience does that person bring to the business? What special or distinctive competencies? Is there a plan for continuation of the business if this person is lost or incapacitated?
If you will have more than 10 employees, create an organizational chart showing the management hierarchy and who is responsible for key functions.
Include position descriptions for key employees. If you are seeking loans or investors, include resumes of owners and key employees.
Professional and Advisory Support
List the following:
• Board of directors • Management advisory board • Attorney • Accountant • Insurance agent • Banker • Consultant or consultants • Mentors and key advisors
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VII. Startup Expenses and Capitalization
You will have many startup expenses before you even begin operating your business. It’s important to estimate these expenses accurately and then to plan where you will get sufficient capital. This is a research project, and the more thorough your research efforts, the less chance that you will leave out important expenses or underestimate them.
Even with the best of research, however, opening a new business has a way of costing more than you anticipate. There are two ways to make allowances for surprise expenses. The first is to add a little “padding” to each item in the budget. The problem with that approach, however, is that it destroys the accuracy of your carefully wrought plan. The second approach is to add a separate line item, called contingencies, to account for the unforeseeable. This is the approach we recommend.
Talk to others who have started similar businesses to get a good idea of how much to allow for contingencies. If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20 percent of the total of all other startup expenses.
Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also explain in detail how much will be contributed by each investor and what percent ownership each will have.
Example :
Start-Up Costs (Capital Expenditure)
One-time Overhead Cost Integrated Warehousing System (MIS) $0.00 Point-Of-Sale (POS) MIS $0.00 Stocking equipment (e.g. conveyors, forklifts, scanners, etc.) $0.00 Packaging Equipment (e.g. barcoder, boxing machine, tape, etc.) $0.00 Fitting Out & Renovation $0.00 Website $0.00 Office Equipment $0.00 Laptop $0.00 Phone $0.00 Copier/Printer/Fax/Scanner $0.00 Stationaries (markers, w hiteboard papers, etc) $0.00 Total Capital Expenditure $0.00
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VIII. Financial Plan
The financial plan consists of a 12‐month profit and loss projection, a three‐year profit and loss projection (optional), a cash‐flow projection, a projected balance sheet, and a break‐even calculation. Together they constitute a reasonable estimate of your company's financial future. More important, the process of thinking through the financial plan will improve your insight into the inner financial workings of your company.
12-Month Profit and Loss Projection
Many business owners think of the 12‐month profit and loss projection as the heart of their financial plan. This is where you put it all together in numbers and get an idea of what it will take to make a profit and be successful.
Your sales projections will come from a sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month-‐by-‐month for one year.
Profit projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses.
Note : Keep in mind your assumptions, so that you can explain them later, if necessary, when financiers or investors ask for them.
Three-Year Profit Projection (Optional but recommended)
1 2 3 4 5 6 7 8 9 10 11 12 Revenue: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Gross Sales Less: Sales Returns and Allowances Cost of Goods Sold: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Materials Other direct expenses Gross Profit (Loss) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other Income: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Discount received Rental income Gain (Loss) on Sale of Assets Interest received Gross Income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Expenses: Financial expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Bank Charges and commissions Interest Personnel expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Wages Payroll Taxes Other Operational Expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Amortization Insurance Maintenance and repairs Miscellaneous Office Expenses Permits and Licenses Rent Telephone Travel Utilities Vehicle Expenses Total Operational Expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Net Income (Loss) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
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Projected Cash Flow
If the profit projection is the heart of your business plan, cash flow is the blood. Businesses fail because they cannot pay their bills. Every part of your business plan is important, but none of it means a thing if you run out of cash.
The point of this worksheet is to plan how much you need before startup, for preliminary expenses, operating expenses, and reserves. You should keep updating it and using it afterward. It will enable you to foresee shortages in time to do something about them—perhaps cut expenses, or perhaps negotiate a loan. But foremost, you shouldn’t be taken by surprise, that is if you have taken your cash flow projections seriously and kept strict discipline in managing your receipts and expenses.
The cash‐flow projection is just a forward look at your checking account. For each item, determine when you actually expect to receive cash (for sales) or when you will actually have to pay out (for expense items). Your cash flow will show you whether your working capital is adequate. Clearly, if your projected cash balance ever goes negative, you will need more start‐up capital.
This plan will also predict just when and how much you will need to borrow. Remember, it takes time to secure additional funding to sustain your operations. With the projections, anticipation can be made before funds run out.
Explain your major assumptions, especially those that make the cash flow differ from the Profit and Loss Projection. For example, if you make a sale in month one, when do you actually collect the cash? When you buy inventory or materials, do you pay in advance, upon delivery, or much later? How will this affect cash flow? Are some expenses payable in advance? When? Are there irregular expenses, such as quarterly tax payments, maintenance and repairs, or seasonal inventory build-up, that should be budgeted?
Monthly 1 2 3 4 5 6 7 8 9 10 11 12 Beginning Cash Balance
Cash Inflows (Income): Accts. Rec. Collections Loan Proceeds Cash sales Other: Total Cash Inflows 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Available Cash Balance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Cash Outflows (Expenses): Advertising Bank Service Charges Insurance Interest Inventory Purchases Miscellaneous Office Payroll Payroll Taxes Professional Fees Rent or Lease Supplies Taxes & Licenses Utilities & Telephone Other: Subtotal 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other Cash Outflows: Capital Purchases Loan Principal Owner's Draw Other: Subtotal 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Cash Outflows 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Ending Cash Balance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
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Balance Sheet
A balance sheet is one of the fundamental financial reports that any business needs for reporting and financial management. A balance sheet shows what items of value are held by the company (assets), and what its debts are (liabilities). When liabilities are subtracted from assets, the remainder is owners’ equity.
Use a startup expenses and capitalization spreadsheet as a guide to preparing a balance sheet as of opening day. Then detail how you calculated the account balances on your opening day balance sheet.
Optional: Some people want to add a projected balance sheet showing the estimated financial position of the company at the end of the first year. This is especially useful when selling your proposal to investors.
ASSETS 1 2 3 4 5 6 7 8 9 10 11 12 Current Assets: Cash at Hand Cash at Bank Accounts Receivable Less:Reserve for Bad Debts Stock Prepaid Expenses Notes Receivable Total Current Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Fixed Assets: Vehicles Less:Accumulated Depreciation Furniture and Fixtures Less:Accumulated Depreciation Equipment Less:Accumulated Depreciation Buildings Less:Accumulated Depreciation Land Total Fixed Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other Assets: Goodwill Total Other Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
LIABILITIES & EQUITY Current Liabilities: Accounts Payable Sales Taxes Payable Payroll Taxes Payable Income Taxes Payable Accrued Wages Payable Unearned Revenues Bank Overdraft Short-Term Loan Payable Total Current Liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Long-Term Liabilities: Long-term Bank Loans Payable Mortgage Payable Total Long-Term Liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Capital & Reserves Capital Add: Net Profit Less: Drawings Net Capital 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Liabilities and Equity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Break-even Analysis
A break‐even analysis predicts the sales volume, at a given price, required to recover total costs. In other words, it is the sales level that is the dividing line between operating at a loss and operating at a profit.
Include all assumptions upon which your break‐even calculation is based. P a g e | 58
IX. Appendices
Include details and studies used in your business plan; for example:
• Brochures and advertising materials • Industry studies • Blueprints and architectural plans • Maps and photos of location • Magazine or other articles • Detailed lists of equipment owned or to be purchased • Copies of leases and contracts • Letters of support from future customers • Any other materials needed to support the assumptions in this plan
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X. Refining the Plan
The generic business plan presented above should be modified to suit your specific type of business and the audience for which the plan is written.
