Art of the Enterprise

Art imitates life; or life imitates art?

As we ponder this question, the importance of art becomes real to us, and we realize that the life we make for ourselves is the product of our creativity. It is not difficult to see that life itself is art; and art is life.

From the mundane to the complex fixtures of our environment; from the daily implements that help us get by work to the sophisticated machines that make living comfortable; to the simplest method of doing a task to the complicated processes we undertake to complete a project--- they are all products of creativity. One undeniable fact remain: art is in everything we consume, use, and the way we do things to survive and prosper in this world.

This is true in business as well. Running a business, as many of us know it, and the way it is frequently stereotyped, is a difficult job that requires indifference. An entrepreneur is often cold, calculating, and apathetic to concerns outside his business. Like the market he serves, the entrepreneur is not so much troubled about the impact of his decisions on others, as their impact on the bottom line. To him, the important thing is to generate revenues, earn a hefty profit, and grow the business.  However, many successful entrepreneurs are nowhere near the cold hearted and uncaring individuals they are portrayed to be. They are really artists who are passionate about their business and the way their products and services impact on the market---these be institutions, communities, or people. Their products, services, and the processes they conform to are the result of creative thought. Works of art that call for the artistry of the entrepreneur. It is this creative spark that gives the enterprise the human face, its color, and the vitality that is its culture.

Figaro: Giving Life to a Dying Industry

“The purpose of life is a life of purpose.”---Robert Byrne

This Filipino enterprise serving the famed barako blend of coffee has come a long way since its modest beginnings in 1993 as an unfussy coffee shop. Today, after becoming a full service store that offers a whole range of fast food items, and going into franchise operations, the company has established16 franchisees, and 14 company owned stores throughout the country. It’s a profitable business that continues to grow.

The Small Business Corporation, by way of its Franchise financing facility has financed the establishment of several Figaro coffee stores, and has helped in the growth of the business.

But more than just its business success, what makes Figaro Coffee Company unique among its SME peers is fulfilling a purpose--- to revive the once vibrant and now struggling coffee industry.

It is one of the leading movers in an effort to bring back to the industry its old position of prominence in the world coffee market. Representing the private sector as one of the leading coffee retailers in the country, Figaro Coffee Company has built on the image as a source of Filipino specialty coffee.  It introduced Barako roast in 1999 and it immediately became a big success.

Believing in the potential of the Barako bean, Pacita Juan, owner of Figaro embarked on a program called “Save the Barako.” The program promoted the coffee bean, and encouraged farmers to plant and improved their cultural practices to increase productivity.  At the same time, Juan also set up the Figaro Foundation Corporation to address the plight of the coffee farmers and the other humanitarian needs of the industry.

Soon the business promotion effort became an industry saving cause. Figaro became active in launching various projects such as tree planting, coffee farm tours, art exhibits, coffee conventions, seminars, and trainings in quick succession, all in the call of reviving the coffee industry.

With its use of the mass media, Figaro soon made people aware of the low productivity of the Barako coffee due to the low demand, and because of this awareness, people soon started buying the local coffee which increased the demand among domestic and foreign coffee retailers.

Figaro’s involvement eventually became institutionalized as its owner was selected as private sector representative and co-chair of the National Coffee Development Board, a government created, but private sector led collaborative effort to bring back the Philippine coffee industry on its feet.

Since then, there has been an air of optimism as industry players look to the future. As one industry stalwart puts it, “its bean value is at least three billion pesos. It’s growing by leaps and bounds and there’s room for investment, not only in retail but also in farming.”

Figaro has truly epitomized the devotion of the entrepreneur to its art, or to the purpose to which the enterprise was created. As industry analysts sum it up, it’s an inspired effort to “secure the future of a dying coffee bean.” In the process, not only Figaro has reaped the benefits, but the Filipino and the country as well.

Equity Financing is a Good Way to Finance your Business

Debt financing is what everybody is familiar with. It is what you know as a loan. It may be short term or long term, or it may be transactional. The institution I belong to---Small Business Corporation, a government financial institution attached to the Philippines Department of Trade and Industry provides loans for MSMEs. In fact loans make up much of its portfolio.

