Barriers to growth – challenges for midsize business

| September 5, 2017

In the past 25 years of investing in the Australian SME sector, I have been inspired by the passion and commitment of Australian entrepreneurs, who have built successful businesses from small proprietary family businesses, to large corporations. I would like to share the insights I have gained working with these dedicated Australian business owners, particularly the unique challenges faced by them.


To begin with, I am NOT going to discuss macro-economic issues that confront all Australian businesses, like the strength of Australian dollar or high energy costs.

My top five challenges facing the Australian SME sector are:

  1. The availability of risk capital to fund continuing growth opportunities;
  2. Access to quality human resources to support business growth;
  3. Lack of scale to gain competitive efficiencies; to build complementary networks and to overcome reputational risk;
  4. Lack of confidence; and
  5. Sucession

Risk Capital

All businesses need capital to fund their continuing growth. For the SME’s, the traditional path is likely to be personal financial resources augmented by expensive bank debt being secured by personal real estate property and provision of personal guarantees. However, these will not be sufficient if the business continues to expand. Private equity is a source of alternative capital. Private equity is often perceived to be expensive and intrusive. While I agree that, like any financial product, there are cases of mismatch between the providers of private equity and the users; I can personally testify that in the past 30 years, private equity has become a recognised and reputable source of risk capital. The main challenge is to ensure an alignment between the users and providers of private equity.

Appropriate Management Resources

A successful SME will outgrow its founder(s). To sustain the growth of a SME, the founders/owners will need to be sufficiently mature to recognise that they need to hire good executives to enhance the management structure/resources to sustain the continued growth. This takes great conviction. As I have personally experienced, founders are understandably reluctant to spend money on, say, a chief financial officer as he or she contributes zero to revenue or profit. We all appreciate the need for a robust management information system to ensure that a growing business has access to good financial data to underpin sound decision making. Yet, this obvious point is not appreciated by most SME’s.

Lack of Scale

By its nature, a SME is a modest-sized business. The lack of scale brings many competitive challenges. The usual financial inefficiencies have been well documented. Hence, the founder(s) are often multitasking i.e. they are involved in all facets of the business from production to marketing, to logistics to human resources. In addition to the financial disadvantages, a sub-scale SME also faced what I called the ‘reputational’ risk. The business saying that ‘you can’t go wrong buying IBM’ is a simplistic reflection of this reputational risk. SME’s constantly face this challenge when they are competing against large well-established businesses. Corporate customers internal staff tend to be risk adverse so they do not have any incentive to give an SME a break vis-à-vis a well-established competitor. The lack of scale also hampers the development of complementary networks to enhance business development. A good example is the lack of network to support Asian business development.

Lack of Confidence

My previous points about building up good management teams and accessing aligned risk capital are often stymied by a lack of confidence on the part of the founders. They become risk averse to expansion, so they don’t reach out to outside capital or people to help their business to grow. In my investment career, I have always been rewarded by backing founders/entrepreneurs who are confident enough to ask for help. In a way, as a ‘suit’ that sits on boards, my value add has always been as a listener and a problem solver.

Succession

A well implemented succession plan is the ultimate measure of a SME. It reflects a sustainable business, which will survive the founders, and it also confirms that the company is now ‘corporatised’ i.e the business is no longer dependent on the founder and there is no key man risk.

I am a strong believer of the Australian SME sector. It is a spring well of passionate and committed entrepreneurs who care about their employees, customers and the country. I have benefited professionally and financially working with these business owners. I will always advocate for them.

Su-Ming Wong
Su-Ming is an investment professional with over 35 years’ of direct investment, international corporate advisory and merchant banking experience. He co-founded CHAMP Ventures in 2001. CHAMP Ventures is a leading Australian mid-market private equity funds manager with over $750 million funds under management.

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