How Technology is Enabling Small Businesses

Divyansh apparels’ proprietor Sunil Kumar was looking for the right partner to scale his apparel manufacturing business in Noida. Casually browsing the web, he chanced upon a marketing campaign by Fashinza. Undertaking small outsourced orders from a larger factory and clocking Rs 2 crore in annual revenue till then, Kumar was certain that his six-year-old womenswear manufacturing unit needed to grow. Starting in 2020, his collaboration with Fashinza marked the beginning of the transformational journey of his business. From operating only 20 machines, Divyansh Apparels expanded its horizon to 80 machines in just one year with the help of Fashinza, a digital marketplace that connects fashion brands with garment manufacturers. Moreover, enabled by Fashinza’s other services such as production management and quality control solutions, Kumar’s company was able to enhance its factory’s productivity and now works directly with four international brands and generates approximately Rs 18 crore in annual revenue.

Divyansh Apparels is not an isolated case, and definitely not one-sided.

Fashinza, founded by Pawan Gupta, Abhishek Sharma and Jamil Ahmad, is among a new crop of start-ups innovating niche vertical-focussed tech solutions to tap into the broader and deeper opportunities offered by micro, small and medium enterprises (MSMEs) operating in India. With their contribution of nearly 30 per cent to the country’s GDP, around 50 per cent to total exports, and encompassing around 95 per cent of total industrial units, India’s MSMEs offer a particularly fertile ground for the new-age, risk-taking start-up community, which is always on the lookout for problems of scale that can be solved profitably and efficiently.

“Some common challenges that SMEs face include guarantee of consistent business, managing day-to-day operations, financing and working-capital gaps. When we began working with SMEs, we tried to address these challenges. Most SMEs are highly reliant on middlemen, and can never compete with large manufacturers that have the capital to avail the best tech tools and do data-driven manufacturing,” says Gupta of Fashinza.

Fashinza also assists SMEs in managing the entire product development, sourcing and production process from design to delivery. Backed by marquee investors like Accel Partners and Elevation Capital, this Gurugram-based start-up today has over 500 partner factories across India, Bangladesh, Vietnam and Sri Lanka. It counts brands like Forever21, FirstCry, Nykaa and Bewakoof.com among its customers, and claims to help partner SMEs reduce turnaround time, achieve 4x increase in profit margins and 2x capacity expansion.

“Start-ups are bringing big-company processes to SMEs, helping them become more data- and metrics-driven, hence making them globally competitive. They are helping them with their product discovery, outreach and go-to-market strategy, both in India and outside India,” says Sameer Jain, Council Chair of SME Council at Nasscom.

With the emergence of viable and economical digital retail technology solutions, a lot of SMEs are going directly to consumers. Many start-ups similar to Fashinza are helping them in this more. Arzooo, which enables offline electronic retailers to compete on par with online platforms by creating a digital inventory; Unicommerce, an online, multi-channel order fulfilment platform; LoveLocal, which provides complete shop digitalisation solutions for retailers; and Zomato-backed Shiprocket, an e-commerce shipping and enablement platform for SMEs, are pushing the digital wave among small businesses.

“Start-ups are great enablers for SMEs, helping them embed advanced digital tools like AI and ML into their business models. The SME sector is a massively untapped market for start-ups, as the deep-rooted pain points around marketing, finance, inventory management, logistics and skilled manpower offer start-ups enough use cases to innovate low-cost technology solutions,” says Hemant Seth, Director of MSME at industry body FICCI.

K.R. Sekar, President of the Bangalore Chamber of Industry and Commerce, says affordability and ease of working with start-ups are the major factors driving the growth of this increasing collaboration. “Start-ups, given the size of their operations, are nimble and have no constraints in terms of innovation quotient. They want a test bed for their products and SMEs are in the right place to support this requirement. SMEs that were reluctant in implementing technology solutions due to their exorbitant costs are now finding that they can work with start-ups for technological knowhow at a price point that is affordable for them,” he adds.

