In the South and Southeast Asia region, promising micro, small, and medium-sized enterprises (MSMEs) are bringing their innovative ideas to life and creating positive impacts on livelihoods. However, they face many challenges when it comes to scaling – one particular challenge is raising investment.
On this World MSME Day, Asmita Moon, Business and SME Development Specialist for the WE4F South and Southeast Asia (S/SEA) Regional Innovation Hub sheds light on the crucial role innovators play in driving global sustainable development, while highlighting key first steps MSMEs should take when pursuing investment.
Fundraising is a Journey
Micro, small, and medium-sized enterprises (MSMEs) account for 90% of businesses, 60 to 70% of employment and 50% of gross domestic product (GDP) worldwide. They also play a significant role in their contribution to the Sustainable Development Goals (SDGs). However, 41% of formal MSMEs in developing countries and emerging economies have unmet financing needs, and the current credit gap is estimated at US$5 trillion for formal MSMEs and US$6 trillion for informal MSMEs around the world.
These innovators are required to understand different financing options in the market and the process of choosing the correct investors, build financial models that demonstrate growth, and establish relationships with all the stakeholders involved in the process of fundraising, particularly in new sectors such as water-energy-food nexus. Among them, women innovators struggle with systemic perception biases and a lack of opportunities to present their potential and raise capital. Fundraising, therefore, becomes a journey rather than a milestone for innovators who ought to be in constant preparation to access equity or debt for scale.
The Start of the Fundraising Journey: Investment Readiness
Investment readiness (IR) is the capacity of an enterprise to understand and meet the specific needs and expectations of investors. It covers the mandatory requirements for these companies to start raising investments from any private source.
Having a trusted partner at the start of the fundraising process could make this arduous journey for innovators better. With that in mind, the WE4F S/SEA hub supports its innovators to build strong financial models with the assessment of different revenue channels, pricing strategies, and financial statements – balance sheet, income statement and cash flow. The hub works with innovators who have not yet raised private capital or are preparing for a bigger round of investment after seed funding rounds. Investment readiness support is intended to prepare them to work with the S/SEA investment team which focuses on enabling access to investors and capital and provides technical support beyond the readiness phase.
For innovators looking to start their journey, there are a couple of things that need to be focused on:
Building a Strong Base
Typically, the investment readiness journey is not distinct from business expansion. Before raising investments, it is important to have clarity on the usage of funds for capital and/or operational expenses. While it’s common practice to mention the share of the utilization of funds across business needs (e.g., 50% of the funding needed for human resources, or 30% for working capital), investors are keen to understand the assumptions and costs on which this assessment is based. It requires a strong business and financial model, and work that goes behind the expansion plan such as market research and understanding human resource requirements.
How WE4F Supports This Step
WE4F provides technical assistance (TA) and works with innovators in bringing clarity to these models. Not all innovators are at the same stage of business or in the same geography, so TA needs to be customized before investment readiness starts. For example, while working on IR support with one of the innovators in India, the hub realized that sales were not being categorically logged into the innovators’ customer relationship management (CRM) system. This was important to rectify since the investors are interested in knowing businesses’ driving forces. The sales data also represents the company’s customers, product lines, and sales channels. After going through IR support with WE4F, the innovator revised their process and started training their on-ground team on structured sales data collection.
Developing IR Competence
Fundraising is not the mantle of CEOs alone – it is only effective as the business’ team. Building new models and expansion plans depends on accurate and detailed data, which is provided by team members. It is important to familiarize team members on their contribution to the process and develop their IR competency. Some businesses may think of competency development as a one-time activity, but it is actually a long-term process. Taking the long-term approach, enables faster company growth and builds a strong organizational culture.
How WE4F Supports This Step
WE4F currently provides direct TA to RecyGlo (an innovator with operations in Myanmar, Thailand, and Vietnam), to raise debt and equity for expansion in new countries. The hub helps develop the RecyGlo team’s IR competency by training RecyGlo’s team members and founders on finance and business development for the development of financial statements. Including RecyGlo’s team in the training and readiness process reduces the pressure on founders to train their team and brings better alignment among various key personnel in the organization.
Projecting Strengths and Vision
While being ambitious in projections, it is important to back it with one’s current work with data and logic. The inclusion of activities, achievements, and capabilities of the team in the pitch deck can cement the initial interest of investors.
Pitch decks are often among the first outputs designed after financial statements. To accommodate different types of investors, businesses need to have a few different versions of their pitch decks. Beyond business metrics, including a gender assessment through publicly available tools or environmental data submitted to donor partners can help a company stand out among peers. It is important to note that aesthetics such as proper formatting, standard font size, text alignment, consistency, and color theme, can be used as tools to bring clarity to the pitch deck’s content.
How WE4F Supports This Step
WE4F supports innovators in developing a pitch deck and discusses the content that needs to be adjusted as per the different investors. Innovators are also supported through external vendors and workshops.
Understanding investors and the market for raising funds is an essential part of the investment readiness journey. Businesses should learn about investors and their interests before approaching them, it is important to see if the investor aligns with the business’ vision. Investment is not a one-way street – businesses choose their investors as much as investors choose businesses. Investors are not just financiers, they also are mentors and enablers.
Engagement with existing investors through workshops and convenings on strategies for successful early-stage fundraising and gender and climate-focused investment landscape can help businesses understand different investor perspectives. For more mature innovators, it is an opportunity to learn to communicate their scale for blended financing.
”Companies need to know the reporting requirements, source of investor funds, their objectives, and see if the story matches. They need to budget for the time it is going to take for reporting.SujanCountry Manager, aQysta
While WE4F provides innovators with investment readiness support, it cannot be done alone. The private and public sectors need to partner with the other enablers who have the interest and capacity to support innovators in the water-energy-food nexus. To partner with WE4F or learn more about the program’s IR support, email email@example.com (for South and Southeast Asia), firstname.lastname@example.org (for Middle East and North Africa), or WE4FAfricaRIH@tetratech.com (for Southern and Central Africa).