Getting money to grow
Friday, 20 July 2007
Last Updated: Monday, 13 August 2007
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Every business person dreams of finding a rich or famous benefactor who will support their vision and pour cash into their business. Well, sometimes dreams can come true. By JAMES BENNETT
Every business person dreams of finding a benefactor who will support their vision and pour cash into their business -- and sometimes dreams can come true. There are number of examples of start-ups attracting the support of well-known entrepreneurs and even sports stars. Sometimes it takes a good connection or a good pitch to win a big backer over. Sometimes it takes a bit of dumb luck.
Wayne Besanko attracts Stuart Appleby
Wayne Besanko started his business Powerchip in Melbourne in 1991. The company, which makes computer chips for car engine control units to improve engine performance, was one of the first in its type in Australia and indeed the world.
As the internet took off, the company put great effort into its web site and attracted orders from overseas, particularly from North America. One order in 2002 was from the Australian golf professional living in America, Stuart Appleby, who bought a chip for his BMW M5.
He liked the product so much that he wrote to Besanko and suggested that the company move to the US. Appleby was so enthusiastic that he invested $US500,000 to help finance the move and even worked to help the company negotiate new distribution agreements and woe customers and business partners.
Besanko has resisted the temptation to use Appleby to spruik the products, despite the golfer’s offers. Instead, Appleby helps with customer relationship management and networking events. Appleby has also driven a Powerchip-sponsored car in some motor sport events.
The lesson from Besanko’s tale is clear: stay on the lookout for customers who love your product and have the money and enthusiasm to help you expand.
Paul Cave woos Jack Cowin and Brett Blundy
Paul Cave provides a great example of vision and persistence. In 1989, Cave had the idea of conducting walking tours of the Sydney Harbour Bridge. When Cave finally opened his BridgeClimb business in October 1998, it was an instant success, selling $18.5 million in tickets and merchandise in 12 months.
But the intervening nine years had been a struggle to get the business off the ground and convince the New South Wales Government it was safe and sustainable. Getting through that period was only possible with the support of investors with deep pockets and plenty of patience.
Cave’s white knights were Brett Blundy (founder of the retail chain Sanity) and Jack Cowin (owner of the Hungry Jack’s fast food chain).
Blundy first heard of Cave’s concept at an executive support group they both attended. He later convinced an initially sceptical Cowin to come aboard and the pair offered Cave $6 milliion in return for a stake in the business. They have been rewarded handsomely for their risk: BridgeClimb paid dividends of $11.25 million in 2005-06 on sales of $38 million.
Cave’s example shows the value of networking and selling your story to everyone you meet.
Jeffrey Moss and the James Packer connection
Some people are lucky enough to make the right sort of friends at high school. Jeffrey Moss attended Sydney’s exclusive Cranbrook school, home to students including Rodney Adler, Jodee Rich and the far more successful James Packer.
In the 1980s, Moss joined his family’s business Pretty Girl Fashion, which was established in 1945 and had became one of the largest designers and manufacturers of private-label women's fashion in Australia.
In 1991, Jeffrey Moss bought out his family's interest in the business and developed specialist product teams to serve his key customers, including Myer-Grace Bros, Rockmans and Suzanne Grae. Pretty Girl made headlines in 2000 when Consolidated Press Holdings bought a half-share in the business for an undisclosed sum.
The business expanded rapidly, acquiring a number of rivals and building its own labels, particularly Rockmans. Revenue increased from $50 million in 1999-2000 to $230 million in 2003-04. In late 2006, the Packer family’s main investment company Consolidated Press Holdings bought out Moss’s stake to take total control of the business. It posted a $15.6 million loss in 2005-06 but expects results to improve next year.
The lesson? Make sure you become friends with at least one member of the Packer family. If that is not possible, at lease remember to keep in touch with your network of school friends. One of them may just be looking to invest in an expanding business.
Michael Gordon – rich investor
Some rich people are just looking to give support a fledging business. Michael Gordon, who sold his childcare company Peppercorn Management in 2004 for $121 million, used the proceeds to set up an investment company called Bydand.
The investment company has a commercial property division and runs a number of cattle properties within its rural division. But the public face of the company is its corporate division.
Gordon believes his strength is helping small companies to grow. His strategy is to take stakes in small listed companies and help them identify takeover targets and other growth opportunities. Bydand has taken holdings in retirement sector companies Sunny Cove Management and Village Life and investment company WRF Securities.
Gordon is one of many wealthy businessmen who are on the lookout for investment opportunities. Study the financial media, try to identify these people and get your story in front of them.
Top read more about how to attract investment from private equity and venture firms, click here.
