Family, friends and fools
For many entrepreneurs, making the leap to the big time often requires extra funding from investors. But who do you turn to when your own borrowings have reached their limits and your money from the FFFs (family, friends and fools) has dried up?
Given the increasing difficulty of obtaining debt finance, fortunately there are sources of equity funding available from various providers, including venture capital (VC), angel investors and silent partners.
According to Michael Cameron, director at Williams Hall Chadwick, the first option is no doubt the FFFs, but before doing this it is recommended to have a proper business plan in place.
“It’s always best to approach people you know,” says Cameron. “But you should have all the documentation in place including a business plan and a reason why you need the extra money. Put together a presentation and talk to your accountant or financial adviser, as they will have contacts in the business world that you can access.”
Venture capital funding
Startup businesses have traditionally looked to VC for funding, particularly technology-based enterprises. The benefit of VC funding is that it allows the opportunity to see an idea through to commercialisation, with VC backers usually bringing in their own advisers with experience, skills and useful business acumen to oversee their investment.
According to the ABS, as at 30 June 2011, $15.9 billion had been committed to VC and later stage private equity funds in Australia, of which 91% had been invested by Australian investors.
However, VC investors are often looking for large equity injections, depending on their investment mandate, and owners will have to give up equity in their business, reducing their eventual return and losing some control.
Angel investors and silent partners
An angel investor is typically a high net worth individual willing to invest in a startup business. Similar to VC, they expect a high return for their investment, but do have a higher appetite for risk.
For established businesses, silent partners may be preferred, as such investors typically are not seeking control over the business but rather to support it and gain a profitable, ongoing return.
“The benefit with silent partners is that the current management team remains in place, however owners may need to institute a dividend policy to ensure the silent partners get rewarded for their investment.”
ASSOB, AAAI and AVCAL
In Australia, sources of potential equity funding include the Australian Small Scale Offerings Board (ASSOB) – a mini-sharemarket which has already raised more than $122 million for unlisted Australian companies.
Businesses can raise up to $5 million on the ASSOB in tranches, although it requires a referral from an existing member. The board also has a facility for secondary sales of unlisted securities, allowing investors to trade shares in such companies.
The Australian Association of Angel Investors (AAAI) is a not-for-profit national forum for angel investors, providing education and advocacy services. It estimates that angel investors have invested $1 billion in 5000 early-stage businesses across Australia.
Another organisation, the Australian Private Equity and Venture Capital Association (AVCAL) aims to promote the interests of such investors in Australia. According to AVCAL, its members account for $26 billion of investments, including fund managers, pension and super funds and others.
Using everything at your disposal
For businesses seeking greater amounts of equity, the National Stock Exchange of Australia (NSX) could become a stepping stone to an eventual listing on the Australian Securities Exchange (ASX), due to the NSX’s less stringent listing requirements.
However, Cameron says that entrepreneurs should delay seeking outside investment for as long as possible to maximise their returns:
“The earlier you seek outside funding and the less refined the idea, the greater the loss of control. It’s in the interests of the entrepreneur to fund the idea for as long as possible to maximise the value at the end because you can retain greater ownership as it moves through the stages to development.”
This article represents the views of the author only and not those of American Express.
Anthony is a communication consultant at BWH Communication and a freelance writer with 15 years' experience in the stockbroking and media industries of Australia and Asia. He is a regular writer on business and other issues for publications in Australia and Japan. He consults on communication strategy to businesses ranging from private enterprises to professional service firms and publicly listed companies, with a particular interest in entrepreneurship in all its forms.