Surviving the new business investment drought
Thursday, 24 April 2008
Last Updated: Thursday, 24 April 2008
By Mike Preston
Raising capital to grow has become a bigger ask. SmartCompany runs through the options that are left, plus gives five tips for your business to adapt and survive the funding famine.
It’s official – the credit crunch has come to the small end of town, and it’s leaving start-ups and emerging businesses battling for the limited funds available to fuel their growth.
Over the past decade Australian businesses have grown accustomed to using external funding – whether from banks, venture capitalists or through private investment – to help accelerate growth.
Almost one in five businesses sought debt or equity finance in 2005-06, according to the latest Australian Bureau of Statistics figures, with growth being one of the main uses for the money raised.
But the global credit squeeze is changing all that. Venture capital firms are finding it harder to raise investment funds, the business angel sector is shrinking, and banks are hiking rates and cutting lending volumes.
For start-ups and early stage businesses, this shift means growth expectations and strategy must change. For those who are quick to adapt, however, it needn’t mean an end to growth.
Venture capital feels the squeeze
A little over a year ago Danial Ahchow was able to secure $5 million in venture capital from a syndicate that included Seek founder Matthew Rockman and Sydney property developer Shaun Bonett for his dot-com start-up Service Central. He admits it would be tough to get the same funding today.
“Frankly, I don’t think we’d be able to do it today,” Ahchow says. “My sense talking to people around the place is the money just isn’t there. People still believe in the business plan and the founders and the opportunities for growth, but the investors are just too conservative now.”
Ahchow says there is a growing view in the start-up community that the climate for venture capital has got decidedly chilly in recent months.
The appetite for riskier early stage investment has declined as institutional players such as superannuation funds respond to the uncertain times by adopting more cautious investment strategies.
Doron Ben-Meir, chief executive of Prescient Venture Capital in Melbourne, agrees that it is harder for companies to attract venture capital, but sees this as a return to normal conditions. “The market has come back to what is probably a more natural and sustainable level of funding for the early stage,” he says.
Ben-Meir says he is finding it more difficult to attract backers for his firm’s venture capital investment funds in the current environment. Venture capital firms like his are facing tight times at the moment because superannuation funds – the cash cows of the private investment world – are pulling back their allocations for the sector.
As the value of super funds’ share holdings has fallen, the relative value of their venture capital holdings have grown, prompting cut backs in the sector to bring investment ratios back into line.
The result is less money allocated to venture capital firms, which in turn has put a squeeze on the funds available to early stage companies.
“For those looking for venture capital the situation is not terrible, but it is tight. There is money around but there is less of it, and it is in the hands of a very few, so diversity of supply is down,” Ben-Meir says.
Other firms emphasise that there is still funding available for good companies. For example, Starfish Ventures, one of Australia’s biggest venture capital firms, this week announced $4 million in funding for information communications technology business Audinate.
Starfish investment director Malcolm Thornton accepts that institutional backers of venture capital are more cautious at present, but says that is only affecting firms seeking new funds.
“We’re not looking for new funds and we have more than $250 million under investment at the moment, so the equation hasn’t really changed for us,” Thornton says.
But that in itself presents a disturbing prospect for businesses – the longer the credit squeeze lasts, the more venture capital firms will be out there competing for the same limited pool of funds, and the more prolonged the funding drought for companies seeking capital.
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