To read about entrepreneurs who are out there seeking investment for their businesses right now, see our Money Wanted section.
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One downside of listing is that business owners cede some control to shareholders. There are many benefits, including being able to use scrip as a currency in takeover offers.
By James Dunn
Business owners who have sweated and toiled their way up the funding hierarchy for business – starting at the credit card and the ‘family, friends and fools’ level of grassroots private funding, moving through the banks, government grants, business angels and possibly venture capital firms – often decide they are ready for the sharemarket.
The instant, anonymous liquidity of the sharemarket, with certainty of settlement, is attractive to many business owners. Selling a stake in a business or a partnership can be as time-consuming as selling a house – offers are made, haggled over and refused. But on the sharemarket, the business is priced to the cent at any second – giving a business owner a clear exit strategy.
If you are willing to cede some control of the business to other shareholders, equity has many attractions. Unlike debt, equity does not have to be serviced, and eventually paid back. Equity can be used as a currency: you can offer your scrip as consideration to buy other companies, without cash changing hands, a form of currency not available to an unlisted company.
And equity is in demand. Every week, more than $460 million is pumped into the Australian stockmarket by the superannuation industry alone. Demand for equity outstrips supply. In 2006, according to Credit Suisse, there was $62 billion in demand for Australian shares from domestic institutional investors, and $52 billion in supply ($17 billion of which came from Telstra 3), for a $10 billion mismatch. This year, Credit Suisse expects that demand over-bite to increase to $44 billion.
Some of that excess equity capital floating around looking for a home could find its way to your business if it is listed on a stock exchange.
Australia has four stock exchanges: the $1.6 trillion behemoth of the Australian Securities Exchange (ASX), and the much smaller trio of the National Stock Exchange of Australia (NSXA), Bendigo Stock Exchange (BSX) and the Australian Pacific Exchange (APX). To confuse the issue, the BSX is owned by the NSXA, which is owned by NSX Limited, which is listed on the ASX.
To list on the ASX, a company must agree to abide by the ASX Listing Rules, and meet at least one of the following conditions. It must have:
- Market capitalisation of at least $10 million.
- At least $2 million in net tangible assets.
- At least 500 shareholders, who own at least $2000 worth of shares each.
- $1 million in net profit after tax over the past three years.
- More than $400,000 in net profit in the past 12 months.
The smaller exchanges have much friendlier criteria, as befits their SME focus. NSXA requires a shareholder spread of 50 and a market capitalisation of $500,000. The BSX requires aggregated profit for the last three full financial years of at least $500,000; net tangible assets of at least $500,000; and a likely market capitalisation of at least $1 million (after deducting the costs of fund-raising) and at least 50 shareholders with at least $2000 worth of shares.
The APX requires a $2 million market capitalisation or $2 million in net tangible assets, and at least 50 shareholders with a shareholding of at least $2000 each.
In reality, say corporate advisers, if a company does not have a market capitalisation of $40–50 million, a ‘starter’ exchange is where it should be. ASX listing at that size is too expensive and the company simply will not get any institutional interest: far better to gain experience in the listed environment on a smaller bourse and graduate to the ASX.
To float on the ASX, the underwriting broker will charge 5–7% of the capital raising, payable out of the proceeds. Before that, there are the out-of-pocket expenses of the ASX and Australian Securities & Investments Commission (ASIC) registration, the fees paid to the lawyers for preparing the prospectus, fees for reports by the investigating accountants and any other independent experts and the printing fees. The total cost of the pre-listing process is rarely less than $150,000.
On the ASX a $2 million company could be listed for an initial fee of $13,310 and an annual listing fee of $7450, plus a fee of $6650 if the company raises additional capital once listed.
On the smaller exchanges, listing is much cheaper. For example, for a $2 million company, the NSXA application fee is $5000 plus the CHESS (Clearing House Electronic Sub-register System) fee plus GST comes to $7250; and the annual listing fee is about half that.
On the NSXA, you will need a nominating adviser (nomad), usually a legal or corporate advisory firm, to act as an ongoing conduit with the exchange, which generally costs $15,000–25,000 a year, but on the BSX that isn’t required.
“Listing gives a company the credibility and the transparency of a listed environment, with all of its reporting and compliance discipline,” says Richard Symon, chief executive officer of NSXA.
“But after listing, it’s up to the company to get the shareholders to support it with patient capital. If the fortunes of the company progress over time and the earnings grow, the price that people are prepared to pay for the shares will increase. The sky’s the limit.”
See the ASX’s listing fees calculator at www.asx.com.au/professionals/listing/cost.htm and the NSXA’s listing fees calculator at www.nsxa.com.au/listing_fees.asp).
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