The Bay of Plenty has a thriving culture of innovative companies and entrepreneurs. But they can face major challenges in securing the funding they need to thrive. We examine what makes capital providers willing to invest in developing businesses.
One major concern for companies seeking capital is to ensure they have secured the intellectual property (IP) that can prove crucial to their ultimate success.
Another key issue is for companies seeking investment and their potential funders to ensure that both parties’ interests are properly aligned.
And strong financial planning and governance is likely to enhance companies’ chances of securing funding in a New Zealand market where, despite the increasing flow of funds into the startup sector, there are still some gaps. (see Angels thriving, but still a gap in the VC space here)
Those were among the major messages that emerged from the recent Innovation is Gold seminar in Tauranga, one of several hosted around New Zealand by IP law firm James & Wells. The seminar featured a panel of leading funding experts.
It also included experienced investor and entrepreneur Timothy Allan, chief executive of successful Bay startup Ubco, which has secured both US and local funding to launch its electric utility bike into the American market.
James & Wells managing partner Carrick Robinson said in the firm’s experience a lot of companies treated locking down their IP as a “bit of an ad hoc process.”
That was particularly concerning given that the companies were looking at what could be the most valuable and only asset to give them a competitive advantage in the marketplace.
“Rather than a lot of thought going into it at the beginning, IP protection is usually something built on the back of a success,” said Robinson.
“But the issue with IP is that a lot of it needs to be put in place before anything goes public.”
James & Wells recommends a four-stage process – assessment, strategy, implementation and review.
The assessment needs to examine what the company has that makes it different from other businesses.
“A lot of market research has to go into what you are trying to achieve, what the market is like, what are your competitors doing, and what do you have from an IP perspective that can be protected,” he said. “The aim is to find out how you can leverage that IP to build a sustainable business that gives you commercial advantage.”
And when setting up their IP strategy companies also needed to take into account their ownership structure and vehicle and the possible ultimate exit for company founders and investors, said Robinson.
“Once that strategy is set up it’s time to take a step back and take a sanity check… on how flexible it is with respect to opportunities and setbacks.”
He noted that the IP implementation was bound by time-frame deadlines.
“Once we start the process it’s a little bit like a skyrocket – once you light the fuse you’re on your way. So it’s quite important that expectations are realistic about what we are trying to achieve, but also that we try and build in some flexibility. And that also allows you to map out what funding is required to provide that protection over the lifespan of the property.”
The seminar reflected the views of a cross section of funding experts, from the pre-revenue incubation stage and online equity crowd-funding, to venture capital and bank debt options.
Bay of Plenty-based incubator WNT Ventures provides initial investments of up to around $600,000 to pre-revenue companies that have strong IP being commercialised out of universities and crown research institutes, as well as the private sector.
The Bay will also benefit from the recent government support for a new agri-tech focused regional research institute, which is expected to foster the growth of early stage companies. (See PlantTech poised for takeoff mid-year here)
Carl Jones, the chief executive of WNT Ventures, said one of the key things the Bay incubator learned early on was the importance of sticking to your knitting. “As soon as you move outside that realm of knowledge you can start making mistakes.”
Jones said firms looked to venture capital not just for funding, but to access knowledge and avoid making mistakes – especially at the early stages of their development.
“That goes to all the future rounds of capital as well. You’re not just seeking money, you should be doing due diligence on the funding sources to understand what they can bring to your business and help you grow.”
All investors were looking for essentially the same things, said Jones.
“We are looking for global opportunities with really great teams and strong defendable IP positions… we need to be able to go to market and build a company and defend our position against a lot of big players.”
Ubco’s Timothy Allan said having an established market entry was crucial for its funding success. The company was supported in its Series A funding by Bay of Plenty early stage funding group Enterprise Angels, facilitating the investment of $860,000 in July 2016. The electric bike company went on to raise $2.5 million from NZ and Australian investors, with an US investment of $1.45 million last year bringing the total to $3.95 million. (See Bay electric bike company secures US investors, Bay of Plenty Business News, June 2017)
“Generally in New Zealand if you don’t have something that’s in the market, investment is going to be difficult,” he said.
