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Value Creation for Startups & SMEs: A Private Equity Perspective

Role of systems & processes, need of new client acquisition and employee welfare at large in creating value at small organizations

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Value creation is not a fixed or tangible. Value is an abstract concept which is in the minds of all managements and companies and they work hard to understand exactly what value means to their customers so that they can generate and provide it. Value creation can be done by improving the existing product or by providing the better services

Let us look at it through an example: Value creation for customers helps sell products and services while creating value for shareholders, in the form of increase in valuation, interest from other investors to put money into company.

Companies can only achieve this if they motivate their employees to be more creative and work harder towards understanding customer requirements. Value, therefore, must be created for those employees in order to motivate them to achieve their higher objective. Value for employees would mean being involved in decision-making and working in a conducive, open and friendly yet challenging environment where merit is the only means to rewards. Employees also value meaningful work, excellent bonus mechanisms and continued induction and development.

How does it apply to SMEs?
Interestingly, small and medium sized enterprises are best geared to understand this concept, as the interactions between the managements and the stakeholders is the strongest owing to the size of the operations. They establish their first connects with stakeholders through a tangible value-creation promise and kick-start their respective business.

Unfortunately, after surviving the startup phase, many of them fail on the value creation front and do not capitalize on the forms of existing market extension, product improvement and enhancements, customer relationship interfaces and quality improvements. The issue doesn’t lie at their end – they were never built in the first place to move forward, since their primary focus was often survival and transition to the next level. Also, the complexities of value creation increase, requiring an altogether new set of skills.

How can SMEs work towards creating value? 

As an SME, to create significant value, the organization must work on the following aspects:

* Focus on creating and stabilizing systems and processes to ensure smooth functioning of the organization
* Managing the human resources of the company through a well-defined organizational structure with clearly defined reporting hierarchies
* Providing inductions in order to nurture and develop new skill sets among the different teams in order to improve organizational efficiency
* Creating a base of loyal customers in such a way that the marketing efforts are largely supported by referrals as a result of the high quality customer service
* Aligning the interests of the top, middle and bottom levels of the organization in order to ensure the optimum utilization of resources

A common pattern that can be observed among typical Indian SMEs and startups is as follows:

* Most SMEs tend to take systems and processes very lightly
* Most promoter-driven SMEs tend to score high in the skill set inherent to the promoter, which defines the core competence of the company
* Broadly there are few clients, which these SMEs acquire in the initial growth phase of the organization, primarily driven through network and closed user groups
* However, the efforts of the promoters towards scaling the operations beyond the base level of clients are limited which ultimately stagnates the growth of the company

The skill set of the promoter is usually good enough to create a base level of growth, as far as acquiring the initial customers and building the basic organizational setup is concerned. It is also a priority for SMEs, since fewer, bigger clients are easy to maintain and build. However, creating and developing systems and processes normally results in significant bandwidth accretion for the SME which is an important aspect that is ignored by most Indian promoters and is an area of potential value creation.

Thus, it is clear that for such SMEs, significant element of value creation happens through:

* Acquiring new clients in the short term, who add significantly to the revenues of the company
* Creating efficient systems and processes which ensure the optimum utilization of all organizational resources
* Aligning employees at all levels with medium term goals of organization

This is where the expertise of operational private equity funds can act as a significant value creator for SMEs. The intervention of the fund can exist across several horizontals, depending on the environment, sector and the nature of business of the specific startup/ SME. Some of these interventions include technology interventions that bring cost leadership, HR intervention to ensure the hiring of the best possible talent in the industry and demand generation through cost-efficient marketing mediums. All these aim towards helping the company build a sustainable competitive advantage and survive and prosper in the uncertainties within a highly competitive business environment. Operating professionals in the field of Private Equity can bring in their exposure from different organizations and sectors that can bring forth a phenomenal change in the way SMEs and startups function and help optimize the process of value creation for stakeholders.

Finally, creating value for investors would, of course, mean delivering consistent high returns on their capital. This generally would require both strong topline and bottom line growth. These, in turn, can be achieved only if a company delivers sustained value for customers, hence the virtuous circle of value creation kicks off.

TIW Private Equity Strategy
TIW’s Fund Strategy revolves around the following core principles to create returns:

* Focuses on consumption driven sectors and domestic demographic dividend to drive superior alpha returns (FMCG, Manufacturing Consumption, digital consumption, real estate services, financial services, auto ancillary, specialty chemicals, pharma, food & Agri etc.)
* TIW Private Equity Prefer investing with first generation entrepreneurs who have higher passion & energy to scale organizations and drive exponential growth
* Like taking minimal market risk and prefers execution risk in strong macroeconomic/sector themes
* Looks at margin expansion/improving ROE of companies through operating interventions along with growth as superior driver of return

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Tags assigned to this article:
smes private equity corporate

Mohit Ralhan

The author is Managing Partner & CIO – TIW Private Equity

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