Len McDowall

Raising venture capital for private companies in any market is difficult. Throw in the current global finanical crisis things become clear near impossible for capital seekers. It is truly an environment where only the eductaed will survive.

Each week I come across at least five new companies who are seeking capital. Funding for companies has dried up mainly becuase most investors have lost money, and are therefore in a phase of “licking their wounds”, - therefore are very adverse to investing into anything new, let alone a small private company or speculative start up. Unfortunately, most of those seeking capital are private, and/or start-ups.

No matter the markets, or investor appetite, there is a never ending capital demand for new or expanding companies. And make no mistake - there is money available - it has just become much harder to get your hands on it.

If you are one of the companies who seek capital, here are some tips that will greatly boost your chances of raising funds:

Timing

The time taken to raise capital has doubled or even tripled. So allow at least 6 to 9 months to complete capital raising. Yes it can be done quicker, but you cannot rely on this. Don’t make the mistake that many others have of waiting till 30 days from bankruptcy to start looking for money. You will most certainly fail.

Preparation

Make sure you offer is the best it can be. Ensure you have a good advisor assisting you with the structuring of your capital raising, and a good Information Memorandum and that clearly explains your opportunity.

Below is a quick check list, if you tick all the boxes, it will put you in the best possible position to raise the capital you need;

• Be sure to have a well thought out and completed business plan
• Experienced and respectable board and management team. One with a proven track record and is capable of successfully implementing the business plan
• A very sound understanding of competitors, the industry sector and how your company is different
• Realistic and achievable two year financial forecasts that have been professionally prepared (most accountants can do this). Projecting too high is detrimental to capital raising. Be conservative.
• A clear explanation of the valuation of the business, backed up by a valuation model that the potential investor can understand and believe
• An explanation of how investor’s funds will be deployed to grow the value of the business. In other words - a “use of funds” statement
• Explanation of when and how the investor will get a return on their investment - i.e. an Exit Stategy! (you wouldn’t believe how many organisations seeking capital leave this part out). This is a key element from the investor’s perspective.
• Investor pitch presentation - both verbal and in Powerpoint form no longer than 20 minutes total

Distribution

Now that you are prepared, you must get your offer in front of as many potential investors as possible. Raising capital, particularly in the current market, is a numbers game to a large extent.

The other reason to show your offer to as many people as possible is because you never know who they know. They could refer your offer to one of their friends who is more suited to invest into your offer.

IMPORTANT: This information is general and should not be taken as specific advice. Readers should always seek their own professional advice.  Please feel free to send your questions to info@integralcapital.com.au

Len McDowall

If you are a business owner and are looking to sell your business, achieving the best price requires a lengthy and detailed process in terms of preparation. Anyone who has been through this process will tell you it is no easy road - however nothing worthwhile has ever been easy. With a little effort and a lot of preparation for an exit, you can dramatically improve the result.

Risk

Basically it all comes down to risk - both within your existing business and risk of whether it can sustain its current earnings or improve them in the future. So the key to success is to lower the risk for the incoming buyer. This will greatly increase your chance of getting the highest price possible for your business.

When selling your business

If you have decided to sell, there are many things to consider. But fundamentally, the more stable the business is, and the rosier the future growth, the higher the price you will achieve. Also who you sell to is very important. This is called Strategic Value. You might be worth X to one buyer - but to another buyer - say a competitor (through a merger and acquisition process) you could be worth double that because they can leverage off your business, take you out of the market or save substantial start up costs.

Potential buyers could include existing management through a management buyout or (MBO) a private equity groups.

Here are some points to consider when looking to sell a business:

1. Make sure your financials are up to date - including historical and future

2. Make sure the business systems and process are documented

3. Tidy up your marketing material

4. Have a business plan updated and ready to hand over

5. Makre sure your staff and management are the best you can find

6. Make it easy for the buyer to come in, and easy for them to achieve what they want

7. Allow adequate time to prepare and execute the sale. Fire-sales will not get you the result you want.

8. Make sure your advisors are up to the task. This includes accountants, lawyers and coroporate advisors.

9. Do a legal and financial check up on your business and address any key risks that are uncovered.

10. Ensure all your contracts are in place and up to date - this includes staff, suppliers, licences, contracts, distribution agreements, leases etc

11. Ensure your IP is fully protected and can be easily transferred to the new buyer.

There are many other factors which can affect the sale price of your business such as:

• General market conditions - both on a macro and industry specifici level
• Your ability to ‘market’ your business to the right potential buyer - so targeting is the key
• The buyer’s current situation - e.g. they might be going through a re-structure and are not in ‘buying mode’. In the case of indiviudal buyers, maybe they are about to go on holidays or are in the middel of selling another business. So timing here is critical.
• Luck - sometimes you can be in the right place and right time.

The best advice is for an entreprenuers and business owners to prepare well in advance when they are planning to exit their business.

Len McDowall is the managing director of Integral Capital Group

If you are a SME, you may believe that raising capital is enough to grow your business successfully is enough for success. However this is not necessarily the case - in fact it’s hardly ever the case!

Yes raising capital and cash flow is important, but what is far more important is having the right mindset for business. That means accepting that you may not know everything and bringing people in who have “been there, done that” with experience at all levels. Let’s face it, if you knew how to do it, you’d already be doing it! Or have done it in the past.

If you can bring someone on to your board of directors, or even as an advisor or mentor, who has achieved what you are seeking to achieve, it just makes sense that they are going to provide you with invaluable advice and insights into how to achieve your business goals.

Let’s say you have an online internet business of some sort (there are lots  of these around now). And you want to build it into a substantial company and eventually sell it. Well the very best way you are going to achieve this is not with lots of IT boffins and programmers. It’s with someone who has done exactly that - started an internet company, raised venture capital, built it up and either sold it or listed it onto the stock exchange.

NOT someone who has a sold a chain of pizza bars, or sat on a few boards, or has “business coach” written on their business card. You must find someone who has specifically achieved what you want to achieve, in the specific industry you are in.

Get them involved as a director, mentor or advisor. Give them a percentage of the company if you have to. Ownership of something successful is better than all of nothing. Your chances of reaching your goals have goen from 5% to maybe 70%.

As a corporate advisor, we see many businessess which come to us seeking venture capital. They want someone, whom they don’t even know, to invest their money into their company so they can use it to grow the business. 9 times out of 10, there is no one involved in the business with a proven track record. Having the right person involved will give the investor confidence that it can be done and vastly impoves your chances of attracting venture capital.

So what does that have to do with your mindset? Everything becauase you have to start thinking about your business as a university course. Especially if it’s your first one. Your goal should not to be to retire off the sale of your first business. It should be to learn. Because if you do it once, then you can do it again at twice the speed.

Gerry Harvey’s first business was not Harvey Norman. It was a small auction business in Sydney. Richard Branson’s first business was not Virgin. It was growing and selling Christmas Trees.

Too many business owners hold on too tight to their first business, thinking that it’s the be all and end all of their business experience. If you just change your mindset so that this business is just a stepping stone, and your real success will come from the experience you gain from the process and from your mentor, then it could unlock som serious hurdles that may be holding you back

Len McDowall is managing director of Integral Capital

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