Growing Business while Stopping Capital Leakage. The Coffs Harbour Approach
Executive Officer, North Coast Business Angels, Coffs Harbour NSW Ph: (02) 6650 0752 Fax: (02) 6651 7633, email: rod@coffs.com.au
We Have Businesses in Our Community that have the Capacity and Desire to Grow, but Cannot Secure Traditional Finance. How can We Assist?
Introduction
North Coast Business Angels has been born out of identified needs from our community.
North Coast Business Angels – Informal Venture Capital Program, a business matching service provides three major benefits to the region.
Local private investors looking for somewhere to place their money now do not need to send it out of the region, they can put it to work in their own community, enriching the community and creating jobs.
Businesses with the potential to grow can fund their growth without taking on further debt. They do that by offering an ‘equity share’ in the business to an investor in return for funds which are repaid when the investor withdraws from the company.
The investor (referred as Business Angel) will usually have business skills, acumen, a network of contacts or experience that can be used in the business in order to facilitate the business growth. The investor may be currently involved with other business activities, semi-retired or retired and interested in either a passive or active role.
Coffs Harbour Future Development Corporation is one of a small but growing community of development corporations which are independent, autonomous bodies, not for profit but not part of Local Government either. Its Board of Directors includes senior managers of the city and business community, plus the Mayor and General Manager of Coffs Harbour City Council.
Several years ago Paul Sullivan the General Manager of Coffs Harbour Future Development Corporation (CHFDC) recognised that in order to increase the wealth of Coffs Harbour and the region, that the business community should come together to focus on issues impacting on the region. Some fifteen focus groups were subsequently formed to look into areas such as existing business, education, tourism, health, aviation, etc. and these groups in effect dictate the Development Corporation’s working agenda.
The existing business focus group identified two major issues impacting on the business community within the region. Firstly, the following statement was recorded “we have businesses in our community that have the capacity and desire to grow, but cannot or do not wish to secure traditional finance in order to facilitate the growth. How can we assist them to grow”? Secondly, there was a belief that considerable investment funds were leaving the region weekly to be invested into metropolitan investments. Further it was believed that local investors would be willing to invest into regional businesses providing that good business investments would be found.
So, after considerable deliberation it was decided to assemble a group of leading professionals and entrepreneurs from across the Mid North Coast region to form an advisory committee to work closely with Coffs Harbour Future Development Corporation to find solutions.
Rather than reinventing the wheel as it were, the committee decided to focus their attentions to investigating whether there existed a program or programs in the world that had been established to combat similar business concerns. The search finally led them to the United Kingdom where they discovered a Program called Business Angels. Through their UK investigations they connected with Professor Colin Mason, a recognised world authority on informal venture capital.
After some 15 months research, investigations and hard work which saw the committee’s Chairman Mark Davies meet with Professor Mason in the UK, Coffs Harbour Future through its Board and the advisory committee have been able to secure Australian Securities and Investment Commission registration for the first non-metropolitan, regionally established and operated, community–focused, non-profit, Business Angels Program, in Australia. The result was North Coast Business Angels.
Coffs Harbour Future being a non-profit organisation needed assistance in providing funding for a full-time Executive Officer. In July 1998, The Australia’s Holiday Coast Area Consultative Committee entered into a partnering relationship with Coffs Harbour Future and has been instrumental in having funding provided from the Federal Government Department of Employment, Workplace Relations and Small Business (DEWRSB) for the past two financial years (1998-2000).
What is Venture Capital?
The Venture Capital market is made up of individuals referred to as Business Angels who provide equity capital to new and expanding businesses with whom they have not generally been associated previously. In the past for small to medium sized businesses or business opportunities this role has been taken by family and friends of people seeking finance.
Venture Capital is often used to seed, start-up or grow existing businesses. Many small to medium sized businesses that want to grow, but do not want to completely rely on debt finance from traditional lenders such as banks, seek equity funds to finance the growth.
As the name implies, ‘equity finance’ means that the person providing the funds takes an active role in the running of the business as an equity shareholder. It may be that the investor(s) takes a seat on the Board of Directors of the company or may work in the business on a part-time basis (either in a passive or active role).
