INVESTMENT CLINIC: Smart funding of new enterprises?

INVESTMENT CLINIC: Smart funding of new enterprises?

The weight of capital into private equity funds in Australia has grown significantly in the past two to three years, although it remains a relatively small component at a total of $8.52 billion when compared with total funds currently under management of $612 billion.

In Australia, as recently as two years ago, companies wishing to raise $5-10 million were advised to take the IPO route. Now, with a stronger weight of capital private equity is becoming the preferred path for raising capital at the earlier stage of a company's development, where more hands-on interaction with their capital providers is required.

Companies taking the private equity route have a much greater flexibility when it comes to accessing additional rounds of funding and an IPO should only become an option much further down the track.

The disadvantage of going public to raise a relatively small amount of capital is that it locks companies out of accessing private equities to meet their funding needs particularly when markets turn tough as they always do after a period of aggressive growth. Indeed, a lot of our smaller floated companies are now undergoing consolidation, this being one of the few alternatives left for their cash-strapped enterprises.

So just how much growth have we seen in the private equity market?

We saw the market take off in 1998-1999, when $682 million was raised. Venture capital invested during 1999-2000 was $991 million, the highest amount recorded since AVCAL began its survey in 1993, and marks a 45 per cent increase over the previous year.

Last year we saw tremendous growth with $1.954 billion raised. However in the wake of the tech correction, VCs have been extremely cautious about placing these mounting funds, preferring to sit and wait for the quality investment opportunities.

There is no denying last year's tech correction has driven a fair degree of caution back to the tech investment sector - to address this entrepreneurs will need to be armed with much more than just a good idea.

So after an inactive three quarters in 2000 and the notion of VC's cleaning up and out their portfolios, opportunities for new investment still exist - but where? Private equity is increasingly in search of quality investments with solid technical and commercial proofs, coupled with the potential for accelerated growth. In other words a relatively risk free investment.

As a result early stage technology companies with strong management, real revenues and valuable alliances and client contracts will have greater investor appeal. Additionally, we are witnessing a resurgence of great later stage technologies as they emerge from hibernation.

However, the need for more risk accepting early stage investment funds is paramount, as many of our new so called "venture" capital funds are essentially only interested in development and expansion stage investments. The big gap is from "seed" to "startup" and where most value-add can be created.

The trends of the past 12 months show a steady influx of new entrants, and a resurgence of later stage opportunities particularly in the technology sector.

This great diversification by stage, industry, and regional activity look set to continue and drive investor confidence back to supporting solid commercial opportunities.Richard Llewellyn is the CEO of strategic capital and investment group Nextec. Contact him at

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