Necessity of an Equitytech Platform for SME Equity Funding

Significance of equitytech in the fintech industry

Activities in the non-equity fintech domains: The concept of fintech has been traditionally restricted to technologies related to payments, lending, credit rating, wealth management, insurance, regulation, compliances, management of financial securities, smart contracts, algo-trading, etc. Among these, payments, loans & insurance have assumed significant prominence. Now, even in these debt and insurance spaces, a very few fintech companies are providing end-to-end online consulting services. Most of the fintech companies are providing only one or two of the allied services in the main long chain of the financial transactions. This is the condition of the lending and insurance space where there is the maximum focus of the fintech universe.

Activities in the equitytech space: Activities in the equity space are conspicuous by absence in the fintech spectrum. Out of the 2150 fintech companies in India, only 10 might be in the equitytech space. There are only three types of activities happening for equity transactions in the fintech world: 1. The first is a deal database platform. Here you get information of the equity deals that may resemble to your desired deal in one way or the other. The information on the past deals may help you in identification of an investor or in benchmarking your valuation. 2. The second is a deal brokerage platform. Here, you pay the platform to list your need to sell or dilute your business and pay a bit more to contact each investor. The platform has nothing much to do with success of your transaction and has serious limitations in validating the information submitted by the businesses, investors or advisors. 3. The third type of platform is a virtual data room (VDR) platform for a due diligence. Here, the deal is already done offline & the platform helps you to access documents online with several security & access features.

Absence of equitytech platform: There is no end-to-end equity funding related delivery or implementation fintech platform company in the whole world (except Apohan whose platform is in the making). Forget fully automated, there are not even semi-automated delivery platforms in the equity fintech (or EquityTech) space.

Necessity of an Equity funding platform

I have tried to capture the key reasons why there is a need for development of an EquityTech platform through a series of questions & answers.

1. What all is wrong with BANK funding for SMEs?

Major gaps in bank loans for the SMEs: Banks, Non-Banking Finance Companies (NBFCs) & many other types of lending institutions don’t lend at all or lend less than required or lend late or lend at higher rates or lend with difficult (unfair/ unacceptable) terms & conditions when it comes to SMEs. They reject 40% of the business loan applications. It is unpredictable whether they will sanction a loan & when. Their repayment cycles don't match with the revenue growth cycles of the SMEs leading to cash flow management problems in SMEs & premature defaults. They don't give moratorium till a new project crosses break-even operating capacity or if there is downtrend in the revenue. You may be surprised to know that the banks classify the SME loans in the high risk category whereas the default rate of SMEs is much lower than that of the well-appraised, well-rated large companies. In fact, it can be said that the banks lend to SMEs only to fulfill the priority sector lending (PSL) norms prescribed by the Reserve Bank of India (RBI).

Huge unmet SME funding demand: The amount as per the loan applications rejected by the public sector banks in India itself is 0.6 trillion USD as per 2018 statistics. The total demand of business funding considering the applications not made out of hopelessness and the applications rejected by the private banks and by all kinds of Financial Institutions (FIs) is much higher. All of this demand may not be demand for equity but a large fraction of it matches the risk appetite of equity investors. While large companies have a very high (debt by equity) D/E ratio, SMEs have heavy promoter-equity & lesser institutional loans. The demand shows the potential of an EquityTech platform.

Limitations of bank lending system: The banks are the trustees of the third-party (or public) money and they must lend as per their pre-defined internal rules & the laws governing the banking system. Banks virtually must provide loans to the businesses that meet their criteria of eligibility even if this credit would be risky in the personal perception of a lending officer. The bank officers will have to refute a loan application by a deserving business merely because it does not fulfill the financial and documentary requirements. In contrast, equity is a discretionary fund & the investors or their representatives are free to make a case-to-case subjective decision. Hence, at least theoretically, there is more feasibility of equity funding for SMEs.

Insatiable security requirement: Further, bank lending is in the proportion of the existing wealth of the SME (and the promoter) to be provided in the form of security and hence the possibilities of exponential growth dependent only on bank loan are virtually none. A businessman who has an absolute certainty of a big business growth would sell the property & put 100% proceeds in the business rather than mortgaging it to a bank & raising capital for 50 to 75% of the value of the property. The problem with the SMEs is that there is no such extra, free property to get additional loans for growth or turnaround. Equity doesn't have any such security requirement problem. Rather, the investors & promoters, after the deal, are supposed to provide the securities in proportion of their holdings for the existing loans.

Ruthless recovery on a default: Banks are ruthless in recovery if you look at the phenomenon from the SME perspective (& not from the so called banking system stability perspective). Typically, they sanction a small fraction of the loan applied for by an SME putting the very viability of the project at risk and creating one's own Non-Performing Assets (NPAs). But, SMEs can't afford & can't manage litigation against powerful banks in proving bank's role in loan default. One major internal error or one major external shock & you are gone! The Securitization And Reconstruction of Financial Assets & Enforcement of Security Interest (SARFAESI) act helps banks in using government machinery to recover loans auctioning business assets, personal assets, family assets, ancestral assets & assets of all guarantors. Also, the civil & criminal court case, if complex, make an SME promoter repent for having started a business in place of doing a job.

Hence, may be the bank loans don't dilute your control & you don't have to share your fortunes; may be you can redeem the loan & become debt-free, but the bank loans come with their own disadvantages & you must look at the equity funds that don't have any of these lacunae.

2. Why equity is a better SME funding option?

Advantages of equity funding: The businesses don’t have to pay back the equity (unlike you to pay back the principle amount in a loan), they don’t have to pay a fixed, periodic, guaranteed return ( unlike the interest payment enforced by law), no security is required for equity funding. Also, there is no limit on the amount that can be availed & all required amount is available as per the need of the business irrespective of the existing size of the business. There is no legal recourse for recovery to the investor in the event of non-performance. The investor can't take the promoter to a court in personal capacity, in the capacity of a shareholder, in the capacity of a director or in the capacity of a company. The equity investor has all the bargaining power at the door-step & not after making an entry. This is the reason equity funding is purely merit-driven & unprofessional SMEs can't get it. It is also this very reason why a business is studied with 360 degree details before committing equity by the investors. SMEs must understand why loan processing is so easy & why equity funding so complex.

