Podcast Transcript

[00:00:00] Sean Steele: G’day everyone, and welcome to episode 69 of the ScaleUps Podcast. I'm your host, Sean Steele, and you are very lucky because you've got me two weeks in a row. I am on a mission to help you fulfill the potential of your business so you can maximise the value you can create in the world whilst fulfilling your personal ambitions, you know all that. You on the other hand, are a motivated seven figure Founder looking to scale up to eight and beyond, and that's why you're here. And if you're like most of the Founders that I support through advisory services, like my growth mentoring or advisory boards or our courses, then you haven't built a business bigger than the one that you're leading right now. 


[00:00:31] And so whilst things are probably going well for you in your business, you know that the business has got heaps of potential that you haven't been able to tap yet, and you're also aware that you don’t know what you don't know, which is why you are here and looking for practical how-to type guidance, your strategies, and a bit of inspo along the way from our guests. 


[00:00:49] Well, that is exactly what you're going to get today. Welcome to 10-Minute Tuesday, which is the episode style where I unpack some scaling principles, tools, and strategies to help you think about how to fulfill the potential of your business. And today we are focused on Capital. If you are in need of some cash to fund your business growth, your big dreams, your big hairy audacious goals, your BHAGs, then you're in the right place. Because this week I'm going to share 14 different ways that you can get access to some growth capital to help you grow. And why 14? I have no idea. It must be a thing. Because last week I also did 14 ways to optimise your cash flow. Quite a different thing. If there's some significance to that number, maybe just drop me a comment in LinkedIn. I would love to know, uh, what it is and why I'm on a 14 roll. Anyway, I'm going to have a look at four categories today. Three sources of money. If you could see my fingers, I'm like doing the airmark, quotation marks in the air because nothing comes without expectations. So three sources of money, debt, equity, debt and equity blends, and even some early stage options. So there's lots to choose from. So, what I'm going to do today is I'm going to give you an overview of the 14 different options so that by the end you can ask yourself some good questions to help you figure out which options might be suitable for you, or that at least you'd like to spend some more time understanding. 


[00:02:02] This is absolutely not a three-hour monologue with heaves of detail around everyone. It's an overview, right? This is like 10-12 minutes or something like that. And just as a disclaimer, this is just me sharing my perspective. It is a general overview. It is not financial advice. Please seek out solid, personalised financial advice and don't ever take financial advice from a podcast, make sure you get what you need. Okay, let's get going. Let's talk about free sources first. What I meant by free, they don't involve any debt or giving up any control of your business, like equity. And nor do they require repayments, generally. They're given in exchange for you delivering something. 


[00:02:38] Like most things, obviously you need to consider the risks and rewards of each approach. But the first one is grants. Grants, some people are just awesome at getting grants. You know, they're usually funds provided by government agencies or private foundations, and they're usually focused on helping small businesses grow. They're usually non repayable types of funding, but there's always of course, constraints and expectations. You know, at the same time, competition for them can be fierce, and the application process can be pretty time consuming. So, that's option one - Finding grants.

Option two, customer funding. Lots of people never really think about this one, but if you've got a customer who wants you to develop a product or a service for them that's actually quite niche and maybe even expensive for you to create, using a customer funded model might be a viable alternative for you to fund that. So, it works by them obviously providing some funding for you to do that development, and you're giving them some exclusivity or bonus in return for them, funding the development. And so, on the plus side, that can be a great way to fund new products and services that you can eventually use for the open market, but perhaps they've got an exclusive period. On the other side of course, if it doesn't work, you can have an unhappy customer or maybe even lose a customer, which is obviously not ideal.

Okay, so that's a couple of free options. Let's talk about debt options and debt and equity options are the ones that people would be most familiar with and most common. First debt option, it's going to sound a bit out there, but property loans. Now I'm not telling you to go and put your house on the line, but typically the cheapest interest rate that you can get on any debt is an equity loan secured against your house. 


[00:04:08] Okay? Right at the time of recording, interest rates are a little bit high. For those of us who've been around for long, they're not really that high, but for the younger people in our businesses, they've never seen an interest rate north of five. So, you know, they're going, wow, look how big these interest rates are. 


[00:04:22] If you own a home, obviously you can use that to help fund your growth, assuming that you're allowed to use. The proceeds of the loan to fund a business investment. So, you have to check that of course. And clearly this is a big risk, right? You know, you could risk losing your home if you're unable to repay the loan, which would not be a great outcome. But the reality is, if you don't talk about it, I mean, let's be clear, lots of entrepreneurs have funded their growth, particularly in the early days through equity loans on their houses. It is one way to access some funds.