1. For Raising Capital For Bankers
Bankers want assurance of orderly repayment. If you intend using this plan to present this plan to lenders, include: o Amount of loan o How the funds will be used o What this will accomplish—how will it make the business stronger? o Requested repayment terms (number of years to repay). You will probably not have much negotiating room on interest rate but may be able to negotiate a longer repayment term, which will help with cash flow. o Collateral offered, and a list of all existing liens against collateral
For Investors
Investors have a different perspective. They are looking for dramatic growth, and they expect to share in the rewards: o Funds needed short‐term o Funds needed in two to five years o How the company will use the funds, and what this will accomplish for growth. o Estimated return on investment o Exit strategy for investors (buyback, sale, or IPO) o Percentage of ownership that you will give up to investors o Milestones or conditions that you will accept o Financial reporting to be provided o Involvement of investors on the board or in management
2. For Types of Businesses Manufacturing
• Planned production levels • Anticipated levels of direct production costs and indirect (overhead) costs— how do these compare to industry averages (if available)? • Prices per product line • Gross profit margin, overall and for each product line • Production/capacity limits of planned physical plant • Production/capacity limits of equipment • Purchasing and inventory management procedures • New products under development or anticipated to come online after startup
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Service Businesses
• Service businesses sell intangible products. They are usually more flexible than other types of businesses, but they also have higher labourlabor costs and generally very little in fixed assets. • What are the key competitive factors in this industry? • Your pricing strategy • Methods used to set prices • System of production management • Quality control procedures. Standard or accepted industry quality standards.
The generic business plan presented above should be modified to suit your specific type of business and the audience for which the plan is written.
• How will you measure labour productivity? • Percentage of work subcontracted to other firms. Will you make a profit on subcontracting? • Credit, payment, and collections policies and procedures • Strategy for keeping client base
High Technology Companies
• Economic outlook and trends for the industry • Will the company have information systems in place to manage rapidly changing prices, costs, and markets? • Will you be on the cutting edge with your products and services? • What is the status of research and development? And what is required to: o Bring product/service to market? o Keep the company competitive? • How does the company: o Protect intellectual property? o Avoid technological obsolescence? o Supply necessary capital? o Retain key personnel?
High‐tech companies sometimes have to operate for a long time without profits and sometimes even without sales. If this fits your situation, a banker probably will not your ideal lender. Venture capitalists may invest, but your story must be compelling.
You must do longer‐term financial forecasts to show when profit take‐off is expected to occur. And your assumptions must be well documented and well argued.
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Retail Business
• Company branding and Public perception • Pricing: o Explain mark-up policies. o Prices should be profitable, competitive, and in accordance with company image. • Inventory: o Selection and price should be consistent with company image. o Inventory level: Find industry average numbers for annual inventory turnover rate (available if you have researched well). Multiply your initial inventory investment by the average turnover rate. The result should be at least equal to your projected first year's cost of goods sold. If it is not, you may not have enough budgeted for startup inventory. • Customer service policies: These should be competitive and in accord with company image. • Location: Does it give the exposure that you need? Is it convenient for customers? Is it consistent with company image? • Promotion: Methods used, cost. Does it project a consistent company image? • Credit: Do you extend credit to customers? If yes, do you really need to, and do you factor the cost into prices?
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3.2.3. Particular Information Emphasis by Funders (Pitch Material)
Funders tend to like business plans that present a lot of information in as few words as possible. When preparing slides for a pitch, the following business plan format (within 15–20 slides) is all that is probably necessary:
Purpose — Define the company/business in a single declarative sentence.
Problem — Describe the pain of the customer (or the customer’s customer). — Outline how the customer addresses the issue today.
Solution — Demonstrate your value proposition to make life better. — Show where your product physically sits. — Provide use cases.
Why now — Set up the historical evolution of your category. — Define recent trends that make your solution possible.
Market size — Identify / profile the customer you cater to. — Calculate the Total Addressable Market4 (TAM) (top-down), Serviceable Available Market5 (SAM) (bottom-up), and Serviceable Obtainable Market6 (SOM)
Competition — List competitors — List competitive advantages
4 Total Available Market is the total market demand for a product or service. A top down analysis starts by using secondary market research, such as market analysis reports, to determine how many end users meet different characteristics. This data is usually expressed with an inverted pyramid that has several horizontal levels, where the bottom most level is the smallest and contains all end users who meet your End User or Customer Profile. 5 Serviceable Available Market is the segment of the TAM targeted by your products and services which is within your geographical reach. A bottom up analysis shows from your primary market research how many end users you have identified that fit your End User Profile. 6 Serviceable Obtainable Market is the portion of SAM that you can capture. P a g e | 63
Product — Product line-up (form factor, functionality, features, architecture, intellectual property) — Development roadmap
Business — Revenue model Model — Pricing — Average account size and/or lifetime value — Sales and Distribution model — Customer / Pipeline list
Team — Founders and Management — Board of Directors/Board of Advisors
Financials — Profit & Loss projections — Balance Sheet analysis — Cash Flow analysis — Cap table or Use of Proceeds — The Deal or Amount asked versus Equity offered
3.2.4. Investors' Assessment of Value
The SOM and SAM help de-risking the investment while the TAM enables to assess the upside potential.
The Serviceable Obtainable Market is your short term target and therefore the one that matters the most: if you cannot succeed on a fraction of the local market, chances are that you will never capture a large part of the global market.
For the investor the ability to reach your SOM means that he will not lose his shirt. In that context SAM acts as a good sanity check to assess the likelihood of achieving the market share implied by the Serviceable Obtainable Market and as a proxy for the short term upside potential of your business.
If you can deliver SOM in time then you are capable and credible, and you might be able to increase the market share and reach a more important penetration of the SAM which would deliver a good return on investment.
Example :
You come to pitch an investor who has a minimum target return of 10 times. You are seeking a US$250 k investment in exchange for 20% of the start-up's equity.
Based on your market research and business plan we can reasonably assess that: TAM = US$2 bil SAM = US$100 mil P a g e | 64
SOM = US$5 mil within 2 years and US$12 mil within 4 years EBITDA margin = 25% Valuation at exit = 8x EBITDA benchmarked to listed companies within the sector
Well, once you deliver US$5 mil in revenues the EBITDA is US$5 mil revenues x 25% margin = US$1.25 mil and the company is worth 8 x US$1.25m EBITDA = US$10 mil. The investor return on investment (ROI) is US$10 mil x 20% ownership / US$250k investment = 8.0x.
When you reach US$12 mil of revenues the EBITDA is US$12m x 25% = US$3 mil and the company is worth 8 x US$3m = US$24 mil. The investor return on investment is US$24m x 20% ownership / US$250k = 19.2x.
Clearly here if you can capture your SOM the investor will meet his target return and he is then left with a company that has achieved 12% market share on a segment that represents 5% of the TAM of US$2 bil (US$100m SAM / US$2bn TAM).
If you decide to expand the company and scale internationally, the company’s revenue potential (assuming you can reach a similar market penetration at scale) becomes 12% market share x US$2bn TAM = US$240 mil. Which would imply a US$60m EBITDA (25% margin) and therefore a potential valuation of US$60m x 8 = US$480 mil. The investor could therefore offer to invest a up to US$48 mil in the company in year 4 in order to meet his target return on investment of 10x.
As you can see TAM SAM SOM have different purposes: SOM indicates the short term sales potential, SOM / SAM the target market share, and TAM the potential at scale. All play an important role in assessing an investment opportunity and the focus should really be on getting the most accurate numbers rather than the highest.
3.3. Understanding the Language of Lenders and Investors
After successfully navigating the startup phase, the enterprise moves on to the growth phase and subsequently to the expansion phase. In the latter two phases, more financing becomes available, i.e. both from traditional sources as well as alternative ones. In order to capitalise on both options, the entrepreneur has to first understand the language of lenders (financiers) and investors (funders).
To the entrepreneur, it is all about risk-taking and capitalising on opportunities to generate more profits. The financier’s core business is lending to sustainable businesses that are able to service the interest and repayment of capital. As such, effective risk management and monitoring are critical considerations to them. In making the lending decision, financial institutions evaluate the sustainability of the P a g e | 65 business model, the integrity and track records of the borrowers and also consider the value of the assets offered by the borrowers to secure the loans.