Limitations of internal accruals: The internal accruals from the business are insufficient to take care of the financial requirements for increasing working capital, refurbishment of assets, modernization of the processes, digitization of documentation, accommodation of cost inflations, etc. even for the same level of operations. They are insufficient even for other small growth initiatives on operations and marketing side. When an SME becomes 10-15 years old, it develops sufficient confidence & abilities to now grow at a much higher rate. This requires many changes in the existing business which need capital. While banks loans are too unpredictable & risky, internal profit reserves are too insufficient keeping a potent business at low scale despite high management capability.

Equity funding & exponential growth: When it comes to applying the loans or internal accruals for the large scale growth initiatives, joint ventures, greenfield plants, expansions, foreign trade, international business, diversification, vertical integration, etc., they fall short of the requirements by many times. Additional bank funding is not available as all the assets are already provided as securities for the existing loans. This stagnation situation is more true for SMEs who typically have hardly any fund-raising skills.

The conclusion is that if there is no equity, there is no growth! Further, no loan is available for distressed assets & the only option is equity. Hence, the conclusion is: no equity = no growth, no turnaround.

Further, it is expected that an SME business should multiply the wealth of an investor, pay regular & increasing annual dividends. But then, if there is a situational problem, the equity stands with the company till the things are back on track. Unlike banks, he doesn't destruct the company to recover his money on priority causing huge loss to all other stakeholders.

3. Why funding for SMEs & not for large companies?

Technical & operational capability is not a problem in SMEs: Around 60-90 lakh (screened, more than Rs. 25 cr revenue) SMEs in the target market in India don’t get funding even if they are highly competent in "making & selling" products/services with good profitability. The technical or engineering or marketing competence of SMEs is not an issue. The absence of equity funding to such SMEs is only due to absence of the necessary consulting infrastructure in the market. It is a false impression among the highly qualified individuals educated from high-ranking educational institutions such as IITs & IIMs that the SMEs are ever small because they don't know how to do business. That is not the case. If at all, the SMEs are stuck with money problems & if adequate money is available, they can easily get rid of whatever remaining operational issues. The SMEs have a great expertise when it comes to managing the technical or operational or engineering side a business such as project development, project management, project construction, vendor development, supply chain management, manufacturing, operations & processes, repair & maintenance, quality management, marketing, business development, sales, distribution channel management, research & development (R&D), etc. However, business is not all about making & selling! It is a financial investment as well or rather, it is a financial investment in first place!!! This is something where the first-generation, Non-MBA, Non-CA, non-CS, Non-lawyer promoters of SMEs are very unorganized.

Limitations of SME managements: In fact, the capabilities of the the Managing Director of an SME are much superior than a HOD/director of a large company. This is true especially looking at the constraints of capital, smaller size, lack of economies of scale, poor staff strength, no brand, lower bargaining power, promoter's non-corporate background. Apart from this, as a private limited company, they have to oversee a wide variety of work which is not related to their core profession. SMEs are excellent when it comes to making and selling products with a clear visibility of the profit. But their managements lack competence & bandwidth for growth strategy, turnaround strategy, good succession planning, financial performance, risk management, systems & processes, documentation, networking with communities other than clients. Like a IAS commissioner posted in a remote district, they have hardly any good second-rung management support. They become very good in the activities that they face each year over the age of 10-15 years of the business, but they do remain poor when it comes to one-time strategic transactions that a business can't avoid. In fact, these matters are very difficult for the seasoned operational professionals with good educational background even in the large companies!

SMEs deserve equity funding: It is not that SMEs are not equity-funding-worthy. But still, equity funding is virtually absent in them. A lot of money is getting poured into the same blue-chip companies making their (market price by earning per share) P/E ratios look absurd if we go by traditional wisdom on growth rates of companies. Without analyzing much, the investor community has tagged SME as a No-Go segment. Apohan aspires to change this perception & promote SME equity funding alternative investment funds (AIFs). A large number of SMEs do fulfil the conditions for an investment-worthy business such as a good financial character of the company, a clean corporate structure, an attractive return on investment, an acceptable risk profile, a respectable growth rate, a respectable degree of professionalism, marketing ability, good margins, good potential, etc. After all, the blue-chip companies of today were SMEs of some age & those who chose to actively grow them are much better off than the today's marginal investors. SME EquityTech platform makes sense because a substantial number of SMEs deserve equity funding on merit basis!

Large companies are insufficient for a platform scale: The number of large companies is extremely small and it does not justify the creation of an online EquityTech platform. Out of the 63 million businesses in India, only 6000 are listed & only 1200 trade actively on the stock exchanges. Even if we take the number of large companies (with revenue more than Rs. 250 cr) at 25000, the number of transactions per day are going to be hardly any. Also, if we substract the offline transactions, we would be left with hardly any online transactions in large corporate segment. Hence, an EquityTech (FinTech) platform capable of closing thousands of equity deals in a year is useless if it is not made to target the millions of SMEs in India & across the globe.

Reputed consultants are not interested in SMEs: The number of consultants that desire to provide services to large companies is many times more than the number of large companies. This is so even if we include very large private limited companies, public limited companies, MNCs, etc. The reputed consultants want to associate themselves with the large transactions & big brands. A large deal is easier as compared to an SME deal. A consultant has all internal operational documentation available in case of a large company whereas in most of the SMEs, business documentation regarding operations itself is in the brain of the (busy) businessman. It is difficult to write down a complete, consistent & sufficient description of an SME business for a (busy) reputed consultant. The management of a large company has defined boundaries of consulting mandate whereas in case SMEs a lot of energy is needed to be spent on equity education, deal structuring & removal of misconceptions. You need to originate the SME deals whereas in case of large companies they pre-exist. The SMEs can't afford prices of the reputed consultants. In my personal observation of the consulting industry, the IIT/IIM (and equivalent) staff of the reputed consultants would consider it below their dignity to have to work on a small SME deal. The domain expert consultants such as M&A, taxation, accounting, corporate, law can't provide all essential services under one roof to the SMEs & the deals fail. This is why SMEs are underserved when it comes to strategic transactions & an EquityTech platform can fill in the vacuum.