                                            

Loans are lent out with the intention of getting back the principal amount plus the interest depending on how long the loan is to be repaid. If the borrower is not given a grace period of about 6 months to a year at most, the loan is immediately amortized or repaid; the principal plus interest which is usually fixed and given at the onset of the loan.

The lender in most cases is does not participate in the business; is not interested in owning it, but merely wants to get his money back plus interest.

 Debt is ideally used only to finance the working capital requirements of business at most about 70 percent of it. Or short to medium term asset acquisition such as for machinery and equipment.

For start ups, product development, or expansion of the business, a more appropriate kind of financing is available.

We call it equity financing. In this article, I will talk mostly about equity financing under SB Corp.’s Venture Capital and Enterprise Incubation Program or SME-VIP.

First let’s start with the basic---- equity financing is not a loan; it is an investment.

So unlike a loan, an investment is not to be repaid immediately. The one providing the investment becomes part owner of the enterprise, and shares of stocks are issued for the invested amount.

Second difference from a loan is that an investor expects their investment to grow and given back over a period of several years many times over their original amount of investment.

However, there is no specified rate of return, but has a minimum rate of return without limits on the upside. Usually, there is no specific time the investment has to be returned to the investor.

Finally, investors may get involve in the management of the business as part of the deal of investing. Investors are often members of the Board of Directors.

The good news is that aside from SB Corp.’s lending or loans program, it now has a venture capital/equity financing program as an offshoot of the passage of the revised Magna Carta for mSMEs or R.A. 9501, which includes in our mandate, a venture capital fund.

What is SME-VIP?

The SME-VIP shall identify, select and nurture and develop business ideas and early stage/start-up enterprises into competitive businesses. A minimum objective is to create sustainable and viable enterprises that are self-supporting and can already stand on their own.

Specifically, the SME-VIP will have the following objectives:

• To provide equity and/or venture capital financing;
• To provide by itself or though its network of  partners capacity building services; and
• To help provide through its network of partners access to production facilities, office spaces, equipment and machinery rentals, and marketing venues.

How does the SME-VIP work?

The program concept starts with a business idea. This may be a technology, a unique product or service that requires capital to start. Or may have already started up but requires additional capital to grow further.

We take this pre-bankable business and let it undergo the business incubation process. Business incubation is a business support process designed to accelerate the successful development of start-up and fledgling enterprises through an array of business support resources and services, developed and orchestrated by SB Corp. management and offered both in the incubator and through its network of contacts.

The enterprise that graduates from the incubator program is expected to create jobs, improve the environment, commercialize indigenous technology, improve local economies, and contribute to the general standard of living of the country.

Critical to the definition of an incubator program is the provision of capacity building such as management guidance, technical assistance, and consulting tailored to fledgling and growing firms. The usual thinking is that it is a requisite for incubators to provide physical locations and facilities to its clients. However, about half of incubator programs serve “virtual” enterprises. These are enterprises that are housed outside of incubator facilities, most probably home based or with their own premises, but can benefit from the services extended by incubators.

In this particular instance the SME-VIP shall provide venture capital and equity financing, and capacity building services to businesses enrolled in the program. The SME-VIP shall broker the package of assistance needed by the enterprise be these in the form of financing or of capacity building services. An enterprise incubator’s main goal is to produce successful firms that will leave the program financially viable and freestanding.

Five Stage Implementation

The SME-VIP shall adopt a five-stage process in its implementation to attain its set objectives and targets. The following describes the general mode of operation of the SME-VIP:

1. Enterprise Identification and Prequalification

This involves the scanning of the environment for business ideas and early stage enterprises which may be the subject of the incubation program. Various sources of such enterprises may be the sub-borrowers of conduits financial institutions, inventors, SME borrowers of SB Corporation, the academe, research institutions, government institutions and their programs, Chambers of Commerce and Industries, Trade and Industry Associations, Non-government Organizations and other VCs and private equity funders. Those identified as potential investees/incubates are screened based on a set of pre-qualification standards and subjected to a due diligence process that they should pass.

2. Enterprise Institutionalization (pre-operating requirements)

The next step is to institutionalize the enterprise based on the requirements of the SME-VIP.  This involves the registration of the enterprise as a corporation, its capital structuring, the preparation of its business plan, the execution of all necessary documentation of the assistance to be provided whether financing or capacity building in nature, its location in an incubation center (only when needed) and the completion of all attendant activities prior to its operation as an incubator enterprise.

