How to Raise Capital in Australia

By Reuben Buchanan, Managing Director – Axstra Capital Pty Ltd

Capital raising is one of the most misunderstood areas for SME’s and entrepreneurs. However if you know how to do it, it’s relatively easy to achieve. Before a business even attempts to raise capital it is crucial that they have a detailed understanding of the current investor mindset in Australia.

Capital raisers need to understand the following:

  • Who are the investors?
  • What are they seeking?
  • And what are the challenges and concerns they face when seeking to invest?

By understanding more about investors, companies are able to better tailor their pitches, increasing the overall potential for a successful capital raising. A recent Wholesale Investor National Survey conducted on their database of over 10,000 high-net worth investors was undertaken to answer these questions. Here is what was discovered.

Who are they?

  • Database breakdown: Most businesses believe that the capital they are seeking to raise is most likely going to come from Professional Investors, however the survey revealed that only 24% of investors belong to this segment. Interestingly, we have found that the majority of investors that are currently seeking to invest in private companies are actually Private Investors (45.5%) and CEO’s/Entrepreneurs (30.5%).
  • How much money do they have: Contrary to common belief, there is significant capital available to invest right now. Results suggest that 54.9% of investors have $500,000 or more available to invest and 60.1% have at least half their portfolio in cash right now. For companies seeking capital, there is a clear window of opportunity that is closing quickly.
  • What is their preferred investment style: An overwhelming majority of businesses only target passive investors and don’t understand that a significant portion of the market is now made up of active and strategic investors. This is an important distinction to make as it alters the level of involvement that businesses can expect from the investor.
  • What are their views on the current investment climate: Despite media reports suggesting that investor confidence is down, we found that 99% of investors are optimistic about the current investment climate and 81.5% are bullish about investing right now.

What are they seeking?

  • Most important deal attributes when making investment decisions: Many people believe that “profit” and “quality pitch” are the attributes of a deal that get investors excited. The survey reveals however, that nothing could be further from the truth. The top 5 attributes that investors are looking for when making investment decisions are Quality Management, Proof of Concept, Sector, Path to Exit and a Quality Business Plan. This is crucial for businesses to understand when approaching investors.
  • Equity stake sought: Many entrepreneurs are hesitant to involve investors in the decision making process as they believe the investors want all the control, in fact 89% of respondents do not seek to control the company when investing, and 80% of investors want less than 30%. Those investors who do seek to be actively involved with the company usually add significant value to the company through their intellectual capital, and access to established business and investor networks. Ultimately they are investors for a reason – if they wanted to control the business they would simply buy out the company and run it.

What are the biggest challenges investors face when seeking to invest?

  • Finding suitable opportunities: 49% of respondents stated that they had trouble finding suitable investment opportunities. For companies seeking capital this means they need to focus on connecting with investors and utilising proven private investment distribution platforms.
  • Valuations are too high: Private companies who are seeking to raise capital are notorious for creating valuations that are both unbelievable and unrealistic. This is reflected in the 33% of investors that believe valuations are too high.
  • Companies are unprepared: 41% of investors believe that companies are unprepared when they approach them. Given that it is immensely difficult for companies to even connect with investors, the fact that companies are not investor ready means they are killing their chances before the process has barely begun.

Preparation for making your company “investor ready”:

To increase your chances of successfully raising capital for your business, you need to ensure your business is prepped with this purpose in mind.  You will need to ensure you have a good advisor assisting you with the structuring of your capital raising, and a thorough Information Memorandum that clearly explains your opportunity.

The checklist below covers the major issues that an experienced investor will look for (and expect) in an investee company:

  • Focus on building a very strong board and management – You need an experienced and stable management team not only knowledgeable in regards to the industry and product, but also capable of successfully implementing the business plan and managing the company’s operations. Investors invest in management who are committed – long term – to the business. You can also add strength to your company by getting any previous active investors on your board.
  • Be realistic on valuation – it is crucial that you explain how the business has been valued, backed up by a valuation model that the potential investor can understand and believe. This valuation should be justified by way of comparable investments, assets, capital and time invested, listed benchmarks and future financial projections.
  • Outline an Exit Strategy for the investor – how the investor will get a return on their investment is crucial to outline. Im constantly amazed at how many entrepreneurs seeking capital leave this part out. The Exit – or the investor getting their money back, plus a capital gain, is the key reason for the investor getting involved. If you don’t clearly define your
    exit strategy, your chances of raising capital will be severely limited.
  • Identify the style of investor you are seeking – now that you are aware that there are passive, active and strategic investors, the next step is to identify from the outset the level of involvement that you would prefer from your investor. But remember to be flexible – investors today seek more than a ride when investing into private companies. Whilst investors don’t want to run your company, they do want to become actively involved so be prepared for this.
  • An explanation of how the investors’ funds will be deployed – Be clear on how much you are asking for, what the funds are to be used for, and how much of the company it will represent.  It is recommended that you offer around 20% to 30% equity (depending on the investment round, and how much capital you seek) as this seems to be the optimum level sought by the majority of investors.
  • A realistic investor ready business plan – This should include a detailed and realistic business strategy of current and future plans.
  • Efficient internal accounting and financial systems – There will be intensive due diligence conducted on your business prior to an investor going ahead with the investment. Therefore, signed-off accountant reports are an absolute must.
  • Solid understanding of your industry sector – You must be able to demonstrate a comprehensive understanding of the industry in which you are operating, including who your direct and non-direct competitors are and why your company is different or special within this industry in product, distribution, profit, returns, management, location, contacts, technology, barriers to entry, patents or other unique competitive advantages.
  • Sound understanding of your target market – you must have a detailed understanding of your customer (target market), including market size, demographics, trends, pricing strategies, accessibility, growth potential and demand for products and services.
  • Only target investors who are interested in your sector – It wastes both your time and the investors time if you don’t establish up-front whether or not the investor you are targeting is actually interested in your sector.
  • Raise capital now! Investors are active right now and have cash. Don’t wait till the market recovers – as values go up, investors’ appetite for deals and cash available will drop.

Distributing your offer

Now that you are prepared, you must get your offer in front of as many potential investors as possible.

Raising capital, particularly in the current market, is a numbers game to a large extent.

The other reason to show your offer to as many people as possible is because you never know who they know. They could refer your offer to one of their friends who is more suited to invest.

IMPORTANT: This information is general and should not be taken as specific advice. Readers should always seek their own professional advice. For more information, please email enquiries@axstra.com.au

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