Why VCs struggle to invest in SMEs!
Size does count! The ability of a business to withstand blows is largely linked to its size and momentum. Size suggests momentum, skills, resources, customers, retained income, cashflow and all the things that suggest safety and low risk.
It’s not untrue. Whilst SMEs have the ability to chop and change and respond to a changing environment, they remain vulnerable to the vagaries of the market place and changing business environment.
The traditional venture capital funding models have serviced the needs of business well down the business lifecycle and/or have attained firm offtake and service agreements, both of which allow for the business to invest in skilled, capable and well-resourced staff. Often, these companies' 'books' are mostly accurate, the executive teams are skilled and well suited or stitched together, the founder works in a team and most often, post-funding, the VC can manage risk and return through a monthly or quarterly board meeting. Governance is mostly assured and the ability to influence and control the investment is high. The antithesis is the case in SMEs.
Poorly-resourced, under-capacitated from both a human capital and business operations perspective, massive dependencies on the lead entrepreneur and books that are mostly inaccurate and always late, increase the investment risk disproportionally. In addition, the VC model takes a fund of, say, R500m and invests it into, say, seven or eight businesses with equity values typically around R250m. A SME fund of, say, R100m, is investing in at least 25 businesses with equity values around R15m. Two very different scenarios in terms of skills, costs and business models are therefore required by the fund managers. It’s not the same, it will never be the same and the requirement to benchmark a VC cost model on an SME investment model only fools the buyer.
Having invested in over 28 SMEs, worked with over 1,500 entrepreneurs in SMEs ranging in equity value ranges from R5m-R120m, Aurik makes a great partner to you in establishing and operating the risk return model of an SME fund. Talk to us today to build your SME fund tomorrow!