An important aspect of this method of finance is that the investor usually brings significant skills (management, marketing, finance etc) to the business in addition to the capital. Often the investor is retired or semi-retired, having access to significant capital in reserves that can be put to use assisting a business to grow. Using their networks, contacts and skills developed over their working life, they see that the business has a high chance for success.
Venture capital is an increasingly popular source of financing for existing and emerging growth businesses and is medium to long-term equity finance, usually covering 2 –7 years duration.
In Australia, our business community is assisted by two different venture capital market places. They are the:
- Formal Venture Capital Market Place – for listed equities.
- Informal (Private) Venture Capital Market Place – for unlisted equities.
The Formal Venture Capital Market
(Often referred to as the ‘Big End of Town’.
The Informal (Private) SME Venture Capital Market
Comprises:
- Many Business Introduction Services. Visit web-sites detailed in Further Information.
- Several Private companies. Visit web-sites detailed in Further Information.
- Internet listing companies, eg ASX. Visit web-sites detailed in Further Information.
- Private Investors known as “Business Angels”.
Generally assists with the raising of equity finance between $50,000 - $250,000.
Who are SME Business Angels?
Business Angels can be anyone. They generally invest in businesses for periods between 3 – 7 years although some invest for shorter periods of 2 –3 years.
Research by Mason and Harrison, (leading academics from the United Kingdom) identifies a Business Angel as “someone who may make one such investment in a lifetime, perhaps to help a friend to set up a business, and at the other extreme someone who is continuously on the lookout for investment opportunities and makes frequent investments...The key factors in their decision whether or not to invest are the quality of the management and the growth potential of the business. They seek a financial return on their investment in the form of capital appreciation, although many investors are also motivated, in part, by non-financial considerations”.
Generally the investment that Business Angels make are relatively small, in the $50,000 to $100,000 range, although some may be considerably higher. It may be that investments are syndicated amongst several investors to provide the necessary level of capital.
The Investment Readiness Study undertaken by Ernst & Young, Centre for Innovation & Enterprise (1997), details the six important factors placed on investments by investors in order of importance are as follows:
- Potential Return from Investment – ROI.
- The People involved.
- The Exit Strategy (When and how to withdraw from Investment).
- The Product/Service/Process Innovation.
- The Size of the Company and Turnover.
- The Internal Systems Used.
Why Do Businesses Seek Equity Instead of Debt?
Not all ‘growth’ businesses have either the capacity or desire to grow through debt financing. Indeed, the cash requirement to meet their growth plans is only one part of the growth equation. Generally, growth businesses identify the need to bring to their management team other non-technical skilled individual(s). The skills usually sought are business or financial management, technical, marketing or export knowledge.
Equity provides the following benefits:
- No regular (monthly) payments due - Improves cashflow
- Equity provider shares risk in business – All decisions made in best interest of the shareholders.
- Equity provider demonstrates faith in business – Easier to attract further investors and funding if required.
- Equity provider brings own ‘network’ and resources to the business – Opportunity to expand business beyond existing scope.
- Equity providers are often active in the business – Mentorship and managerial assistance provided.
Benefits for the Business Angel
Investors participating in the matching process are seeking a new solution to an age old problem, how to make money. The investor is generally looking for increased returns on investment funds and/or the opportunity to pass on their expertise and experience.
The Business Angel investment is patient capital. This means that the company does not make (monthly) repayments on the finance the Business Angel invests and usually does not pay dividends to the investor. The Business Angel’s reward comes when s/he sells the investment at the agreed exit time, (usually back to the owners of the business).
The process usually provides one or more of the following benefits to the Business Angel:
- A revitalized interest in working or business life. eg: after retirement or experiencing the ‘glass ceiling’.
- An investment where the business angel can be actively involved. Reap reward from his or her own efforts and skills.
- Adventure and challenge of the ‘new’.
- Opportunity for better returns than other forms of investment. Eg superannuation.
- Tax advantages.
Benefits to the Business
Lack of Capital and lack of Management Expertise are the two problem areas that tend to impact at some time on the growth of an organisation. Capital starvation is a major difficulty for private businesses. This may well be because business owners either cannot or do not wish to take on board further levels of debt finance. Also, as a business grows and diversifies, increased skills needs in areas such as management, marketing, exporting, people skills, and other fields, usually become evident.