Financial institutions take the following into account :
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Quality of the revenue and • Revenue earned and supported by buyer’s letter of credit carries debtors lower risk than revenue made on open account basis. • Revenue on open account basis and mitigated by credit insurance policies carries lower risk than those not covered by credit insurance. • Overseas debtors in developing and emerging countries carry higher risk than those from developed countries. Asset conversion cycle • This measures the number of days that the company takes to convert purchases into sales and collections. The longer the cycle, the higher the default risk. • The stock turnover, debtors’ turnover rate and creditors’ turnover rate are common indicators to understand and measure the asset conversion cycle. Ability to repay debts and • The bank uses these formulas to ascertain the debt servicing service interest capability of the company: (EBITDA) Annual Interest + Principal Loan Repayments and Net Cash Flow From Operations Annual Interest + Principal Loan Repayments • A financial ratio of more than 1 indicates that the company is able to generate sufficient profits
If the financier assesses that the risk of non-payment is high, it will typically ask for security (such as properties, cash deposits). Without sufficient security value to mitigate the risk of default, it is unlikely that the financier will increase the exposure.
3.3.1. Financial Projections and Performance
These two different perspectives result in differences in interpreting the financial performance. The table below gives a sample of the different viewpoints of the entrepreneur and the financial institution in interpreting the financial performance of a company that has achieved high revenue growth and return on equity.
Financial Performance Entrepreneur's Financier's Perspective Perspective Revenue doubled from The revenue growth came Sales to emerging markets US$3 million to US$6 from new sales to emerging carry a million countries. High profit margin of higher default risk as they are 20% for sales to emerging made on open account basis markets, compared to 8% for with a long credit term of 90 sales to traditional, established days. The laws in certain markets. emerging countries are weak in protecting creditors’ interests, making it harder to enforce collection. Average stock holding Bulk purchases reduce These stocks are financed by period increased from 60 procurement cost and improve short-term bank borrowings P a g e | 67 days to 120 days profits by 5%. The longer stock that have to be repaid within holding period is not a concern 120 days from the date of as these stocks can be sold purchase. If you are unable to within six months. sell and collect from customers within 120 days, you will default on repaying these short-term facilities. Average return on equity at I have done better than many Although your return on equity 20% per annum based on listed companies and is 20% per annum, the total $200,000 profits and $1 increased shareholder value. liabilities are 4 times more than million shareholders fund The bank should lend me more the shareholders fund. This, funds to generate higher return coupled with the collection risk on equity. from emerging markets and the longer stock holding period, increases your risk rating. Traditional banks will not be able to lend you more monies. Instead banks will look at reducing the current facilities.
The example above clearly shows that financial institutions are very focused on identifying the risk of non-payment of loans. Financial institutions like banks are lenders, not investors. They make money by lending you money, not by the performance of your business.
3.3.2 Entrepreneurs' versus Financiers' Perspectives
The table below shows the financial performance of two entrepreneurs in the same business of distributing electronic parts.
In US$ ('000) Cash-focused Company Revenue-focused Company
Revenue 6000 12000 EBITDA Margin 6.6% 4.0% EBITDA 400.0 480.0 Interest expense per year (120) (240) (Increase)/Decrease in Net 20 (640) Receivables Cash Generated (used 300 (400) in)/from Operations Cash (used in) Investment (400) (400) Financing Requirements (100) (800) Existing Banking Facilities 2000 4000
Fact in Summary : o The Revenue-focused Company was able to distribute and generate sales of US$12 million through its regional distributors and agents. P a g e | 68 o The Cash-focused Company generated sales of US$6 million through direct selling methods to reach customers in the region. o Both intend to invest in a US$400,000 facility to buy equipment to provide engineering services to its customers. o Both wanted a 3-year term loan of US$400,000 from a bank to finance their expansion plans.
Finance Application Outcome o Revenue-focused Company’s application was rejected. Traditional commercial banks may also decide to reduce its letter of credit/trust receipt facilities from $40 million to $30 million. Revenue-focused Company was forced to scale down its sales and eventually went into financial difficulty. o Cash-focused Company succeeded in getting the term loan for its new business. Banks may also offer to provide a revolving credit line of US$2 million.
Why Banks did not lend to Revenue-focused Company
Traditional commercial banks are concerned with this new business being able to generate earnings and cash flows to repay the new term loan. There was no guarantee that this new venture into engineering services would succeed. Hence commercial banks would consider if the existing core business could provide the cash to repay the new term loan.
These are the key financial ratios that traditional commercial banks look at:
Interest Based on this : (EBITDA) coverage Annual Interest ratio measures Revenue-focused Company’s current interest coverage ratio is 2, while Cash- the strength focused Company’s is 3.3. Cash-focused Company is in a better position to of the service its interest expenses. business to service its Cash Flow From Operations Before Interest Payment interest Annual Interest obligations Revenue-focused Company’s negative cash from operations of USS$400,000 normally worries banks. Although it has a positive EBITDA, it is not able to collect fast enough and its net receivables have increased by US$640,000 mainly from its regional distributors and agents. Cash-focused Company is in a better position as it does not have a build-up of receivables and is able to generate positive cash flow from operations of US$300,000. Ability to Based on these two formulas : repay debts (EBITDA) Annual Interest + Principal Loan Repayments
Cash Flow From Operations Principal Loan Repayments
Financial institutions usually examine the cash flow statements to confirm the reliability of using EBITDA as a measure of the company’s ability to repay debts. In Revenue-focused Company’s situation, banks would find that Revenue- P a g e | 69
focused Company would not be able to generate sufficient EBITDA to service the new term loan and interest. Its current negative cash flow from operations confirms that Revenue-focused Company is heading towards a liquidity trap. In Cash-focused Company’s situation, banks would find that Cash-focused Company is cash flow positive and has a healthy cash position to service new loans.
In Revenue-focused Company’s application, the negative cash flow from operations of US$400,000, the build-up of its receivables position, mainly due to its overseas distributors and agents, and its weak interest cover will alarm most traditional banks. In Cash-focused Company’s case, it secured the term loan for its new business. Banks would be comfortable with the prudent management style of cash-focused companies and will be prepared to provide more loans to them.
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4. FINANCIAL MANAGEMENT
4.1. Entrepreneurs : Questions to Ask Yourself (Plans for New Capital)
When running any business, the need for capital, unfortunately, never ends. This means that understanding how to find and shake the “money tree” is critical. And before beginning the search, there are a number of crucial questions that need to be asked — and answered.
1. How Much Capital Do I Need?
Although many resources provide information on starting a business with no or little money in the bank, remember that any business worth building requires some kind of financing. Having little or no capital is a primary reason why businesses fail.
Bootstrapping a business by relying on savings or leftover income you have can only last so long when you are not drawing a salary. If your startup business requires even minimal set-up like office space for desks, equipment, or employees, the amount of capital needed before opening your doors for business is likely to be substantial. Asking for Enough Money The most regrettable mistake an entrepreneur can make when seeking capital is asking for too little to have a chance at success. Lacking sufficient capital in the beginning is akin to starting a long journey with little preparation, or a half-tank of gas; the odds that you will reach your destination are slim to none.
When calculating the capital you need, plan that everything will take twice as long and cost twice as much as you expect. Figure that your worst-case scenario will occur, not your best-case. Do not assume instant profitability, a common mistake of many first-time entrepreneurs according to many business sources. And it is important to note that if insufficient capital is raised initially to provide your company with sufficient runway, it will be nearly impossible to raise more money just to keep the business going, if sales are slow or emergencies occur.
A rule-of-thumb for startup capital should, at a minimum, cover all plant, equipment, and leasehold costs, plus at least six months’ worth of projected operating costs, including salaries and utilities.
