There are alternatives when raising capital; you just have to go into them with eyes wide open. DORON BEN-MEIR
By Doron Ben-Meir
Most of my blog entries have so far been about venture capital funding – not particularly surprising as it has been my field for the last nine years!
There are, of course, many other mechanisms available to fund a business.
Given the relatively small number of venture capital firms in Australia, a number of early stage technology businesses – particularly in the biotech space – have gone to the public markets for funding.
Whereas there may not be many venture capital firms in Australia, our market is well served by a significant number of investment banks and corporate advisers. Such firms are largely transaction driven in that they make their money through combinations of retainers and success fees subject to successfully raising capital for their client companies.
In the case of initial public offerings (IPOs) they will assist clients with book builds, investor road shows and so on, all directed at creating a sufficient spread of investors to qualify for public listing.
Large private businesses with a broad range of clients, solid cash flows and substantial growth track records can benefit from this process in that it provides liquidity for shareholders and may generate a value increment as a result of higher price earnings multiples offered by the public markets as distinct from private and/or corporate buyers. For this reason many venture capital-backed deals often float to provide investors with a liquidity event (exit).
Larger businesses then attract attention from market analysts who then provide regular reporting for their clients. This is a two edged sword – but for good performers it provides for enhanced market profile and so helps maintain a relatively high capitalisation. This is then useful as a currency for acquisition activity etc.
Earlier stage companies, typically looking to raise less than $10 million through an IPO, generally do not reach market capitalisations sufficient to warrant analyst attention. Trading depth is typically quite shallow, which limits shareholder liquidity, and they have to maintain costly administration in order to satisfy their compliance obligations.
Many smaller companies still head down this path because there is money to be made from the process (good for investment bankers and advisers) and, notwithstanding public disclosure obligations, founding shareholders often remain in control without many of the protective provisions often associated with venture capital investments.
The trouble comes if these companies do not perform and need to raise further capital. Venture capitalists generally prefer non-listed assets and the general public get justifiably nervous when small companies fail to meet prospectus targets and need to raise fresh capital to remain solvent. All of this then plays out in public and severely impacts market capitalisation and shareholder confidence.
Remember Hofstadter’s Law: “It always takes longer than you expect, even when you take into account Hofstadter’s Law”.
So while listing will make money for the bankers and advisers, if you’re the one who has to run the business, or you’re a value investor, it’s worth thinking twice before taking a very young or small business to the markets.
Doron Ben-Meir has been an active venture capital manager for the last eight years. He founded Prescient Venture Capital and prior to that was a consulting investment director of Momentum Funds Management. He was a serial entrepreneur over a 12 year period, co-founding five new technology based businesses.
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