Len McDowall

There is no shortage of information on how to invest into the stock market but limited information on how to invest into private companies. This is especially more tricky if yo are a minority investor and have no control in the company. The main difference between investing in public ASX listed companies and private ones, is liquidity. There is no ready market for private companies should you wish to exit your position.

The only way you can really get out is when there is a liquidity event, such as a trade sale or IPO. This may take years, if ever, so there are certain steps you should take prior to investing into your neighbours “exciting new business venture that’s sure to go global”.

How can I become a private investor?

Anyone can become a private investor, but in order to be a successful one, here are some tips:

• Need to have capital that you can invest and a willingness to accept risk with the investment. i.e. only invest money you can afford to lose.
• Its best to have some experience of running your own successful business or businesses. The more the better.
• You need to be keen to get involved in start-ups and developing companies in a hands-on way, should the need arise.
• Do plenty of due diligence on the promotor such as ASIC and other searches. Get some references from them and check up. You want to know what kind of track record they have behind them, and also if they are an honest and trustworthy person.
• Back promotors or entreprenuers who want your expertise and knowledge, not just your money.
• Get the investor to clearly justify the valuation to you. Question them on it. Ask yourself, is the business really worth what they are asking?
• Get good legal representation. Make sure your lawyer has previous transaction experience and get them to review the shareholders agreement. Also make sure you get a qualified accountant to go over the projection assumptions.
• Find out if there are any planned dividends to be paid once the company is profitable.
• Question the promotor on the exit strategy for the business.
• Spread your risk across multiple investments. Don’t put all your eggs in one basket.
• Don’t get to excited about the first boat that docks at your shores.
• Join a business angel group. There are many business angel groups and associations across Australia. This will also asssist you with finding new deals.
• Be patient. Be prepared to wait 3-5 yeards to get your investment back.
• Keep your money onshore. As soon as it leaves Australia, you have no protection under ASIC corporations law. If you lose your money, you are on your own and you can pretty much kiss it goodbye.

And last but very not least, follow your gut instincts. If you don’t feel good about a deal, or an individual at the first meeting, or there is something not right about the deal, just let it go. There will be plenty more where they came from. As a real estate agence once said to me, “the deal of a lifetime comes by almost every week”.

Len McDowall

In my article “How to be Investor Ready” (18th of September 2007) I discussed a number of factors that a business owner needs to take into account so as to be “investor ready” before approaching investors.

The question is then how do you then actually deal with, and prepare for meetings with those investors?

My suggestion is that you should create some “exclusivity” about the way you approach them.

Use a “rifle shot” approach by selecting say six (6) target investors which are in your opinion the best that would suit your proposition and send your business plan or information memorandum to them.

If none of these are willing to invest then select another six (6) and so on……don’t approach everyone at once as you will have difficulty handling requests for meetings and information.

Also investors don’t like deals that have been “shopped around” so when raising capital; try to keep it “exclusive”.

Compile a list of the questions that are most likely to be asked by investors and be ready to answer them.

Ensure that your documentation is ready before approaching them. Items such as finanicial accounts, intellectual property documentation, major contracts, key staff contracts, etc are incorporated in a due diligence file and available as they are sure to be asked for. 

I suggest that you even “role play” how you think the meeting will be conducted, using a friendly third party who can objectively comment and assist you. Remember that you will be speaking for most of the time, with the investor asking questions, so plan how you do your presentation.

Try to put together a short Powerpoint slide show as the investor will remember more if he/she both sees and hears the information.

Try to set a reasonable timetable for the investors to get back to you with expressions of interest so as you have some control over the procedure.

Preferably the CEO should do the main part of the presentation and the CFO of the company should present the financials aspects.

Finally keep the presentation reasonably short as investors have limited time. A good way is to ask how much time is available at the start of the meeting and restrict your presentation to suit.

Good Luck!

Len McDowall

The share market is somewhat unpredicatable at the moment and the appetitie for new Initial Public Offerings (IPO’s) has all but ground to a halt. However that doesn’t mean that there are not still a large number of companies seeking capital.

As a matter of interest I thought I would share with you the types of deals that I have recently assessed, the industries, the typical phases they are in and the investment required.

Industries include:

Web Hosting, Resources (mineral deposit), Funds Management (Business Loans), Property Development, Energy Market (New Competitor - Retail Energy), Wireless Telecommunications (Modems), Employement Website, Pet Foods.

The majority of these companies are either Start Up or Early Stage, with only a small percentage looking for capital to expand their business. The average capital required is around $1M however some opportunities are seeking as high as $20M.

