- Player: Francois Otto
- Company: Sasfin
- Position: Head of Corporate Finance
- Visit: www.sasfin.com
Most fast-growing companies eventually find themselves looking for external funding. If you’re in this position, what are your options?
“For many companies, going public makes sense. It’s a great way to bring capital into a business to fund further growth,” says Francois Otto, Sasfin’s head of corporate finance.
“It’s much easier to access growth funds on listing and once you’ve listed.”
But Otto adds that it’s a decision that needs to be considered very carefully. Also, it’s important to ask yourself exactly why you want to list.
“Before you go public, you need to have a very clear vision for the future of the company. You need to know exactly what you want to accomplish. Once done, it’s very hard to put that genie back in the bottle. That’s why it’s a good idea to make use of an advisor who can help you examine the merits of the process for your specific operation.
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“You have to think of your business as a product that is competing with other products — businesses — for funding.”
Otto also warns that listing is not for everyone. “You have to understand what it means to run a public company. Information will be public and shareholders will expect results. It’s not like running a private company where you are completely in command,” says Otto.
Finally, it’s important to remember that it’s not a quick process. Preparing to list — and putting all the required reporting systems and processes in place — takes time.
Debt funding — also known as getting a loan from the bank — is another option, though Otto warns that this is not always a viable option for a business looking to scale aggressively.
“Once upon a time, your bank manager operated similar to a venture capitalist,” says Otto. “He or she would listen to your plans, and then decide whether to bet on you, or not. You could, in a sense, ‘sell’ you idea to your bank manager. You had a personal relationship, and that could help you secure loan. These days, however, the process has been centralised. Your bank manager can’t give you a loan just because he knows and trusts you. He has no say. These decisions are made centrally.”
Of course, you can still get a loan, but banks favour less risky endeavours. “Banks are most likely to fund your expansion if it means increasing your assets — buying a new factory or equipment, for example — because the risk is relatively low. Those assets will be available to recoup the loan if something goes wrong,” says Otto.
VC and equity
“About 10% of businesses are so obviously worth investing in that they essentially sell themselves. Investors come to you, asking to invest — you don’t need to seek them out. The other 90% actively need to compete for investment.
“You have to think of your business as a product that is competing with other products — businesses — for funding,” says Otto.
The good news, though, is that established business looking to grow are more likely to secure funding than start-ups looking for early-stage investment. “There are some active VC firms in South Africa, but not that many. We certainly don’t see the same sort of massive investment that you find in Silicon Valley. If you’re a new company, getting hold of funding is hard,” says Otto.
“However, if you have an established business that is doing very well, but needs investment in order to grow to the next level, you’ll find it much easier to attract funding.”
Many of the people who invest, though, will expect equity in return, so as the business owner, you need to consider how much of the company you are willing to surrender.
“Offering up equity is often the only avenue open to start-ups whereas for more established businesses they could more easily access debt or equity,” says Otto.
“So if you have a business with a proven track record, you have a stronger bargaining position, but you need to decide what is right for your business and what you want to achieve.”