The aim of having Business Angel involvement is to improve the chances for the business venture to grow and succeed. The benefits to the business, community and a region when this occurs will be improved employment and increased disposable incomes - a true win-win situation.
Benefits can be:
- Increased level of cash for, eg working capital and/or asset purchase.
- Someone to share the enthusiasm, passion and interest in the business.
- Skills, knowledge, contacts, networks and experience to “fill the gaps”.
- Another objective point of view of the business and industry.
- Fast tracking growth.
The owners of a business or business opportunity having objectively viewed the situation need to as accurately as possible, identify what is needed in order to assist their business through and beyond the current situation. They must want to become ‘investor ready’ by ascertaining the level of equity finance that will be appropriate and the specific skills needed from a Business Angel.
Becoming Investment Readiness
The businesses and opportunities wishing to embark on the ‘matching process’ are advised to make themselves ‘investor - equity ready’. This means that:
- There is a willingness to accept an equity partner;
- There is either a good business plan (documented by the owners) or a detailed Information Memorandum furnished along with an accompanying Executive Summary, clearly articulating the requirements and needs of the business;
- The business owners know what skills are needed for the planned growth;
- They are clear about what the business needs;
- Financial statements and accounts are in order with business and private affairs clearly separated; and
- They have knowledge of the market and growth potential.
Once the business or business opportunity is capable of presenting the ‘above’ and has registered with the appropriate Business Introduction Service the process can proceed.
North Coast Business Angels
The North Coast Business Angel’s model has been developed and established in consultation with regional professionals, local private investors, business entrepreneurs and Professor Colin Mason, of Southampton University, United Kingdom (Prof. Mason is the leading venture capital research academic in Britain). The Program functions very well because we have an Executive Officer who works on the ground throughout the Australia’s Holiday Coast region (Woolgoolga to Taree 300 klms) .
In September 1999 the Program was presented with the Regional Development Practitioner Award for “Outstanding Leadership and Achievement in Regional Development Practice”, by the Australian and New Zealand Regional Science Association Inc at their annual conference in Newcastle, NSW. The Federal Department of Transport and Regional Services sponsored the national award.
The Program has achieved several successful matches, with many of our registered business opportunities and investors currently involved in due-diligence or negotiations.
Our Matching Process
As soon as we register a new business opportunity we either a fax, email or post an ‘Opportunity Summary’ to all registered business angels. This provides our registered investors with a two-week ‘commercial window of opportunity’ before the business opportunity is communicated to the broader general public.
Once the two-week period has been competed we list the opportunity onto our Internet web-site and into the next quarterly ‘full colour’ VenturesNews newsletter.
We also host Investment Forum Showcase evenings where registered business opportunities present their business opportunity to small gatherings of high net-worth individuals.
If a business angel shows interest in investigating a business they usually contact our office and communicate their interest. We inform them that they will be required to complete a Confidentiality Agreement before receiving the complete Confidential Business Opportunity File.
Usually within one week the business angel(s) communicates with us either their interest to meet with the business opportunity owner or informs us that s/he doesn’t wish to take the matter further.
If the business angel(s) wish to meet the business opportunity owner then it is our role to arrange a mutually agreeable meeting date, time and venue.
The Executive Officer facilitates the meeting between the business opportunity owner and the business angel(s). He ensures that the legal warnings as set down by the Australian Securities and Investment Commission are communicated. Also he suggests there are several compatibility’s that each party needs to consider. They are:
- Personality: Can you see yourself investing/working with this person?
- Philosophy: Does the other person appear to have a similar philosophical outlook?
- Skills: Does the investor have the required skills? Does the owner have sound technical skills?
- Funding: Does the investor(s) have the capacity to raise/inject the required level of finance? Does the owner require all the funds immediately?
The Executive Officer also suggests that by the end of the meeting we are seeking one of two outcomes. Either both parties agree to continue further discussions and negotiations or decide to shake hands and walk away.
Once introductions are out of the way the investor(s) have the floor to ask the business owner questions requiring further details. The business or business opportunity owner then has the opportunity to ask pertinent questions as to the skills required by the business and the investor(s) ability in this area and also the ability to provide the funding. The meeting duration is usually between 1 to 2.5 hours. The parties determine the appropriate outcome and leave the meeting.