Standard online products not suitable for large companies: The transactions of large companies are complex. Also, their management has prejudices in terms of expectations. It would simply refuse to accept a standard or semi-standard platform based product. We don't expect the managements of the large companies to use a platform for multi-hundred, multi-thousand crore deals. The SMEs make an EquityTech platform a practical & scalable model.

Hence, exactly in the same manner LendingTech companies are meeting some SME funding need that was previously unfulfilled, Apohan's EquityTech platform can fulfil the equity need of SMEs.

4. Why Rs. 25 to 250 cr (3 Mn to 30 Mn) revenue range of target SMEs?

Screening micro enterprises is unviable for a start-up: It is not practical to select, study, screen & fund the companies below the revenue threshold of Rs. 25 cr because they are just too many of them. There are 63 million MSME businesses in India alone. 85% of them are micro. But even 15% of these, i.e. small & medium size business too make a vast & complex universe. No investors & consultants can have sufficient capacity to scan & filter the good ones from all the MSMEs. We have to exclude the micro businesses. For the purpose of Apohan's business, the definitions of MSMEs (Micro, Small & Medium Enterprises), SMEs (Small & Medium Enterprises), SMBs (Small & Medium Businesses), etc. don't necessarily need to exactly match those of the government. A select range of mid-size companies, small-cap companies, distressed companies too can use the platform.

The golden threshold of Rs. 25 cr revenue: The probability that a manufacturing company with more than Rs. 25 cr is investment-worthy is very high & its screening is worth a try. This conclusion is the result of Apohan's interaction with around 900 MSMEs in India. A business must be sufficiently professional with some spark in the management to reach a Rs. 25 cr revenue in case of SMEs. Some SME businesses below this value may be meritorious but it will be impractical to identify them in the vast crowd. In Apohan's assessment, an SME promoter with a very basic sincerity & involvement without much business wisdom reaches a revenue level of Rs. 10 Cr in a span of 10-15 years. They aren't a safe or rather, a promising bet for equity investment.

Too small companies can't withstand strategic transaction process: The companies below Rs. 25 Cr revenue wouldn't be able handle the complex equity funding process. They most likely wouldn't be able to pay the consulting fees, especially any pre-success fees. We have seen that these companies don't even have sufficient provisions for Registrar of Companies (ROC) fees, stamp duty, compliance firm costs, etc.

Investor's time & importance of screening: For a platform to be successful, it must cater to the top most requirement of the investors: Screening of the whole universe of the business entities in an effective, fast, scientific, orderly, reliable manner to shortlist the candidates of matching profile. An investor would use a very few criteria to generate the first, large shortlist. As he learns more about the outcomes, he would add many more additional criteria till he makes a smaller shortlist to establish a contact for a deal. The number of parameters studied in case of each prospective target company to make this small shortlist may run into hundreds (and subconsciously thousands). Why? A private limited company is the great-grandfather of even real estate assets when it comes to illiquidity & complexity! Its description just doesn't end!! Its specification list just doesn't end!!! Apohan's EquityTech platform would provide a scientific & systematic way for the investors to shortlist SMEs without spending much time. Subsequently, they will be provided the larger pieces of information to take a clear decision on whether to approach a target or not. At Apohan, we have derived this Rs 25 Cr number very carefully correlating the ability of an SME to make justice with the equity of an investor & the revenue level of an SME. Again, our platform / portal would have sufficient guidance material for a smaller businesses to cross this threshold but they won't be our target audience.

Hence, it is important not to permit the companies outside a range on the EquityTech platform for equity funding transactions. However, they can avail other strategic consulting services which are time-based, scope-based or expertise-based in place of success-based consulting.

5. Why equity funding CONSULTING is necessary for SMEs?

Equity transactions are very complex: The SMEs know how to sell a product, not how to sell the business itself !!! An SME promoter who considers oneself as a great marketer, does try to sell/dilute the business himself for around 6 months in the beginning only to discover at the end that it is not his cup of tea. Equity funding or any other one-time strategic transaction for that matter, is very complex, costly & lengthy. Do it yourself philosophy is good for routine, standard and easy work. It can be extremely risky for crucial transactions which may cause big damage to an SME if carried out in a negligent manner. The complex transactions do need external consultants even in the large companies.

Poor success ratio of equity funding queries of SMEs: There is hardly any utility of a personal connection with an investor in a strategic transaction as the investment is based on the merit of the SME. It is not based on the proximity to an investor. It is not based on the networking skills of the consultants alone. The brokerage platforms have created a chaos in the SME equity funding market as anyone & everyone can declare oneself as a M&A consultant or a broker. If 10,000 queries originate for equity funding on the brokerage platforms or in the physical market from SMEs, only one fructifies. It is just so inefficient! This is not because SMEs don't deserve equity investment or investors don't have sufficient investment appetite, but because a structured process is not followed. Some chemical reactions need a specific catalyst & if you put a wrong catalyst or no catalyst 99.99% times, what other result would you get? To increase the success ratio (SME deals/ serious SME deal queries), the SMEs must appoint competent outside consultants.

Absence of hope among SMEs regarding getting equity: The current level of hopeless ineffectiveness has led to a high degree of sense of frustration about availability of equity among the SMEs. SMEs aren't wrong in thinking so. When they see that almost all of the attempts of all their peers to get equity funding fail, they develop an opinion accordingly. A good SME promoter strongly believes that if he himself had Rs. X Cr fund, he would have definitely put it in the business. But he is never able to find & convince an another person who actually has the money & who is ready to invest in his business. Why? Because a pure technocrat SME promoter himself can't identify appropriate investors, can't represent his business as an investment opportunity, can't make an logical offer. SMEs need expert consultants to do all this. Otherwise SMEs would believe whatever is happening in the market.

