Investor ready
For businesses after a grant to fund serious growth, capital raising may be the alternative answer. Not to be taken lightly, capital raising usually involves an investor backing your venture in exchange for part ownership in the business and a hand in the business’ medium term future in an executive role.
“The advantage of equity is that investors behave more like partners in the business, they bring more to the table than just the capital: they have background knowledge in the industry, capabilities, contacts, sometimes marketing knowledge,” says Candida Costa, consultant with BSI Capital.
While investors will require a fair amount of reporting—forecasts, cash flow projections, profit and loss statements and an evaluation of the business—the good news is that you would already have this on hand from your grant application.
The downside of capital raising is that the investor has most of the power and will often have conditions attached to the money they give, which may include setting business key performance indicators and obtaining a significant share of the business. If you’re not comfortable with this, capital raising may not be for you.
Costa says businesses must do their homework and know what to expect in this process. “If you need the capital you have to accept the terms that are being proposed, but you can’t just accept without knowing what it implies,” she notes. “Their view on the business will influence how the business goes. Your interests have to be well aligned for it to work. Sometimes it’s better to take longer to grow organically than accept something that won’t be beneficial for the company.”
The benefits, however, are an injection of money and expertise into the business for a temporary period, usually less than five years.
You may also be able to tap into funds from other countries, depending on your plans for the money. If you’re setting up operations in another country, for example, you may be able to attract funding for that arm of the business, says Costa. “I work with funds based in Brazil and VC [venture capital] funds will normally invest in local businesses. So if you want to go to Brazil and set up operations there, you might be able to raise funds with a local VC firm. Knowing the available sources of funding in that market can increase the chances of success in raising capital.”
So now you know what to do with that redundant grant application. Don’t waste the information you’ve gleaned about your business, put it to good use and find funds another way.
Investment advice
Know thyself. Understand your working capital requirements before you go into export. Before you start exporting you have so many costs and understanding what those costs are, and how big the exercise will be, will allow you to take advantage of the market you’ve developed. The worst thing is spending money to get to a point and then you don’t have working capital to fund the actual sales.
Ask the professionals. The big four accounting firms are a good reference because they’re present in almost every country. Some law firms also have international networks and can assist you in each country. International banks like HSBC could be good, too.
Understand the conditions. The term sheet is where you establish the terms of the investment. It’s very important to seek professional advice on what those terms are and have a good understanding of those. Most terms sheets have certain KPIs and if they’re not achieved, it will also have clawback clauses or clauses around equity based on future outcomes. The investor can end up with more than 50 percent of the company.
—Candida Costa, consultant with BSI Capital (www.bsi.com.au)
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