Improving Finance for SMEs

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Good morning.

Thank you for inviting me. It's wonderful to be in here in Australia. And it's an honour to be with so many people who share a dedication to the success of entrepreneurs.

I am very pleased to join this panel about how to improve SME financing.

I'd like to contribute by offering my thoughts on global trends affecting SMEs and the context in which we are to improve financing for them. I would then like to discuss the key factors that help SMEs succeed in their globalized marketplace. Finally, I'd like to offer some ideas on ways that we at BDC are improving our support.

Before beginning, though, allow me to give a brief description of my organization, BDC.

1. BDC 101

We are a business development bank. Canada's parliament created us to promote entrepreneurship by supporting entrepreneurs. We do this by offering financing, investment and consulting to SMEs. Only SMEs.

We offer these services on a pan-Canadian basis. Our employees work in 94 offices across our country's six time zones. We use partnerships to reach entrepreneurs who do not live in cities and towns.

Every day, about 600 BDC employees visit hundreds of SMEs. At present, more than 27,000 Canadian entrepreneurs are BDC clients. To support them, we have invested over $10 billion in committed financing and venture capital.

We have close to 200 companies in our venture capital portfolio. And through investments in 17 funds, we have equity positions in more than 180 others. In total: $770 million committed to almost 400 companies.

We provided more than 2,400 business consultations last year on business issues such as innovation, productivity enhancement, strategic planning, sales and marketing, human resources and business ownership transition. Combining consulting and financing means we offer "smart money."

Of our 27,000 clients, more than 6,000 are exporters. In value, this is almost 40 per cent of our portfolio.

In VC, we create companies. This means investing in the commercialization of technologies, helping structure management teams and boards of directors, and introducing them to key market players. We sometimes accompany them in emerging markets and open doors to new markets.

Our parliament obliges us to be profitable, which we are. This obligation dictates a mode of operation that makes us constantly anticipate and meet SME needs in a way that is balanced from a risk management perspective. As the needs of SMEs evolve, so do our services. Indeed, we resemble SMEs in that we have to stay relevant to be profitable.

Our success in understanding and meeting SME needs is explained, I believe, by the wisdom born of six decades in the business, thousands of relationships with Canadian entrepreneurs and an operational DNA that requires a constant quest for relevance.

2. SMEs' essential contribution

When they do succeed, SMEs make an irreplaceable contribution to the economy. One of their contributions is employment opportunity. In Canada, for example, SMEs were, at last count, responsible for employing more than 6.8 million people. Remember that our total population is only about 33 million. So for us, 6.8 million is critical. It is also more than 60 per cent of our private-sector workforce.

3. The context: global trends affecting SMEs and SME financing

With economies increasingly open to cross-border trade, SMEs must adjust to powerful global forces.

• The rising influence of developing nations brings increased competition as well as new opportunities. Their competitors are no longer just across the street.
• The fast onset of competition from emerging markets can erode profit margins. This requires a renewed focus on innovation and productivity. Products and even skills can become commodities, almost overnight.
• In particular, SMEs in developed economies such as Canada are finding it difficult to compete on cost alone. Such firms will have to add more value in the value chain, or seek new opportunities in the global supply chain.

To seek new opportunities, SMEs have to improve their ability to innovate and be more productive.

• Investment in physical and intangible assets are important, and both can be expensive. However, the ability to invest in innovation is key to competing in a global context.
• Innovation requires investment in intangible assets, which are key drivers of economic growth and productivity.
• Global competitive pressures require entrepreneurs to shift more towards knowledge-based and innovation-driven strategies if they wish to maintain profit margins. Innovation is the link to increased productivity.
• Most SMEs are unaware of the importance of intangible assets and lack the management skills and financial means to adopt such strategies.

As financial institutions with a vested interest in the success of SMEs, we must help them to tackle these challenges and seize opportunities.

These evolving trends create new SME needs, which are producing a pressure to move from traditional term loans to quasi-equity and VC equity financing. These higher-risk financings will also challenge existing credit policies, existing valuation methods and risk assessment practices.

4. Key Success Factors for Entrepreneurs

Not all SMEs want or are able to succeed in the global, competitive and knowledge-based marketplace. When we look at those that do, however, we see that they appear to share the following characteristics or practices:

1. They are "lean."
2. They respond rapidly.
3. They invest in productivity-enhancing automation.
4. They outsource non-value added or commodity tasks.
5. They invest in human capital and training.
6. They understand their clients' needs.
7. They focus on value added and service quality.
8. They seek and occupy positions in niche markets where they can compete despite the presence of global and larger competitors.
9. They seek and find opportunities in adjacent markets, where their product or service can be deployed in a complementary way to meet a new client's needs.
10. They use global networks to secure opportunities in global supply chains.

