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Local success stories exemplify funds’ role

VENTURE capital has played a critical role in the growth of some of Western Australia’s best-known companies.

A prominent local example is shipbuilder Austal, which was backed by Castle Harlan Australian Mezzanine Partners before listing on the Australian Stock Exchange in 1998.

Clinical Cell Culture is another emerging Perth company that has been helped on its way with backing from venture capital funds.

ECAT Development Capital became a major shareholder in C3 in 2001 and was so impressed that it sold its other investments and engineered a reverse takeover last November.

The end result is that Clinical Cell Culture is now listed on the Australian Stock Exchange, yet the company still uses venture capital to support its growth.

Last month it announced plans to raise $3 million from BioTech Capital, one of Australia’s largest biotechnology investment funds.

A further $3 million will be raised via a share placement to clients of two corporate finance groups – Sydney-based Emerging Growth Capital and Perth-based Poynton and Partners.

It will also raise $1 million via a share purchase plan, through which existing shareholders can subscribe for up to $5,000 of shares.

This neatly illustrates the diversity of capital raising opportunities available to local companies.

Clinical Cell Culture’s rapid commercial progress stands in contrast to most other technology firms, which require patient investors willing to support them through a long development phase.

There is no shortage of venture capital investors in Australia.

The Australian Venture Capital Association web site www.avcal.com.au lists 50 venture capital providers and 10 incubators, while the Australian biotechnology portal www.ausbioinfo.com lists 116 providers of finance and investment services.

These lists encompass a wide range of firms, from providers of seed and start-up funding to providers of growth capital for established businesses.

The dividing line between the different categories is not always clear.

Carmichael Capital Markets director Kellie Benda has prepared a guide to venture capital which defines seed capital as being for organisations with a business or product at the conceptual stage.

The organisation is still run by the founders and would typically seek between $200,000 and $500,000 for R&D and prototype development.

The next stage of funding normally occurs when a prototype has been developed and the business has minimal, if any, sales.

At this stage the business would normally introduce professional managers to work with the founders and seek up to $2 million from venture capital funds to help commercialise the product.

As the business generates sales and a track record in the market, it can seek further capital from a wider range of investment funds and private investors.

This would include private equity funds that normally invest once a business has a three to five-year track record.

This funding would be used for activities such as market expansion, management development and product development.

For an investor, the degree of risk is higher if they invest at the seed capital or start-up stage.

Therefore they will expect higher potential returns.

As a guide, Ms Benda said seed capital investors would seek a return on investment of 70 per cent or more.

Venture capital funds that invest at the prototype stage would seek a slightly lower return of 60 to 70 per cent.

While there is a general perception that venture capital is very difficult to obtain, CyberResearch director David Silk has a contrary view.

He believes venture capital funding is relatively simple to obtain, if a new business is organised.

“People need to get their act together,” Mr Silk said. “They need to have a quality management team and they need to develop their business plan and their marketing plan.”

Mr Silk also believes local entrepreneurs need to look beyond Australia, for both business development and funding opportunities.

“Its critical to be on the international stage from day one,” he said.

Ms Benda agrees that quality and depth of management is one of the key characteristics for potential investors.

They will also focus on the prospects of the business, such as the size of its potential market, the growth prospects, and barriers to entry, which make it easier to defend its strategic position.

She said investors liked a ‘clean’ corporate structure, which included a clear distinction between the company’s assets and the founder’s assets.

Investors also need to ensure the company is the undisputed owner of its intellectual property.

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