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Access New Capital for Your Business

Understand the implications of the capital injection options available to your business.

Entrepreneur

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With access to capital critical for the expansion and growth of one’s business, there comes a point where entrepreneurs need to consider attracting new forms of investment based on the significant cash injection required.

Options considered usually include listing or, alternately, taking on a private equity (PE) partner. With both able to achieve the same objectives, it’s important that entrepreneurs consider the respective implications before choosing which option will best ensure the sustainable success of their business.

The options available

Capital and liquidity are essential for the growth of one’s business. At some stage, however, many entrepreneurs will require a much larger capital injection than the bank will loan them to take their business to the next level. This is when listing or taking on a PE partner become viable alternatives.

While both options will allow an entrepreneur to raise capital fairly rapidly and increase liquidity, they will also assist the business to improve its profile in the market – thereby achieving the same strategic objectives.

Listing and PE have very different implications for a company that entrepreneurs need to be cognisant of from the outset.

In both scenarios, one is inviting external parties to become involved in the core functioning of the business. Because of this, it’s important to appreciate how these new relationships will work, and the obligations and roles of each.

Listing your company

Listing your business in a positive economic climate can work particularly well, as prices and earnings increase on the back of investor confidence. This is what we saw in many of the local listings that took place in the market about five years ago.

The recent global economic downturn has changed this significantly though, reducing the amount of liquidity available and making investors more reticent to invest in newer ‘unknown’ companies. When liquidity is at a premium (as it currently is), big fund managers typically pursue blue chip investments in favour of small-cap companies.

As a result, small-cap companies are punished in this type of cycle – going against their original intention for having listed. Because trading is slower and somewhat restricted, a business’s shares can become inert, with prospects for raising capital and increasing liquidity significantly limited.

Companies also often list in order to make future acquisitions. In recent years, the option of using a listing in order to purchase another company has, however, been curtailed as operators are reluctant to sell for ‘paper’ – rather wanting cash for the sale.

There are a number of other considerations to take into account before listing. When listing, one is moving from the context of a private company to that of the stock market where dealings are highly regulated and scrutinised. This has various consequences for one’s business.

From a corporate governance and administration perspective, there are a number of very stringent requirements to adhere to. One must consequently have the right systems in place in order to meet these on an ongoing basis. The level of reporting required by a listed company also makes it fairly easy for one’s competitors to analyse one’s business; establishing everything from margins to positioning of one’s competitive advantage.

Before making any decisions, understand what you are getting yourself and your business into. Should listing not prove the right option for a business in the long term, delisting can be costly and have negative implications for the company’s profile. To this end, listing should be based on a sound forecast of increased earnings projected over the next five years, in a bullish economic climate.

There are pros and cons to listing as well as taking on a private equity partner. The important consideration is what suits your business. Many entrepreneurs don’t realise that a PE partner offers concrete liquidity and is usually open to new acquisitions – offering a viable alternative to listing purely for this reason.

Because PE players also assist with management buyouts, they can bring new blood and expertise on board during the process, enriching the talent pool and potential of the business. PE goal-posts are different to those of a listing, and PE partners are typically in it for the long haul: what happens in the interim is not as important as overall performance of the company.

As such, one’s PE partner is normally far less interested in a linear trajectory of earnings than the market would be. This is because they’re ultimately working towards selling at the ‘right’ time, even if the business takes longer to reach that point.

By joining the board of the business, a PE investor can also provide invaluable expertise and act as a source of independent advice to management. In the case of RMB Corvest for example, our objective is to understand the business and add value.

This means that, while we don’t become actively involved in managing the company, we attend board and management meetings. In this way, involving a PE partner can bring the right combination of liquidity and expertise to a business, especially if it’s a small-cap company. It can also act as a step on the path towards listing – improving corporate governance procedures and boosting growth prior to entering the market.

Thus while listing and involving a PE partner both offer entrepreneurs a means of taking their businesses to the next level, the most important part of the process is arguably making the right choice between them.

The starting point is to research — and understand — the options in the context of your own business. Remember that this is the next step in positioning your company for sustained success and growth. As such, your strategic objectives must be aligned with the means of achieving these.

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

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2 Comments

2 Comments

  1. Steven Green

    Dec 20, 2012 at 07:46

    Nice article I think it would have been nice if you Had referenced some companies that offer these sorts of deals as well.

