We are entrepreneurs too. We feel your pain.
We are entrepreneurs too. We feel your pain.
Our team has accumulated expertise from both sides of the capital raising market. We found a total of 110 market inefficiencies that MSMEs face when looking for capital which can be classified into three main pain points:
Our team has accumulated expertise from both sides of the capital raising market. We found a total of 110 market inefficiencies that MSMEs face when looking for capital which can be classified into three main pain points:
• Market entry barriers
• High deal acquisition costs
• Distraction from doing business
• Market entry barriers
• High deal acquisition costs
• Distraction from doing business
High market entry barriers:
High market entry barriers:
Access to finance is frequently identified as a critical barrier to growth for MSMEs. According to a survey of 1,001 entrepreneurs conducted by Ernst & Young in 2011, almost two-thirds of respondents reported that it is difficult for entrepreneurs to access funding.
Access to finance is frequently identified as a critical barrier to growth for MSMEs. According to a survey of 1,001 entrepreneurs conducted by Ernst & Young in 2011, almost two-thirds of respondents reported that it is difficult for entrepreneurs to access funding.
According to CBInsights, the inability to secure financing is the top reason startups cited for their failure.
According to CBInsights, the inability to secure financing is the top reason startups cited for their failure.
Young entrepreneurs, however, face even greater challenges, and countries burgeoning with youth unemployment need entrepreneurship to stimulate job creation.
Young entrepreneurs, however, face even greater challenges, and countries burgeoning with youth unemployment need entrepreneurship to stimulate job creation.
MSMEs are less likely to obtain bank loans than large firms. Despite intervention by several governments, bank lending remains difficult to obtain, particularly in the EARLY STAGES OF GROWTH. For more than 10 years, the SME funding problem has been known, and although measures were taken, the problem STILL persistent.
MSMEs are less likely to obtain bank loans than large firms. Despite intervention by several governments, bank lending remains difficult to obtain, particularly in the EARLY STAGES OF GROWTH. For more than 10 years, the SME funding problem has been known, and although measures were taken, the problem STILL persistent.
Risk aversion among institutional and other investors has also made it more difficult to obtain equity finance. Aside from the extremely well-known venture capital funds, countless investment firms all over the world are willing to invest in various niches and geographics. Often, the pain of seeking out these firms is what prevents MSMEs from raising money as expeditiously as possible.
Risk aversion among institutional and other investors has also made it more difficult to obtain equity finance. Aside from the extremely well-known venture capital funds, countless investment firms all over the world are willing to invest in various niches and geographics. Often, the pain of seeking out these firms is what prevents MSMEs from raising money as expeditiously as possible.
Instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises. Larger-scale angel funding should help improve the liquidity but will take time to develop and MAY FAIL if the correct approach and tools are not used.
Instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises. Larger-scale angel funding should help improve the liquidity but will take time to develop and MAY FAIL if the correct approach and tools are not used.
High deal acquisition costs:
High deal acquisition costs:
Fundraising can be frustratingly slow and expensive. MSMEs complain that it is difficult to discover the set of investors relevant to their investment round. Investors, especially at the seed stage, have many conditions imposed on the capital they distribute, including restrictions on location, industry, target market size, business model, amount of capital being raised, valuation of the startup, and terms of the deal. These conditions are rarely published anywhere in a structured way. This leaves founders resorting to overwhelmingly large databases of investors or curated lists that might miss less-well-known options for capital.
Fundraising can be frustratingly slow and expensive. MSMEs complain that it is difficult to discover the set of investors relevant to their investment round. Investors, especially at the seed stage, have many conditions imposed on the capital they distribute, including restrictions on location, industry, target market size, business model, amount of capital being raised, valuation of the startup, and terms of the deal. These conditions are rarely published anywhere in a structured way. This leaves founders resorting to overwhelmingly large databases of investors or curated lists that might miss less-well-known options for capital.
A chaotic system where entrepreneurs and investors find each other through a series of costly, bilateral search and diligence processes leading to blind spots to create massive inefficiencies further and inhibit the flow of capital to where it is needed the most, at true scale.
A chaotic system where entrepreneurs and investors find each other through a series of costly, bilateral search and diligence processes leading to blind spots to create massive inefficiencies further and inhibit the flow of capital to where it is needed the most, at true scale.
Distraction from doing business:
Distraction from doing business:
The COVID-19 pandemic is having a pronounced impact on SME cash flow management, with longer-term implications causing slower performance. Its impact will undoubtedly leave its mark on SME financing for the foreseeable future (Financing SMEs and entrepreneurs, 2020, OECD). There is significant evidence that it is this “extra-financial” value of investors that dictates their helpfulness, given equivalent capital contributions. However, determining the nature of this value for a given capital provider is often difficult.
The COVID-19 pandemic is having a pronounced impact on SME cash flow management, with longer-term implications causing slower performance. Its impact will undoubtedly leave its mark on SME financing for the foreseeable future (Financing SMEs and entrepreneurs, 2020, OECD). There is significant evidence that it is this “extra-financial” value of investors that dictates their helpfulness, given equivalent capital contributions. However, determining the nature of this value for a given capital provider is often difficult.
The major burden for business owners who have identified and researched their ideal investors is finding a way to connect to each one. It’s commonly accepted that a “warm introduction” is the best way to start a conversation with an investor. The further removed a business owner is in the global social graph from an investor, the lower the chance they will get a direct introduction, and the lower the probability of investment. For many first-time entrepreneurs, it is simply impossible to get a direct introduction at all. MSMEs tend not to have the same networking, professional expertise, and tribal knowledge as larger companies. And building a reputation to increase chances of finding relevant capital can take years.
The major burden for business owners who have identified and researched their ideal investors is finding a way to connect to each one. It’s commonly accepted that a “warm introduction” is the best way to start a conversation with an investor. The further removed a business owner is in the global social graph from an investor, the lower the chance they will get a direct introduction, and the lower the probability of investment. For many first-time entrepreneurs, it is simply impossible to get a direct introduction at all. MSMEs tend not to have the same networking, professional expertise, and tribal knowledge as larger companies. And building a reputation to increase chances of finding relevant capital can take years.
Due to these market inefficiencies, many good ideas never happen (or don’t spread around the world as quickly). IFC estimates that 65 million firms, or 40% of MSMEs, have an unmet financing need of $5.2 trillion every year (MSME FINANCE GAP, World Bank Group, 2017). An additional financing demand of $2.9 trillion is projected due to the COVID-19 crisis (World Bank Group, WP 9414, 2020). MSMEs are one of the strongest economic development, innovation, and employment drivers. Creating opportunities for MSMEs is a key way to advance economic development and reduce poverty.
Due to these market inefficiencies, many good ideas never happen (or don’t spread around the world as quickly). IFC estimates that 65 million firms, or 40% of MSMEs, have an unmet financing need of $5.2 trillion every year (MSME FINANCE GAP, World Bank Group, 2017). An additional financing demand of $2.9 trillion is projected due to the COVID-19 crisis (World Bank Group, WP 9414, 2020). MSMEs are one of the strongest economic development, innovation, and employment drivers. Creating opportunities for MSMEs is a key way to advance economic development and reduce poverty.