For high-growth businesses, ongoing access to finance is a key issue. Businesses that don’t have this access may find that they simply don’t grow as fast, while others can find that limited cash flow will cause problems for day-to-day operations.
When it comes to funding, the landscape has changed dramatically since the global financial crisis in 2008 and continues to change today. In the US, later-stage funding has been increasing over the past few years, although early-stage funding continues to see the highest growth.
While many would say that start-up funding is one of the most important aspects of getting businesses off the ground, this funding is often coming at the expense of funding options for larger companies that are trying to rapidly scale.
Investors have a high appetite for start-ups and early-stage companies, making it more challenging for mature enterprises looking for capital so they can grow.
While investors in the United States are more comfortable with risk and uncertainty, this is less true elsewhere (particularly in Australia), where they worry more about execution risks- which are higher when businesses are scaling-up.
Head of AirTree Ventures, Daniel Petre says that the total return for tech venture in Australia has been “…zero or less than zero.” While AirTree raised $60 million in 2014, Mr Petre considers the biggest issue with VC’s in Australia to be a lack of experience. While many funds in the US have an “entrepreneur in residence” who will understand tech, this has not been the case in Australia.
“There’s been more money at the seed level than at the growth stage,” Mr Petre said. “Startups with good ideas don’t have issues raising in Australia, however if you’re trying to raise $50 million there’s not a lot of people willing to fund that, so it’s a little harder”.
What does this mean for businesses that are neither start-ups or well-established? They face a gap when it comes to funding- something that has been exaggerated by public policy interventions such as the government-backed interventions in the UK like the Start Up Loans project and Innovate UK which has boosted start-ups and young companies while leaving later-stage businesses to search fruitlessly for funding.
Alternative Financing Options Emerging for High-Growth Businesses
Businesses looking to scale will be interested to learn that there are now more alternative options emerging for finance.
One of these is the secondary market- also known as the “private initial public offering”. This is ideal for companies wishing to privately offer shares instead of offering them through an IPO. This also often includes companies that aren’t quite ready for the extensive work with investor relations and regulatory burden that comes along with a stock market quotation.
This is working incredibly well in the US, where technology companies raised £20 billion through secondary markets last year, compared to $600 million through traditional IPOs.
Attention has been drawn to these private offerings as well-known and popular tech companies like Pinterest and Airbnb opt to raise their capital this way, and this has led to more interest in investment by investors in hedge funds, mutual funds and sovereign wealth funds. However, this does mean that tech companies need to ensure that they’re
valued correctly before attempting to secure finance through these investors.
For tech companies focusing on fast growth, many governments around the world are offering support for the investors of such companies. This has made Israel one of the most thriving tech clusters in the world as its government offers generous tax incentives for investors, while the UK aims to also offer tax incentives- one of the reasons why the Australian company Atlassian moved to the UK in 2014.
The tech sector has dominated the ASX for the last few years, as companies like Ozforez, MYOB and Freelancer enter the market. Bank support is typically harder to get today when compared to the years leading up to the GFC, however, the alternative finance sector is gradually stepping into this breach.
In Europe last year, the alternative finance sector grew by a huge 144%, and some of these alternative finance options for companies include Kickstarter campaigns, crowdfunding and peer-to-peer lending platforms. While initially these platforms were ideal solely for start-ups and small-scale ventures, this is no longer the case.
While the growth of alternative finance providers in Australia has been limited by legal restrictions, regulations are now becoming more liberal- meaning that fast-growing tech companies will find more opportunities to raise funding in the future.
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