When you look at the so-called ‘facts of the matter’ as they apply to raising capital for SMEs (small and medium enterprises) they paint a particularly bleak picture. But, typically, as with most issues in New Zealand, when you scratch beneath the surface, people are “making a plan”; muddling through; and a fair number have come up with alternative sources of capital.
According to the experts involved in correcting the situation through their work on the Capital Market Development Taskforce, for privately-held companies most capital is provided from families and individuals (the three Fs – friends, family and fools – as they are rather irreverently known in investment circles), retained earnings and institutions. Few companies rely on outside capital, or on outside talent for governance or advice.
“From a capital market perspective there are issues on both sides of the market – owners tend to be sceptical about the benefits which capital markets can bring and often have little ambition to grow their businesses, while investors often
find it difficult to access investment opportunities in this part of the market.”
SMEs are reported to be turning directly to capital markets to raise debt and particularly equity. Indeed, the ‘new normal’ for the New Zealand economy compared to the previous decade is likely to involve more conservatively geared household and firm balance sheets and a more constrained and conservative banking sector.
When you add the taskforce’s observations on SMEs in particular – “these companies have a high reliance on bank debt and little access to alternative sources of external financing: New Zealand has one of the most bank-dominated financial systems in the OECD” – you begin to think we are all being slowly strangled financially, and our growth prospects, along with the much-heralded ability to match Australia, are but a pipe-dream.
Raising the bar
Chris Due has been a local ‘angel investor (see sidebar) for many years. He works with one of New Zealand’s leading venture capital firms, specialising in start-up/early-stage investments, with a focus on assisting their investee companies. He continues to serve as a director on a number of SMEs, including those seeking to raise venture capital funds and/or local finance – so he speaks from experience, some less-heavenly than one might have hoped for.
“The traditional banks have definitely raised the bar in providing additional working capital to SMEs. As the old adage has it: ‘when the business needs money, the banks do not want to lend’.
“I know of one company with an undrawn ‘approved’ facility, which, when it presented its business plan – now requiring more funds because business activity was down in the current market – was promptly declined by the bank.
“In another case, the funder – a second-tier lender – has made some additional finance available (less than was asked for) and only by locking-in the major shareholder with more guarantees, etc. The ‘pledges of support’ previously given to the company, were completely ignored,” says Due.
There’s no question it is tough out there.
Why then would anyone go plunging into a highly-charged and thoroughly volatile environment – especially with New Zealand’s physical environment and clean technology as a focus?
Milestone Capital has established the Rutherford Innovation Fund (RIF) to raise capital to back companies needing financial assistance and business skills to take their innovative ideas to a commercial level on the international stage, according to principals, Nick Gerritsen and Kenji Steven.
“This is a new type of capital – action capital,” says Gerritsen.
The RIF claims to be the first managed fund in New Zealand with a focus on ‘clean tech’. It’s a portfolio of private equity companies which include algae fuel manufacturer Aquaflow Bionomic Corporation and carbon sequestration firm Carbonscape.
“A lot of people will become wealthy by investing in clean tech companies, but it is hard to choose which companies will be successful among the plethora of scientific projects working on new ways for the world to live,” Steven says. “There is huge engineering, scientific and technical skill in New Zealand, waiting to be commercialised. The missing ingredients are the business understanding, the networks, the systems and the capital.
“We have real expertise – between us we have established around 150 companies and learned from the successes and failures.”
Gerritsen is a recognised clean tech pioneer in this country and Steven has institutional investment management experience, while currently chairing a claimed US$1 billion-plus global alternative investment firm.
Milestone Capital reckons they gain an additional investment edge through having their principals as cornerstone investors and hands-on fund managers. They believe the first mega-trend was the transistor and semiconductor; then came the personal computer and the growth of the Internet. The third mega-trend was biotech, medical technology and pharmaceuticals. They are convinced clean tech is next.
“New Zealand abounds with clean tech ideas; after all it has a long history of creative engineering and scientific brilliance. That is why the fund is named after Ernest Rutherford, the Kiwi who was the first person to split the atom and the father of modern nuclear physics.”
Milestone will choose the businesses and then “give them the tools and resources they need to ensure global best practice”.
“We will share our global networks and operational skills and put in place good financial systems and best practice in corporate governance to enhance the chances of being successful,” Steven says.
“We will prepare them to collaborate with the big strategic players because collaboration is the most efficient way of building smart companies. In clean tech, some of the biggest companies in the world are collaborating with start-ups.”
Venture capital does not work for these companies because venture capitalism is about cutting a sharp deal and selling on for a profit, Gerritsen claims.