“And I don’t think we would have got our US investment if we hadn’t had quite an advanced road map for delivering a road legal product. Our US investors were very insistent on that and it actually helped us.
“It’s a given that you have to have something with an x-factor about it. But you also need to have revenues and traction – those are the things [investors]are particularly interested in.”
Simeon Burnett, founder and chief executive of online equity crowdfunder Snowball Effect, said that across New Zealand a lot of wealth was quite fragmented.
“We’ve set out to aggregate that community and then provide them with investment opportunities,” he said. Since launching in 2014, the company had dealt with 17,000 registered investors and more than 900 wholesale investors.
“Our aim is to get the money in and the shares issued in one to two weeks. It’s a massive advantage for companies to get that cash raised and turned around within a short period.”
Snowball Effect was generally looking for companies with $750,000-plus of revenues with an established board and independent governance, seeking $1-to-7 million in expansion capital.
“Financial reporting is probably the area where we see the biggest need for improvement by New Zealand businesses,” said Burnett.
“A lot really struggle when it comes to having financial forecasts in place that are realistic. A lot are aspirational – but at some point you’re going to have to understand how much you’re going to have to raise to keep the business going. That drives a lot of decisions. Having some pragmatic financial forecasts in place is absolutely critical.”
James Beale, chief executive of Bay-headquartered, regionally focused Oriens Capital, which launched in late 2016 with a $50 million fund, said the governance input from a private equity funder could bring real engagement and commitment.
“PE companies will reach a clear agreement with management about what is important,” he said.
“And they will encourage decisiveness and a drive for strong returns that are time bound. It’s all about delivering a strong IRR in the shortest time possible.”
Private equity funding had become a much bigger part of the economy with a range of players in New Zealand including Australian funds, said Beale.
Oriens Capital provides both expansion capital, and management buyout funding for business ownership succession. The fund recently partnered with Pioneer Capital in its first deal, buying out the founder’s stake in Hawkes Bay-based Rockit Global.
The deal also resulted in a significant increase in the value of the Enterprise Angels members’ early stage stake in Rockit.
“Private equity engagement involves robust regular communication within the board and the executive team,” said Beale.
“PE investors want to let management get on with their jobs, but they are absolutely prepared to assist the business where they can.”
The key questions for a business owner to think about when evaluating a funding source are, were these people they could work with, said Beale.
“Is there genuine alignment between the fund and the people and staff and business culture? You have to like these people because you are going on a journey together. And what do these guys bring outside of capital?”
That could include industry knowledge, connections and relationships, geographic expansion and distribution expertise, and transactional expertise for a later M&A, trade sale or IPO.
From Oriens Capital’s perspective, there had to be an investment thematic, as was the case with Rockit, which markets its fruit as a packaged convenience snack and played into the global “grab it and go” theme in food retailing.
“And we need to understand the big goal, the vision,” said Beale.
“We need to understand what key attributes provide the source of sustainable competitive advantage and how do we protect, then enhance these and perhaps take them to a global stage.
“And what does that look like from a business perspective and from a value perspective.”
Private equity can help maximise future value and accelerate business with ownership transition and transform the business, said Beale.
“Both parties need to be aligned in their goals and objectives.”
Another funding option not to be overlooked is traditional access to bank debt.
Andrew Pryde, head of corporate finance & insights at ANZ Bank, said the New Zealand economy was continuing to perform well.
“Banks in New Zealand are all seeking to grow their market shares across the mid-market business sector.
“These market dynamics make for a very competitive landscape for banks and non-banks, all of which is good for NZ businesses seeking growth capital.”
Pryde said a bank’s primary role was to provide capital to well-established and/or growing businesses.
“Bank loans are structured to suit the underlying purpose of the growth capital. That includes, but isn’t limited to long-term capital to support business acquisitions or succession, and short-term capital for fund asset acquisitions and short-term working capital.”
At a minimum banks will require a security interest over business assets and at a maximum they may require mortgage security where there is a property, and / or personal guarantees.
The advantages of bank debt funding were that it was comparatively cheap because it was subject to full repayment, that it allowed businesses to plan their growth, and that the interest cost could be deductable, said Pryde.
“And the business owner retains full ownership of their business.”