Assessing your options

Okay, so you’ve ticked all the boxes and confirmed that you have a business, it’s ready to grow, it’s capable of growing and you have the ambition and team to achieve this. What you need is some fuel. And that probably means money.

Coming up with a lot of cash is rarely easy but don’t give up hope before you start. Don’t be put off by out-of-date notions like ‘less than one percent of approaches to venture capitalists end up in a deal being done’. As we have noted above, the sources of what can be called angel and venture capital available for New Zealand companies are diverse. It is important to remember the following:

• Angel investors are the main source of equity capital for very early-stage companies in developed Western economies, and New Zealand is no exception.

• Venture capital funds do invest in companies at the seed and early development stages, but only in the few perceived to have very large international growth potential.

The starting point when thinking about funding for your business should be to:

• really understand what type of business you are and what stage the business is at (pre-seed, seed, early, development?) and,

• based on that, list all your (realistic) funding options (equity and non-equity) and aim to exhaust the most appropriate and likely options first!

Savings and personal equity

Using your personal savings to launch your business is a common and obvious strategy, and even if you’re not in a position to completely find its growth, having some ‘skin in the game’ will make you more attractive to investors. While you may not want to risk the kid’s entire education fun, why would a perfect stranger take a financial risk with your idea or business if you won’t? Using equity that you’ve built up in your home is a common source of start-up money.

Bootstrapping

Bootstrapping is pretty much what it sounds like—pulling yourself up by your own bootstraps, under your own power.

• Business that started up with little to no external funding
• bootstrapping is heavy on the ‘a penny saved is a penny earned’ kind of thinking.
• if you’re going the route of a bootstrapper you really do need sales—that’s the only way to keep cash flowing. Focus on the customers and what they need
• Some start-up entrepreneurs take a second mortgage on their homes to raise capital and others use their credit cards for cash advances and to buy raw materials.
• keep in mind that, while easy to access credit card business accounts, this is still a loan and usually one with high interest.

Bank

Hit up the bank for a loan. At some point, most businesses do it. The plus is that you maintain ownership and control of your business. As most banks are conservative lenders, they won’t write blank cheques to fund an early stage venture, and you’ll probably need some collateral for the loan. Most successful companies use a combination of bank debt and equity to meet their funding requirements over time.

Strategic partners

Sometimes, you might think you need money but what you really need are things, skills or time. While it’s possible you may need a combination of money and things, skills and time, taking on a strategic partner can add fuel to your fire for very little risk. Strategic partnerships can look like

– collaborating with a designer
– partnering with another supplier
– partnering with a major corporate who will take your product to the market.
– another business and share office space, equipment and supplies.

Even well selected corporate partners will probably restrict your ability to sell to whomever you choose and if they don’t perform to expectations you can become well and truly stuck. Make sure you have a good lawyer riding shotgun with you when you do the deal, and make sure they’ve had experience with doing deals with corporates before.

Joint Venture

Joint ventures occur when two or more organisations come together to produce a product or service or share resources and skills. It’s another way to stretch your investment and share the risk, but it does require you to share ownership and control.

• long-term relationships, so make sure you get along 

Licensing and royalty payments

If your business has a process or product protected by a patent and you’re struggling to find the money to produce it, it might make sense to license your process or product to another company. That company would then make the product and sell it, and you’d get royalties or licensing payments from them.

Distribution agreements

Finding a suitable partner for a distribution agreement works well if you have the capacity to produce a product but not the capability to market and sell it. Distribution agreements can be an excellent option domestically, and are especially helpful when you want to export.

For example, if a company knew it could only ever sell about five units per year in New Zealand, but that the global market was huge, it would probably partner with an international company to distribute the chairs worldwide. works well if you have the capability to produce a product but you don’t have the capability to market and sell it

Government grants/programmes: New Zealand

There is a range of grants, incentives and programmes that can be sourced from government agencies. However, because these are changed, modified or ceased quite regularly, you always need to check their availability.

New Zealand Trade & Enterprise (NZTE)

The Foundation for Research, Science & Technology offers a suite of investment schemes that are available to help cover project costs relating to research and development. Companies need to have high growth potential and an export focus.

Inland Revenue now administer a 15 percent tax credit for research and development (R&D). Businesses doing R&D may be able to claim a 15 percent tax credit from the start of the 2008/09 income tax year. The R&D must meet three key eligibility tests relating to the business itself, the activity and the expenditure. (Update)

Government grants/programmes: International

There is a range of grants/incentives that can be sourced from a variety of countries, and many New Zealand companies are accessing funds in this way. Once you have decided on the country or countries where you want to have a presence, you can explore the options for, and the possibilities of, getting this type of funding.

Franchising

New Zealand has one of the highest rates of franchising in the world, and it’s a great way of growing a business concept that you have developed and protected.

Burger Fuel is a good example of a modern company that fuelled its expansion by franchising. Instead of raising money to open more stores and hiring managers, it sold franchises. This allowed the company not only to make burgers in more locations at less personal risk, but also to ensure those stores were operated by investors with an investment of their own in the store. When the company wanted to fuel expansion overseas, it needed a big injection of cash and listed on the NZX in 2007.

New franchisers must be prepared to work hard to make the concept marketable. They will also still need to invest capital. The costs involved will vary depending on the complexity of the business and how well developed and documented it is already. However, bear in mind that, despite the benefits of franchisees investing their own capital in the individual outlets, the costs of establishing the system and the support structure mean that most franchisers do not see any significant return in the first couple of years.

Use your own business: factoring

Do you need funding or just an improved cash flow? If you know the money is coming but the timing is out, try to negotiate different terms with suppliers and customers, consider leasing equipment instead of buying it and having your sales force work on commission instead of wages.

Likewise, negotiating short sales cycles will keep you from sitting around waiting for longer periods before you are able to invoice the customer.

Factoring is a way of using your business to increase its own liquidity, and involves another company (or an individual) either purchasing your accounts receivable or loaning you money against them.

Initial Public Offering (IPO)

‘Initial Public Offering’, ‘flotation’, ‘float’ and ‘listing’ are just some of the terms used when a company decides it wants to list on the share market or ‘go public’.

An IPO will generally not be an option for many seed or early-stage businesses for a variety of reasons. However, there are certain situations where this is a viable and good option, e.g. where the business needs to properly fund its business plan and there is a broad investor appetite for what that company is doing.

Examples of this would be the IPO of online accounting software business Xero in 2007 and that of vodka maker 42 Below in 2005. 

Also remember that while an IPO might not be an option for your company now, it might be in the future. Both 42 Below and Xero had received other forms of funding (including angel investment) before eventually listing.

Most IPOs of this type of company take place in New Zealand—through share markets such as the NZX’s NZAX market. However, there are also a few examples of New Zealand companies being floated on offshore markets, such as BrainZ and Datasquirt (Australian Stock Exchange [ASX]) and Endace (Alternative Investment Market [AIM] in London), so international options also need to be considered. It all depends on factors such as the nature and size of your particular business, which countries you do business in and, finally, investor appetite for the particular opportunity you are offering.

If you think that an IPO might be an option for your business (now or in the future), first talk to people who have experience in this area. As a starting point, local exchanges NZX and Unlisted both offer advice and networks of trusted advisers to assist start-ups and smaller companies to raise capital and broaden their shareholder base with a view to an IPO.

Because expertise and knowledge around listing early-stage companies are developing in New Zealand, look for examples of companies that have been through the process and seek advice from suitably experienced people before proceeding.