Taking the risk out of raising capital

Written on the 13 May 2009

 

It’s almost 12months since the Federal Government axed the Commercial Ready grant scheme resulting in a significant impact on Australian innovators. Raising venture capital is now even tougher. With longer fund raising timeframes and early stage companies at risk, Brisbane Business News talks to two industry experts about the challenges the venture capital sector is now facing and what small companies can do to improve their chances of success. 
 
BECAUSE money for new investments has been drying up, Brisbane-based early stage investment consultancy iLab Incubator has found itself working more with existing companies lately, and for its early stage clients the main goal has been to acquire government grants.
CEO Anne-Marie Birkhill says fund managers are taking more caution in the sector and this has been coupled with the loss of the Commercial Ready innovation grants.
Birkhill’s impression is that venture capital-raising is taking longer and applications for funds are finding much higher levels of scrutiny and new ventures must have sufficient funds to make it through the next 12 months as the terms are tougher.
“Before we used to say it might take six months to get funding but now we’re saying it will probably take a year,” says Birkhill.
“The days when a VC would back just a great idea are long gone – entrepreneurs now need to be exceptionally well prepared and have the whole package — great technology, a large and growing market, a great management team, a plan to achieve their goals and an exit for the investor,” she says.
Many VCs are conserving funds for follow-on funding in existing investments and at the same time the loss of the Commercial Ready innovation grant has meant that early stage companies have been hit on two fronts.
“The combination of a frozen capital market, the unavailability of grant funding and other factors related to the current economic environment makes it very tough to be an entrepreneur right now,” she says
“It is critical for our future economic prosperity that we support them and ensure the development of a strong and sustainable technology sector and without early stage funding we risk losing a whole generation of highly prospective technology ventures.”
For companies to improve their chances of acquiring venture capital they need to monitor cash flow carefully, rein in discretionary spending, accelerate the passage of their first products to market to generate revenues and recruit the best possible management team. In other words, they must do everything they can to ensure survival.
Australian Private Equity & Venture Capital Associaton Ltd (AVCAL) CEO, Dr Katherine Woodthorpe has called for crucial government support to return confidence in the venture capital market.
Woodthorpe says the Commercial Ready program gave rise to a competitive and efficient venture capital market, but axing the program has exacerbated existing problems.
Like Birkhill, she sees the announcement of the Innovation Investment Fund (IIF) as a positive step.
“The recent announcement by the Government of an $83 million injection into the Innovation Investment Fund for portfolio company follow-on investments has been a great – albeit very limited – first step by the Innovation Ministry in these turbulent times,” says Woodthorpe.
High risk projects are never a ‘walk in the park’ and it could be a year or two before venture capital funding markets return to normality, due to a number of factors including a lack of capital, a dead IPO market and a serious challenge for the biotech sector.
She points out that without follow-on funding from either the private sector or the government, reports suggest that around 300 biotech companies will disappear.
“Australian bio-tech companies, many of whom are VC-backed, currently employ around 50,000 people — many companies in the industry are in serious need of follow-on funding,” she says.
But there have been some positive signs in the venture capital sector, especially with the emergence of the carbon-friendly cleantech industry through recent government recognition and noteworthy investments in the sector.
Over the last three years $285 million has been invested in cleantech nationally, making Australia ranked 8th in the world by dollar invested.
While the venture capital industry is facing difficulties it must be noted that the financial years of 2007 and 2008 were some of the highest venture capital-raising years since 1999.
Between FY2006 and FY2008 there were 11 profitable exits through public markets and 13 profitable exits via trade sales.
In the Queensland arena over the last three years the major players of CM Capital, Uniseed Management and QBF sealed 35 deals valued at $63 million between them.
From current trends, the next three years may not be as promising as the past three, but Woodthorpe recommends the following attributes that VCs are looking for if companies want to improve their chances for success:
  • Strong and competent management team.
  • World class product, broad patent protection.
  • Potential for international market reach.
  • Comprehensible commercial plan, clear vision, logical exit strategy.
  • High return on investment (ROI) capability.

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