2. How Do I Raise New Capital?
The most common source of startup capital is in the form of loans from family members, home equity loans, and even credit card advances. Governments and some state agencies do sponsor subsidized loans and grants for startups and MSMEs through their economic growth initiatives and enterprise development programs. P a g e | 71
When these sources become exhausted, entrepreneurs usually seek capital from private sources such as commercial and investment banks, private investor groups, wealthy individuals (HNWIs), and venture capital funds. Their proposed investment is usually styled in the form of debt, equity, or a combination of each:
Debt. The most common form of capital used by startups is debt, and it is secured by the assets of the company including the possible personal guarantee of the owners. As time goes by, the company repays the principal with interest from cash flow. If the business fails, the lenders foreclose and liquidate the assets for repayment, possibly seeking any deficiency from the owners. Asset lenders are concerned with the market value of the assets, not the business enterprise, lending only a proportion of the asset’s value to the company in order to ensure repayment. Lenders are not normally in the business of taking risks. While the interest rate on borrowed money may be high, using debt allows you to maintain 100% ownership. Equity. When utilizing equity, investors become owners of the business with the entrepreneur, the amount of ownership held by each is dependent upon a negotiation, which in turn is based on the amount invested and the agreed-upon value of the business (as it is at present, and as it may be in the future). Business valuation is an art, not a science; the conclusion is always subjective depending on the perspective of the valuator. Entrepreneurs typically want as much money as possible for as little equity as acceptable; investors are the opposite, wanting as much equity as possible for as little money as possible. The final equity proportions and amount of money raised is generally a compromise based upon the eagerness of the investor to invest and the desperation of the entrepreneur looking for money.
Delaying capital infusions from external parties as long as possible (until you can prove the business concept and show revenues) is recommended. Investors typically require that entrepreneurs have “skin in the game” before being willing to invest their own money, and prefer you have made progress toward implementing your business plan as well.
3. What Is the Value of My Company?
The value of a company is important because it is the basis for determining the “cost” of the new capital when seeking equity additions to the capital structure. Simply explained, a company with a US$1 million valuation and no debt seeking a new capital of US$1 million would be worth US$2 million after the investment. The old owners would own 50% of the new US$2 million company (for their contribution of the old company with a US$1 million value), while the new investors would also own 50% interest for their contribution of US$1 million cash. Generally, a valuation considers four questions: i. How much is the company worth today? ii. How much could it be worth in the future? iii. How long will it take to create the future value? iv. What is the likelihood of achieving success? P a g e | 72
There are a number of different methods used to value companies. Specifically there are different ways to value pre-revenue companies, asserting that entrepreneurial projections are “too imprecise” and optimistic to be reliable. And ways that focus on more traditional methods of corporate valuation. At the very minimum, prospective business owners seeking capital must understand the basic concepts of discounted cash flow and the use of market multiples before establishing or negotiating a value for your company. Or find a trusted financial expert to help you.
Understanding how your company will be evaluated and being able to affect the valuation positively can enable you to get higher valuations and retain greater ownership of your company when the investment is funded.
4. What Are My Legal Responsibilities to Potential Investors?
Generally, business owners seeking funds from individual investors are required to provide forms and specific factual information in understandable language to potential investors so that they have the ability to evaluate the investment and determine whether it is right for them. Offerings and continued legal obligations of companies to their investor owner are regulated through the respective ASEAN countries' Securities Acts and the Securities Exchange Acts.
Seeking and paying for competent legal advice when soliciting, negotiating, or contracting with investors or lenders is mandatory for prudent business owners. While an attorney may not secure advantages for you on the upside, a lawyer’s value in eliminating the possibilities of fraud charges, confusion about the agreements reached, or avoiding future legal problems is considerable.
5. How Do I Negotiate a Win-Win Agreement?
A funding event, whether for a startup or an ongoing business, involves two parties: the investor and the company. In some cases, there is a single investor; in others, multiple investors. In the latter case, such as a crowdfunding event, the investors participate as a unit, each sharing a proportion of the same investment. In some cases, funding is take-it-or-leave-it; in others, there is intense negotiation. In each case, the parties strive to reach an agreement that accomplishes their respective goals.
Negotiations between investors and business owners involve, at minimum, the following factors:
The Amount of Capital Invested. Funding may be a single amount or a combination of investments over a defined period. The Timing of the Investment. A specific sum is invested initially with future investments on specific future dates or when certain contingencies have been met. The Return on Investment. In debt, return, or from the company’s perspective, “cost” may be expressed as interest with specific payment periods and principal amortization. In equity, return is the proportionate share of future earnings directed to the investor. P a g e | 73
The Timing of the Return to the Investor. Prospective payments in the future will be discounted to reflect the investor’s opportunity costs and the risk-free return which he would have otherwise earned by forgoing the investment. The Certainty of the Return. Since the return on capital will be in the future, investors are naturally concerned about the likelihood the projected results becoming reality. This “risk” increase is directly proportional to the period between investment and projected return, the size of the return relative to the investment, and the reliability of the underlying financial and operating assumptions. Control. Investors usually require certain protections to minimize losses or to maximize gains when possible, including majority ownership of the company in the event of certain events. Business owners generally resist direct intervention into company operations, viewing it as a challenge to their authority and capabilities.
Negotiation is a skill that can be learned and practiced. However, learning at the table across from a seasoned professional is usually expensive. Seek advice and assistance before you make an agreement you will regret.
4.2. Managing Working Capital
Cash flow is undeniably the lifeline of every business regardless of its stage of development. A business can survive for a short time without sales or profits, but not without cash. It is cash which pays the bills and allows trading to continue. And if you are growing, and extending credit to more customers, the need for cash is greater. Managing a sustainable business in a volatile business environment requires adequate cash flow and funding. Most businesses fail because entrepreneurs do not manage their working capital well.
It is important to know how much money you need to run your type of business as the business cycle of each business is unique, with its own sales trends, profit levels as well as payment and collection patterns. Each cycle starts from the day you receive an order from your customers and ends when you collect cash from your customers.
The goal of working capital management is to manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the short term sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way. The interaction between current asset and current liabilities is, therefore, the best main theme of the theory of working capital management.
4.2.1. Sources of Working Capital
The sources of working capital can be divided as long-term source of working capital and short-term source of working capital. Long-term funds are required P a g e | 74
to create production facilities through purchase of fixed assets such as plant and machinery, land and building, etc. Investments in these assets represent that part of the firm’s capital is blocked on a permanent or fixed basis and is called fixed capital. Short-term funds are needed to manage the day-to-day operations of the organisation. It is a temporary working capital.
Working capital for long-term purposes can be obtained by several ways. There are different sources of long-term working capital: i. Issue of shares ii. Issue of debentures iii. Retained earnings iv. Sale of fixed assets v. Security from employee and from customers
Sources of Short-term Working Capital are: i. Trade credit ii. Credit paper iii. Bank credit iv. Public deposits v. Government assistance vi. Customer credit
4.2.2. Key Elements to Capital Management
There are two elements in the business cycle that use cash — inventory (stocks and work-in-progress) and receivables (money owed to you).
The main sources of your working capital are:
Collections (when debtors pay you) Credit terms (when your creditors provide credit) Credit facilities (where your banks provide you with letters of credit, factoring lines, trust receipt facilities) Cash (when you raise capital) To manage working capital effectively, you need to manage these capital sources. You can do this by:
Collecting payment faster than the credit terms provided by your suppliers. This way, you will not need to use your credit facilities to pay off your suppliers first before collections come in. Reducing inventory levels. This will reduce your need for credit facilities and cash, and result in bank interest savings. The operating cash flow can be used to boost sales or for investment. Negotiating for a longer credit period and increased credit terms with your suppliers. This will decrease reliance on your principal bankers. P a g e | 75
4.2.3. How to Calculate Your Business and Trade Cycles
To determine the number of working capital cycle days required to run your business, you need to plot your business and trade cycles.
Cash, along with vendor payables, are used to purchase inventory, which goes through processes to become a service or product for sale, ultimately to be sold and held as an account receivable balance until eventually being paid off by the customer. The Net Trade Cycle shows how long the cash is tied up in the trade cycle before coming back out as cash again. The Net Trade Cycle can tell a company how many cycles it goes through in a year and how many total dollars are tied up in each cycle. This indicates how many dollars are tied up in each day in each category whether it is accounts receivable, inventory, or accounts payable.
The faster a company can turn cash back to cash, the faster it can grow without increasing the investment in working capital.