Undue focus on investor connection: SME promoters behave as if investment money is the most rare commodity on the planet. But this is untrue. Why SMEs can't meet a large number of investors in some marketplace? Because a private limited company is private in the sense that it can't ask for equity publicly. So, the promoters of the SMEs have to network only privately to get equity capital. SME promoters are well-connected in the business world & they do come in contact with some investors. But mostly these easily-contacted investors are not relevant to them & their experiences with these investors are not encouraging. SMEs don't realize that any person with investment corpus is not a useful contact. Even if an investor is relevant in some case, the other prerequisites of this complex process are not fulfilled. An EquityTech platform would remove the focus on investor connection alone & would carry out 360 degree preparation for process-driven closure of a transaction.

Unethical consulting practices in SME consulting must end: Traditionally, SMEs hire consultants only for compliances for non-technical work. It not required to go into the depth of what they are doing so as there are no damages & penalties. The transaction consultants is a new species for the SMEs. Their fees is very high as compared to the compliance firms. SMEs also don't know the difference between compliance consultants & strategic consultants. In most cases with SMEs, compliance consultants such as CAs, CMAs, CSes, bankers, valuers, lawyers, certified or registered entities, chartered engineers, MBAs without any transaction experience are appointed as equity funding consultants with sole & exclusive consulting mandate. These people engage on pure success basis to try their luck on commission margins by, again, connecting an SME with an investor which never works. It is also not their full-time main businesses & hence failure of a transaction doesn't make any difference to them. Also, as SMEs don't have a clear idea on the business valuation, the focus of these so called consultants is on closing the deal at the cost of SME promoter's value. The SME promoters find it very difficult to understand finance & within finance M&A/strategic transactions are most difficult. Hence, if a broker without any knowledge of M&A pronounces the word "merger" 10 times in front of an SME promoter, he secures a sole, exclusive equity funding advisory mandate! Since this is not the main profession of the broker, the failure or delay doesn't affect him at all. Also, for him, it is a trial with luck to earn a handsome commission without doing anything!

End-to-end consulting infrastructure: Equity funding process will reach to its logical end if and only if end-to-end consultancy service is provided to the SMEs. Since there is no transaction experience or transaction department in an SME, an external consultant or consultant's platform is necessary.

You may be surprised to know it, but all the fault of deserving SMEs not being able to raise capital can be squarely laid on the absence of a good consulting infrastructure in the country & also on the unethical consulting practices by the so-called noble professionals.

6. Why only SELL-SIDE consulting on the platform?

Importance of awareness about equity: First of all, SMEs in India need a basic awareness about "existence" of equity funding as a practical & workable funding option. They must know that if they are a good business, the rejection of their bank loan applications is not the end of the world. SME prefer to fail, destroy all the value but don't try for equity funding in time. They remain stagnant for years together, but don't approach investors for equity. While they themselves have started business with their own equity, they don't explore additional equity from third-party, unknown, unrelated, new & neutral equity investors. Forget growth, they are not serious about equity funding even when they can foresee financial distress coming their way in next 1-2 years. Their idea of equity funding is limited to very close family members, friends, relatives, past colleagues or any personally close business connections. There are hardly any valuations, negotiations, agreements of treatment of future events, due diligence, allocation of rights & responsibilities, identification of incentives & penalties. Due to poorly crafted & drafted relationship contract, when there is a substantial gap between the contribution of a co-promoter & his benefits, they simply part ways (with or without a dispute). This development permanently sours SME promoters' outlooks about business sharing. No consultant tells them that you have failed to contract upon what was present & what was foreseeable. You have failed to jot down the principles of treatment of what was not even foreseeable. Having failed to work with the close ones, these SME promoters permanently become close-minded to induct any unknown third-party equity. This is only because of the absence of adequate awareness of equity funding. An EquityTech platform must provide all the basic learning to an SME. In the survey of SMEs by us, Apohan has found that SME promoters are highly intelligent people as well as they are impressionable leading to huge number of deal originations. Also, their thought process is driven by logic & rationality & hence, they can be easily convinced about the utility of equity funding for their business. On the other hand, the investors or investment banks are doing transactions all their life & they don't need any learning or training on the equity funding transactions. They may need basic awareness about merits of investing an SME which is covered below in this article.

Importance of removal of misconceptions about equity funding: Once SMEs become aware of the advantages of equity funding & approve availing it in-principle, the next activity is dealing with their misconceptions about equity. Please note that most of the SMEs that are in business for 10-15 years are capable of managing much larger volumes than their current size. They have a desperate requirement of funds to fulfil the growth dreams of the promoters. They are also ready to experiment with new means of raising capital. But then, they have a huge number of confusions, misconceptions, suspicions, fears, cautions regarding their own fate & the fate of their SME when it comes to an equity transaction. In the limited observation of Apohan, unlike the dry, job-hopping & bonus-oriented top echelons of large companies, SME promoters love their company, their brand, their employees; they are emotional about their creation; they care about the future of all the stakeholders in the ecosystem. They don't want to risk damage to this system. SME promoters don't understand that dilution of control is perfectly fine so long as the net-worth of shareholders is going to increase more in a shared venture in comparison with a solo path. They don't understand that in a typical case, the new stakeholders bring synergies on the table & not an unwarranted interference. They don't understand that beyond a scale, a business must draw capital based from well-contracted unknown sources than un-contracted existing relationships. SMEs need conceptual clarity or rather, an education for removal for misconceptions about equity funding. There is too much negative publicity of failed deals in India. In many a place, the consultants have made silly mistakes & omissions but they aren't held accountable for deal failures. This can done through videos which will help promote equity funding among SMEs as well as will act as the tools for inbound marketing for an EquityTech platform. Read Reasons for failures of strategic transactions in SMEs in India

Importance of working knowledge of transaction process: The SMEs compare the equity process with a bank loan application processing. The bank loans are fully secured & law is with them when it comes to recovery. That is not the case of an equity investor. An equity investor has to verify all the claims of an SME made about the future & get oneself satisfied with the claimed returns on the investment. He must study the business in detail to understand the risks for his investment. He must ensure the safety of his investment. He must understand the implication of this investment to his principle business or activity. He needs documentary evidences & not verbal claims. He needs to check the reasonability & rationality of the offer in terms of valuation & terms of contract. He needs to carry out a due diligence to understand the business in detail. He may need to verify the engineering claims from the experts. As a prudent investor, he must look find out past wrongdoings, if any, of the SME promoters & ensure that he is in a good company. An SME promoter must be respectful towards these needs of an investor and this respect would come only if he is made aware of the broad content & flow of the transaction process. They also need working knowledge of the complex equity funding process, the consultants, stakeholders, compliances, costs, budgets, documentation, etc. At Apohan, we make a pre-engagement & a post-engagement presentation to the SMEs to make them aware of their roles in the process. We explain them that this is not a compliance assignment where a CA takes care of most of the needs but a business advisory service where active participation of the promoters is needed.

