The New Zealand economy is dominated by small to medium sized businesses. Unfortunately, although we are very active at launching new businesses, we have a very poor record of growing them. This is mirrored in the export statistics which show a similar record of non-performance
This may be because of what ANZ bank’s Joseph Healy calls the ‘Triple U-virus’ affecting the investment attractiveness of SME businesses – unloved, unwanted and undervalued. The paradox is that while entrepreneurs complain about the lack of investment capital, investors say that the money is available but very few proposals qualify as being ‘investment ready’.
Many start-ups depend on the three F’s – friends, fools and family for initial capital, and with bank support, this is enough to get the business up and running. However significant growth, particularly into export markets, consumes substantial amounts of risk capital, and this is where private equity investors have an essential role to play.
So what is it that investors look for that is apparently absent in too many investment cases? According to our experience at the ICEHOUSE Accelerator, investors are interested in three groups of characteristics – the entrepreneur, the profit potential of the product in the target market, and the resilience of the business itself.
Entrepreneurs must have a burning passion for the idea and a clear strategic vision of success that sustains them with an enthusiasm. In sports psychology the power of self belief and positive visualisation powers the motivation and aspiration to achieve. The entrepreneurial vision should also include a vision of a successful exit strategy enabling investors to capitalise on the wealth of their investment.
Secondly, the stresses and strains of driving a company into successful growth can take its toll on the entrepreneur, and so the investor is more confident in a partner who reflects a healthy attitude to personal resilience.
Thirdly the entrepreneur should be able to demonstrate strong leadership skills and show an understanding and acceptance of their leadership role within their company. The entrepreneur needs the ability to motivate teams and engage them with the goals of the company.
The second group of factors for an attractive investment is of course the potential for financial returns from the business. Investing in entrepreneurial ventures is a risky business and that risk has to be balanced by the potential for high returns.
High returns come from high sales growth with substantial margins, strongly positive cash flows, and a balance sheet that is dominated by high-value intangible assets (e.g. brand value, customer relationships, quality assurance systems, IP on product/process design and internal core competency). This is because the value of these intangible assets drives arbitrage profits for investors at the exit stage, especially with evidence from timely and accurate management accounts.
Thirdly, the company itself must be in good shape to attract investors. Resilient companies have good depth of management, and self motivated teams supported by well developed systems and procedures. Company resilience also encompasses robust governance practices and guidance from professional advisors.
The conclusion is that ‘investment ready’ companies need a set of characteristics to be attractive to investors. Does your company have:
- uncomplicated company and capital structures with good governance and advisory services
- a spread of shareholders and good depth of management
- entry and exit strategies for investors and founders
- timely and accurate management accounts
- large and growing markets with a demonstrated strong demand for the product/service
- a high risk/high return relationship in the financial business model
- progressive increments in shareholder value
- potential arbitrage profits on exit
- key people with key operational skills
- high performing and engaged staff