Business Cycle Trade Cycle Trade Financing
Issue Purchase Supplier Receives Bank Issues Letter Day 0 Order to Supplier Letter of Credit with of Credit 60 days term 30 days 30 days
Supplier Ships Supplier Negotiates Bank Accepts Letter Day 30 Goods from Port Letter of Credit for of Credit Payment 60 days 60 days
Goods Reach Supplier Receives Bank Pays Day 90 Purchaser's Port Payment Supplier
30 days 30 days
Manufacture / Payment Due to Day 120 Fabricate or Install Bank
15 days
Customer Receives Day 135 Invoice Funding
45 days Gap of 60 days P a g e | 76
Collect Payment Day 180 from Customer
Figure 7 : Determination of Funding Gap from Business and Trade Cycles
In the example given, this company has a business cycle of 180 days from the time it places an order for raw materials (goods) to the time it collects payment from customers. The supplier’s trade terms is 60 days but by then, the company has just received the materials from its overseas supplier. It has to use the trade facilities from financial institutions to pay the supplier and extend the credit period by 30 days. By that time, the company would have just completed manufacture / fabrication or installation. We can see that this business has a funding gap of 60 days, which has to be met by its internal cash resources. There are several financing techniques that can be used such as revenue-based financing, purchase order (PO) financing, factoring account receivables and business cash advances. Alternatively, it can factor its invoices to the bank to bridge this funding gap of 60 days, or extend its credit period to 90 days or more, if at all possible.
4.2.4. Working Out Your Working Capital Lines for Your Business
The following table shows a business with projected sales of US$2.5 million and projected purchase requirement of US$2.0 million. The business cycle for sales to GCC is 145 days, while the cycle for Asia Pacific takes 110 days. The trade lines required for sales to GCC are worked out by dividing the annual purchases of US$2.2 million by 360 days and multiplying by 145 days. The credit facilities required from financial institutions are therefore US$0.89 million. Using the same calculation method, the trade lines required for sales to Asia Pacific are US$0.67 million. The current trade lines available are US$1.0 million (financial institutions and creditors), hence another US$0.56 million is needed to support growth in new sales.
(expressed in US$ million) GCC Asia Pacific Total
Sales 2.5 2.5 5.0 Purchases required 2.2 2.2 4.4
Business cycle (days) 145 110
Trade lines required 0.89 0.67 1.56 Available trade lines 1.0 Additional trade lines required 0.56
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By doing a simple calculation like this, you can show your investors/funders why you need to increase your credit facilities and how you plan to use them.
4.3. Managing Capital Expenditure
A capital expenditure is an outlay of cash to acquire or upgrade a business asset. Common examples of a capital expenditure include the purchase of a new building, or the cost of significant upgrades to an existing facility. A capital expenditure is considered to be deductible, because it represents an improvement to the business, and it is deducted over the expected life of the item, rather than all at once as in the case of repair or maintenance expenditures.
Engaging in capital expenditure is a routine way to improve and expand a business, whether done on small or large scale. Large corporations may acquire additional companies, as in the case of an automotive giant which purchases another car manufacturer, while smaller businesses may consider the purchase of a new office printer to be a capital expenditure. In general, allowances are made in the budget of the company for capital expenditures, including unexpected ones involving the replacement of items which cannot be repaired.
Budgeting for capital expenditures is critical to future planning. In deciding on a certain capital expenditure, a company's management makes a statement about its view of the company's current financial condition and its prospects for future growth. It is also giving indications regarding what direction(s) it plans to move in the years ahead. Capital expenditure budgets are commonly constructed to cover periods of five to 10 years, and therefore can serve as major indicators regarding a company's "five year plan" or long-term goals.
A capital expenditure is amortized over the length of the life of the investment, which may range from an expectation of five to forty years, depending on the investment. This time period is known as a recovery period, and recovery periods for major assets are set out so that companies will know how to deduct capital expenditures. The amortization means that the company cannot deduct the cost of the capital expenditure all at once, and must instead spread it out over the life of the investment.
Two of the greatest challenges facing growing businesses are capacity management and capital budgeting. Capital investments are long-term investments that use future cash flows to repay bank borrowings taken to finance them. A wrong decision can be fatal to the company. Many companies do not carry out sufficient evaluation when making capital budgeting decisions. The following case studies provide many useful lessons for businesses that are thinking of investing in new premises and new equipment. P a g e | 78
4.3.1. Case Study 1: A Village Artisan Enterprise
Artisan enterprises engaged in village crafts that include jewellery, decorative pieces, household utility articles and other items like tourism souvenirs such as chess sets, pen holders, paper weights and fridge magnets.
In this case study, a village artisan was doing well with his own crafts that were selling briskly at his village which was close to a tourism attraction.
Business was good and customers were steady. He maintained prices for fear of losing customers and not selling everything he made. Used profits from his business to buy a motorcycle for his enjoyment. He was enjoying his fruits of labour and did not realise the 'unexpected' increased expense on owning a depreciating asset (the motorcycle) that did not profit his business. He ended up selling his motorcycle at a loss and need to borrow money for his artisan materials to make his crafts. What should he have done?
While treating oneself to a gift is not necessarily a bad idea, he could have:
Invested the profits to buy tools to mechanize his trade. Increasing productivity would have allowed him to churn out more products and increase revenue. He may even have been able to reduce the cost of producing one unit of his wares through increased efficiencies or through greater economies of scale. He could have also invested in more materials as well as more labour to help him produce more products, which would have increased revenues and profits. He would only have to concentrate on looking at more ways to sell his products outside of his village.
4.3.2. Case Study 2: A Contract Manufacturing Company
An entrepreneur decided to invest in a new factory for the following reasons:
Business was so good that he had to turn away customers. Existing factory space was too small to cater for future expansion. The landlord offered a new place five times the size of his current factory. He did not require such large premises but he thought it was an attractive offer as he could sublet the unused space. His principal bankers offered to finance the entire construction cost of US$12 million over 2.5 years, which he could repay over 10 years. His current EBITDA was US$2 million, which he expected to grow to US$4 million with the new premises. The annual loan repayment and interest is US$1.7 million. He thought he would have no problem servicing the term loan as his future EBITDA of US$4 million provides 2.3 times cover for the amount he has to service. P a g e | 79
For the reasons given, the entrepreneur went ahead with the construction. In the meantime, he took up a short-term lease of 3 years and purchased new equipment to cope with the increase in orders. Three years later, the company shifted to the new premises. While its sales increased 2-fold, EBITDA remained at US$2 million and the company struggled to pay off the US$12 million term loan. What went wrong?
The entrepreneur made the following mistakes:
He was in the business of providing contract manufacturing services, which require skilled engineers/operators and production equipment, not factory premises. The decision to invest in the new premises was hence not necessary (There was no certainty that orders would remain high and prices would not drop). The fact that the offer from the landlord was attractive and he could rent out the unused space was also immaterial if it did not cover the increased fixed costs. He did not really need five times more space. He paid for the high cost of construction, which did not benefit his main business. The additional burden of repaying the US$12 million bank loan ate into his future operating cash flow. He also did not consider the high fixed operating costs (such as ground rent, utilities bills, property taxes, etc.) that came with a big building. This meant that he needed a higher sales volume to cover his fixed costs. He lost his flexibility to choose the right customers and was forced to fill his large capacity with orders that made lower or no profit margins. The combination of lower profit margin and higher operating cost caused his EBITDA to deteriorate even though sales increased. He would have been better off taking up a short-term factory lease and leasing (not buying) new equipment to cope with the increased orders.
4.3.3. Lessons for Entrepreneurs
The case study highlights the importance of focusing on the objective as well as business and revenue models of the business. When deciding whether to proceed with a capital investment, ask these questions:
How will this capital investment strengthen my competitive edge against my competitors? How will this capital investment create more value for my customers who will be willing to pay for the additional value and benefits that I can generate? How will this capital investment change my fixed operating cost structure and what is my new breakeven sales target for the higher fixed operating cost structure? What kind of revenue and earnings should I expect from this capital investment?
Most entrepreneurs do not spend enough time to consider the questions above. Instead, they dedicate more time to raising funds for the capital expenditure. It P a g e | 80 is important that these questions are answered first before considering the various financing options for the capital expenditure. P a g e | 81
5. FUTURE OF ALTERNATIVE FINANCE
5.1. Developing and Expanding the Lending and Investing Network
In recent years, the alternative financial sectors, like the peer-to-peer (P2P) sphere, have shown a growing commitment to provide lending solutions to MSMEs, and especially to impact investing that reflect a want for a more equitable access to finance. But to adequately connect businesses to funds and vice versa, an entire ecosystem of inter-related entities need to be strengthened and supported (see Figure 8). We identify the following six areas of strategic expansion in order to develop and grow a successful lending and investing ecosystem.