  2. Business Plan Whiz

    Jan 17, 2013 at 12:31

    I agree Steven, in adition it would have been great to include a discussion on crowdfunding here. A recent Deloitte report says that around $3Bil will be raised through crowdfunding this year so surely deserves a mention here?

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Venture Capital

3 Top Tips SMEs Should Be Aware Of When Accessing Funding

Darlene Menzies weighs in on the top three things you should consider when accessing funding.

Darlene Menzies

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1. Applying for credit facilities

Apply for credit facilities (such as a bank overdraft or revolving credit facility) when business is going well, which is when a bank is more likely to approve it. This also means you will have the money immediately available if you hit a cash flow challenges. Don’t wait until the business has hit a cash cliff to apply, as you will be less likely to qualify or be in a position to negotiate the best rate/terms.

2. Have critical documentation easily available and kept up-to-date

Create a secure electronic folder, preferably stored online, that house all of your statutory and financial documentation that funders will request from you when you apply for finance.

This includes up to date copies of your company registration documents, shareholder agreement and register, certified copies of member/director IDs and marriage certificates, tax certificate, signed customer contracts, business plan, latest financial statements, up to date management accounts etc. SME lack of finance readiness (i.e. having their documentation available for funders) is a key constraint to being able to access funding.

3. Know your credit score, both your personal credit score as the business owner and your business’s credit score

Our report shows that 61% of entrepreneurs applying for finance don’t know their credit score, yet this is one the primary evaluation components used by funders to determine the risk of lending money to the business.

It’s important that SMEs request their credit scores and address any issues that are negatively affecting them. You are permitted one free credit record per annum from the Credit Bureau. Take time to learn about how the credit system works.

Access to finance

“There are a number of research studies that confirm the link between access to finance and business growth, showing that increased access to funding increases revenue and job growth in SMEs.”— Darlene Menzies, founder of finfind.co.za

Read next: Government Funding And Grants For Small Businesses

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Venture Capital

Taking A Business Public Can Unlock Its Full Potential

How can business owners continue to create shared value and drive growth beyond the venture capital funding rounds to attract new investors and customers, and unlock the inherent value in their business?

Graeme Wellsted

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In the context of entrepreneurship, a great deal of emphasis is placed on the start-up phase of a business. But what happens beyond that?

Going public

Listing on a stock exchange is often the best way for a business to realise the next phase of its growth ambitions and create opportunities for shareholder and investor diversification.

Listing a company provides a more effective tool to access capital and enhance liquidity than private equity markets, as there is a much larger investor base to tap. Importantly, this pool will also include institutional investors, such as pension and investment funds, most of which are mandated to only invest in listed entities.

Reasons to list

Raised capital can be used to fund expansion or research and development, or meet other capital requirements for acquisitions. Listing creates exit opportunities for founders, shareholders and early-stage investors, and helps to spread the risk of ownership. Other growth opportunities become accessible as lenders can more accurately determine a company’s market value to determine loan-to-asset ratios.

Valuations for potential mergers or acquisitions are more objective. In this regard, a share issuance can be offered as a suitable exchange of value, rather than using cash to make a purchase or acquisition. Listing a business boosts its credibility and brand equity, which is beneficial from a customer perspective.

It helps to attract and retain the best talent from an employee perspective through the implementation of an employee share incentive scheme.

Related: What should I know about a Public Company before registering one?

Achieve consensus

But before a business lists, it is important to consider the commercial benefits and, consequently, if this is an appropriate next step. In this regard, the leadership team must first review the strategy and agree on where the business is in its lifecycle, and where it is going. For any business to be successful, the shared beliefs and purpose of its leadership team must align and there must be consensus among shareholders that the time is right to list.

Consider the trade-offs

Once this point is reached, consider the implications of taking a private company public. Firstly, business owners must understand that they are effectively giving up control of their company. They must also acknowledge that the transition from a private to public company can be difficult, with increased compliance and transparency.

Listing on a stock exchange also raises the public profile of the company. This includes greater oversight from external stakeholders, with strict reporting and disclosure requirements required by the exchange and regulators. These aspects are mandatory to ensure greater transparency, which translates into greater protection for investors.

Meeting compliance requirements

Arriving at this decision therefore requires a thorough due diligence process. This entails meeting financial reporting and minimum regulatory compliance requirements, which have potential cost and administrative implications that can prove challenging, particularly for smaller businesses.

