Money talks, especially when it comes to expansion. For most small businesses trying to get off the ground, lack of capital to drive growth remains the number one challenge.
Even with the best idea in the world, a business has limited scope to reach its potential unless it can get access to a ready source of money. Rather than going into debt through a bank loan, more and more smaller business owners are seeking out funding from private investors, by agreeing to sell part of their equity interest in the business in return for a cash injection that will allow them to expand quickly.
“We’re all about good business ideas and opportunities that are out seeking investors” : Paul Neiderer. Giving away ownership of a business in return for capital isn’t an easy decision but it seems there’s no shortage of businesses willing to go down this route. Australia’s largest capital raising platform for small private companies, the Australian Small Scale Offerings Board (ASSOB), is currently receiving enquiries from one to two businesses a week needing to raise between $500,000 and $2 million in start-up cash. Once a company has been approved to list on ASSOB it can issue shares to investors on the trading platform, which can later be sold in a similar way to trading shares on the ordinary stock market. Around $120 million in investment capital has been through ASSOB in the past six years, with 46 companies successfully completing capital raising programs over the course of 2011. The average amount raised has been around $350,000. “We’re all about good business ideas and opportunities that are out seeking investors,” says ASSOB chief executive Paul Niederer. “Around 50 companies are added to the ASSOB capital raising platform each year, as we are a stepping stone to trade sales, stock exchanges and other exits.”
One of this year’s success stories on ASSOB has been minerals exploration company Glen Iron, which two years ago had little more to its name than $50,000 worth of tenements in Queensland. It went to ASSOB seeking to raise around $2 million to fund its search on the tenements for magnetite, a naturally occurring mineral in iron. Glen Iron raised $2.1 million in four investment stages, and in just over 18 months has listed on the London Alternative Investment Market under the new trading name Strategic Minerals plc, and rapidly expanded its operations globally through acquisitions.
“We were looking to list on a market to get better liquidity,” says company director Pat Griffiths. “We used ASSOB to start and then moved forward to raise more money. The process enabled us to get credibility. The whole process has been brilliant … and has given us the platform to move forward. We are now doing purchases over $1 million, which couldn’t have happened without ASSOB and having publicly listed paper.”
Accessing private capital is not an easy road, however, and business owners not only need a good story to sell to potential investors but need to have well documented business plans and company accounts. “Only a small percentage of businesses seeking private equity funding are successful,” says Michael Gershkov, chief executive of private capital raising group Springboard Equity. “There really is a lot of preparation involved, and professional investors will not commit to any investment unless they are totally convinced that what they are investing in has a good future and will deliver them a solid return. “You need to have passion and energy, you need to have credibility, you need to have a good business story, you need to create an event to tell the story, you need access to a professional PR person who will get you exposure and in front of the media so people can start talking about it, and you need to have a network of people who you and directors can go to get investors to seed the initial funding.”
The top tips for smaller businesses seeking private capital, according to Paul Niederer
1. Owners need to demonstrate to potential investors that they and their team can deliver, and have the ability to implement the promises made in their investment documentation and pitches.
2. New stakeholders need to be welcomed into the business on a fair and equitable basis.
3. Prospective investors need to be engaged in a process that enlightens and enthuses them until they are comfortable enough to invest.
4. Owners need to tell their personal story. “You are inviting people to invest and they want to hear your authentic, personal voice shine through and feel your passion,” says Niederer. “Remember, your company’s biggest asset is you. Keep that in mind as you tell the story of your business and how it will grow.”
5. Owners should include a video in their investment pitch. These days it doesn’t take much equipment to record a high-quality video of you and your team telling your business story.