The Lending and Investing Eco-system
Figure 8 : Building a Lending and Investing Eco-system (Demand & supply-sides, Enablers, Media, Research)
A. Developing Internal Capacity Short-term support for strategy development of a sound alternative finance ecosystem can come from consultants or advisory firms with expertise in lending and investing infrastructure and community. On a more long-term basis, engaging experts in the form of investment committees to discuss potential opportunities and strategy would bring policy-makers and the business community closer for commitment and collaboration. This does not only raise awareness but lends voices to advocates and platforms for active engagement on challenges and multi-lateral cooperation.
Likewise the quality of the startups and investible companies need also be raised. In order to make investment risk manageable for investors, government agencies P a g e | 82 working with investment platforms must establish clear guidelines and reasonable regulatory environment to convince investors to explore and engage. These will be instrumental to building credible pipelines of investable opportunities. Financial literacy and understanding of how investors and entrepreneurs perceive financial information have been comprehensively discussed in section III, and this needs to be followed up by talented individuals in the company to signal and attract investments. Similarly, funds looking for investments need to sufficiently networked and looped within business circles and startup communities to be able to be first to secure investments or acquire targets. Special government agencies can also ensure MSMEs are getting the right financing forms and help at different stages of their business cycles. B. Stakeholder Communications Effectively communicating the vision related to building and sustaining a lending and investing ecosystem is critical in ensuring that every stakeholder is aware of what is being sought — a more prosperous and inclusive society. Advocacy with these stakeholders should include messaging from the government that narrates an alternative financing strategy, and a clear connection between investors, entrepreneurs, social enterprises, service-providers, academia, media and the initiative's mission as a public good for the underserved and disenfranchised. C. Legal and Enforcement Structure Any financial scheme or economic system has to be protected by a sound legal and enforcement system that protects the rights of individual, not only property rights, but also intellectual property. When the objectives of financial inclusion are set and rules are framed to achieve them, an effective mechanism must be implemented to make sure that the rules are enforced and observed. Effective enforcement requires a mechanism to detect the violation and proper sanctions to deter anyone from violating the rules to, for instance, intellectual property. These include enforcing contracts through the mechanism of prevention and the mechanism of remediation.
Respondents highlighted that it is important to also consider the legal framework in the countries where the investments are being made. Some developing countries have more traditional delineations between for-profit and not-for-profit activities which need to be understood to conduct lending and investing work. In ASEAN, expectations of successful financial integration are high but the challenges are immense, given the diverse legal and regulatory environment within the varying pace of economic development of each nation. D. Deal Flow A key consideration for developing lending and investing practice is to consider how deals will be sourced. Does the ecosystem currently have the ability to find or build investment-ready enterprises in its target geographies and impact areas? One way is to explore joint ventures (funds, platforms, and partnerships with business organisations) to help source and share investments. Another way is through accelerators which run programs with demo days at the end to showcase startups to investors. Equity crowdfunding platforms contain significant deals for P a g e | 83 investments too, and for companies to raise capital. A fully formed concept of where investments will be made and how entrepreneurs will find them is a key consideration shaping initial strategy development. E. Performance and Impact Measurement For any system, economic or otherwise, its system-wide adoption can only take place wholeheartedly if it has the promise to produce the expected results. With that, an effective set of balanced metrics has to be designed. This would enable the necessary growth and performance measurements that will now include MSME funding volume, overall economic growth and ecological sustainability from business activities. In terms of shared prosperity and financial inclusion, it is a means to capture economic progress in more holistic terms, besides merely measuring productivity and output. Similarly, a much better metric for alternative financing would be financial literacy and education levels, alongside MSME alternative lending volumes and GDP. Organisations that are actively engaging in lending and investing should also add their unique insights to the existing efforts within the sector7. F. Partnerships As in all areas of collaborative work, partnerships are critical. Developing partnerships with a range of actors in the lending and investing ecosystem adds strength to them and can be a strategic way for organisations to value add to existing efforts or shore-up areas of shortcoming. Key stakeholders that survey respondents mentioned as important partners include incubators/accelerators, innovative foundations, academic institutions, intermediaries, and, of course, alternative investors themselves (PEVCs, social impact investors, etc). Leveraging partnering capabilities within the organisation aligned to the needs of different stakeholders is key. Exploring where and how best to manage these important relationships (e.g., more centrally within key program area(s), more decentralized within guidelines, etc.) are important considerations based upon the nature of the lending and investing role(s) and capabilities.
5.2. Policy and Regulatory Improvements to Enable Access to Alternative Capital
One simple and effective way to characterize policies for venture capital and innovation is to distinguish those that aim to increase the demand for alternative funding, largely through the support of the creation of entrepreneurial ventures, and those that aim to increase the supply of alternative financing, largely by making them more attractive to intermediaries and investors. We examine each set of policies in turn, and the attempt to derive some conclusions which are supported by existing research. This will put us in a position to address issues relevant to ASEAN on reasonably solid grounds. A. Demand-side Policies
7 Silver Economy Index, Sustainability Accounting Standards Board (SASB), Acumen Lean Data, Social Return on Investment (SROI), Gold Standard (environmental impact), and IPA Goldilocks ToolkitAZ, to name a few. P a g e | 84
While individual initiative is at the heart of entrepreneurship, public policy has a part to play in either promoting or stifling the ambitious entrepreneurial initiatives. An important role for the government is to create and maintain general economic and institutional conditions that are conducive to entrepreneurial initiative. A climate of institutional stability, more than just the entrepreneurial spirit, is conducive to the environment of entrepreneurship. This creates a healthy and stable economy, with strong economic activity and healthy competition domestically as well as from foreign companies.
In this section, we look at three types of specific policies that may affect the development of entrepreneurship. We will focus on policy dimensions that may have particularly strong effects for the creation of new companies as well as the growth of existing ones. 1. Fostering Competition Among Companies The first policy dimension to consider is the degree of competition in the economy, especially from foreign companies. Competition has been shown to be very important for innovation8 and for economic growth9. Competition is particularly important for entrepreneurial companies for two reasons.
First, new companies that have ambitious goals need to find space in the economic environment to grow. An economy where incumbents are protected and can entrench themselves from new challengers is not attractive to entrepreneurs. While I am not aware of specific studies on this topic, a simple look at which are the most innovative economies also points to them being, among other things, very supportive of competition in product and service markets.
The second reason why competition is a necessary condition for entrepreneurial success is that competition from abroad is particularly useful to force new ventures to become themselves competitive from the start10. Indeed, economists have long abandoned the idea that the protection of infant industries may be a successful policy11. Once again, without any goal of proving causality, innovative economies are mostly open to competition from abroad. As foreign competition improves productivity12, new companies that are born in economies open to imports and FDI are structurally more productive. Being born in a demanding environment means that start-up often prepare themselves from early on to succeed, but also to cooperate and forge alliances with foreign companies to become a regional or global player. In a globalized world, being born an ‘entrepreneurial jet-setter’ may prove a long-lasting advantage.
8 Aghion, Philippe, Nicholas Bloom, Richard Blundell, Rachel Griffith, and Peter Howitt (2005). Competition and Innovation: An Inverted U Relationship, Quarterly Journal of Economics, vol. 120 No. 2, pp 701-728. 9 Aghion, Philippe, and Rachel Griffith (2005). Competition and Growth. Cambridge, MA: MIT Press. 10 Bloom, Nicholas, Mirko Draca, and John van Reenen (2016). Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity. Review of Economic Studies, vo. 83, No.1, pp.87—117. 11 Baldwin, Robert (1969). The Case against Infant-Industry Tariff Protection. Journal of Political Economy, vol. 77, No. 3, pp. 295-305. 12 Pavcnik, Nina (2012).Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants. Review of Economic Studies, vol. 69, No. 1, pp. 245-276. P a g e | 85
2. Fostering the Creation of New Technology The second policy dimension relevant for creating entrepreneurship is the development of a solid technology base and of highly qualified human capital. As we know from Schumpeter13, technology is a major driver of creative disruption and of the creation of new business models that enrich individuals and make life better for society as a whole. Clearly, technology development is largely driven by private initiative, as it is by experimentation, new ways to create solutions to unprojected problems that may arise.
