Paul Niederer is the chief executive of the Australian Small Scale Offerings Board (ASSOB), a platform that assists small companies raise between $250,000 and $5 million in equity capital by matching the companies with sophisticated investors.
About 60 companies list on ASSOB each year. In the first stage of the process, the companies personally invite family, friends and followers to invest in what is called a compliance listing. After this, the network of 19,000 people on ASSOB’s database get the chance to invest.
According to Niederer, the company is experiencing strong demand thanks to the still constrained credit environment for SMEs and the resources boom. Its goal for 2011-12 is to raise $100 million for 100 companies.
The goal is part of a turnaround strategy for ASSOB, which had to be recapitalised after the GFC sent investors packing. The company is now profitable again and on track for revenue of around $1 million.
Today, Niederer talks about the challenges
You are aiming for 100 companies and 100 million next financial year. Is that going to be a big jump from this financial year?
It will be. We raised between $1-2 million a month, around the $25 million dollar mark for the year. So it is a big increase, but before the GFC we were raising a lot more than now.
We have been consistently raising capital all the time and in the market as things are at the moment, we are pleased with the results that we are achieving at the moment.
Is the amount of capital that needs to jump, or the number of companies?
I think it is more about the number of companies that capital is raised for. The systems are all in place and the people are all in place, it is just that you need to get more businesses choosing to raise capital by making an offering of equity. Most people don’t think of it as a possibility.
What sort of businesses have been particularly prominent in the last 12 months? It sounds like mining for obvious reasons, but are there other sectors?
Anything that, to investors, seems like it has got good growth prospects. Such as Cocoon Data, which makes encryption software, that was a good raise. I think it was $1.5 million in four months for them and they have gone on to greener pastures. There is quite a few in this IT and green tech sort of area, where people see there can be a good upside to those sorts of things.
What is your feeling on the mood of investors at present? Are they receptive to opportunities or is it taking a while to convince them?
In this area, when you are dealing with people that are usually fairly close to the companies and usually passionate about them and what the person is doing, it is not like trying to guess where the market is going or anything like that. It is really about backing a team and the story and where they have got so far.
But there can be some interesting things come up around what investors need to know. We were raising capital for a company that is selling products made from a by-product of the sugar cane industry and we had what we call discovery meetings, where you sit down and you get everything out on the table. You say “Right, where are we going to get investors for this one, who are the people that you know, who’s allied to the company, which niches, and which tribes follow the business.” They actually had a couple of investors at the meeting and I said to them “Well, what made you guys decide” and they told us that it took them two or three weeks to get comfortable because they didn’t think the guys would build the factory.
And so as a result of that you realise there are probably a lot of other people that will think that and the company decided that they were going to move to building a smaller prototype factory and actually started producing before they would go to the next stage.
You realise sometimes that investors, especially at this level, just want to get to know the people and what the business is about. That can happen with a good offer document and a good video, and that can happen quite quickly. But where there are gaps and people don’t get 100% of the story and they have to go away and try to convince themselves, then it can be longer.
What is the lesson for companies that are interested in raising capital then? It sounds like they need to be really selling the story comprehensively with things like videos and site tours and let people touch and feel as much as possible?
That’s right. We have found that it is very much a process of nurturing investors. That is the good thing about this platform. People can come in at an early stage, even before an offer document has been produced, and they are part of that journey that the company goes through as they are putting that together and as they are achieving their milestones.
It is very one dimensional if somebody just says “Here’s my offer document, do you want to invest?” However, if they are part of a nurturing process on the capital platform, it seems to be far more successful.
What is the challenge around getting the message to potential companies that funding?
I think it is just that most companies are thinking I don’t really want to give away any of the ownership. But in reality, it is a passive investment. There is no shareholder agreement, so in reality somebody is going give you their investment and they they will leave you to get on with what you’ve got to do.
I think many people think that by getting outside investors that they may loose some element of control, but the way it is structured on the ASSOB platform, there is no loss of control and the owners are always in charge.
So I think that it is just about getting the message across with clarity - that it’s ok to have 10-30% of your company owned by somebody outside and if they put the money in there you don’t have to pay 12% to the bank for that capital. I think, it’s why we tend to have more early stage companies.
Are you battling against a perception that raising money and being a public company is something that big businesses do?
It could be. I suppose they only find out about that public company one when they have been down that road, although it costs I think $550 dollars to register a company. Why we do it is with a private company, they don’t have to keep proper accounts, they don’t have to OK each share transfer, they can do anything really, and we need to make sure that the investors are at least on a fair basis with the other stakeholders.
Fair enough. How is ASSOB itself travelling? You have had a tumultuous few years.
After the GFC we had to cut the cloth to suit the climate and we changed our model as well so it was more attractive to our main sponsors, so they got more of the money out of the transactions and we could embrace more the traditional capital raising advisory networks that were already in the market rather than doing a lot of that work ourselves.
It has meant that in the last two periods we have reported profits. It’s nothing spectacular, but I guess what we have been doing is refining and building so that we can move forward and take on more volume and know that we have got things substantially under control.
So, if you were to go from 50 companies this year to 100 next, does that require new infrastructure or new employees?
No. We are working around 40% capacity.
And is your sense that there is more good companies coming through?
Yes, there are a lot of companies out there because where do they go? Banks won’t lend, even if they secure their house usually now it’s difficult to ensure the house is attractive to the banks.
Ironically, another issue is that the costs of building a company have gone down a lot. I was talking to a guy today who I think he was involved in setting up E*TRADE way back and he said in those days you had to build a server room and you had to have all these costs. It’s so much different these days. Instead of costing $3 million or $4 million to get a business going you can get it away for $500,000 or $1 million. So therefore the venture capitalists no longer play in that space of the $3-4 million because, those companies only need $500,000.
And then in terms of the angels, they’ve got selective criteria and they need to get a ten times return or whatever. We’re agnostic to that. Of course we want to make sure it’s fair to the investor, but we’re not going to be judgemental about whether or not they get ten times their money.
Looking back at the last three years as a CEO, what I like best is that there are a lot of good companies that have come on that are heading for good exits. The greatest thing about the GFC you don’t actually get the shonky stuff anymore. People haven’t got time to work away on fly-by-night-stuff, they actually have to have substance and that means that the things that do come up on the platform have real people behind them that are putting their life on the line.
The whole make-a-quick-buck market disappeared after the GFC which meant we’ve built a far more stable platform. The next dimension for us is moving into what you could call compliance social media and that’s what the legal team will work on within the legislation. How can we move forward and embrace some of the things that are going on in the social media world but do it in a manner that’s compliant and respectful to the legislation?