Consulting needs on sell-side are very high: There is huge difference between work volume for consultants on sell-side & buy-side, especially in the SMEs. The SMEs don't have much routine operational documentation as all the necessary information is in the brains of 2-3 important people. The promoters started the company to sell products & had no idea any time about diluting stake & hence there is no question of existence of any transaction documentation in an SME. It takes a lot of time to understand the core proposition being made to an investor. SMEs have only a client network & no investor network. They don't have even a network of good compliance professionals for management of the corporate process, accounting, taxation, etc. It is extremely difficult to dissociate their psychological thinking from the low-cost, no-interference compliance professionals when they have to engage strategic consultants. They don't appreciate the volume of work required to be done by the consultants for 100% successful transaction. They don't know how to make transaction communications which are almost legal & always critical in nature. They don't know the art of representation of their nice SME as an investment opportunity in front of investors for getting equity funding. Equity funding can lead to a rapid organic growth of a company. However, many SMEs just don't understand it and they don't have (or provide) any personal time bandwidth for this process. Investors or buyers generally don’t need process awareness as it is their daily core activity. Deals don't happen because there is no strong consultant to represent the weaker sider. Apohan's EquityTech platform would fulfil this gap.

Poor representation in front of investors: An SME does not have a transaction department or capability to even procure the consultancy requirements of a strategic transaction like equity funding. An SME can't represent itself in front of the investors in a transaction process as the SME is unaware of many aspects of a transaction. This is one of the major reasons why equity funding deals just don't happen. I want to buy apples & I have money. The apple grower doesn't know at all how to sell apples. He knows only how to grow & not how to sell. Will I be able to buy apples & enjoy them? No! This is the exact problem with the SMEs. The equity funding transactions involves questions from investors & there is a reason behind asking those questions. The SMEs don't understand the purport, context & significance of many such questions & information requirements. The fail to explain what the investor is asking. At Apohan, we prepare a 50-page inception report explaining basic information & all past significant developments. Also, we prepare a business plan where the future claims of SME are explained. There are around 25-30 transaction deliverables for an SME equity funding process & we don't allow a transaction to fail in the want of representation.

Other stakeholders on EquityTech platform: The principle parties on the platform would be Apohan & the SME business. Now, please note that this wouldn't be (only) a business development platform though business development would be a principle activity there. It also wouldn't be a brokerage platform nor a Software-As-A-Service (SAAS) platform. Apohan wouldn't be selling "use of software" services there. So long as an entity is relevant, the platform will be free for transaction purpose. Apohan will be a business service platform. It will be a delivery platform like Uber. It an implementation platform (like startupwala) for equity funding. There are typically two sides to a transaction & there are multiple number of parties on either side. All these parties will be able to associate & dissociate as the transaction originates & gradually reaches its logical end. The platform would be used by the investors, compliance professionals, technical professionals any other stakeholder nominated by the principle parties to the transaction. It can also be used by subject matters experts that need to associate with either party in a transaction. Except for the direct clients of Apohan, other stakeholders will be using the platform for free during the currency of the transaction. Because, charging both buy-side as well as sell-side would lead to conflict of interest. Also, charging the other stakeholders on sell-side too would be conflict of interest. This single roof service with almost all competencies in-house with the flexibility of accommodating all stakeholders would increase the speed & efficiency of a transaction. Hence, a sell-side advisory platform would fill in the major deficit in the equity funding consulting chain & many transactions would go through.

To summarize, though the "existence of a wealthy investor in the close network" is popularly perceived as the most pressing need for success by many SMEs & consultants, it is only the sell-side advisory capability that closes an SME equity funding deal.

7. Why a delivery platform & why not a BROKERAGE platform?

Brokers are good at nothing: Or in other words, why end-to-end scope based model? Because a strategic transactions needs a CA, a CS, a business lawyer, an MBA (marketing, strategy, finance), a banker, an investment banker, an insolvency expert, a valuation expert, a tax expert, a technology expert, an engineering professional, a sector expert, a networker, in a single consulting company to take a transaction to success with near 100% certainty. When it comes the work for a CA alone in an equity deal, the expertises required are: financial part of deal structure, accounting, indirect taxation, direct taxation, due diligence of financial statements & records, financial compliances, Foreign Exchange Management Act (FEMA) compliances in case of FDI & financial system integration in case of a merger. There due diligence can be, ideally, of around 25 to 30 functions in a company. The valuation skills needed for valuation of the real estate, plant & machinery, inventory, intellectual property, brand, goodwill, business as an enterprise, financial securities, synergies of businesses coming together, etc are very wide. When it comes to secretarial skills, there is a wide variety of corporate transaction & there are humongous number of permutations & combinations of features & options. This is true of each of the distinct skills mentioned at the beginning of this paragraph. Unfortunately, SME promoters don't know much of this (probably it not their domain as well) but their dependence on a broker for deal closure leads invariably to a failure. Is a broker supposed to know all this?

Poor services of business brokerage industry: In India, forget the professional knowledge of equity funding process, there are virtually no professional brokers who the fundamentals of business brokerage. At Apohan, we firmly believe that brokerage model is good for no one; it is highly unpredictable; it has frustrating failure ratio; Also, the brokerage industry is unethical & treacherous. They would keep the SME promoter or the investor in dark & make any compromise to realize their commission quickly.

