By Jouko Ahvenainen,
Co-founder at Grow VC Group
Image Attribute: Shared space offices / source: Pinterest.com
One best way
to accelerate the growth of the economy is to help Small & Medim Enterprises (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 have no credit scores, no financial history and if they are, for
example, software or service companies, they have no tangible assets. Some of
their 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. Crowd-funding and p2p lending offers more flexibility, but also
investors in those services want to see evidences 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 limits 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 participated 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 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
to develop 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
requires 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 develop 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.
About The Author:
Jouko
Ahvenainen is a serial-entrepreneur, e.g. co-founder of Grow VC Group, a
pioneer in new funding solutions, including equity p2p investments. He
participated in changing US finance regulation, getting the Senate and
President to allow crowd funding and has worked with EU finance regulation.
Jouko started his work with crowd funding models in 2008.
Jouko is a founder, partner and board member in several innovative digital finance companies. Jouko is also an advisor for US, European and Asian investing and finance programs. He has especially worked to plan and implement models to get crowd investing and institutional investor models to work together.
Jouko holds an MBA from Helsinki School of Economics / McCombs School of Business, at the University of Texas, Austin and a M.Sc.(Tech.) from Helsinki University of Technology.
This is article was originally published at Startup Commons under
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