Co-founder at Grow VC Group
Image Attribute: IndraStra Creatives
One best way to accelerate the growth of the economy is to help SME’s to get capital for growth. European Financial Forum’s panel just highlighted that a better access to capital for SMEs is a key question for the European economy. Business angels and VC’s are an answer to some companies, but most of SMEs are not suitable or relevant for the risk capital equity finance. It has become harder to get bank loans and banks typically want to get some collateral. How to really help all kind of SMEs to get finance?
Young companies like Startups have no credit scores, no financial history and if they are, for example, software or service companies, they have no tangible assets. Some of there can target angel or VC funding, but it is suitable only for companies that look for significant scalable growth, at least 90% of young companies doesn’t belong to that category, but they are still important for the local economy and employ people. Crowdfunding and p2p lending offer more flexibility, but also investors in those services want to see evidence the company can survive and grow.
The bank lending became much harder to get after the finance crisis in 2008. Also, the banking regulation and capital requirements limit banks to lend to companies without solid risk analysis. At least, banks like to have collaterals or someone (for example, entrepreneurs) to guarantee the loan. Sometimes also some 3rd parties, like government, export finance agency, or other SME loan guarantee programs, can guarantee loans. But they also need some criteria to select companies for those guarantee programs.
The fundamental problem with the finance decision is, how to evaluate a new business that has no real history, no real revenue, and only nice promises in a business plan. Finance decisions are normally based on data (even the human aspect is also relevant e.g. with business angels), and these young companies have no data. Can we improve this?
It is not totally true, there is data from those companies and entrepreneurs, but it has been difficult to get the data and use it. For example, the entrepreneurs might have had earlier businesses or participated in their university or college to a program to start their own business, they have used e.g. local city’s or region’s entrepreneurship support services and made business plans for those, maybe they have applied grants to start a company, they can have some advisors or participate in an accelerator, and they have participated in events to pitch and market their business. All that have created data to know their plans, but also see, how they have performed since first plans and what is the performance of the entrepreneurs. This data can already create a timeline, what the team has done, what they have achieved, and have they kept they promises, or learned from failures. Also, the history of other similar companies is relevant.
The problem has been this kind of data is in many places, complex to combine and maybe no way to get and analyze it in one place. Startup Commons is operating especially in this area. It offers tools and databases that all relevant organizations that work with SMEs can share information and also companies can get a better service. It is a digital infrastructure for governments, entrepreneur services, accelerators, investors and others to connect, measure and benchmark SME ecosystems for progress tracking, service flow management, financing and international benchmarking.
Of course, this data is different from traditional credit scores or many years audited accounts. But it is much more than a one-page business plan or marketing slide deck. And it offers concrete data to develop new metrics and tools to evaluate companies and how financeable they are. And now it is the interest of all parties from governments and banks to entrepreneurs to better collect that data and develop metrics to improve the access to finance.
Startup Commons is now working with many SME ecosystems around the world, and one part of developing is the access to capital. At the same time, we want to involve more parties to work together with this. Data, metrics, and financing criteria require cooperation from many parties, from government and regional programs to banks, accelerators, and private investors. We invite all parties to participate in this work.
Data is the key to developing the future finance services, as e.g. McKinsey emphasizes in its report. For new and young companies we need new solutions to collect and analyze data. Digital SME infrastructures offer a solution for this and it is also the best interest of entrepreneurs and SMEs to get this data to effective use. By developing this infrastructure, data collection, and new metrics, we all can make the SME financing work better.