Bizarre concept of deal closure: Brokerage models don't work in SME equity funding. Period. Making an SME promoter & a (most likely un)matching investor meet in a five-start hotel (or introduction) can be maximum only 2-3% part of total consultancy delivery work. Visiting Delhi, Mumbai, Dubai, Hong-Kong, Singapore, London to see an investor "representative" without any preparation moves things nowhere. SMEs spend around 2-3 years in this fashion, spend good money & develop a deeply entrenched antagonism or hopelessness about equity funding. They also make a very strong determination after these 2-3 years that would never ever spend even a penny on any consultants for this activity. Apohan has seen a large number of SMEs that after experimenting with brokers have developed a negative opinion of equity consulting. Is just meeting a rich man or an institution sufficient? No, not at all!

Brokers are incapable of initial deal structuring: Unlike large businesses, a typical SME promoter has only a few "observations" about his company on the strategic aspects. In many a case, they don't have even a proper strategic problem statement, aspiration statement or confusion statement about their business. They don't know what they want, what is good for them. And it can't be established in a shallow, short interaction. In case of SMEs, it is just not that the promoters are capable of forging a deal & the domain consultants have to take care of the compliances. They need a lot of help on understanding the exact problem or aspiration of the business, available options of solutions, deal structure, approach for implementation. And all of this has to happen before consulting engagement! Hence, when the brokers do get counterparties based on half-baked information, the deals break after wasting a lot of time. Funnily, though being an intelligent technocrat & a successful businessman, an SME promoter never finds oneself sufficiently & satisfactorily "knowledgeable" even after multiple exposures to funding deal failures.

Confusing brokers with M&A consultants: Most of the SMEs misconceive the brokers (the introducers) as transaction consultants. This is a major reason why they never get equity even after 2-3 years in SME world. Brokers don't expect retainer fees as they do no work other than inexpensive introductions. SMEs try to offer the same terms & conditions to equity consultants which doesn't work. The consultants have to a lot of education work, operational documents, transaction documents, communications, meetings apart from acting as the six internal functions (BOD, strategy, corporate, finance, contracts & transactions) of the client company for 4 to 9 months. No consultancy company can afford to apply this much working capital for their clients. Brokers have no scope of work, no deliverables & no timelines as they are not paid. The most unfortunate thing is that the SMEs try to offer the exactly same commercial terms to the equity funding consultants & never engage with a consulting company that can solve their problem. The SMEs don't understand this difference between brokers & consultants and always remain bereaved of the capital.

There are many brokerage platforms world over & they have their own value propositions. However, for Indian SMEs the probability of success with brokers is very less.

8. Why strategic services & why not COMPLIANCE services?

No strategy departments in SMEs: SMEs have a very highly competent setup when it comes to operations as we saw above. They also earn reasonable experience in managing support functions such as HR, IT, & admin. However, the SMEs don’t have the departments such as strategy/ corporate management/ finance (or for that matter funding)/ legal matters & contracts/ strategic transactions to represent themselves. They also don't have a professionally competent board of directors in above domains. Hence, they need strategic advisory more than any other support for growth.

Code of conduct for compliance professionals affects scalability: The domain consultants such as auditors, accountants, valuers are bound by a code of conduct & they sort of represent the interest of state than (or in addition to) the pure interest of a business. Also, the number of assignments they can carry out in here is limited by law. They have compliance orientation than business orientation. They especially lack in understanding markets, technology, operations which form the core of a business. The compliance firms typically don't have engineers & MBAs. They also can't proactively seek more business. They can't advertise. Hence, if an EquityTech platform has to get momentum, it can't provide compliance services even related to the transaction. Also, if the major & risky part of the transaction is carried out by the strategic consultants, the cost basic compliances is hardly any.

Strategic consulting is globally scalable: Unlike compliances, the fundamental elements of business strategy are same across the globe by their very nature. This makes the EquityTech platform business model internationally replicable with minor changes. Apohan does plan to launch the platform outside India once it gets success in the most difficult market- India!

9. Why a platform & why not OFFLINE business model?

Offline scales are very poor: The highest ranking transaction advisory companies in the world close around 100-200 deals in a year across the globe. Apohan has an ambition to close 100 deals a day after 10-years! We desire to achieve this feat under our own brand Apohan!! For this, application of an online platform is the only way.

Online equity funding can be at the scale of bank loans: The number of loans sanctioned by a bank per day is reasonably high. It runs into 100s & 1000s of sanctions per day even for a medium size bank. Looking at the complexity of the application assessment process, this would have looked impossible before banks got the requisite infrastructure. If the banks can process thousands of loans per day then it should be possible to process hundreds of equity deals per day as well using technology and systems. Now, the only caveat is that the analysis of a business for equity funding is in much greater depth than the one required for lending. At Apohan, we believe in the principle of transaction efficiency. As the consultants, we have to pick up the right information from the right resources in a right order from an SME. Then we need to analyze that data & present the same to the stakeholders such as investors in the gradually increasing doses. The only difference between banks & Apohan will be that we will never own either the SME or the investor money. But, effectively we will be connecting the savers & the users just like a bank does.

Platform complexity to be an IT developer's delight: For any transaction, equity funding process ideally requires analysis of around 30 distinct departments or functions in a company. One can assume that there around 10 departments each from corporate, operations & support sides. Also, possibly there can be 350 "types" of documents (or types of crucial pieces of information) in a manufacturing company which could be of interest for a diligent investor. These are types of documents and actual documents can be more. There are around 45 important sequential steps in a equity funding strategic transaction. Apart from existing operational documentation, the consultants have to prepare around 30 new reports/documents/communications specially for the transaction purpose. Looking at the various permutations and combination of types of transactions, types of companies and types of deals, types of instruments, making of the final shape of the platform is going to be a delight for the IT professional who love challenges.

