01 Aug I am planning to raise capital to sustain in post-COVID turbulence, should I choose the traditional firms or the new online-based business broker?

As the Covid-19 crisis deepens, the engines of economic growth have come down to a halt, and the pandemic has been transformed into an economic crisis, leading the global economy towards recession. For MSMEs to be back on track and run their business activities, the government has recently announced a relief package of INR 3 lakh crores for providing collateral-free loans to MSMEs. This will lead to a concept known as the fund of funds i.e. the external investors like venture capital and private equity firms would be enticed to fund the loss-making start-ups by buying a fraction of ownership.

With a large number of VC/PE investments in start-ups expected in the near future, the question arises what should be the medium via which these start-ups should raise funds. Should they choose the traditional way of fundraising or should they go for technologically advanced online business broking platforms? In order to answer this question, it is important to understand the online business broking industry which has the potential to replace the traditional business broking system currently in place

The Technological Landscape of Business Broking Industry

The technology and the software industry serve as the catalyst to almost every other industry and the business broking industry is no exception to it. The modern-day business broking industry makes use of online platforms which serve as the private market network for businesses, investors, acquirers, lenders, M&A advisors and boutique investment banks. These platforms automate deal origination, valuation, matching and introduction of businesses and investors across the globe. With the click of a button, members can access investment banking services such as mergers and acquisitions, fundraising, joint ventures & debt transactions. Business broking platforms combine all the features and functionality necessary for fundraising including deal prospecting, deal management, due diligence filtering out potential investors etc.

The main and the much-appreciated benefit of automation is that the entire legal work involved in a deal is done automatically for both the parties without requiring their physical presence which allows them to put their entire focus on investment/growth strategy. This makes the due diligence process less tedious and much simpler. But there are some companies like the consumer goods company for example, which requires a thorough, in presence due diligence process. Also, some companies are a bit hesitant of putting their information, data and financials online which may create an ambiguity amongst the investors. For such companies, the traditional business brokers might be more suitable than the online business broker.

Although these tools are partially made up of generalized business software solutions, they are created for and leveraged specifically by investment banks, private equity and venture capital firms. These tech platforms contain at least a basic virtual data room software component which is an online repository used for the storage and distribution of digital files and documents and ensures maximum security alongside project management, pipeline management, workflow management, and analytics features. One point of hesitance in going for an online business broking platform is the security concern. But these platforms boast of their security features backed by virtual data rooms and two-factor authentication. Although previously, VDRs were not very effective in ensuring maximum security, however, with advancements in cyber-security space these software’s now can move information through various online solutions without any data theft or loss of information. Hence, the user can certainly be sure of the security features.

How much do they charge for the services?

To use these online business broking services, a user is first of all required to sign-up to the online platform and choose a subscription plan as per his/her requirements. The price of subscription plans ranges from INR 5,000 to INR 40,000 per year based on the features offered. After this, the user can search for the potential investors including venture capital, private equity and angel investors and provide a pitch and deal prospectus to raise funds. The interested investors would then participate in the deal and the entire process starting from deal prospecting to post-deal analytics would be done online. In addition to the subscription fee, the online brokers also charge a 1-2% commission of the overall deal value from all the parties involved. So, for example, a business owner looking to raise 10 crores investment for his venture would have to pay around 2% of 10 crores plus the subscription charge of INR 30,000 (assume) which is approximately INR 20,30,000 as the commission fee. On top of that, the fundraiser can continue to reap the benefits of the subscription plan for the specified validity period even after the deal ends. On the other hand, the traditional business brokers charge anywhere between 3-4 % of overall deal value and hence the same business owner would have to pay anywhere between INR 30,00,000 to INR 40,00,000 commission for the same deal. Hence it is safe to assume here that online business broking platforms are the clear winner in terms of cost savings.

Conclusion: –

There are several challenges ahead for the fund-raising industry and online business broking could be a solution to overcome those challenges and make the entire process of fundraising more efficient. But whether you should choose an online business broker or traditional business broker depends completely on your requirements and feasibility as mentioned in the article above. A proper analysis of the pros and cons should be done for both aspects to make an informed decision.