Show us the money: A guide to raising capital

Securing investor funding is the key to accelerating business growth, particularly for fledgling ventures. NZBusiness shares advice from three of New Zealand’s leading funding platforms.

It was well-known US venture capitalist and author Richard Harroch who said, “It’s almost always harder to raise capital than you thought it would be, and it always takes longer. So plan for that.”

It is true that raising venture capital can be daunting for fledgling businesses, but at the same time, investor funding has never been more available, accessible or flexible. And yes, with such a diversity of funds, boutique investment banks, angel groups and crowdfunding providers out there, it may not be easy. But planning, and seeking the best advice, is vital.

Jack McQuire and Barnaby Marshall, partners at Auckland-based Icehouse Ventures, say venture capital primarily works the same in New Zealand as anywhere in the world. Investors (whether an individual high net worth, a fund, corporate or group of angels) invest for a minority ownership position in the business.

“Every investor has different preferences about what they’ll invest in, the terms they offer, and how they’ll contribute to the business beyond their capital, but for the most part they are small variations on the same approach,” explains Jack.

Available capital has grown considerably – Icehouse Ventures invested almost three times as much capital in 2021 compared to 2020, despite the uncertainty caused by Covid.

“There are more investors than ever, and those who’ve been around a while have more capital to invest,” says Jack. “This is forcing investors to offer more, and different, value to business founders to stand out, creating more options for founders to find an investor who’s a ‘perfect fit’ for them.”

Jack says an emerging alternative to venture capital is ‘venture-debt’, where funds provide both working capital and growth capital without taking equity.

“It suits larger, later-stage businesses but presents an attractive alternative for founders who want a different option than venture capital without mortgaging their home.”

Barnaby Marshall says Icehouse Ventures looks for businesses with ‘exceptional founders’ who have unique insights into markets or technology, or tackling global problems. “They demonstrate bravery in the face of seemingly insurmountable challenges and are committed to what is often a decade or longer journey to build an iconic, enduring and impactful business.”

In terms of return, investors want ‘great’ not ‘good’, says Barnaby. “The venture investment model is typically based on the pursuit of outliers, where the biggest success in a decade could be larger than every other opportunity combined in the same period. This forces us to be optimists, spending more time looking to understand the best possible outcome rather than the worst. “There’s typically a high appetite to take significant risks provided the end prize is big enough and feels attainable,” says Barnaby. “The downside is there are lots of businesses that probably will do well, but won’t pay off a hundred other failures, so aren’t the best fit for venture capital.”

Both Jack and Barnaby believe that most venture capitalists agree that true outliers are built by founders, not managers.

“So when we’re investing we’re not investing in just a business but a team to lead it,” explains Jack. “This is why we take minority positions and focus on founder ownership and control, because they’re expected to be in the driver’s seat for the foreseeable future. We step in and get active to help along the way, or when things really go off the rails. But our strong preference is to be one step removed from the day-to-day – unlike some investors, such as private equity, who might take a more heavy-handed approach.”

How to attract investors

Build a business that investors want to own a piece of, and they will come. The best way to do that is to focus more on building the business, less on convincing others to invest in it, advises Barnaby.

“While it might seem counterintuitive, I’d only engage with venture investment when it is absolutely necessary and not a moment sooner. Once lack of capital is holding back the business, that’s when it is time to engage with prospective investors,” he says.

“Research them, reference check them, and try to understand their focus before you engage. Once you’re convinced they’re a fit for your vision – as opposed to trying to pivot your vision to be a fit for them – then simply get in touch and share your story.”

The complete package

In New Zealand businesses are well catered for by the local capital raising market – there are options for all size companies, large and small. The capital raising providers come in all sizes too.

One service provider that’s grown exponentially in recent times is Snowball Effect.

It offers bespoke capital raising services for private companies in early expansion or growth phase seeking $1 million to $20 million of equity, debt or both. It also targets businesses looking to scale up internationally, with food and beverage, software and technology being three of its most served industries.

“Our current focus in the market is between angel investment for startups and traditional private equity for more mature businesses,” says Simeon Burnett, CEO of Snowball Effect. “Since 2014, we’ve raised over $125 million for a diverse range of companies operating in a wide range of industries.”

Simeon says they offer a complete capital raising package and access to a wide range of investor options. “It’s an efficient and effective way to raise funds. Our investors range from high net worth individuals, private equity and venture capital funds, through to retail investors.”

“In addition to capital raising, we offer a suite of ongoing services that enable companies to grow efficiently, including share registry management, shareholder communication and secondary share trading tools.” 

For business owners looking to raise capital, Simeon says it pays to come prepared, with your business strategy, a proposed valuation and a financial model that makes sense. Have those capital raising conversations well ahead of requiring the funds.

“It can be a time consuming process and things can change along the way. Building in contingencies is vital to avoid putting the business under too much financial stress, which is more often than not very harmful to the result of a raise.

“Before a company approaches us, we encourage them to spend some time defining their company goals and working out exactly how much capital they need to raise to achieve them. It might sound obvious, but ticking this off upfront will help later.”