Use of emerging technologies: Emerging technologies will this make the equity funding consulting job easier. Artificial intelligence will interact with the SME to collect the business information & simultaneously educate the promoter. Data analytics will use the data & prepare the final deliverables. In future, blockchain technology will permit safe document flow & smart contracts. Identification technologies will reduce nuisance of having to entertain unrelated or risky people. Big data technology would help to read any documents & process the information. AR/VR (artificial /virtual reality) may help in a plant or facility visit of the investor sitting from home. The aggregator framework of the Govt. of India would save the efforts of having to collect the same financial data of SMEs again. At Apohan, we intend to deploy all the technologies in a cost effective manner. Technology would help to collect, analyze & communicate the huge information of a large number of SMEs through a scientific & systematic process. It will reduce transaction costs by around 10 times after reaching the desired scale.

Though a strategic consultancy company worth its salt can implement an efficient systems in offline business model, it can't reach the scale, especially looking at the permutations & combinations of investor requirements & SME requirements which can be easily handled by an online platform.

11. What disruptions EquityTech concept will bring to M&A industry?

Reduction in costs: The EquityTech platform will prevent funding deal failures in the SME space. It will eliminate commissions & hurdles of the brokers. Brokers take exclusive, sole mandate & block the deal till they reach inter-broker fee sharing agreement. Also, eliminating them itself will save 2% (of consideration) cost in SME space. The platform will stop wasteful communications. It will eliminate the irrelevant party immediately when its irrelevance is established & also it will also identify probable irrelevance as early as possible. This will reduce transaction time. And finally, the platform will act as a new source of money for the deserving but capital starved SMEs.

New investment venue for investors: The EquityTech platform will make available a new venue to the investors. It will not be as mundane as the stock market investment & also not as risky as a start-up investment. On the surface of the Earth, the terra-firma or soil has a density of 2500 kg/m3; water has a density of 1000 kg/m3; & for simplicity sake, let's ignore a few things lighter than water because they are too small in quantity. Now, when you look at the atmosphere, it has a density of only 1 kg/m3. There is nothing in between 1 & 1000!!! The same is true of investment avenues available for investors. On one side there are very risky start-ups & on the other side there are stale blue-chip companies. The galaxy of well-screened, well-filtered, well-managed, well-represented SMEs on Apohan's EquityTech platform can serve as a good investment avenue for the investors with a return appetite in between this vast gap.

Enhancement of bargaining power of SMEs vis-a-vis investors: The EquityTech platform will increase the barraging power of the SMEs vis-vis investors in terms of valuation & terms of contract in a transaction. There will be competition among the investors to invest in a high potential SME. The profit making SMEs can get good multiples in valuation in comparison with their listed peers. The distressed SMEs too will get good bargain if the turnaround would provide the investor's expected rate of return on his investment.

Prevention of acquisition frauds: There are many brokers, large corporates & financial investors that dupe a gullible SME promoter of his wealth, ownership & control. The SME promoter typical can't understand the documentation of such transactions & ends up losing almost all value created all over life to the fraudster investors. This is more true of the distressed assets where this activity is carried out in connivance with the bank officials. Apohan's EquityTech platform will stop cheating by the corporate fraudsters who buy technocrat promoters' company taking disadvantage of their ignorance in the transaction field.

Regulation for private company equity funding is less: Unlike the lending, payments & insurance domains, the regulation applicable to equity funding consultancy services (or to the SMEs themselves) is hardly any. This is especially true because equity funding for private limited companies is hardly regulated. An SME has to follow a due corporate process but there is hardly any restrictive about the entire process. Also, this ease would continue till the company gets listed. There is much more flexibility in structuring the deal, the instrument, the contract than listed companies. The only restrictions that exist pertain to provisions in the articles of association of the company (AOA), shareholding agreements, creditor / bank agreement, maximum number of shareholders, maximum number of directors, FDI rules in case of foreign investment & the secretarial rules. Nothing of this is restrictive for a cohesive management. Also, relatively, for private companies, the regulatory environment is stable. Now, if applicable regulation is not as restrictive, that sector must progress. But this doesn't seem to be happening. Apohan's fintech platform will fill in this void.

12. Why to invest (say, Rs. 100 Cr) in a screened SMEs than in a listed company?

Higher visibility into investee company: For same amount such as Rs. 100 cr (15 Mn USD), SME investor has higher visibility into company affairs and there is no random news affecting your wealth.

More management control: The investor has much higher management control vis-a-vis virtually no control in large, listed companies with multi-billion dollar valuations.

Piece of mind: He has higher importance as an individual in the company & the same has its own value. You will go completely unnoticed in the AGM of a large company & you will be on dais in a small company for the same amount. As an investor, you don't expect any unpleasant surprise in an SME as their prices don't fluctuate.

Synergies with a technocrat promoter: The synergies between financial & corporate management skills of the investor (or his nominee director) and the pure technocrat promoters of SMEs are very high. The promoters solve operational & technical problems very quickly & struggle a lot for a lot of time to manage a even simple query (forget trouble) on corporate side. It would not be wrong to say that the SMEs destruct themselves on corporate front due to ignorance in that field. The investors with corporate experience can stop this destruction. Investors with experience in financial, legal & corporate management don't have any ability to run profitable manufacturing operations. Relatively, their money has very poor returns in many other investment avenues. Their coupling can create huge value.

Low overheads: SMEs have hardly any overheads & large corporate's top staff won't travel without business class.

Low compliance costs: SMEs have low statutory compliances whereas listed MNCs have substantial compliance cost & risk.

Agility: SMEs have high agility & their business models or processes can be changed very easily.

Higher growth rate: The valuation of the SMEs increases faster as they have higher growth rate on lower base. In case of large companies, mostly the market is saturated. In case of SMEs fund unavailability itself is financial unviability & if this problem is solved, there is no other problem in an SME company. All the problems are derivatives of a fund crunch.

Stable share price: If you look at a large company, the financial viability itself is a big issue if we consider the perspective of the last incremental investor. The financial statements might be showing a handsome performance from the perspective of an average investor but for the incremental last investor it might be a loss making proposition if the stock has fallen. This is not the case with SMEs. The share price of private limited companies typically don't fall without a substantial reason. So long as the size & profit is growing, it increases linearly.

