Knock, Knock, Apohan’s Coming!
Opportunity does not always knock on your door. So Shailesh Waghmare and Arun Joshi looked around hard and found Opportunity’s door to knock on. And the door opened! In 950 out of the 1200 companies they surveyed!
Combing for an opportunity in a sector that is generally overlooked by start-ups, was one part of the story. This was natural for the duo as says Shailesh, “I had always worked in the SME sector in an advisory capacity. Arun and I were employed in Delhi. But both of us wanted to shift to Pune due to familial reasons.” And that led to the change in gears from employee to start-up founder for the two.
So, what is it that Apohan does that is needed by almost 80% of their target audience, as shown by their survey? And therein lay the other part of the story – looking at the unmet need in the SME sector. Shailesh reveals a very interesting fact. “Since I have been with the SME sector, I have seen that most of them are profitable and have operational excellence, but since they have their nose to the ground, they view expansion very differently from start-ups.”
“Unlike start-ups, where seeking funds for equity is de rigueur, the story is very different for the SMEs. Here most company owners depend on their CAs and CSs for advice. Which is generally to go the debt route. And that is very different from an equity route.”
“SMEs are obsessed with saving tax and the negative impact of this is that profits do not get truly reflected in the books. Because of this, the valuation of the business gets affected. So, SMEs get stuck in the debt game.”
What Shailesh and Arun did was show them a brighter picture. “It is possible to grow further without taking a loan. An investor can fuel your growth engine, but there is some work to do.” As an example, Shailesh talks about an auto component SME that had a turnover of Rs. 850 Cr. “Despite this, he was still looking at debt for expansion. They don’t know that equity is interest-free money.”
Equity funding is investors’ money and so it’s obvious that they take a lot of precautions. There are a lot of processes and due diligence that has to be done. “And very few CAs know these processes.” And this is where Apohan – the digital platform built by the duo comes in.
The documents required for equity investing according to Shailesh are:
- The Investment Teaser: This is a document that an investor will see and understand the business. It is always anonymous because in the SME sector, looking for funds is looked at differently. Employees will think the owner doesn’t have money and the company will shut down. So will the vendors, and even the customers. It is important that the teaser paper carries no name.
- The Financial Model:This should be an agile model that shows various scenarios. It should be able to run a scenario where an investor can see 10X growth in the next 5 years. Or a 5X growth, then what will be the impact of such growth? This automatically leads to valuation.
- The Valuation Document:This is an information memorandum that tells the tale right from inception to date. And all that has happened in between.
Initially, the duo started offering their services offline but soon realized that to scale the business they needed to go digital. “We are focussed on the SME sector. Unlike say, a PWC that can flourish with perhaps just two transactions a year globally because they serve the large global giants. But the story is different for the SMEs. There are approximately five million SMEs and even if we want to reach out to 10% the number is huge. So, we decided to do it the digital way.”
Building the digital platform:
To do that they hired college grads as interns to develop their platform. Since Apohan takes care of the entire ecosystem in-house, they had to also engage some subject matter experts and engineers. In nine months at a cost of Rs. 35 lakhs, their platform was ready.
This PaaS – the Apohan Strategic Transaction Platform can screen a company and inform if it is investment ready or not. “We have developed algorithms that can do the calculations based on the data fed in – whether a company is investible or not. Based on the output, we provide recommendations on what they should do to become investable.”
Apohan charges anywhere between Rs. 5 to 15 lakhs as a pre-success fee where they let a business owner know about the investability of his company and give recommendations. If the company undertakes the investment route then the success fee is 2-6% of the amount raised.
They launched their platform last month and already have signed up seven clients. Taking an SME company to success in fundraising involves many things. Says Shailesh, “we have to get all their documentation done. Then there is due diligence where you validate everything you have said. For this, we create a data room where all the info is stored in one place. Once the investor has all the info then they can cross-check by speaking to the clients of the company, employees, vendors, etc. Based on the output of the due diligence, the investor will sign a term sheet to agree on the valuation. Once we sign up a client, we provide end-to-end transaction advisory services. Our platform does everything except strategic compliance.
The way forward:
The outlook for this company looks bright. “We have already signed up seven pre-success customers and have 250 hot leads. Our issue now is we need highly qualified CAs and CSs onboard. Moreover, we have noticed that investment readiness with SMEs is just about 10%. This is because while they are very good at getting business and managing it, they are too busy with operations and do not keep their books as per investment requirements. Also, they are not very professional. They baulk at hiring high-cost professionals.”
One month on, seven customers in, 250 hot leads, and 80% of the industry seems ready to buy into their services. Looks like opportunity just opened the door wide open for them and they’ve got their foot firmly in!
An SME who did it!
Aditya Agarwal, Director, Shri Ashtavinayak Glass:
“In most cases, an SME is a family-run business and the concept of equity funding is not known. We now have a turnover of Rs. 70 Cr and have grown this far on either our own funds or bank loans. But bank loans are an inside matter, no one will know. Whereas an equity investor means you have to bare all. You have to have all your records, numbers put out in front of them. Due diligence is like going nude. But what SMEs don’t understand is that if you want to grow, if you want to get really big you cannot do so via the bank loan route. An equity investor gives much more than just money. It comes with strategic alliances, technical collaborations, networks, and much more. When we decided to go in for equity funding, we did face a few questions from elders in the family and two customers who wanted to know if all was well. We explained this to them and they were fine. Equity funding means my company is clean in terms of compliances and that I am not afraid of opening my books to the market. And if that fuels my hunger for big growth, so be it.”