Business Recorder (BR) Research
The dearth of financing available to small and medium business owners leaves them gasping for some influx of liquidity. Most SMEs therefore rely on friends and relatives or trade creditors for financing arrangements. However, to plug in this financing gap venture capital can be utilized to provide SMEs funds to transform them into internationally competitive firms.
Venture capital (VC) can be termed as a sub classification of private equity where financing is provided to small, seed and early stage emerging firms that have had high growth track record or promise growth potential in the future. Globally, venture capital is a significant source of funding for small emerging firms and start-ups that lack access to capital markets.
C funds invest in SMEs because of perceived value addition to operations and governance making them more streamlined and competitive. Ultimately, VC funds and SMEs can have a mutually beneficial relationship with the former earning good returns upon exit and the latter getting the necessary expertise and funding required blooming.
Venture capital financing for SMEs was also on the agenda at the “First National SME Conference: contribution, challenges and prospects of SME sector in Pakistan” organized by SMEDA and the University of Management and Technology last week. According to statistics shared at the conference, FY15 brought funding of approximately $35 million (PKR 3.5 billion) marking an impressive 800 percent increase year-on-year. When compared to banking sector lending of roughly $60 million (PKR 6 billion) VC financing is almost more than half of commercial lending.
Significant venture capital financing included a $100,000 funding of Markhor which makes modern design hand crafted shoes by Y Combinator, an American seed accelerator. In September last year, the largest property listing online portal in Pakistan, Zameen.com raised $9 million from three undisclosed international VC funds.
In May of FY15, Naseeb parent company of Rozee.pk raised $6.5 Million in a Series C funding round with Vostok Nafta and Piton Capital Lead Investment as the main investors. Inov8 Limited currently one of the fastest growing and the most dominant mobile payment solution in Pakistan attracted a massive sum of $5.4 Million in funding from Sheikh Al Nahayan.
The rising trend of venture capital and start-up incubators is a welcome move for small business owners and economic growth of the country. Some prominent ones include Plan9, the Punjab government-backed start-up incubation program; LUMS Centre for Entrepreneurship (LCE), the university’s own start-up program. Karandaaz Pakistan is also providing growth capital to help accelerate and deepen capital access to small growing businesses in Pakistan. This column will take up the issues pertaining to a provision of a more conducive atmosphere for VC funds in the coming weeks.
With the potential and innovation capability of budding entrepreneurs as well as small and medium business owners, a strategy should be chalked out at provincial levels to secure venture capital funds from Chinese private equity and venture capital firms to maximize transfer of resources as well as technology for Pakistani SMEs. Moreover, most VC funding has been done in tech based start-ups and if the umbrella is extended to cover manufacturing and service sector SMEs it would be icing on the cake.
First published: May 31, 2016.