These key success factors are increasingly critical parts of the process by which we evaluate our financing and investment proposals.

5. How do we help them?

Not every SME will want to be global. Some are born global, others will grow into being global. What do they need? What do we need to give them? What do we have to do differently?

Here are six ways that BDC is offering a different kind of support.

1. We help them improve their value proposition and navigate the globally competitive marketplace.

• For example, one of our clients, a software developer, has products (cable set-top boxes) to help people navigate the large number of channels in the television world, as well as link these to their cellular phones.
• We invested in the company. Over time, we introduced them to potential partners in China and Korea.
• In China, they now have contracts with Hansun and Keybridge. They are also doing a trial with a third company for a potential market of 10 million wireless subscribers.
• In Korea, they are in talks with a large conglomerate that wants to invest and partner for the Korean market.

2. We act as a gateway to expert advice and best practices.

• For instance, last year we unveiled a new program called Manufacturers Plus to help SME manufacturers be more innovative and competitive. Its methodology is based on best practices.
• We offer tailored consulting and financing services – productivity diagnostics, strategic planning, market development, mentoring programs, supply chain management, etc.
• We help them identify the sources of their difficulties and mobilize them, in a variety of ways, to take competitive action. We may even finance investment projects that might flow from these actions.

3. We help entrepreneurs secure the capital they need to invest in intangible assets.

• We have specialized loan products and services such as Innovation Financing to support growth through new product development or entering new markets, or both.
• We have learned and continue to learn to assign value to intangible assets with:
  • current value (i.e., well-established distribution network, patent portfolios) and;
  • future value (such as training programs or market development plans),

4. We support investment in R&D through our venture capital services.

• About 40 per cent of our venture capital portfolio companies originated and developed in universities and labs.
• These investments help turn new ideas and technologies into attractive products and globally successful companies.
• We are a Canadian leader in the critically important early stage (including seed) investment phase.
  • 81 per cent of the dollar amount of our direct investments.

5. We support investment in productivity improvement through a combination of consulting and financing.

• For example, another of our clients makes slate roofing tiles using traditional expertise.
• They needed help to surpass new competitors in Spain, Brazil and China.
• We helped them objectively analyze their strengths and weaknesses to give them the clear direction that global marketing requires.
• Today this SME exports to Europe, the U.S. and here to Australia. It has increased its production by a factor of twenty and employs 300 people.

6. Support investment in training, especially management skills development.

• This fall, from thirty locations across Canada, we'll be providing a Web cast seminar on globalization.
• Doing it as a Web cast will allow entrepreneurs from across the entire country to join in to learn more about globalization and its impact. They need this to be able to identify strategies to navigate it.
• Through our consulting services, we will then offer to accompany them with tailored support.

6. Conclusion

In a speech I gave last year to a gathering of Canadian researchers who specialize in SMEs, I used an analogy to make a certain point, an image that I think fittingly captures the plight of SMEs. The idea is from Charles Darwin, the famed evolutionary biologist. So, if you will permit me a one-minute biology lesson, I will share it with you, too.

Darwin observed that Nature, with every new generation, throws up variations on species. For example, if we look closely at a nest of young birds, we will often see one that is different in some way from the others. A variation on the theme, if you will. Perhaps a longer beak or wider-set eyes. Or longer feathers.

Depending on its health, resourcefulness and the changing demands of the environment, the odd-looking offspring can survive and prosper. If it reproduces, it can even go on to become the dominant form of the species.

Darwin chose a poetic term for these evolutionary variations. He called them "hopeful monsters." Monsters because they look different from the rest. Hopeful because it is not at all clear they will survive. Their survival depends on their abilities, their resourcefulness and the dictates of the environment. And sometimes luck. Such is evolution.

Some SMEs are like hopeful monsters. They are variations on the theme, competing to survive in a changing, demanding market environment.

When I used this image in the speech last year, my purpose was to make the point that researchers and bankers must learn to recognize those SMEs that are the new, globalization-savvy versions of the originals. We have to understand their environment and their place in it. And we have to work to reduce the role of luck in determining their success.

This brings me to my final point: what I think our future should hold, if we are to improve financing for SMEs.

What I think it means is that we finance institutions should change our definition of business development. We should stop defining it in terms of volume of transactions.

We must evolve from finance institutions that court SMEs into SME business development specialists. Their business development, not ours.

Thank you.

I look forward to hearing what you think about my ideas, answering any questions you might have and discussing the way forward.