Export News, August 2011
It can be difficult for the average exporter to attract capital to support growth. So what are some of the secrets to getting ‘shown the money’ by investors and other providers of capital?
The money is there. Since being established in 2002, the NZ Venture Investment Fund has invested $123 million into 100 seed and start-up companies, backed by a further $308 million of venture and angel investment capital. Almost 80 percent of these companies are exporters, and mostly in the technology sector.
“Typically the companies have developed new technologies, backed by patents, which give them a distinctive niche into high value international markets. They are usually in sectors such as software and internet, agricultural technologies, medical devices, niche manufacturing and biotechnology.” says NZVIF chief executive Franceska Banga.
The venture capitalists’ view would be that there is never a shortage of funds, just a shortage of viable investment propositions.
For young exporters looking to accelerate their growth, or for mature businesses with owners wanting an exit, similar principles apply to successfully gaining the confidence of investors.
Solid evidence of profitable financial performance, strong earnings projections, talented and committed management, products or services of a certain standard, and intellectual property protection are all important measures.
(NZTE has good resources in this area. Their Investment Ready Guide offers guidance on understanding sources of funding, how to access it and present yourself)
It is often the ‘market’ aspect that can be underestimated by people seeking capital. All of those other elements above being equal, the excitement a strong market story creates can make a huge difference to your prospects of getting the cash.
A good market story has to be based on a solid, provable opportunity. Companies, particularly those in the start-up phase, can be overly optimistic about their forecasting. Technology businesses especially tend to only see upside.
It is the hamburgers to China syndrome -“we just have to sell hamburgers to 0.5 percent of the Chinese population to get enormously rich.” But the Chinese population is never the market.
It is the subset of people in China who eat the kind of hamburgers you sell, who aren’t loyal to your competitors, who earn enough to pay for your product, who can access them through your distribution channel, who like your style of hamburger and so on.
The key thing to remember is that smart investors are not backing your product at all. What they are betting on is your ability to solve a customer problem. What interests venture capitalists is not clever products, but clever ways of meeting a clear market need.
What’s the difference? Consider this scenario confronting a 19th century venture capitalist:
- Proposition 1: I’ve invented this amazing thing called a car. It has a black metal chassis, rubber wheels and a combustion engine.
- Proposition 2: I’ve invented this machine that gets you around as fast as a horse and buggy but never gets tired.
Which one would you have invested in? The example sounds silly, but some New Zealand entrepreneurs will describe their valuable investment commodity in terms of what it is, rather than what it does for people. They expect investors to somehow divine what the market opportunity is.
Lenders want to invest in a market opportunity that you are developing, not your product. Of course there are many other important factors such as quality of management, financials and intellectual property protection. But it is this fundamental marketing concept that is often the missing element in compelling business propositions.
How do you develop this story for potential funders?
First it is about the customer. Who are they, where are they, how many of them are there, how much money do they have, how often do they buy? The more clarity you have around this, the more believable your sales projections can be.
For example, you might have developed a revolutionary mountainbike and be seeking big wads of capital to go international. The market is not all people who could conceivably ride a bike, it is infinitely smaller. It is those people who like mountainbiking, can afford your price point, are looking to buy, have low loyalty to existing models etc.
Second is the market opportunity. What problem does your product solve for them and how intense an issue is that for them?
People buy bikes for many reasons, such as transport, fitness, adventure or just wanting to look cool. Which of those customer needs does your bike meet best and how big a need is that in all of your chosen markets?
Third is competition. Who else provides a solution and how do they compare? It doesn’t have to be a directly comparable provider – doing nothing may be a competitive choice for your customer, or some quite different way of solving their problem.
Bike manufacturers are many and varied. There are also other ways of getting around – from the humble foot to the skateboard to the motorbike to the bus. Do you understand all of those options and where your machine fits in?
Fourth, why are you special? Compared to those other ways of the customer solving their problem, why is yours better? Is it easier, faster, cheaper, higher quality or just cooler?
Why is your bike any better than the thousands of other choices? Maybe the design makes it more comfortable to ride, or it is 10 percent faster than any other comparable bike, or Alberto Contador uses one or it is the best value for money.
Fifth, how do the customers buy it? What channels do you have in place to sell and support your product, and what opportunities are there to sell other, similar products?
People like to try bikes before they buy. How can they ride yours, what shops stock it, can you order parts online, who services them?
The problem with funding capital in New Zealand is less about the lenders than our ability as business people to provide compelling investment propositions. Understanding the market you are in is the first step to creating the magic formula that will attract the capital to help you realise the potential of your great idea.