According to the OECD, the SME sector is important not only for local prosperity, but for the entire global economy too. It is within this sector that most new jobs are created, a significant proportion of innovation occurs, and many new technologies are developed. Despite the fact that a reliable supply of capital is central to the development of these companies, funding problems persist. Indeed, it remains one of the major challenges within the SME landscape.
When SMEs create their own microecosystem to meet their capital needs, they gain greater control over the pace of capital supply
In recent times, the capital market has changed. It is beginning to react more to how things are perceived, rather than just numbers and facts. As a result of this change, new behaviours have emerged, with investors no longer blindly backing projects due to what they have seen or heard.
Instead, the major focus is now based on how likely a project is to succeed. In order to build an accurate assessment, investors will need to consider the experience and ability of those in management positions, as well as the board’s capacity to convert management’s work into shareholder value. If there are no credible management figures or board members, it is likely that the investment will not be particularly strong, and the investor will probably refrain from committing their hard-earned funds.
Liquidity planning
Although SMEs may have become accustomed to capital markets providing money on a regular basis, once investors start to retreat and investments are evaluated more carefully, the entire SME landscape begins to change – it starts to be a competition for money. This insight is crucial for the continued existence of each SME firm in the capital market, not least for the daily trading of stock, which will begin to decline as a result. Falling volumes affect volatility and risk, which further deteriorates and complicates an SME’s ability to attract new capital.
A number of studies have now established that the trading volume of SMEs is directly related to their value or price. Volatility is also likely to be a decisive factor in the price of the share. There are several tools in the market that aim to stimulate more trade, and yet few of them work well for SME firms. Instead, traditional trading parameters need to be paired with other dynamic aspects and trade patterns to optimise a modern and high-performance trading engine. However, all technical solutions have a weakness: namely, they become too static in their approach, and therefore a human touch is required to ensure that these commercial engines are efficient.
Market developments challenge the existing tools used to manage a company’s capital supplies, many of which have become clumsy, ineffective and old-fashioned. This can often result in a large loss of value for SME shareholders. While it is true that investment tools work well for large companies, SMEs need a completely different type of methodical capital supply – one that has a stronger basis in their own liquidity planning.
A unique ecosystem
SMEs today are completely dependent on the capital market’s own players for their capital procurement. As long as these players have financial interests in particular issues and specific business models, nothing will change without SME companies requesting it themselves. Therefore, it is up to individual companies to take responsibility for their equity supply in a way they have never had to previously. Fortunately, however, there are more alternative investment opportunities available than ever before. These include private debt funds, crowdfunding marketplaces, high-net-worth individuals and many other sources.
First, when SMEs create their own microecosystem to meet their capital needs, they gain greater control over the pace of capital supply. Second, businesses can manage the whole process without interference from external players. Third, everything happens on market terms. Fourth, management can spend more time developing the company instead of constantly seeking new financial solutions to cope with ongoing capital supply. Having a personal capital ecosystem enables organisations to beat the market. The money they raise can then be used to create additional shareholder value, which means that the value returns to the financial market.
This virtuous cycle can continue for as long as the company needs money to develop its business. As long as outgoings are subject to market conditions, the value growth of the company will remain strong. By combining trading engines with their own capital ecosystems, SMEs create the best possible conditions for achieving their goals, and still allow for satisfied shareholders to back their future investments.