Once business owners have a clear picture of their company’s goals, Snowball Effect advises them to spend time exploring the capital raising options: debt vs equity, public vs private, strategic vs passive. “Each type of investor has its advantages. Strategic investors can provide advice and open up growth opportunities whereas passive investors may be less inclined to weigh in on the direction a company is taking.”

A common mistake is financial forecasts that are not up to scratch, or simply don’t align with the stated growth strategy, says Simeon. “Ensuring that your financial projections are well thought through and realistic will save you significant time once you get into the capital raising process, and give you clarity on the amount of capital that you need to raise to fuel the growth of your business.”

Changing times

New Zealand’s capital raising market continues to evolve. Early stage (angel) investment continues to rise each year and the venture capital available in New Zealand now has far exceeded historical records, with many offshore funds looking to New Zealand for high quality investment opportunities.

“Private equity firms have been increasingly raising larger funds, meaning their minimum investment size has increased from around $10 million when Snowball Effect was starting out, to $15 million or more now,” says Simeon Burnett, adding that his company now has more opportunities to help a wider range of businesses.

Generally speaking, long term money printing by central banks globally has kept the capital markets flush with increasing amounts of capital, he explains, and this is certainly evident in New Zealand.

“Any part of the capital markets are now viable for us to look at. We are now talking to several companies looking to raise capital in excess of $20 million.

“Credibility in the capital markets takes time to build, and we believe we’re now in a very good position to be able to offer a wide range of financing solutions for the companies that we work with.

“Beyond 2021 we hope that we can do our part in making the equity capital market in New Zealand more accessible to investors, and more efficient for companies to raise capital,” says Simeon.

Strong market

It will be interesting to see how the shakeout from the pandemic plays out on the capital raising market, Burnett believes. “Many businesses have been well positioned to capitalise on the pandemic induced environment, or have pivoted their businesses to survive and grow in a new direction.”

With record amounts of capital available, and many households unable to spend discretionary income as easily, he says the capital raising environment in New Zealand is extremely strong at the moment with many believing there has never been a better time to raise capital.

“At Snowball Effect, we continue to reach record heights in terms of the number of companies we’re working with and the amount of capital we’re raising. For context, out of the total $125 million we have raised to date, we have already raised more than $33 million in FY21 and have a full pipeline of raises booked for the remaining five months of the financial year.”

Icehouse Ventures’ Jack McQuire says it’s important to view venture capital as “fuel in the tank”. “But it is neither the destination nor even the point of the journey. Stay focused on the ‘North Star’ of building something iconic and the rest will follow.

“There are plenty of people better qualified than me to offer predictions of the future. I prefer to accept it’s uncertain and can change quickly,” says Jack.

“That said, I’m a natural optimist. I say 2022 will be a continuation of the past few years of growth; in the number and ambitions of founders, the availability of capital and the possibilities for business to create a positive impact on the world.”

IN WITH THE CROWD

Since its arrival in New Zealand in 2014, equity crowdfunding has become an increasingly popular platform for raising capital. Impact organisations, such as social enterprises or businesses with an environmental or social focus, are particularly well suited to it.

“These are businesses that have a loyal crowd of customers and a good story,” says PledgeMe CEO Dr Claire McGowan.

Claire shares the ‘3 Cs’ of equity crowdfunding eligibility:

• A good Company that people can relate to, has a good proof of concept and performs well.
• A Crowd of customers and loyal fans who are well connected.
• Good Communications. A company that is deeply in touch with its brand.

So how do you prepare for an equity crowdfunding campaign?

Claire says talk to your customers, friends, family, partners and anyone else closely connected to the business, about your plans. “Make sure you properly gauge the interest before deciding to move ahead,” she says. And doing the PledgeMe CrowdfundingU (CFU) programme effectively prepares businesses for an equity campaign.

To go ahead the ‘3 Cs’ will need to be in place. Communication leading up to, and during, the campaign is essential. You will need to be set up for strong progress after the raise; have talked to your crowd and gauged their interest in investing; and received a strong, documented response to go ahead. 

PledgeMe has many examples of successful crowdfunding campaigns. “Any of our case studies[1] work and show how campaigners can succeed,” says Claire. “Three examples are OCHO [2], Happy Cow Milk[3] and Parrotdog[4]. All three had received strong indications from their crowd that they would invest and all had really strong, well-planned communications plans.”

If you’re crowdfunding for the first time, start by checking the interest of your crowd. Establish whether they would want to own a piece of your company and what the value for them would be.

“If you’re not receiving a strong enough response, maybe that means you need to wait a bit and work on your value proposition, your customer base, and your communications with them for a while first,” suggests Claire. “If it’s a very weak response, maybe it means equity crowdfunding is not right for you right now.”

The FMA provides a report on peer-to-peer lending and equity crowdfunding. The latest report can be found on its online news page[5]. Depending upon the business opportunity itself, the alternatives include: growing through sales, corporate investment, or private investors (either individually or via an angel group).

“In many instances these can prove to be complementary, and we would recommend the business owner explore all of their options,” says Claire.

https://www.pledgeme.co.nz  

Story by editor Glenn Baker. First published in the February 2022 issue of NZBusiness.