Start-up versus MSME

 

Start-up versus MSME

My Blog No. 27

 Start-up or Startup Company or upstart are terms, which are three or four decades old, mostly evolved in electronic era with the advent of the internet.

Micro, Small and Medium Term Enterprises (MSME) as it is called in India is known as Small & Medium Industries (SME) world over. In India, post-independence, we had Khadi and Village Industries and Small Scale Industries. After bank nationalization in 1969, priority sector for the purpose of bank lending, included agriculture, retail traders, small businesses, business enterprises and small road transport operators in addition to small scale industries. Post-liberalization it was considered prudent to use the term MSME in line with global practice. Ministry of Small Scale Industries and the Ministry of Agro and Rural Industries were merged to form the Ministry of Micro, Small and Medium Enterprises in May 2007. 

There is no standard or generally accepted definition of Start-up. As per ‘Start-up India' website an entity shall be considered as a Startup: 1. if it is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India.2. up to ten years from the date of its incorporation/registration.3. if its turnover for any of the financial years since incorporation/registration has not exceeded INR 100 Crores and 4. if it is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

 

Definition of MSME has changed number of times. With effect from July 1, 2020 MSME has been defined as Micro if the Manufacturing Enterprises and Enterprises rendering Services have Investment in Plant and Machinery or Equipment  not more than Rs.1 crore and Annual Turnover is not more than Rs. 5 crore, Small if Investment in Plant and Machinery or Equipment is not more than Rs.10 crore and Annual Turnover is not more than Rs. 50 crore and Medium if Investment in Plant and Machinery or Equipment is not more than Rs.50 crore and Annual Turnover is not more than Rs. 250 crore.

 

It is not mandatory to register a Start-up or an MSME in India. But if a Start-up is registered with or recognized by Department for Promotion of Industry and Internal Trade (DPIIT), Government of India certain advantages including tax benefits as declared by the government can be availed. Likewise, it is not mandatory to register MSME but in order to avail various government offered benefits and incentives, including bank loans, registration with District Industries Centre (DIC) becomes a pre requisite. DIC is a district level organization, of Development Commissioner MSME Government of India, headed by a General Manager.

 

What is common between a Start-up and MSME unit is, that, both are set up for business and both require enterprise. Level of risk and enterprise is certainly more in case of a Start-up as it works on an idea which is generally new and untested. Mostly Start-ups are started by engineers or others who are often more qualified as compared to those entrepreneurs who start MSMEs.

 

Those who establish Start-ups are called Founders or Co-Founders whereas those who set up small or medium enterprises are called Promoters. The term Promoter is defined in the Company Act of India, Income Tax Act of India as well as by SEBI whereas the term Founder has not been defined under Indian law.

 

Start-up begins with an idea, supposedly innovative, with a set of Founders/Co-Founders, moves towards Minimum Viable Product (MVP), gets funded by seed funding through Angle Investors, Venture Capitalists, Private Equity and finally Initial Public Offering (IPO). It has low or no debt. Debt may be only through the Debt Instruments to suit the requirements of Investors, mostly at the level of Venture Capitalists.

 

MSMEs have a different trajectory. They start with usual factors of production; land, labour, capital, enterprise etc. Based on a Project Report they raise funds- debt- from commercial bank after providing margin money or bringing in Promoter’s Contribution in the form of equity. Current Debt Equity ratio is 1:1.5, i.e. on an equity of Rs.100 a bank loan of Rs. 150 can be raised. Business grows organically, generally slowly, micro unit may become small and then medium and finally as a large unit. Final stage of funding for scaling up comes from an IPO. The financing of MSME is based on purpose of loan, security offered and contribution made by the Promoter. Financing is also done on the basis of past performance as reflected in Financial Statements submitted by the proponent. Other sources of funding like NBFCs are not common.

 

In case of Start-ups funding comes for developing the product in the initial stage but mostly for scaling up, for gaining market share at later stages. Thus, funding is to finance or fuel the growth potential of the venture. Funding is mostly done keeping in mind future market share and future profits.

 

In case of MSME loans, banks or financiers do not participate in managing the venture but Investors may seek active role in management and decision making in the case of Start-ups. Bigger investors take board position/s in the funded Start-ups.

 

Key words for a Start-up include Idea, Innovation, Founder, Co-founder, Business Plan, Seed Funding, Angle Investor, MVP, Venture Capital, Private Equity, Subscriber Agreement, Shareholder Agreement, Business Incubator, Accelerator and Start-up Eco System.

 

Key words for MSME include Project Report, Promoter, Promoter Margin, Promoter Contribution, Loan, Bank Loan, Debt Equity Ratio, and Financial Statements.

 

To sum up, based on idea, innovation and growth potential Start-up is a new avatar of MSME which offers multiple routes and options to founders and investors to exit.