Monday, April 18, 2011

Got capital? Markets about to tighten. So start planning now.

Access to capital is what drives innovative companies. In this five part series, Dr Mark Rainbird proposes to share five vital steps towards getting and using capital successfully in a tight capital marketplace.
Everyone’s aware that obtaining capital is a tougher task now than it was before the 2008 global financial meltdown.
While there are constant murmurs about the markets bouncing back and lines of credit being freed up, those at the coalface will vouch that it remains tricky out there.
To make matters worse, a recent report by consultants McKinsey & Company indicates that capital is about to become more expensive. A predicted building boom in developing economies looks set to divert investment away from businesses in developed countries.
According to the report, companies with low overheads that can show stronger returns on invested equity will win in coming years as the people holding the pursestrings search for less capital-intensive operations.

What this means for your business

Capital raising — particularly when carried out by smaller companies — tends to occur in response to a particular need of the business, such as equipment or site purchase, working capital issues, merger and acquisition activity, or general expansionary activities.
While this makes perfect sense, there’s also significant value in building ongoing relationships with reliable sources of funding (both debt and equity), when not in immediate need, in order to provide your company with additional security in the future.
With such measures in place, businesses are able to respond quickly and effectively to market changes, capitalising on opportunities as they arise. In addition, capital will also be less expensive if sought strategically rather than from a reactionary position.
Having reliable lines of funding can reassure investors that your company will execute on its strategic business goals without having to resort to short-term, high-cost capital, or shareholders having to “stump up” more funds.
Having the right funding strategies, plus the right advisors and backers, will mean you don’t need to give away huge amounts of equity in your organisation to fulfil your goals.

The balance of economic power in the world is rapidly changing.

Companies from so-called developing countries are often running quite lean operations. In many cases, low wages, low material costs, and different taxation rules equals advantage over established companies from developed countries.
While it’s something that should be on everyone’s to-do list, working on your overheads and ensuring that you’re squeezing as much value from every dollar should be a priority this year if you’re seeking investment.
Keep in mind: they’ll have plenty of opportunities now to put money into companies with low capital outlay and high returns, so the more you can bring your business in line with this mode of operation, the stronger the chance that investors will want to work with you.
Over five articles in the coming weeks, I’ll discuss in more detail the vital steps towards getting and using capital successfully in these new, competitive markets.
Dr Mark Rainbird is the MD of Ramscove and has over 15 years capital and M&A experience, and has held senior executive positions in private, private equity, ASX and Government organisations.