The SME Investment Readiness Program (SME IR Program) jointly created by venture capital firm OBOR and Khmer Enterprise officially kicked off last Saturday, with 25 startups joining the workshop’s first phase.
Of the 25 participating SMEs, nine were agriculture businesses focused on sectors such as food processing, fertilizers, and organic vegetables. Five of the SMEs were involved in small-scale manufacturing, and the remaining startups were in the energy and tech sectors.
OBOR Executive Director Shivam Tripathi said the SMEs will be guided by industry experts on how to access financing through microfinance institutes (MFIs), banks, or venture capital firms as they attempt to scale up their operations.
SMEs in Cambodia often face setbacks when applying for financing because they don’t have a clearly recorded financial history to prove their revenue and overall financial health, making lenders more hesitant to hand out loans. These lenders typically require collateral as well, but that may soon change.
“It’s all about preparing the businesses who are already generating revenue to be ready to go and talk to the investors,” Tripathi said.
“How do you present your businesses? Do you have a business plan ready, do you have a deck ready? Do you have some forecasting?”
The program will focus on helping businesses understand their investment needs and producing the required materials to present to potential investors when the time comes to make their pitch.
Five SMEs deemed to have the most potential for external financing will be chosen to continue to the second phase of the program, where a more hands-on approach will assist each SME in preparing financial materials and data.
Tripathi said industry experts will assist the SMEs in deciding whether they should seek funding from equity investors, lending institutions, or donors.
“In phase one, we are assigning mentors and guiding the SMEs, but we’re not actually going into the historical numbers, and starting to pinpoint mistakes. That kind of work we will do in phase two, where we will place a financial consultant with each of the SMEs. They will closely work with them for two months or so to make them completely ready. The material should not have any gaps and they should be able to answer any questions,” Tripathi said.
A prize of $15,000 will be split among the five SMEs made possible by financial sponsors ABA Bank, AMK, Wing Bank, SME Bank and ACLEDA Bank.
Available capital depends on external factors for SME IR Program
Tripathi said the amount of investment capital in the region is fluctuating, with proven SMEs currently having a better chance at receiving financing than startups without a long financial track record.
Some financing from banks and MFIs has dried up due to the financial impacts of COVID, such as an increase in non-performing loans, but events such as the coup in Myanmar have opened more venture capital as it seeks new homes in other emerging markets.
“There is more interest from the regional investors to look at Cambodia, especially the ones that were investing in Myanmar,” Tripathi said.
The dynamics of lending are changing quickly in the Kingdom as well. Whereas many banks and MFIs have historically required collateral for loans, they are now looking towards new technology and factors like alternative data to assess loan risks, Tripathi said.
Alternative data refers to non-traditional forms of data used by institutions to gauge financial health and could include mobile data usage, app usage data, credit card transactions, and even social media sentiment.
He said it may take a year before the effects of COVID balance out, at which point more capital would likely be available for profitable SMEs.
On the venture capital side, he said deals appeared to have decreased some over the last year on the start-up spectrum, but impact investments geared towards SMEs appear to be stable.
Judging from his own experience working in Cambodia, Tripathi said it’s hard to realize quick returns on large investments in the country, and it’s the longer-term players that typically succeed. Demand sometimes takes too long to develop, for example, or there may be not enough capital in the market to be able to quickly push new ideas.
“In Cambodia you still have to build your businesses brick-by-brick, you cannot just go all in and spend a lot of marketing money and then move the market,” he said.
COVID a boon for some sectors, a curse for others in SME IR Program
Covid, however, opened the door for some businesses to quickly capture market share.
“Because of Covid, in some sectors, it has happened. Not because of capital, just because of whole pandemic. Those sectors have really boomed, they have grown fast,” he said.
Businesses that were ready to adapt and quickly utilize new technology fared well, either by adopting an e-commerce model or quickly reacting to a surge in demand.
E-commerce players such as food delivery services and logistics operators have experienced a boom, with international companies like Grab and Foodpanda often grabbing the lion’s share of the market. While overall intracity transport has suffered, international companies have also swooped in to capture much of the on-demand cab-hailing market.
There are local success stories too. Kokopon, an e-commerce platform, was originally built as a coupon aggregator for consumers to find deals at supermarkets. After this business model became unprofitable because of Covid, Kokopon CEO Sokneang Neng switched gears and started selling locally grown produce to consumers via third-party logistics companies.
“It became clear to us that quality local products had potential,” Neng said.
“We wanted to survive as well as save other small business that lacked technological skills and we are proud of it.”
SMEs in the tourism sector have continued to decline, and while Tripathi sees long-term growth in the sector, he doesn’t see capital flowing in that direction until surer signs point to a rebound.
“We have seen some uptick in numbers at Camboticket within the last two months or so, and we have noticed more people flying in. Definitely more people are coming, more people are traveling, but it’s nowhere close to the numbers before Covid. I think at one point the early mover will have some advantage if somebody can move fast now, but timing that can still be a bit tricky,” he said.
For now, he is focusing on the SME IR program to connect SMEs to the funds they need to grow.
He said he valued the partnership with Khmer Enterprise, a government-run initiative under the Entrepreneurship Fund created by the Ministry of Economy and Finance, and said the organization will improve the health of the SME sector in the future.
“They have a very long term vision, so I think overall in the long term they are going to add a lot of value to the Cambodia ecosystem,” he said.