Investors looking for high growth opportunities should look toward SMEs

SMEs are here to stay whether the economy is growing or slowing

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Small-medium enterprises (SMEs) make up 99% of companies and 70% of employment in Singapore, thus they play a huge role in growing Singapore’s GDP. SMEs are here to stay whether the economy is growing or slowing. For investors looking to diversify their portfolio, investing in an entrepreneur’s raison d’etre may be an attractive option. So what are the factors to look for to determine if investing in an SME is worthwhile?

Niche Opportunities

Experienced investors would look for small companies that are highly specialised within their area of operations. More importantly, the company could be at the forefront of developing a product or service that would see massive returns from its current alpha stage. For example, a pioneering SME, like SmartCow, that specializes in Industrial-grade Artificial Intelligence that addresses everyday pain points like pest management would be an attractive investment option.

In fact, the Singapore government launched AI.SG, a S$150 million initiative to fund AI research that solves real world problems. This endorsement from the government would signal to investors that burgeoning tech startups in the AI niche would have a high growth potential towards being used en masse.

High Return On Assets (ROA)

Small companies often have a higher return on assets than large companies, as entrepreneurs often have a more vested interest in making their companies succeed.

In an NUS Business School Study, family-owned businesses, which are usually smaller than non-family firms, that are listed on the Singapore Exchange (SGX) fare better in ROA, at 5% returns compared to 3% from non-family businesses. The study also cited that the family’s vested interest stems from a desire to protect the family name, and the ownership of the enterprise is a form of stability for the family members.

Flexibility

SMEs, by nature, are more attuned to the movement of the market than bigger corporations. Because of this, they are able to adapt and learn about newer technologies faster than MNCs. The savvy entrepreneur would know how to minimise the impact of a failed product and move onto the next project without much fuss. This also means that the investor would not lose much of their initial capital should the first project in a small company fail to take off.

Also read: Singapore govt to help more SMEs go digital with new tech hub

For example, Arteastiq was once a furniture selling shop before turning the loss-making venture into the high tea and art jamming experience that it is today. The same shop now has a Plaza Singapura branch, and a few franchises under its name.

Impact of Business Growth

Entrepreneurs are more likely to build a product that is scalable in order to capitalise on economies of scale. While the company stays small, the expansion of business through a new product or contract would translate into a large percentage of growth relative to the valuation of the company.

This then signals to the stock market that the company needs to be re-priced, taking advantage of the volatility in stocks due to its small size. The stock market would also give a stronger re-rating based on this impact in the company’s growth.

SGX’s Catalist Board has seen a combined market capitalisation of over S$12 Billion and the number of stocks listed has since doubled from its inception in 2007. However, some investors may still be wary of dipping their toes into SMEs because of the inherent risk in starting something new. While there are programs to help educate investors on how to invest on SMEs that would help meet their goals like LIAM Consultant’s Tiny But Mighty course, entrepreneurs should look into how they can present their company as an attractive investment option by building a product that scales, and to have a solid business plan.

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