1. On-going discussions, due-diligence (detailed investigations) and negotiations take place usually away from our office, (though not always) as these processes can take considerable time and the details are usually highly confidential. If during this time a decision is arrived at by either party to suspend their activities, we then place the opportunity back into the public arena and commence the process of locating business angel(s) once again.
2. When the processes are drawn to a successful conclusion we are informed of the relevant details and accept the appropriate ‘success matching fee’.
Pitfalls
Not every business or opportunity is suited to this type of financial investment and not every investor is suited to investing into this asset class.
The following are critical considerations:
- It is suggested that before business owners or business angel(s) make any investment decision they objectively assess their own Risk verses Reward level required. Failure to do this is very likely to effect an inappropriate investment match.
- All parties whether an investor or business opportunity should use all the resources available to them such as; accountant(s), solicitor(s), business consultant(s) and others to assist in conducting the required due-diligence and negotiations. Failure to do this is very likely to effect an inappropriate arrangement.
- All parties are seeking a Win – Win outcome. If either party feels that they are being harshly treated or one is having an upper hand, then the partnership probably won’t work.
Where to Locate Further Information
If you are interested in learning more about the asset class, Service Providers, where to locate registered opportunities, how to start investing, etc, then check out the following sources.....
Printed Materials:
Dynamic Small Business Magazine – Nothing Ventured-Nothing Gained $9.95
(Purchase through the larger newsagents, 2nd edition due in September)
A Guide to Private Capital for Private Companies $ 75.00
(Purchase directly from Business Angels Pty Ltd, Vic see web address)
Australian Venture Capital Journal by *Pollitecon Publications $380.00
Nothing Ventured Nothing Gained by Bill Ferris, *Pollitecon Pubs $ 29.95
Australian Venture Capital Guide for 2000 by *Pollitecon Publications $ 50.00
Enterprise and Venture Capital by Christopher Golis, *Pollitecon Publications $ 40.00
* Pollitecon Publications Email: vbivell@ozemail.com.au
Web-site: www.ozemail.com.au/~vbivell
Web-sites:
National
Private Capital Council Association of Australia |
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Australian Financial Review |
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(select Enterprise and Venture Capital at index) |
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Australian Venture Capital Association Ltd |
Notes:
1. The Private Capital Council is a non-profit market-based peak body association of market participants covering this asset class.
2. The Australian Venture Capital Association Ltd is the peak body that covers the formal VC market place.
NSW
North Coast Business Angels |
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Australian Business Angels |
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ASX Enterprise Market |
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The Venture Capital Market Place |
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VIC |
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Business Angels Pty Ltd |
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BSX |
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VECCI |
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QLD |
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BizEquity Ltd |
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Enterpriseangels |
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WA |
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Entrex |
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Netequity Pty Ltd |
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Satcom Pty Ltd |
Conclusion
If, you have growth businesses or business opportunities in your community that have the capacity and desire to grow, but cannot secure traditional finance in order to facilitate the growth, then you should consider establishing a similar program to North Coast Business Angels, in your community.
The Informal Venture Capital Market in Australia is in an immature stage. Those of us working with this asset class are greatly encouraged to see each year a growing number of organizations and business angels entering the Informal Venture Capital marketplace.
The asset class provides much interest and benefits to many businesses, business opportunities and business angels. Businesses can fast-track their growth and in doing so provide increased employment opportunities for the community. It can provide business angels with portfolio and risk diversification, added safety, and the opportunity to become involved actively with their investment(s). However, not every business or opportunity is suited to this type of financial investment and not every investor is suited to investing into this asset class. Also, unfortunately not all businesses or opportunities perform to expectations.
When the Investment(s) Performs To and Beyond Expectation
It is the writer’s opinion that investing into this asset class can provide many positive benefits to the Australian economy. Indeed, “When Business and Investment come together it can increase the Wealth of the investor and Business Owner. The Community Gains through enhanced employment opportunities and increased disposable incomes. The result equals Regional and National Growth”.
Through the information contained in the paper the reader is now empowered to assess their communities specific venture capital needs, skills required and interest level to establishing a Business Matching Service. The reader has also been provided with current contact details for the majority of Business Matching Services in Australia at June 2000.