Lower entry valuation: Even at the time of entry, the SMEs have lower valuation for purchase of the shares or subscription of the new shares due low relative valuation multiple in comparison to their large peers.

Equal or lesser risk: For an SME which is screened for several operational parameters in the way Apohan screens, there is no difference between risk of investment in it from that of a large company. Here, one must understand that there is difference actual business risk & investor perception of investment risk. Risk perception is due to absence of information, documentation & communication. Risk is due to real business related reasons. Investment can be made easy by removing perception part of the risk in case of SME with Apohan's fintech platform. The actual business risk of an SME is same as that of a large company. The high risk perception can be removed by making available all the information & documents. Rather, SME business risk is less as mostly macro-market risk is not all that directly applicable to them. Time & again stock exchange regulators, RBI, ICAI, ICSI, Ministry of Finance, etc have failed to remove even the basic (simple manipulation) risks related to investing in the listed companies as well.

Multiple exit mechanisms: For SME investors, when it comes to exit, there are multiple exit mechanisms such as buyback, MSME exchange listing, main exchange IPO, secondary sale to another investor, next round of investment, merger with large company, converting a distinct class of equity into redeemable debt, etc.

Liquidity & price discount: When it concerns with liquidity, the stocks of listed companies are also as good as illiquid if they have fallen 20-30%. If you want to sell private company shares for 30% discount, you will get an immediate buyer. SME shares face no random price fall like in listed companies & there is peace of mind. There is an opportunity of extra-ordinary gain as absence of money is the only & the biggest problem with SME which gets solved with equity funding. In case of a listed company, safety is a bigger promise than return on investment. In a well-screened SME, both these are relatively more assured.

Comparison with start-ups: When comparing them with startups, the small businesses that have crossed the revenue of 3 million US dollars have a much longer vintage and a solid proof of concept. They are standing in the market for 10-15 years, with profit, with growth, with reasonable compliance history, without much knowledge of corporate management, as a first-generation businessman, with a humble beginning & that too in a hostile business environment like that of India! Shouldn't this guy be the one on whom you bet?

SMEs are difficult to negotiate with compared to startups as they have real wealth, something to lose. This is coupled with lack of awareness on equity, a lot of misconceptions about strategic transactions & lack of readiness for funding process. But if they are educated on these fronts by Apohan & are well-represented, they make a good opportunity. They don't have an absurd risk-return profile like start-ups; they aren't as stale as listed companies & offer a good opportunity for ticket size between Rs. 10 cr to 400 cr. 

13. What is our cause behind creating Apohan's EquityTech platform?

Prevention of SME promoters' wealth destruction: Personal aggrandizement alone can't be the sole motivation of a true entrepreneur. It has to have a good cause behind it. Look at the wealth destruction. It destructs the SME owner's existing capital in the business; it destroys income earned & taken home in the last 10-15 years; a mere declaration of insolvency itself erodes their 50% wealth even if the liabilities are much less than the net-worth; their personal property gets auctioned by the banks; occasionally their ancestral property or property bought with the income of the spouse is also auctioned; properties of all friends & relatives who gave guarantees to the bank for zero financial consideration too get auctioned, they earn a bad repute & lose right to do new business, borrow for it; it leaves them alone in the old age to fight many civil & criminal recovery cases! Who will become a businessman if such stories are too many in the market?

Promotion of SME entrepreneurship: One can understand a business getting closed if there is no market, if there is no management capability to manufacture quality products, if there is no sense of adequate profitability, if there is no fundamental business acumen, etc. Should a business fail because the promoter doesn't know the process to raise fund? Doesn't have sufficient professional skills to raise funds internally? Because there is no consulting infrastructure in the company as well as in the country? Because the law doesn't allow him to openly advertise for equity capital? Because he can't prepare the overly formatted & beautified documents like those of the large companies to meet investors' 'requirements'?

Prevention of destruction of private business capital: In any one financial year, 16% of the number of SMEs at the beginning of year shut down in India!!! And it is not a smooth closure. The payback period of any business is 2-4 years and @ 16% per annum imagine the destruction of half of the nation's private capital expenditure without giving a penny of return. This is what keeps a nation ever poor.

Prevention of business suicides: Generally a businessman & especially an SME businessman is an extremely bold & fearless person. Destruction of his business typically doesn't destroy his personal life; he just learns from the failure & starts doing another businesses. But still, as per India's crime statistics (NCRB report), around 9000 businessmen commit suicide per annum explicitly attributing the reason of their suicide to business failure in their suicide note. This number is increasing alarmingly every year.

Prevention of personal agony of the stakeholders in a business ecosystem: In a profitable business, the businessman is the biggest beneficiary all along its life & look at his condition when the business is liquidated. Now imagine the agony in the life of dependent businesses in the ecosystem, their suppliers, clients & employees & their families.

Creation of world's best strategic consulting infrastructure in India: At Apohan, we want to create a revolutionary company in the strategic advisory space in India beating all the international brands in a spans of 20 to 25 years.

At Apohan, we are committed to start the journey of the deserving Indian SMEs on a mass scale on a path to become a profit-making, return-making, growing, modern, stable, sustainable, compliant, well-governed, investment-worthy, multi-national, diversified conglomerates by creating a sophisticated corporate infrastructure on a equitytech platform. Our own journey too is going to be the same.

Arun Joshi, MD & Director, Strategic Transactions,

ApohanTM Corporate Consultants Pvt. Ltd.

 Address:            301-309, C/o Rudranee Infra, 3rd Floor, Sohrab Hall, Sangamwadi, Pune, Maharashtra, India -411001 (Landmark – Jehangir Hospital)

Location Link: https://g.page/ApohanEquityFundingSME?share

Mobile:               +91 9810481325

E-mail:               [email protected]

Website:           www.apohanconsultants.com

Connect on LinkedIn

 Company:          https://www.dhirubhai.net/company/apohanconsultants

Company PPT:  https://www.slideshare.net/ArunJoshi38/apohan-marketing-presentation-v61-21-032021-aj

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