There are several ways that public policy can contribute to technology development. First, and most logically, the creation of new technology is an intellectual pursuit that takes place in universities and labs, public or private. Therefore, the government can influence entrepreneurship by creating and maintaining effective universities, most of which are public in (almost) all countries. This may seem a simple and straightforward task, but it is not. In fact, interestingly, universities tend to thrive as creators of new knowledge exactly in the conditions where entrepreneurial start-up do: free circulation of brains and money, competition, (and) a sound institutional environment14.
Interestingly, providing more funding to universities does not necessarily result in more scientific output, unless they are subject to keen competition from national or international peers. Cultivating a credible and rigorous national university system is therefore an important early step towards the support of entrepreneurial ventures. In this respect, the US system of high competition for students and mobility of professors is one possible effective solution. But it is not the only one, as systems where public funding and oversight are prevalent may also prove effective, like in the case of the British system or the French system of ‘grands écoles’.
Beyond higher education, technology also arises from the money put to finance laboratories and research projects. Here an important feature of government policy is its potentially forward-looking attitude.
As we know, many fundamental discoveries have not been the outcome of targeted research, but rather the serendipitous fruit of basic research which had little immediate commercial urgency or motivation. So the role of government for helping long-run, basic research is a potentially very fruitful policy.
There are many ways this can be accomplished. For example, investment of long- term industrial project that require fundamentally new technology is likely to lead to many commercial applications down the road, like in the case of the technologies developed for space activities in the race to land on the moon. Also military
13 Schumpeter, Joseph (1975 [1942]). Capitalism, Socialism, and Democracy. NY Harper, New York, NY. 14 Aghion, Philippe, Mathias Dewatripont, Caroline Hoxby, Andreu Mas-Colell and Andre´ Sapir (2010). The Governance and Performance of Universities: Evidence from Europe and the US. Economic Policy, vol. 25, No. 61, pp. 7–59. P a g e | 86 expenditure, albeit controversial, has a long-term nature that promises to yield indirect applications with commercial value along the road.
It is worth further mentioning the importance of a structural dimension that is very important for entrepreneurship: intellectual property rights. Intellectual policy often constitutes an important protection for new companies to shield them from predatory behaviour by incumbents who could easily commercialize their invention. Creating an efficient system of intellectual property rights also allows the creation of a market for technology that has been shown to be very important for allowing companies to make use of the technology they need15. Even in open source technologies, the rights to certain developments or the original technology are important for further commercial applications16.
15 Arora, Ashish, Andrea Fosfuri, and Alfonso Gambardella (2001) Markets for Technology. Cambridge, MA, MIT Press. 16 Lerner, Josh, and Jean Tirole (2002). Some Simple Economics of Open Source, The Journal of Industrial Economics, vol. 50, No. 2, pp.197–234. P a g e | 87
3. Fostering an Entrepreneurial Culture The third type of policy dimension that has important effects on entrepreneurial activity is the creation of a culture that rewards experimentation, risk taking, and therefore tolerates failure. This is a very difficult topic, because it is naturally difficult for a policymaker to influence cultural values and attitudes. This is also a very slow- moving trait of a population, and one cannot change it by decree. However, there are some possible measures that can help the attractiveness of entrepreneurship. For example, governments can influence bankruptcy rules that may excessively penalise failed entrepreneurship or dampens the entrepreneurial spirit of a society. Economies that systematically penalize failure discourage risk taking, and we know that risk tolerance is beneficial to innovation17,18.
B. Supply-side Policies
While supporting the creation of entrepreneurial ventures that create demand for funding may be difficult to a policy-maker because it requires policies that are long- term and appear difficult to communicate to the entrepreneurial community, supporting the supply of funds to entrepreneurs is apparently easier. However, spending public money to entice the supply of funds is also a treacherous route, which in this section, we look at policies that may affect the supply of funds for entrepreneurial ventures. We will focus on three types of policy: subsidies to investors (including tax advantages), direct investment through different types of vehicles, and measures to spur the alternative finance industry.
1. Subsidies to Alternative Finance Investors Subsidies to investors are a very easy measure to enact, and are also palatable to policymakers because they can be easily communicated and have short-term effects. However, subsidies are costly and they may have unintended effects. In fact, there is no systematic study that compares the cost and benefits of subsidies to investors. A serious analysis in this direction would be very valuable for assessing policy. We also know relatively little on the effectiveness of subsidies, since they may take very different forms. Capital gains tax depress investments in the early stage of technology ventures by reducing the incentives of investors to put money in those type of ventures that are riskier but also have higher potential upside. By moving towards safer investments alternative finance firms can therefore save the additional cost of paying a high tax on their capital gain. By reducing the financial gains at the moment of exiting the investment, capital gains also reduce entrepreneurs’ willingness to work hard to find successful strategies19. 2. Direct Investment into Alternative Capital
17 Azoulay, Pierre, Gustavo Manso, and Joshua Graff Zivin (2011). Incentives and Creativity: Evidence from the Academic Life Sciences. Rand Journal of Economics, vol. 42, No. 2, pp. 527-554. 18 Tian, Xuan, and Tracy Yue Wang (2011). Tolerance for Failure and Corporate Innovation. Review of Financial Studies, vol. 27, No.1, pp. 211-255. 19 Keuschnigg, Christian, and Soren Nielsen (2004). Start-ups, venture capitalists, and the capital gains tax. Journal of Public Economics, vol. 88, pp. 1011–1042. P a g e | 88
Direct investment by the government takes the form of either establishing public venture finance firms, or of investing into private alternative fund vehicles. Key performance indicators (KPIs) of the fund will focus on survival and subsequent expansion of the startup.
3. Fostering the Development of the Alternative Finance Industry There are a variety of specific policy measures that can be used to create a larger and more effective alternative finance industry. Some we have already examined in section III, when we considered the general conditions for the development of entrepreneurship and entrepreneurial finance. Here we should focus on more specific measures that target alternative finance firms directly.
A different approach for the government is to create an agency that acts as public investment firms and invests directly into companies. This is for example the case of the US Small Business Innovation Research programme in the 1980s20. There are two aspects to these efforts.
First, these agencies tend to complement private investment funds and often cooperate with them in providing funding to companies that are deemed valuable by private investment firms.
Second, in the US case the development of the public investment firms fostered the maturation of the industry by allowing individual managers to accumulate investment experience that many of them then transferred to private investment firms. Additionally, the volume of investments made by public investment firms was enough to support the initial development of specialized service providers like accountants, lawyers, investment bankers, and head hunters, expertise that are very important for the operation of the alternative finance model.
A very important element for alternative finance firms is to generate good returns for their investors by exiting their companies. An IPO on a public market is arguably the most successful exit21. It is therefore important that successful ventures are able to list on a stock exchange with reasonable costs and with reasonable requirements. Listing a portfolio company allows alternative finance investors to ‘recycle’ the financial capital they manage when it becomes less needed, and to put it back to work where they are most productive22. As a secondary effect, knowing that a listing in a country is possible, also attracts foreign investors to invest, as they have more reassurance of a good path to exit. Assessing the European experience, researchers23 found that opening stock exchanges targeted at innovative companies
20 Lerner, Josh (1999). The government as venture capitalist: The long-run impact of the SBIR program. Journal of Business, vol. 72, No. 2, pp. 285–318. 21 Phalippou, Ludovic, and Olivier Gottschalg (2009). The performance of private equity funds. Review of Financial Studies, vol. 22, No. 6, pp. 1747–1776. 22 Michelacci, Claudio, and Javier Suarez (2004). Business Creation and the Stock Market. Review of Economic Studies, vol. 71, No. 2, pp. 459–481. 23 Da Rin, Marco, Giovanna Nicodano, and Alessandro Sembenelli (2006). Public policy and the Creation of Active Venture Capital Markets. Journal of Public Economics, vol. 90, No. 8-9, pp. 1699– 1723. P a g e | 89 had a positive effect on the willingness of PEVC firms to invest in early stage companies.
