Marrying Ideas and Capital: Challenges and Opportunities

About the author:

Kunal Sanghavi, alumnus from PGPMAX Co17, Chief Financial Officer, Metropolitan Stock Exchange of India Ltd. has contributed this article.

The school is launching the Finance Special Interest Group(SIG) at Equinox 2018. The Finance SIG plans to create platforms for learning and networking as well as generate and disseminate knowledge in areas related to finance. 

Reasons Why Companies or Ideas Do Not Get Funded
In today’s age of digital disruption, business ideas are popping up everywhere. However, very few see the light of the day due to a lack of capital. It is not necessarily the case that capital is not allotted to some ideas because they lack merit, but rather it could be due to many other reasons such as a lack of research/ demonstration, inability to plan well, lack of an appropriate business model, unrealistic or adhoc assumptions, incomplete conviction, and lack of execution capabilities. Above all this, the key is to find people who can lend capital and at the same time crack the right terms with them, which does not necessarily happen all the time due to disagreements in projections, valuations, structure, lack of understanding of markets and business, etc.

Idle Monies Chasing Good Investments Remain Undeployed
On the other hand, there are monies that are chasing good ideas. There are significant funds whose amounts do not get deployed due to a lack of conviction in these ideas. This leads to monies that are unutilised, leading to a conservative approach due to reduced bets. Fund managers look at their overall portfolio and try to minimise risk by ensuring that the moment a few companies call a breakthrough, the companies are identified and they stop taking more bets to mitigate downside risk. This leaves capital unemployed, and at the same time, there is a huge opportunity loss for funders of capital as their effective participation in that phase of economic growth becomes limited.

Marriage of Ideas and Capital
The key is to create a marriage of ideas and capital by addressing various issues listed above at both ends. This requires an appropriate demonstration of characteristics by SMEs/ startups and people who have ideas to attract capital and get the ideas off the ground. This is a huge gap in today’s world, where on one side there are ideas and businesses desperately seeking funding, and on the other there are monies and capital chasing scalable ideas and good business. Hence, there is a role to play for various intermediaries such as strategic and financial consultants, investment bankers, funds, arrangers, advisors, etc., to bridge this gap by addressing various issues described above at both ends.

These intermediaries can integrate well with ideas and businesses such that they become fundable. Funds need to be more flexible in order to meet this unmet demand of capital. To create a better marriage between the two, there is a need for more platforms that can channelise these ideas into pivots by providing various preliminary setups and handholding with the intention to raise funds, such as having the right systems, software, people, credit rating/ history and right governance. These platforms can be created by various incubation cells, existing exchanges, co-ventures in an organisation, and business advisors who not only work to get transactions done but also try to create an overall ecosystem and strategy for the organisation to effectively deploy this capital in the long run and create growth.

Size: Another issue these days is “size”, wherein many big funds do not want to invest in small size investments. However, it has been observed that on account of this trend, many good ideas are unfunded as these big funds are the only ones who can really understand the potential of the ideas. Invariably, many such unfunded ideas eventually see the light of the day and become big by tapping various alternative sources of capital such as debt, bootstrapping, etc. Therefore, funds should also give due attention to smaller size deals as they have huge potential to become big.

Awareness: Many high net worth individuals are unaware of the fact that they can invest in ideas in the form of a business. 

Raising capital enables serious planning (as a precursor) and seamless execution by aligning all aspects of the business to meet all the objectives. As one of my friends rightly said, “Put some money on the table and all the brains will start working to appropriately deploy the same.”