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Corona, Global Economy, India, Indian Economy, Kerala, Opinion

Business Continuity Funds in Corona Era

As it is discussed and published in various articles, the new economic world order will be impacted by the effect of Novel Corona Virus or COVID 19. Due to the lockdown including in Kerala, most of the industries and businesses are seriously affected. It is sure that, in Kerala, many local and small and medium businesses like various corporate services offices and shops will be affected due to the working capital and survival fund availability, and shut down once this corona era will be over and the state will be returning to normalcy.  The startups will also be seriously affected due to this. As the job market is also affected, the spending and purchasing capacity of the market must have gone down already.

In this article, we are discussing the possibilities of the revival of business by making fund available through fund vehicle/entity options for the micro-enterprises, small and medium enterprises, and startups as a funding mechanism will help the survival of the said entities in Kerala market including some glimpses to its legal possibilities subject to Securities and Exchange Board of India (SEBI) regulations.

Startups

Startups are one of the majorly hit industries due to COVID outbreak. The whole disruptions in the economy and industry will seriously and badly affect the continuing status and financial health of the startups. Various startups will have to go for even windup and others will be in panic mode for survival, if there are no proper mechanisms are adopted for revival. At the present stage, the startups have little more monitoring systems and mentoring platforms for their survival comparing to micro-enterprises and small and medium enterprises.
At present to immediate the COVID 19 challenges and issues, the venture capital companies have extended support to startups in various aspects by way of mentoring, technical guidance, business continuity programs with financial support. The well known and famous venture capital funds in India like Matrix Partners, Sequoia Capital, Accel Partners, Kalaari Capital and many other venture capital fund companies have offered multiple levels supports to the establishments they’ve invested. They have arranged various accelerator programs, boot camps etc. The Start-Up India Office, promoted by the government of India and Department for Promotion of Industry and Internal Trade (DPIIT) has also arranged detailed sessions to address the industry situation with direct involvement by higher-level officers.

“The positive side is that at the end of 2019, the Indian venture capital companies have an immediately available investable fund of approx INR 550 Bn collectively. In the year 2019, despite the uncertainty in the global economic scenario, there was an investment of INR 1211 Bn by private equity funds and INR 760 Bn in Startups by venture capital funds. The government undertaking Small Industrial Development Bank of India (SIDBI) has already promoted ‘Fund of Funds for Start-ups venture capital fund’ (FFS-VCF). This FFS-VCF has funded 251 startups aggregating an amount of INR 1683 crores and has committed to investing further an amount of INR 1500 Cr.”

Currently, the startups along with venture capital companies have made different survival plans based on the different probabilities on the date of the lifting of lockdown as well as the rollback of industry and market to normalcy. Even some of the funding companies have set up rapid response funds too to manage the situations. The general buzz word the venture capital funds are suggesting is to get prepared for the worst and then readjust if the situation improves faster as the uncertainty of the situation is the current biggest challenge. The positive side even in this corona situation is the availability of funds with investors and out of almost 80,000 start-ups in India, only about 8% are funded so far. The majority of the balance 92% unfunded startups in India so far will have to approach these established venture capital fund firms the availability of survival funding. As the startups can easily migrate or accommodate the monitoring and mentoring systems of the venture capital companies and their ecosystem, it will be an easy game for startups to fetch the fund and survive as such.

Small & Medium Enterprises (SME)
However, in the situation of Kerala, the SME will be affected more than startups. To revive the Kerala business stories and economic perspective, the fund crunch of SME must be addressed on a priority basis along with startups matters too. Most of the startups can move to the venture capital fund eco-system and survive as we discussed above.
The relevance of business continuity fund comes at the point where we look into the survival possibilities of SME. Meanwhile, let check to some of the legal sides of the fund vehicles in India as we will have to set-up such an entity/vehicle for such a model. In India, the fund industry is regulated and managed by the Alternative Investment Funds Regulations 2012 issued by Securities and Exchange Board of India (SEBI). The said regulations already envisage the SME Fund, Angle Fund, Social Fund etc. There are different procedures and conditions with respect to each fund and models. In this writeup, we are not going deeper on its legal perspectives. We are just pointing out and confirming here that it may be structured as per the existing laws.
Already we have some similar funds investment scheme by NABARD and SIDBI. NABARD is investing in many such funds. SIDBI in addition to the FFS-VCF, as mentioned in Startups part, has even directly established two other funds as per alternative investment fund regulations named India Aspiration Fund and Aspire Fund. The Aspire Fund is targeting the farming and agriculture activities and rural-based small and medium enterprises.