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C. Developing the SME Economic Eco-system
The main issue to discuss at this point is that a good policy cannot be piece-meal but help shape and sustain what economists often dub the ‘entrepreneurial ecosystem’. An ecosystem is a set of elements that mutually sustain and reinforce each other.
An ecosystem is balanced, so any government policy should avoid being too small to make any significant impact or too large as to upset the incentives of private agents. For instance, creating a very small public investment agency, or one which has unstable funding and a short-term horizon, is likely to have no appreciable effect. Also being too large can do damage, by crowding out private investors.
An ecosystem is also a resilient creature that does not need external protection to survive and prosper. Therefore an overly protective environment is not going to be sustainable once the supports are lifted. As we have remarked about the effect of competition on start-up vitality, an alternative finance industry that is able to support ventures that are subject to competition from abroad, and that is able to withstand the competition of foreign investors is mature, will make successful investments and will reward its own institutional investors.
A different type of resilience is the ability to attract and retain the elements critical to the ecosystem. Policy-makers should be aware that both entrepreneurs and capital are mobile, and that for them leaving is much easier and faster than deciding to come back again in the future. Therefore, measures that risk disrupting the confidence of the venture community should be considered carefully. A simple measure of the difficulty to retain talented human capital is the fact that Silicon Valley, where talent can expect to receive reward, is full of ‘refugee’ entrepreneurs from many different countries. These people have left their home countries because these have failed in developing attractive ecosystems, where talent can express itself and reap its rewards.
A difficulty in keeping an ecosystem vital is to balance the interests of its participants. In the case of entrepreneurship, the view of the economist is that there are gains from trade that can create a situation where all parties involved are satisfied. Reality is bit more complicated, since some of the parties are in fact losing out to innovators, and in certain cases they are difficult to compensate.
The recent debates on the ‘sharing economy’ are a clear example. Companies like Uber and Airbnb create wealth but they also upset established industries and vested interests, namely licensed taxi-drivers and hotels respectively. This creates tensions and clearly also puts pressure on policy-makers, who need to balance their decisions. A bright side of this debate is that it has raised public awareness that change, while for some painful and costly, can create enough growth and wealth for society at large that, hopefully, those who lose out can be compensated without them blocking a generally beneficial progress. P a g e | 91
It is useful to consider an example of how the ecosystem concept may be practically relevant for public policy. A study24 finds that US federally funded research leads to an increase in patenting rate within the same region. Interestingly, this effect holds true only in regions where there is an active alternative finance industry.
A deeper analysis to consider the effectiveness of public R&D and other characteristics of the surrounding environment, for example the presence of an already vibrant alternative finance industry in the United States and not in Europe during the 1990s, needs to be done. Such contextual results are very important because they point us to a sobering view of any analysis that focuses narrowly on one dimension of this complex ecosystem, thus failing to reach a deeper appreciation of the underlying relationships between institutional elements.
We conclude this section by considering that an ecosystem needs maintenance. This means that, irrespective of the apparent degree of success, a very useful practice for any policymaker is conducting thorough assessment exercises of the policies they have put in place. These systematic assessments, to be planned as soon as a policy is approved, and conducted promptly, are very useful tools to monitor the progress of policy implementation, and are also very useful to motivate a careful policy design. They naturally allow improvements over time, and would contribute to generate widely available knowledge useful for future decisions.
5.3. Financial Literacy and Alternative Financing Awareness Programs
The Post-2015 ASEAN Strategic Action Plan (SAP) for SME Development (SMED) is structured into two parts, namely the Action Plan and the Implementation Roadmap (Figure Y).
The Implementation Roadmap aligns concrete action lines with timelines. It sets the basis for the monitoring mechanisms for who, when, and how to manage the progress of the action lines on an on-going basis. KPIs provide policy indicators to evaluate the achievement of the strategic goals. The goal of improving financial literacy and raising awareness falls in Strategic Goal B where the desired outcomes (noted as B-2) that "financial inclusion and literacy will be promoted, and the ability of MSMEs to engage in the financial system will be enhanced" are listed. Access to financing from traditional financial institutions is limited due to the lack of credit information. The actions to this goal is to enhance MSMEs’ financial literacy to make them more aware of financial resources and support programs available to them. MSMEs need to be encouraged to utilise diversified sources of financing. The KPI data will be based on the percentage of business loans to SMEs, where so far, only six of the ASEAN member states (AMS) have data available.
24 Samila, Sampsa, and Olav Sorenson (2010). Venture Capital as a Catalyst to Innovation. Research Policy, vol. 39, pp. 1348–1360. P a g e | 92
Figure Y : Structure of the ASEAN SME SAP Source : ASEAN Strategic Action Plan for SME Development (2016-2025)
In terms of implementation, we recommend that ASEAN governments, through its relevant responsible agencies, make financial education a priority, to increase the effectiveness of financial inclusion policy and as part of its socio-economic equality strategy. The better people understand finance and the economy, the better central bank policy transmission and compliance will be.
A cooperation framework can be implemented through national coordination, from responses of related ministers and other stakeholders. Salient areas for increasing the financial literacy level should include the identification of target groups, composing a financial education strategy, and setting program indicators to monitor and evaluate effectiveness, ensuring financial education programs attain the targets that have been set and lead to optimum results.
Through financial education, more awareness in the society is raised towards the goal of improved financial behaviour. To reach this goal, financial education should start at an early age. Even so, the business financial decisions today lie in the hands of business-owners and proprietors with varying degrees of financial literacy and understanding. Hence, specific approaches should be adopted for different target groups on specific needs when communicating financial education. However, the core education aspects should include basic financial planning for MSMEs, business banking products and services, alternative sources of financing as well as complaint and dispute resolution.
Having said that, it is important to note that making people aware of financial services or making available such services are not sufficient. What is required is to help them build their business assets where they had little when they started, and subsequently making their assets not lie dormant or deteriorate but actively working to enhance them. This in turn invigorates the entire economy by optimizing the use of all net assets.
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GLOSSARY OF FINANCIAL TERMS
Financial Terms Definition
Bonds A certificate of debt issued to raise funds. Bonds typically pay a fixed rate of interest and are repayable at a fixed date.
Capital Budgeting The process of managing capital assets and planning future expenditure on capital assets.
Capital Investments Funds invested by a business in its capital assets that are anticipated to be used before being replaced. Capital investments are generally.
Commercial Papers Debt instruments issued by established corporations to meet short-term financing needs. Such instruments are unsecured and the maturity.
Convertible Preference equity shares issued by a business that include a provision Preference Shares allowing them to be converted to ordinary equity shares after a specific time frame. Creditors or Suppliers the company owes money to, usually for services or goods Accounts Payable supplied.
Debtors or Customers who owe the company money, usually for services or goods Accounts Receivable supplied.
EBITDA The earnings before interest, taxes, depreciation and amortisation. It is the net cash inflow from operating activities, before working capital requirements are taken into account.
Factoring Selling the interest in the accounts receivable or invoices to a financial institution at a small discount. It is sometimes called “accounts receivable financing”. Factoring helps a company speed up its cash flow so that it can more readily pay its current obligations and grow.
Initial public The sale of a company’s shares to the public on a stock exchange for the offering (IPO) first time. Letter of credit (LC) A written undertaking by a bank, given to a seller at the request and on the instruction of the buyer, to pay up, at sight or at a future date, up to a stated sum of money within a prescribed time limit.
Trust Receipt A financing facility for imports where a bank makes an advance to the buyer to settle an import sight bill. The advance is generally for a certain period. P a g e | 94
On the due date, the buyer is required to settle the bill with interest at an agreed rate.
Syndicated Loan A large loan provided to a borrower by a group of banks that work together. There is usually one lead bank that provides a small percentage of the loan and parcels the rest to other banks.
Term Loan A loan for a fixed period of more than one year and repayable by regular instalments.
Working Capital The amount of capital or current assets available for operating the business. It is calculated by subtracting current liabilities from current assets.