Growth Idea Lab: Difference between Startups and MSMEs

Saturday, May 18, 2019

Difference between Startups and MSMEs

It has been seen in the last couple of years that startups are being encouraged all over the world. Let us go into the difference between startups and MSME especially in their financial models.

Financial Model of MSMEs:

MSME as a thumb rule follow 3:1 debt to equity ratio. The existing system has led to over-invoicing in the past couple of years. Government incentives were used by many entrepreneurs to meet the debt: equity ratio.

This has led to the widespread problem of underperformance or sickness/weakness for the last few decades. RBI is trying to solve this by restructuring the debt side of the problem but it is only a short-term solution causing most of the units to become sick once again or die altogether.

Financial Model of Startups:

Most of the startup ideas are bootstrapped till there is a proof of concept or financed by angel investors. Series A, B, C, D, E and now F & G round of funding have come into play and every round valuation is going up and the entrepreneur goes on reducing his stake at every round.

With 90 – 95% failure rate, the angel investor loses equity along with the promoters.

So, there is a strong need to make some hybrid models between these two to infuse equity in sick/weak MSME.

Regards,

Nilesh Desai

Director,

SMEA Analytics Pvt Ltd