The India Aspiration Fund is providing the investments generally to the medium enterprises. Aspire Fund is to invest an amount of INR 310 crore and India Aspiration Fund is to invest an amount of INR 2000 crore in SME and rural sectors.

To revive the economy, especially not the big corporate houses but the small shops and establishments, like textiles and apparels, groceries, departmental stores, retail shops and small service firms engaging in different service domain will be addressed with proper fund support and mentoring in possible forms using such business continuity funds. A similar type of ‘business continuity fund’ is experimented and experienced success in many foreign countries in different economic slowdown periods.
The cruxes and challenges, in this case, are most of the SME will not have experience working with such a formal funding, monitoring and mentoring system. And the Government may not be able to fund solely such business continuity fund set-ups when already government will be facing a liquidity crunch. The mentoring is also is not a matter to be exclusively done by governmental departments. But after a period of Corona, like some economists called the third World War, the situations and the world orders are new. Even the small establishments and vendors will have to move and grow to the formal funding circle from friends & family funding stage at this point of history. The bank and NBFC loan will not be an easy and viable model for such organisations.


While we go the detail of the business continuity fund, already there is a model of social funding in India. But such social funding is targeting green and environment-friendly projects and farming businesses majorly. However, our focus is not in this situation. Similar to the funding by the angel funds to the specific innovative idea startups with a lesser and reduced profit motivation and intention, we have to plan an alternative social funding mechanism targeting the affected small and medium enterprises to ensure the business continuity. This business continuity fund by way of alternative social funding can provide the funds to the affected establishments of all levels, for its survival with pre-defined and customized terms and conditions in possible levels.

As this is an alternative social venture funding, the profit targets of this investment will be at a reduced rate than the general commercial investment funds. This will be the USP of this funding mechanism targeting the rural and urban small and medium enterprises. At the same time, this business continuity fund will make the SME more responsible to the businesses as this is not free funding or subsidy. There are profit targets even if it can be small comparing to standard market return on investments and rates. Once an establishment has reached in survival stage, the fund can exit too from the investment. Interestingly, the exited fund can be taken back by the government and other investors or it can be re-invested in other SME if required.

The Government may directly or through its agencies (like KSIDC) initiate and lead such an alternative business continuity fund and fetch the investments from high net worth individuals with social motives and even from some established big corporate business houses with some government funds to make it more credible. The eligibility to the funds by SME can be positively defined. Another major thing of such a business continuity fund is the mentoring and acceleration guidance with systematic monitoring. The Government may get involved and avail the services of professionals in each geographical area or district-wise, extensively for such an exercise with existing governmental resources in the industries department. There must a proper charter documents for the mentoring exercise and systematic monitoring from the first day of funding.

Micro Enterprises and Micro Financing

The story of micro-enterprises will be altogether different. It may not be practically possible to consider directly investing in the micro-enterprises by the above-said business continuity fund. The government must encourage investing micro-financing firms to invest in micro-enterprises. The micro-finance institutions have a much wider experience of financing to the micro-enterprises. They are slowing down new funding and disbursements and facing no repayment from micro-entities and borrowers as their earnings may also have hit. Many of them will have to write off the funds provided to micro-entrepreneurs.

As this is the case of micro-enterprises funding, the business continuity fund must invest in micro-finance institutions (MFIs) and the said MFIs will invest in the micro-enterprises. The MFIs will further monitor, track and mentor the micro-enterprises as per the exiting practice they are following.

As this is the altogether case of startups, SME, and micro-enterprises; moving of the startups to the venture capital fund eco-system, the setting of the business continuity alternative social funding for the revival of SME and strengthening of micro-finance enterprises by the business continuity funds will offer a rollback of the economy to the normalcy, job creations and increase of purchase capacity of people and will create a Kerala model in business revival history.

article originally published in Malayalam on https://dhanamonline.com/entrepreneurship/there-are-ways-to-find-funding-for-startups-and-small-entrepreneurs-during-the-covid-era/

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