However, it’s imperative to meet these requirements, as this ensures the business will stand up to market scrutiny and that the entity delivers exactly what it promises to investors. It also ensures the business meets the exchange’s corporate governance requirements, complies with the Companies Act, and operates in line with industry best practices.

Related: Public Private Partnerships Can Work For Entrepreneurs

Demonstrate value

This due diligence process is also vital if a company hopes to adequately demonstrate value to investors in the open market. This will help listing advisors and sponsors, whose job it is to market your company to potential investors, to more accurately determine if there is appetite for your business.

Institutional and retail investors will use this information to interrogate the business’s value proposition to ascertain the potential for growth following a listing, and determine whether the business model will deliver adequate and sustained returns over the medium to long term.

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Venture Capital

Need Funding For Your Vision? Give ‘Tasteful Persistence’ A Try

Zuko Tisani’s Legazy is a company that plans six international immersions for mainly start-ups, executives and members of the public. He has managed to grow his business from floundering for funding, to attracting large corporate investors. Here’s how your business can follow suit.

Diana Albertyn

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Legazy was launched with the aim of playing a leading role in the South African digital economy by stimulating the trade on African innovation. Legazy is well on its way to increasing the success rate of entrepreneurs through exposure to market access, partners, media and investors. “Before we were consumers and bystanders of industry 4.0,” says founder Zuko Tisani.

“We work with large corporates and Government, speaking their language by understanding what is important to them and not promoting what we think is important,” Zuko explains.

“Our narrative is tailored to fit the specific corporate we speak to. A lot of companies make the mistake of shooting in the dark and send a generic proposal to as many people as possible.

“We also realised the return on investment for content was huge. We are well documented visually and with the corporates that sponsor our projects it makes it easier to get funding because we can tell a unique story, a big story and an emotive one that goes hand-in-hand with our proposal and separates us from others.”

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

Zuko offers these top tips for start-up funding success:

How do you get people to care enough about your idea to invest?

1. Be very clear about how assisting you benefits them

Human nature is selfish. Win-win is not enough. Think more 51% to 49% — give more than you get. How is your sponsor going to be the winner of the day by supporting you? Always bring it back to the bottom-line. Whether it’s tax benefits, market exposure or adding value to their supply chain, be careful not to oversell because it can close an opportunity before it even opens. Do your homework to find gaps to fulfil or to enhance existing projects. Once you have emailed a specific request, lay out end-to-end how you will use the money and how it will benefit them.

2. Be persistent not pestering

Sending mails to busy stakeholders without response is a norm — try to find other stakeholders, who are more junior and would also have an interest in your project, to assist. Tasteful persistence is mostly rewarded — be delicate but direct in what you want; keep demonstrating you can add value and deserve the sponsorship.

3. Make the vision big and the ask small

It’s important to gain and build trust so take what you are given and build on that.

Related: Government Funding And Grants For Small Businesses

What steps can your start-up apply when approaching corporates for funding?

1. New is hard to sell and often has tentative buyers in the beginning

However, it’s worse to enter an over-saturated market where differentiation is difficult to see. A lot of entrepreneurs focus on the complete market and say things such as, ‘It’s a $10 billion industry’. Can you skew your value proposition to make a buyer believe it’s unique? And can you capture an upcoming market such as Generation Z (the coming economically empowered generation) in your offering?

2. Paper trails

If you are looking at partnering with a corporate find out where they have put their money before, and what it took for the start-up to gain access to those funds. Also look at the companies similar to yours that are succeeding — where is the money in your sector? This will also inform where you will be wasting your time.

3. It’s all seasonal

Keep a tight watch on when budgets are allocated. A lot of companies will inform you that they’re not in a good position to allocate money. Find a non-financial resource that you can be offered and leverage their partnership to gain financial support with another sponsor.

4. Know the lay of the land

The winner is the one who has the most information. If you are trying to tap into being a supplier for a corporate, know the decision-makers; know the key influencers. Your business is reliant on relationships.

As connection with anyone becomes easier, it’s easier to create solid relationships with decision-makers who can help your business with a signature. But always ensure your proposal offers the greatest value and that you do not only know the decision-maker, but everyone else who is part of supporting the sponsorship.

Read next: A Comprehensive List Of Angel Investors That Fund South African Start-Ups

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