Phase 2 Money

March 8, 2010 - Author: Tony

Going for growth usually means raising more money. Not always. You may have created that elixir of business, a cash-generative model, and be able to fund your own expansion with your own resources. But you are likely to be the exception.

In most cases to expand you will need to raise outside money. Phase 2 money is likely to be different from the finance you needed to start the business in that it is likely to be substantially more, come from outside sources and be risk-capital rather than loans.

However, longer-term loans from your bank could provide the development capital you need for expansion. So revisit your bank manager armed with your essential business plan and forecasts.

But many businesses will be looking to raise risk capital from outside investors in exchange for shares in your company. The size you are now considering may be outside the scope of business angels. So your choices may be to approach a venture capital organization or a venture capital trust to raise development capital. Or to consider raising money in a stock market flotation.

The advantage of going to the stock market is that it enables investors to buy and sell their shares. This also means that it allows you the opportunity to expand your business by buying others in exchange for shares. Once your shares are publicly traded, your company should be valued higher than it would be if it were still a private company (but this is not always the case).

WHICH STOCK MARKET?

There are several stock markets. The main London stock market is probably the least suitable. Unless you would be valued at a reasonable amount, ?200 million say, small companies get lost and overlooked in favour of the blue chips. In November 1999, the London Stock Exchange started Techmark – a sub-group of companies within the main market. It includes established companies in high-tech industries, such as computers, software, telecommunications and biotechnology. There is also a facility for relatively new, fast-growing companies to join Techmark. Usually, a company needs at least a three years’ track record before qualifying for listing, but special rules allow growth companies with a shorter record to join Techmark.

Your choice is probably between three markets suitable for innovative, fast-growing smaller companies. The Alternative Investment market (AIM) is very suitable for raising sums of money for companies looking for expansion. Unfortunately, floating on AIM can be very expensive, because of the due diligence which needs to be carried out by the advisers. Generally, most of the funds would be raised from institutions rather than private investors, although private investors might buy your shares after the company is listed.

Ofex is not a stock market at all, but a trading facility which is privately owned. It is much less regulated than AIM, but as a consequence is an attractive way of raising funds, most of which will come from private investors. However, your shares may not be traded very frequently once listed on Ofex and another company which you want to buy may not be too impressed with accepting your shares. A number of start-up ventures and innovative companies are traded on Ofex.

NasdaqEurope is a pan-European stock market with fewer constituent companies than AIM or Ofex, but on the whole the companies are larger and more ambitious. The amounts of money raised can be substantial but the cost of listing on NasdaqEurope can be high.

There are disadvantages in taking money from the public and becoming a quoted company. You have to meet the rules and regulations which can be quite onerous and accept that you have an additional layer of responsibility to your shareholders. Your business is no longer a private company, able to do what it wants with the profits and, in particular, your own rewards.