01/07/2003 - 22:00

Making the cash connection

01/07/2003 - 22:00


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In the first of a series on raising equity finance, Mark Beyer assesses the various alternatives.

Making the cash connection

In the first of a series on raising equity finance, Mark Beyer assesses the various alternatives.

A SHORTAGE of equity finance has long been considered one of the main barriers to growth for many Australian businesses.

However, judging by the rapid growth of Australia’s venture capital and private equity industry, the problem is not a shortage of dollars.

The Australian Bureau of Statistics last month reported that $6.9 billion has been committed to venture capital investment vehicles, up from $5.7 billion one year earlier.

The main issue is making a connection between the investors with the money and the entrepreneurs and business people with the ideas.

For budding entrepreneurs in Western Australia looking to raise capital, a good place to start is the list of corporate finance firms in the WA Business News Book of Lists.

It covers a wide range of market players, from stockbrokers with their own corporate finance unit (e.g. Paterson Ord Minnett, DJ Carmichael and Euroz) to accounting firms with a corporate finance arm and specialists such as Chatsworth Stirling, Grange Consulting and Trudo.

Only some of these groups have the ability to execute major capital raising transactions but they all have the expertise to advise on alternative options.

These options include public capital raisings via an Initial Public Offering or a backdoor listing on the Australian Stock Exchange.

They also include raising funds from institutional providers of venture capital, such as Foundation Capital, Innovation Capital and ANZ Private Equity. (See follow-up articles over the next two weeks.)

Yet another option, especially for people looking to raise less than $2 million, is to find a ‘business angel’.

Business angels usually invest their own money in under-capitalised businesses with little security.

In some cases, they have very deep pockets, such as Kerry Stokes.

Through his private company Australian Capital Equity, Mr Stokes has invested in a range of businesses, including Perth-based equipment finance company RentSmart.

Business angels may also be small venture capital investment companies but mostly they are retired or semi-retired business executives looking to invest between $50,000 and $1 million.

In most cases, business angels also look to provide mentoring and management support to the investee companies, often by becoming a non-executive director.

Arguably the best known ‘angel’ network in Australia is run by Sydney-based Australian Business Ltd.

Its Australian Business Angels has been operating since 1993 and represents $200 million in available capital through 700 investors.

Another active player is Sydney-based Pacific Capital, through its online CAPstart Private Equity Market.

For local entrepreneurs, there are moves to establish a local offshoot of Founders Forum, a successful not-for-profit ‘angels’ network based on the Gold Coast.

Pacific Capital director Michael O’Neill has some blunt advice for business people seeking to raise capital.

“They think that writing a business plan is all they need, but often such plans are more like a novel and about as relevant as Wind in the Willows,” Mr O’Neill said.

“The real key to success is in ensuring your business is truly ‘investment ready’ and being able to succinctly describe the critical issues.”

To help entrepreneurs work out if they are ‘investment ready’, Pacific Capital has put a 25-question application on its web site.

Mr O’Neill said most entrepreneurs realise they are not ‘investor ready’ when they start going through the questions.

“If people can’t describe the barriers to entry or their competitive advantage or how they are scaleable, the odds are most people would not consider them to be investment ready,” he said.

Over 18 months, 570 people have enquired about coming onto the CAPstart Private Equity Market, 230 have started to complete the questionnaire and only 35 have completed it.

A 10-hour online assessment process weeded out half of these, meaning that 17 business people have listed. Of these, nine have raised the capital they needed.


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