As mentioned in my previous blogs many investors due to the current market are not looking for start up businesses or entreprenuers with agressive growth plans, they are looking for businesses that can show a solid business plan, strong management team and conservative strategies.  The majority of deals I have reviewed lately are startup or early stage and the market is turning against entreprenuers. Business models are more than ever being questioned, more research will be done by investors, more extensive diligence processes, more information asked for and required to be supplied. For the startups and early stage opportunities, theire are still funding opportunities but more than ever the business will need to ensure they are “investor ready” and have a solid business plan and strategy.

Len McDowall

Even in the current market turmoil, there is still a lack of great deals, not a shortage of capital.

The public markets have all but evaporated for the moment, however the “private equity” sector is still in the market with, collectively, billions of dollars to invest. All you need is a great deal!

However these private investors are not looking for great ideas. They are looking for substantial businesses with great future growth prospects.

Getting a private equity investor to invest in your business means more than the money. Its confirmation that you have a sound, sustainable business model.

Your sustainable business model should include an experienced management team with a sound understanding of the industry they are in, together with a realistic plan which includes achievable financial forecasts.

You must be able to demonstrate great growth potentail and show that you have a comprehensive understanding of the customer.

Approaching investors unprepared is probably the single most common reason why entreprenuers fail to attract capital. If your proposal does not include all of the above, chances are you won’t get past first base.

However, once you learn how to make your business “investor ready” and you succeed in attracting an investor the first time, going for subsequent rounds of funding, or funding a new venture becomes much easier.

Len McDowall

The current financial situation has caused a backlog of businesses seeking capital.

These businesses which would normally attract investors say within a six (6) month timeframe are now finding that investors are not there.

These investors have all been hurt by the stock market retreat, they are experiencing large paper losses and have their hands in their pockets and their cheque books firmly locked in their desk draws.

Current response rates from these investors are down by 90%.

Transactions that have features such as being established, having good cash flows, good management and perhaps are seeking expansion capital or seeking funding for a management buyout always have the opportunity to find investors, particularly if they are of a larger size.

What then will happen to those who are in the earlier category of being a start-up or early stage business seeking capital?

In my opinion they will have to wait longer, try much harder to find that elusive investor and most probably have to give that investor a much better deal then they would have last year.

What is for certain, is that, that group of businesses will create a large backlog of capital seekers.

Len McDowall

Over the last six (6) months a couple of interesting things have happened in the private space as a result of the public markets. The market turmoil (and losses) mean that there is less desire for investors to commit any capital to new investments. As  a result, brokers are advising clients to not try the IPO route. So more companies are looking to raising capital privately and the demand to raise investment capital from the private sector has increased. As a result, we are seeing more deals than ever.

More deals means more competition for the investment dollar. More competition means you have to stand out when your offer hits the desk of a potential investor, otherwise they will simply push it across the desk and into the bin.

This means entrepreneurs and promoters have to be more “investor ready” than ever before. We are not seeing this.

In fact because of the higher deal flow, we are spending less time assessing each transaction, often losing interest in them within minutes if they do not appear to “tick all of the boxes”. We are probably having meetings with one in twenty proposals that we see. We might end up working with one in five people we meet with. So that works out to a ratio of about 1 in 100.

For those seeking to raise capital, here are a few tips which might help your proposition stay on the investors desk;

• Make sure persons stated to be Directors are actually appointed and Australian Securities and Investments Commission (ASIC) has been notified.
• Make sure your current stakeholders have been issued shares and are registered with ASIC.
• Ensure your Intellectual Property (IP) is legally owned by the company seeking the funding….it is often still registered in the name of the founder.
• Prepare a set of financial projections support by thorough details and assumptions. Ideally these should be prepared by an accountant.
• Don’t be to optimistic with your projections. Investors are very sceptical of too much blue sky. They see it all to often and it’s a big turn off.
• Make sure the structuring of the company/group has been thought through with assets and trading activities in separate companies, thereby giving asset protection.
• If there is a Key Man risk, make sure Key Man insurance is in place, i.e. if the founder/entrepreneur dies, or has a serious accident or is incapacitated from working in any way, the investors money has to be covered by insurance.
• Be upfront with any liquidity issues. Investors and advisors don’t like surprises.
• Allow plenty of time to raise capital. Minimum of three to six months! Many companies believe that the funding will “come in tomorrow” with little realism for how long it takes to get the proposal to investors and the timetables of investors.
• Base your valuation on the “real world”. Get some accountants advice on this. If you simply base it on the basis of “how much money you need or how much of the company you want to part with” you will end up with a valuation that is out sync with the market place. Do some research and find out what similar companies were sold for or raised capital at.

If you can work to cover off on these issues, and highlight them in your proposal,  your chances of attaining funding will increase dramatically -maybe ten fold.