“We want to run really fast hand in hand with these creative innovators. It’s like high altitude training – taking these companies into an environment focused on performance,” he says.
The passion to assist
Milestone’s focus on clean tech would be endorsed by legendary Warehouse founder and chair, Sir Stephen Tindall, recently appointed the first ever New Zealand Arch Angel.
Angel Association chair, Andrew Hamilton, a significant player in the angel sector in his own right, notes Sir Stephen has invested more than $150 million in seed and venture capital companies – both directly and as a fund-of-funds. He and his family have invested in more than 100 Kiwi companies.
“Tindall’s passion is to assist young entrepreneurs and he has invested in a variety of sectors including biotech, clean tech, IT and design-led companies. He wants to see New Zealand develop as a leader in the ‘knowledge economy’, and to help create a culture of making New Zealand ‘cashflow positive’ in international goods and services trade.”
Hamilton – who describes himself as energetic, driven, restless, nervous and curious (the epitome of an angel) – points to the arrival in this country of Bill Payne as a turning point in the battle to provide alternate sources of funding to our SMEs. Payne is probably the world’s best-known angel investor and author of The Definitive Guide to Raising Money from Angels. He invests in plus-50 start-ups, is a prolific blogger on the subject, and is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence.
“Angel investment is just one part of the equation in helping build more international businesses from New Zealand. I love angels because they bring smarts and cash to fuel young companies. It is a great thing because you are utilising the wisdom of people who are not typically trying to be the entrepreneur anymore,” says Hamilton. “A key statistic is that these angel-backed companies will represent 50 percent of new job hires in ten years time – that is why they are so important.”
What about the banks?
At this point you might be thinking that banks, the traditional source of funds for Kiwi entrepreneurs have simply folded their arms and looked away, knowing they’ll always get their share. You’d be so wrong. BNZ for one is transforming its business model to take advantage of the opportunity the financial crash has provided.
Richard Ede, BNZ managing partner: “Unlike most banks we were in good financial shape when the crunch hit. A glance at the Reserve Bank figures will tell you that our share of the loan market has grown by five to six percent, while other institutions have been deleveraging and getting out of sectors like agriculture.”
It’s the way they have done it which is causing much comment in financial circles – investing in tailored properties and gearing up as the others retrench. It’s a bold ‘relationship’ strategy – forcing themselves to think like a business owner; opening from 7am to 7pm to meet customers’ needs; and having call centre staff who’re properly trained and can make decisions.
It sounds too good to be true. But it is; and it’s going gang-busters, with customers using facilities like boardrooms, meeting rooms, and good coffee (even) – all on the bank.
The BNZ Business Centre on Auckland’s North Shore is the first in a nationwide network: available to clients who can book meeting rooms, boardrooms and teleconferences online. According to Ede, business on the North Shore has almost doubled over the past six to nine months.
“In line with this growth, we believe our clients deserve an international, best-practice offering - and that’s what we’re giving them.”
BNZ CEO Andrew Thorburn notes that “New Zealand is now looking at gearing up for a higher growth economy and we believe that great relationships with our clients will be key to our growth. The Partners centres have been designed with our clients in mind.”
ASB is also upping its game to compete in a static market gone volatile. According to Steve Cotter, ASB’s product manager, business and international, more than 800 jobs have been saved to date by their Job Creation Loans – designed to deliver greater flexibility for businesses.
“The expanded loan options are proving particularly attractive for exporters feeling the pinch in the current challenging market conditions, as well as those businesses requiring revolving credit facilities.
This $1billion fund, launched in 2009, offers businesses access to funds at below market rates, provided they can demonstrate the loans will create new employment, or prevent people losing their jobs. It is also credited with creating new jobs.
“In the six months since launch, these loans have helped to create hundreds of new jobs, but we want it to have an even bigger impact on New Zealand, so we looked for ways to improve the terms of the fund to benefit businesses,” says James Mitchell, chief executive, ASB Relationship Banking.
Some final thoughts from Chris Due: “SMEs need more professional help – independent directors and their advisers – but understandably cannot afford to pay for it. It is a challenge to get directors to join a business which might have financial exposure – so approach Business Mentors.
“Raising private equity [angels, private equity firms] has got a whole lot harder, and it has never been easy. For startup entrepreneurs, angel funding is scarce and investors are cautious and picky. You may have to concede a greater share of the business ownership than you wish, and the financier will want to ensure greater control. But founder entrepreneurs should still do it, because a smaller part of success is better than going nowhere and dying a slow death.”