Funding for growth
The global economic slowdown rumbles on, but there are some glimmers of hope for companies at all stages of development that are looking for funding.
Challenging financial conditions continue to pose a threat to the survival of entrepreneurial businesses. This is the main conclusion of our recent white paper, Funding the future: access to finance for entrepreneurs in the G20.
The report found significant geographic variations in funding opportunities. Almost two-thirds of respondents said that it is currently difficult for entrepreneurs to find funding - but the extent of this difficulty varies from country to country.
In Saudi Arabia, three-quarters of respondents think that access to funding for local entrepreneurs is easy, with almost two-thirds from China holding a similar view.
They are the exception to the rule, however.
Across the G20 nations, companies that consider the funding situation to be straightforward are rare. Common complaints include excessive bureaucracy and shortages of credit in markets with a high dependence on bank funding.
Geographical differences in financing availability are logical: there will be more funding in countries that were not hit as badly by the downturn or that have recovered more quickly.
Developed markets are reporting a fall in VC investment.
So perhaps the more useful finding of the report is that access to funding can depend heavily on your company’s stage of development.
In a turbulent economy, creditors are likely to be more conservative when it comes to funding what they consider to be riskier investments, preferring to lend their support to more established companies.
But savvy entrepreneurs are still finding sources of financing outside of the traditional channels.
Below, we look in more detail at the funding prospects for each stage of growth, from pre-seed to expansion.
Pre-seed and seed stage
This is the hardest stage at which to secure funding. Most formal investors, such as venture capital (VC) firms, are unwilling to make equity investments in fledgling companies because they are risky and can take many years to make a return.
The report recommends that, for this particular group, governments should establish appropriate regulatory frameworks to support innovative funding mechanisms, help companies that aid start-ups and offer tax breaks for investors.
In rapid-growth markets such as the BRIC perceive that it is difficult for young entrepreneurs to access financing countries, crowdfunding is an innovative way of attracting small amounts of funding directly from multiple investors using social media and internet channels. It is typically a form of debt finance, rather than equity, as there may be restrictions in some countries on providing equity stakes through crowdfunding mechanisms.
The sector is young, but shows potential to fill some of the gap left by a shortage of traditional seed capital.
At this stage, an entrepreneur begins the process of demonstrating the commercial viability of the business. The goal is to earn initial revenues, identify sales and distribution channels, and build awareness of the business. Start-ups’ financing needs to increase at this stage because they must recruit employees, invest in infrastructure and put business plans into action.
Recent years have seen a shift in the characteristics of early-stage investment. Formal VC firms have become less active in funding start-ups and are channeling their investments toward later-stage ventures, where the risks are lower and the returns more certain. As this gap has widened, angel investors have stepped in.
Although angel investors - individuals who provide capital in exchange for a share of equity - have long been active in developed markets, they are now starting to appear in rapid-growth markets too. In
China, Turkey and Russia, almost two-thirds of respondents say that the environment for business angels has improved.
Companies at the emerging-growth stage - the point at which a business is earning revenue, but is unlikely to fund its own growth - face a competitive funding environment.
One way in which governments are helping to address this shortfall is through the use of credit guarantee schemes. These involve underwriting the risk of lending to SMEs so that banks can be reimbursed, either in whole or in part, in the event of a loan default.
Whereas developed markets are reporting a fall in VC investment, the picture in rapid-growth markets is different. The Chinese VC market, for example, is racing ahead.
In 2011, it raised US$5.9b in 323 rounds, compared with just US$1.1b in 2005.
In developed markets, private equity (PE) firms continue to find it difficult to raise finance for large leveraged deals, so their focus has shifted both to mid-size and smaller deals and to generating returns through operational improvements. PE backing provides entrepreneurial businesses with more disciplined corporate governance and a more structured institutional framework for running a business.
Another approach is public listing. But not every company will be able to make the leap from private company to full-fledged member of the main stock market. Junior exchanges can play an important role in bridging the gap, helping companies that may be too small for main stock exchanges to access much needed capital through public markets.
Looking beyond funding
While funding is essential for entrepreneurial businesses of all stages, it is not the only driver of growth. It can be enhanced if it is combined with comprehensive business-development support in the form of management advice, legal counsel or marketing consultants.
So while entrepreneurial businesses with growth ambitions may find traditional funding limited, it isn’t all bad news. There are opportunities for both funding and business development out there - you just have to know where to look.