Moreover, SMEs today are travelling beyond the mainstream e-commerce marketplaces to social media for increased visibility. According to a recent study titled ‘Digital Adoption Trends Among SMBs’ by fintech firm NeoGrowth, about 66 per cent of SMEs in the country have migrated to online sales. Google Business (35 per cent), and WhatsApp, Facebook and Instagram (combined 20 per cent) are the top digital platforms SMEs leverage for customer discovery. Another survey conducted by web hosting service provider Bluehost in the first two weeks of June 2021 showed SMEs receiving as much as 72 per cent of their payments through digital channels compared to 28 per cent of cash payments, which is testimony to the impact fintech start-ups have made across the space.

Udyam, a government-run portal to register MSMEs, has 8.4 million registered entities and as per the National Sample Survey (NSS), during the period 2015-16, there were 63.4 million unincorporated non-agriculture MSMEs in the country. And it would not be an overstatement to say that fintechs have made deep inroads at all levels of the Indian MSME ecosystem. Despite that, a study conducted by the U.K. Sinha-headed committee for the RBI in June 2021 showed the overall credit gap facing MSMEs to be approximately Rs 20-25 lakh crore, while another study conducted by the International Finance Corporation (IFC) pegged it at Rs 25.8 lakh crore. And fintech start-ups are playing a significant role in narrowing this credit gap.

A host of highly funded technology-based lending platforms like Paytm, Oxyzo, KredX, Razorpay, Lendingkart and CredAvenue offer enterprise loans, either in partnership with banks and NBFCs or from their own books. Beyond their mainstream digital payment solutions, fintech start-ups are innovating around digital distribution engines and building alternate data sets for underwriting. A host of start-ups including Khatabook, Dukaan, PagarBook, and Hylobiz are primarily focussed on the SME space, offering various solutions and services including digital bookkeeping; digitisation of attendance, payroll and salaries; and end-to-end payment and neo-banking services.

“SMEs across sectors and regions are today familiar with digital payments. Overall, the challenge of using technology has vanished thanks to UPI, QR code and digital payment services. There is enough awareness in the market. Today, when we go to the market, the questions that are being asked are around the possibilities of integrating different tech products they use,” says Vishal Gupta, Co-Founder of Hylobiz. Bengaluru-based Hylobiz helps SMEs in India, Bahrain and the UAE automate and digitise everything from invoice management to inventory management and accounts reconciliation.

Trade finance platform Vayana Network, which recently closed a Rs 397-crore funding round from a slew of investors including IFC and PayU, among others, is gearing up to launch its International Trade Finance Services (ITFS) platform, for which it received a licence from the International Financial Services Centres Authority (IFSCA). The platform, which it plans to launch this fiscal, will enable SMEs to access international trade finance facilities for their export and import businesses.

“Today, 45-50 per cent of exporters are SMEs. What they really need is foreign currency credit, whereas, what they get is rupee credit, which means they take on the exchange risks. ITFS will allow SMEs to get financing in foreign currency at much cheaper rates for their exports and imports,” says Ramaswamy Iyer, Founder and CEO, Vayana Network.

The Union government, too, has been actively supporting equity investment for SMEs with initiatives such as the Rs 50,000-crore fund-of-funds announced in May 2020, as part of the Aatmanirbhar Bharat package, to be administered by the NSIC Venture Capital Fund Limited (NVCFL), a wholly owned subsidiary of the National Small Industries Corporation.

While technology is helping traditional small businesses break the physical barriers of brick and mortar walls, they still do not attract venture capital (VC) investments as much as their tech-first counterparts. Lack of long-term private capital is a consistent problem for SMEs.

“There’s a large universe of SMEs that have been able to grow their businesses and use capital efficiently. These are the qualities typical VCs seek in their portfolio. Unfortunately, SMEs are not on the radar of VCs because they may not grow as fast as tech businesses and traditional non-tech enterprises may not offer many exit opportunities,” says Mitin Jain, Founder of private equity fund India SME Investments.

“There is some sort of a symbiotic relationship with the SMEs in a way, where start-ups want to ensure successful adoption of their products in India before launching for the world,” Jain adds, summing up the growing opportunity and collaboration between SMEs and start-ups.

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