RAISING CAPITAL

PART 4. RAISING CAPITAL

Starting a business and growing it requires money – which is referred to as ‘capital’. 

Different types of businesses and different approaches to growing the business require different amounts of capital.

The more capital you have at your disposal, the more ability you have to hire people, buy equipment, buy stock, advertise, rent offices, develop your product or service and pay for any other services or resources you may require. Generally speaking, you can grow your business faster if you have more capital.  

In some business categories, particularly those involving technology, speed to market is important. In other categories, speed to market can be less important.

Having more capital invested in your business can have downsides too. More capital means more risk of losing that capital, more temptation to spend it unwisely and if you’ve sourced capital from outside investors, a reduced percentage shareholding in your business (called ‘dilution’) and more pressure to grow your business faster (not always a bad thing).

If your business is growing in value, the earlier you raise capital from external investors, the more expensive that capital is in terms of dilution. This is where you must balance the dilution cost versus the good that extra capital will do for your business and your shareholder value.  

To illustrate this point; would you rather own 100 percent of a home-based SME business or one percent of Apple?

Once you’ve decided to raise capital, you’ll need to document your business plan and design your investment pitch. Most investors want to make money, not lose money, and you will have to convince them to risk their money in your business, rather than investing it elsewhere or leaving it in a nice safe bank account.  

Investors make their money when you sell your business (referred to as a ‘trade sale’ or ‘liquidity event’), float it on the stock market (‘IPO’) or you start paying them dividends. You’ll need to explain which of these you intend to do, how long it will take to get there, and what shareholder value you will have created by then.

The following are options for raising capital which I’ve had experience in:

1.
Bootstrapping: This is where you fund the start-up business yourself, using your own money, profits from the business or a loan from a bank or other party. On the good side you retain full ownership of your business. On the bad side you take all the risk and may not get as much capital to work with.

2.
Angel Investors: Ideal for start-ups. We have an excellent community of angel investors in New Zealand. On the good side they understand start-ups and have events to pitch to their investors. On the bad side capital raising can be time-consuming and a distraction from the business.  

3.
Venture Capitalists: These are professional investors that are looking for a very high return on their investment in businesses that are starting to demonstrate their high growth potential. They typically look for 8x to 10x return on their investment and take a minority stake. New Zealand VC firm IT Capital achieved even more return than this when we sold Exonet to Solution 6 back in 2000 for A$30 million. Although my experiences with VCs have been good, I know of many founders who have lost their businesses through the aggressive actions of VC investors.

4.
Private Equity: These investors invest in large, mature, profitable companies and often buy the business outright. Private equity investors are seldom interested in start-ups. 

5.
Public Listing/IPO: Going public is more suited to larger, well established businesses with solid, profitable financial performance. There are exceptions, such as Xero, which has done well as a public company, but my experiences as CEO of a small public company on the NZAX were mostly frustrating. Small public companies find it difficult to get adequate attention from investors alongside the larger businesses and tend to be grossly undervalued.

Final word on investors

It’s important to engage with the right type of investor for your business. Start-ups are generally better suited to angel investors; then as they grow they are more suited to venture capitalists.  Public listings, private equity investors and/or trade sales usually come later. 

Regular, honest and open communication with your investors is essential. Take them on the journey with you, so they become your allies and will be more helpful when you face the steepest challenges. 

Always remember that your investors are your business partners who back you, share the risk and, hopefully, get to enjoy the rewards of your combined success.

Mark Loveys has been dubbed ‘one of New Zealand’s most successful serial software entrepreneurs’. He was the original developer of Exonet, the ERP software suite now called MYOB Exo, and former chairman and co-founder of Datasquirt.
As co-founder and former CEO of Enprise Group, Mark helped establish EMS-Cortex ‘cloud control panel’ software as a leading international solution and was instrumental in the sale of EMS-Cortex to Citrix in 2011. These trade sales have a combined value of more than $50 million.