Len McDowall

The sub-prime crisis in the US has a knock on effect to other finanical sectors and stock markets globally as many large companies, such as ABC Learning, have used cheap debt to grow. This is started because US mortgage lenders have been on selling their debt without the equivalent asset value,  hence the big problems we are seeing today.

Any listed company with any exposure or even perceived exposure to the debt or the US sub prime market has taken a beating from investors who are scrambling for safety. In many cases this has sent the stock into free fall. Allco is probably the worst example of this, falling from a peak of over $12.61 a year ago, to a low of just $0.33!

I’m sure by now there are some listed companies who wish they were private right now.

Soundings from Private Equity groups around town are that they are in the box seat and are now looking at purchasing assets at much lower prices, although they are not able to gear up as much as they did last year. Plus their private investments are not at the mercy to the sharemarkets wild volatility and unpredictability.

What we are likely to see is more smaller investors taking the Private Equity approach to their investments by investing into quality private companies who have strong upside potential and good management to take them there.

Yes, these deals are harder to find out because of this, investors will be forced to be more savvy when parting with their money. Rather than simply ’punting’ on new IPO’s and ‘hot tips’ with little time spend on investigating the company, the investors will have to do more research and investigate Risk Management Tips before making an investment.

Len McDowall 

With the recent market volatility, I thought I would address some of the issues that private or unlisted companies face when raising capital.

At the core of any capital raising is investor sentiment. There are few investors we know, who are not affected in some way by the state of the markets. This however does not affect the number of deals seeking funding. In fact we are seeing more than ever before.

Private investors are affected in two ways by public market uncertainty:

1. They usually have a portion of their portfolio in the listed space. Usually in a spread of blue chips such as banking stocks, telcos, miners and so on. These are long term buy and holds therefore they have no selling strategy, meaning they would still be holding. Although it may be a paper loss, they still feel they have lost some money and therefore are hesitant to invest further. Usually these investors carve off a portion of their overall portfolio, say 10%, to invest into higher reward deals such as angel investments, pre-IPOs and the like.

2. Even if they have no exposure, they are affected by the negative market sentiment because of the risk associated with investing in general.

Now let’s take our average business which is out there trying to attract investment capital – trust me there are many.

Their job has just become that much harder because of the new market conditions. Therefore they have to be the best of the best. Unfortunately most fall well short.

Few are investor ready and lack many of the elements that would attract an investor.

Exit is usually one of the first things that investors look for. They want to know how they are going to get out!

There are only really two main ways to exit. Trade sale and IPO. IPO is less of an option at the moment as most of the new floats have been delayed. Investors see that an IPO exit is less feasible in these troubled times. Where as 12 or 18 months ago, it was a real way out for most companies.

So whats the solution? Well if you are looking for capital, quite simply your deal has to be head and shoulders above others. There are number of ways you can achieve this:

- Lower your valuation

- Write a better Investment Memorandum

- Define your exit strategy and do some research of other similar company exits

- Projections – make sure you have some and they are realistic!

- Make sure your Investment Memorandum looks professional. Spend some money on a designer

- Keep your Investment Memorandum to less than 20 pages. Investors see up to 10 a week. If its too big, they wont read it.

Len McDowall

Getting your business plan read is one of the first steps towards an investor providing venture capital for your business. Investors are faced with hundreds of business plans and investment opportunities a year. Typically they are initially looking for a well executed summary of the business plan to assist them to quickly evaluate and determine if the proposal is of interest.

A summary or executive summary if well written is an effective way of capturing the investor’s interest. It also an effective tool for the party wishing to raise capital to quickly help qualify the investor’s interest.

So what should you include in your Executive Summary?

The summary should be 2-3 pages covering the purpose of presenting the plan, which is to attract investment and the goals that the company wishes to achieve. Highlight the key points about the business, it founders, expertise in their field; market opportunity, size, growth and potential market share; products and services, their key unique selling proposition; past trading record and achievements and the expected financial projects.

A precise and distinct summary of the key points will outline to the investor the unique features and how the business goals can be realised.

And finally, don’t forget to outline the size of capital funding that is required and how the investment will be used in the business.

Remember, this is your “moment of truth”, your first impression to the investor, make it relevant, highlight the most significant points and it needs to be convincing.

The Executive Summary should be the last component of your business plan that you write, take your time, do it well as it will typically be the first thing the investor reads.

Once written the business plan is a very useful tool for being “Investor Ready”. It not only provides valuable information for potential investors, but in the event you may wish to float your company, the business plan will help assist in preparing the Pre-IPO opportunity . It is also beneficial if you choose to seek corporate advisory services.

There is lots of great Free advice on writing business plans, I have included a 12 Part Series on “How to write a business plan to Raise Capital”, on my website or check out government information sites.

Len McDowall