Angels, behind the scenes

Synergies 2.0

After starting the conversation on how startups and banks can converge to better work towards a better future, I’m back to take this topic further. My previous article in this series talked about how banks can act as pain-killers and vitamins in a startup’s journey. This brings us to one of the more important vitamins to boost a startup’s engine: funding. Investors across categories such as angels, VCs, accelerators, corporates, family offices among others have played a pioneering role over the last few years in this space. An interesting trend to observe is that their role has transitioned from being a mere provider of funding, to that of a mentor and thought leader. On similar lines, the role of a bank, has transitioned ‘Beyond Banking’. A bank’s partnership driven approach extends to investors as well. In fact I strongly feel that the next phase of collaboration between a bank and the investor will be one of the most exciting areas to watch out for in this decade.

What have we achieved so far together?

An investor’s objective is to tap the most promising startups early, partner with them, and evaluate exits at the right time. Similar to investors, a bank builds early relationship with startups through simple & agile banking, and continues to act as their long term partner.

Here is how we have largely fulfilled the startup’s needs for credit so far:

The blurring of lines across various forms of investor and bank funding in recent times opens exciting doors for collaboration.

What does the future hold for us?

Both banks and investors perform a lot of activities behind the scenes. We aim to ensure the startup's performance is as per the business plan, they build a scalable and profitable business and create equity and social value. Our lenses may be different, but our end outcomes are remarkably similar. To add, digital led changes in prospects’ underlying business models have created multiple opportunities for banks and investors to leverage each other’s efforts. Let’s explore a few of them:

Getting the basics right quickly

I am sure all of us have applied to more than one job opportunity in our careers. At the application stage, we had to fulfill a few basic eligibility criteria. The below 2 outcomes were mutually exclusive:

1.    Satisfied all job criteria and proceeded to the next stage

2.    Did not satisfy at least one of them and rejected upfront

It's important to note that the assessor always makes a binary decision at this stage- Yes/ No. Judgmental calls come later. It is a similar case with an investor when presented with an opportunity. They would foremost need to ensure the proposed investee is on the right side of the law. The financial/ operational model, shareholding patterns, etc. need to meet all regulatory guidelines- FEMA, AML, FDI, among many others. These compliance requirements transcend geographical boundaries on many occasions. Any single non-compliance may result in a complete no-go. Now let’s take the case of banks. Banks have over time developed a strong platform to assess such basic eligibility criteria. The first barrier gates are very strong to filter out the non-compliant applicants. For global banks such as HSBC, this extends beyond India. We then arrive at our own preliminary binary decision- a simple yes or no. With investors also seeking such comfort, there exists a great opportunity to strategically collaborate with banks during the initial assessment. With the assurance of basic check boxes ticked off, an investor can then quickly proceed with the next stage of credit assessment.

Say goodbye to paper

As a part of KYC and credit assessment, banks have traditionally focused on paper based evidence – Identity & Address proof, collaterals, stock statements, financial statements, among others. The previous decade witnessed growth of new age financing. It comprises lending based on non-traditional parameters such as receivables, and cash flows. With such changing times, banks have enhanced their underwriting models to better assess the borrowers. Banks such as HSBC typically assess data points from:

   - GST based invoices

   - Cash flows in and out of the banking system

   - Alternative behavior based on numerous data points

Recent innovations such as UPI, open banking through account aggregation and TReDS, promise a very exciting future for innovative lending and cash management offerings. This in turn is converging with the investor’s assessment approach. An investor would typically look at metrics such as per unit revenues, top line projections, and cash flows to arrive at the true worth of the startup. It provides us a great opportunity to raise the bar of the collaboration. A question to all of us would be: “With changing dynamics, how can we create a Win-win situation for all: Startups, investors, and banks? How can we lower the cost of funding, while adhering to all guidelines?” I am very excited with such prospects.

Maintain a hawk’s eye

Post extending credit lines, it is important to ensure the performance is as per the expectations. Since times immemorial, banks have developed frameworks, processes and systems for continuous monitoring of the financial and operational performance of the borrower. Any early signs of weakness raise a red flag, and suitable actions are initiated. Applied in a different context, an investor can be treated as the lender and the investee company as the borrower. A few trends visible are:

- Transition of investment objective from a balance sheet to the one based on profits

- Growing popularity of venture debt financing

It is vital for an investor to maintain a close watch on the startup and correct the course wherever required. Banks have done this traditionally by structuring credit products to suit the business models. These comprise sales/purchase bill loans, corporate cards for vendor payments, supply chain financing, etc. Adequate controls are then dynamically configured to ensure rightful use of credit. Here banks and investors can jointly provide our portfolio companies relevant insights and help them course correct. This approach can serve as a fantastic means to help startups steer in the right direction in their transformational journey and boost a healthy credit growth in the country. 

New age methodologies, combined with transitioning of roles of banks and investors provide great collaboration opportunities for us

Go Beyond Banking

Bank such as HSBC have taken a leap of faith in this space. We help providing startups with necessary network connections, insights on guidelines and regulations shaping up across the globe. Aided by own presence in all major countries of the world, banks such as HSBC act as great facilitators in overseas expansion. Here’s our one stop investment guide for multiple preferred countries. We take care of all trade, forex and remittance needs through digital means. HSBC has a strong franchise in the form of International Business Banking in major countries wherein firms get seamless access to all their global accounts on a single platform. A global relationship support in the home country then acts as a single point of contact for all global accounts.

An investor would normally support international expansion from their investees. However, an investee company has had to put significant efforts to ensure compliance with multiple geographies regulations. So, I’m sure investors and partner startups will welcome any help to reduce the burden. For banks like HSBC, this is a very exciting dimension of our startup proposition. We are keen to work together and help startups grow in the international arena quickly.

So, how can we take it forward?

Till now, banks and investors have partnered through various offline events, and digital forums. HSBC & our investor partners have together helped startups connect with the right audience and experiment with the right corporates. In the coming days, we are very keen to take the partnership above and beyond the existing collaboration. I call this the ‘Bank-Investor partnership 2.0’. Let’s partner more strategically, identify more exciting areas where we can rightfully work together, and jointly boost the startup ecosystem of the country. I am confident that banks such as HSBC are in a sweet spot to drive such innovative and exciting partnerships in the days ahead.

Your thoughts?

The author is Country Head, Business Banking, HSBC India

(With inputs from Dilip Gopinath & Shekhar Lele)