Len McDowall

Venture Capital can be raised from many different sources and quite often, business owners are unaware of the avenues available to them.

The reality is, for businessess looking to raise capital it can become a nightmare for the unsuspecting owner. You always read about the successful ventures, but rarely do you hear of the challenges associated with raising capital for your business.

When it comes to capital raising, most business owners believe they have 3 places to go; Banks, Angels and Venture Capitalists. Few people realise there is a 4th way to go if you want to raise between $1m and $5m.

Banks

Although the most common option for people, it is not ideal for early stage business. This is why…..

1. Are you willing to put your own personal assets at risk?

2. The interest you pay on the loan could be re-invested back into the business.

Venture Capital or Investment Banking Firms

VC’s will traditionally look for growth companies with good earnings, an industry with good growth potential and founders which they believe in. Rarely do they seek to invest in pre-revenue companies.

For the right business a venture capitalist can be a great asset, as they can provide not only the capital required, but also exposure to additional business opportunities through their network.

If a company is seeking captial from a Venture Capital firm, they should be prepared to discount their finanical projections significantly. A VC will correctly make a business accountable for those projections, with equity claw-back for non achievement.

Sophisticated Investors, Business Angels and Venture Capital Groups

Business Angels and Venture Capital Groups are generally created via the networks of high net worth individuals and families, or their companies. Often these groups are not promoted to the main stream public. The discovery of them generally comes from an introduction or association of someone involved in the group.

Generally they will have their own team of specialists to manage and oversee the transactions which they become involved in. For an Early Stage or Start-Up company these individuals or groups can be a valuable source of funding and networks for your fledgling company.

When raising capital the questions you want to be asking are….

1. What percentage of the company am I willing to offer? How are the shares going to be split up between the current owners and stakeholders?

2. Is your business structure investor friendly?

3. If you are utilising the banks, are you willing to put your personal assets on the line?

4. Do you want to retain control of your business, or are you happy to for a 3rd party to have an influence?

5. Have you put in place a strong management team?

6. How unique is your offering, and what is the realistic potential growth?

All of these questions are important, and you should definetly know the answers before you approach any organisation to assist you in funding the growth of your business.

Len McDowall

In my experience, most business owners are way to focused on the day to day running of their business and forget to focus on the big picture - corporate strategy which will allow them to get to where they want to go.

No matter what industry you’ve decided to be in, chances are the earlier days will be the toughest and require most of your attention.  In fact the formative years, or if you are trying to grow, rarely will the business be running without some degree of stress and uncertainty.

The best way I’ve found to deal with this is to focus on the big picture. If you focus on the nitty gritty, it can all become to hard. And it’s emotionally draining as well. You can often feel depressed and deflated about the business because you may be putting so much in with little tangible results.

So how do you remain focused on the big picture? It’s easier said than done. So here are some pointers:

1. Get someone with solid business experience and big picture thinking to join your board as a non-executive director. And meet with them once a month as a bare minimum. Make sure they understand what your long term objectives are. They will then remind you of where you need to go and how to stay on track. Being non-executive, meaning they are not working within the business, will allow them to stay high level and not get caught up in the day to day operations of your business. And no company is too small for this.

2. Get a business mentor. This person is someone with “been there done that” experience. Pay them or somehow incentivise them to mentor you every few weeks or so. Mentoring is simple - you go to them with your problems for that week/fortnight/month and tell then about it. They then tell you how to fix it. Then you go and do it! It’s no use having a mentor if you don’t use them. They can keep you motivated and heading in the right direction.

3. Education. You need to keep learning about how other people are doing it both in your industry and others. So read business books, read success biographies (such as Richard Branson or Arnold Schwarzenegger), attend seminars, conferences and events that can help you improve your knowledge on business. You need to schedule into your diary to focus a minimum of two (2) hours a week to continuously build your knowledge.

I have met and interviewed many very successful entrepreneurs and this is exactly what they do. So I know it works. If you do one, two or preferably all of the above, it will go a long way to ensuring your business is successful. One thing is for certain, if you don’t lift your business thinking to a higher level, it will be almost impossible for you to reach your personal and/or financial business goals.

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

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