3. Enterprise Incubation

At this stage, the enterprise starts operating under the incubator program and starts enjoying the benefits of such. VC or equity financing will be provided. Loans also whenever needed are made accessible.  Capacity building in areas of management, marketing, or production; technical assistance in product and business development, and consultancy and advisory services may likewise be extended. This stage could last from a short one year to about three years depending on the status of the enterprise upon joining and the speed by which it can establish itself in the market and generate revenues.

4. Commercialization

At this stage, the incubated enterprise is spun off as a commercial going concern which means it shall operate at the level of self-sustainability without further capital infusion, grants or subsidies from outside parties or from the incubator. Exceptions would be loans for working capital or capex for expansion, which are part of the normal modes of financing by operating enterprises. This is the test for the enterprise prior to its graduation from the program. At this stage, the enterprise is expected to grow at a faster rate and generate sufficient revenues to sustain its operations and generate profits. Once the enterprise has proven itself to be sustainable for a period of about one to two years, then it is ready to be graduated from the program.

5. Graduation

The enterprise is released from the program and proceeds to fulfill its growth potential. The residency for an enterprise under the program is only for five years maximum.

Applying for the program

First thing to do if you are interested in participating in the SME-VIP is to write us a letter to formally signify your interest in the program. As part of the letter, attach a 1-2 pager description of your business model. This is a short description of your enterprise telling us about the product or service and how it intends to make money, its competitive advantages, and its socio-development impact or how it will benefit the community.

After receiving your letter, we will schedule an interview with you regarding your business.  In the interview we will get to know you better and clarify whatever concerns we have about your business model.

The initial interview will tell us whether or not to endorse the project. We will prequalify it and have it affirmed by our credit committee for us to proceed with due diligence. At this stage, we will ask you to submit a detailed business plan.

Then we examine the business plan and conduct due diligence on you and your business. At this stage, we shall conduct credit investigation, an audit/validation of the business plan, and a valuation of the enterprise.

After due diligence, we structure the deal. The deal structure is the financial plan of business detailing the amount of investment, the nature of the investment whether in common or preferred shares, or convertible debt, the term of the investment, the ownership structure, the projected rate of return, and exit plan.

Finally, we submit our recommendations to our Credit Committee based on an investment risk rating tool that we use and the results of our evaluation and deal structuring.

 The Crecom either approves or disapproves the deal.

Investment Risk Rating

To evaluate our investees, we have developed a risk rating tool for our investments and using this tool, we are able to assign investment grades to our investees and identify, quantify, and mitigate the risks in a particular project.

We call our investment risk rating tool LeADER Analysis which is an acronym for the major parameters that we evaluate in rating the risks. These parameters are: legal aspect of the business, the administration aspect, the Doability of the business plan, the economic prospects and market strategy and its return on investment.  As investee, you must pass the risk rating. Projects with 66-above points or an equivalent investment grade B+ in our Investment Rating table passes the evaluation. The highest investment grade is A+ and the lowest is C.

 

New Mode of Financing for Filipino SMEs

Hopefully, after getting an overview of our SME-VIP, we hope that you will now start to look at equity financing or investment as an alternative mode of financing to loans. After about five years of investing in SMEs our portfolio remains to be small hampered by our ability to find really good opportunities in the SME sector.

However, we are proud to say that so far our batting average is better than 50%---which also means that SMEs are good investees.

For those we have invested in, more than half of them have been good deals. Examples of our deals are investees in cosmeceuticals, a mix of cosmetics and pharmaceutical products, in an engineering firm in the telecom industry, in a seaweed production and processing project, in a manufacturer of movable walls and building acoustics, and a producer of personal care products using essential oils.

Currently, we are doing due diligence on a food processing start-up based in Bicol region that would retort Bicolano delicacies such as pinangat, laing, and bicol express for the consumer market.

SB Corp. has initially put up a Venture Capital/Equity Fund of P 50 million pesos, and we are targeting to invest about P 15 million this year. We have modest targets because we have a small fund. Nevertheless, we look forward to be able to do some strategic deals in certain industries and contribute to their development.