Okay. Second, Standard old bank loan. You borrow money from a bank, you pay it back with interest over a set period of time. That can give you some reasonably competitive interest rates, sometimes reasonable payment terms, and it's often pretty easy to get for established businesses. Keep in mind, banks love security. They are super conservative, so don't be surprised if they want personal guarantees and security over your home and so on. And they also often require a lot of documentation. So perhaps, using a broker might help you speed that process up if you're going to go down the bank option.

Okay, now let's have a look at equity options and then we're going to come back to some different models that are a bit more of a blend of debt and equity. 


[00:05:28] Equity options, Crowdfunding. It's actually a pretty popular way to raise capital through small investments from a large number of people like customers or the potential end user through an online platform, there's usually some kind of a reward or a premium deal or an incentive for any amount that people fund. And it's a great way to attract dedicated and loyal customers to kind of raise money from your fans, right? It can be a bit tricky in B2B businesses where you don't have a lot of customers. It's certainly far more attractive, I think, to B2C businesses or B2B businesses that can actually attract a super wide audience. 


[00:06:03] I've made investments through crowdfunding. I've angel into a company that's done a second round through crowdfunding. It's absolutely become, I won't call it the norm yet, but it's certainly become accepted. The platforms are far more mature, things like Birchal and others in Australia, and many in the States. 


[00:06:22] However, it can be a bit tricky sometimes to get enough backers to reach a goal, so that can be a bit of an issue because the funds that you're raising might be like 50 bucks or a hundred bucks or 500 bucks or a thousand dollars, so you might need a lot of them. But I certainly have seen investments anywhere after $50,000 on a crowdfunding platform. 


[00:06:41] Okay. Preference shares. These are kinds of shares that often involve giving investors a fixed dividend, which might be a bit higher than the common shareholders get, and priority over other shareholders in relation to if there's a liquidation in relation to proceeds from any asset sales that might happen. 


[00:06:57] So it also can give you a more stable form of kind of equity financing. The fixed dividend of course can be attractive to the investors, but like other equity instruments, you know, fundamentally it dilutes the equity of the existing shareholders and the terms of the investment can be pretty varied. 


[00:07:14] Employee stock options, not usually a way that people try to raise capital. Usually, they're using it for incentive alignment, but fundamentally, you're giving the employees the option to purchase company stock at a discounted price, which means it can bring capital into the business by having people buy in. It can of course just be used as incentive and rewards where they're not really sacrificing any cash or putting any cash in. That's quite often effective in aligning your team's interest with yours. But the accounting and tax implications can be pretty significant. So, if you're trying to use it to raise real capital, so it's not the simplest option. They have become more simple over time they have become more standardised over time, they're not right for everybody, but that's an option.

Okay. Private equity. This is basically an investment that's made by a private equity firm in exchange for ownership and a stake, you know, an ownership stake, I should say, in a company. The firms, so the private equity guys are raising…guys and girls are raising money often from institutional investors or high net worth individuals to pull into a fund. And then they use that money to generally take a controlling stake in a business, and their goal is to scale the business up. They usually have like a three to seven year exit timeline. And given that timeline frame focus, it can be a pretty high pressure environment, you know, they want to get in and they want to get out. So, they are really usually trying to pretty aggressively grow the business in that time because they're not long-term holders, they're not passive, they're not long-term holds. They've got a real defined timeline. So that can be excellent if you want to create a strong momentum towards an exit. But if you just want long-term sustainable growth without any pressure, that may not be the right model.

Joint ventures. People have heard about joint ventures, but maybe haven't thought about it as a way of kind of raising equity or diluting risk or bringing in talent, or skills or expertise. And that's basically where, you know, you've got two more parties. They agree to pull their resources to fund a specific project, or company. I've set one of these up in the Philippines a few years back and both essentially providing the capital to fund the operation based on the percentage of equity you hold. 


[00:09:18] So, if the thing is going to cost a million dollars to run for the next two years and you've got a 60-40 split, somebody's putting in 600, somebody's putting in 400, you know, you're sort of budgeting together, you're approving that together. You're both sitting there on the board together. It's kind of like a long-term marriage, right? 


[00:09:32] So, the downside is, that it can be a bit difficult to maintain control over the direction of the venture. So, you've really got to have a calm, trusting, open relationship with good ways of solving any conflict or any points of tension. Because you're going to be pulling your resources together. And so, alignment and communication are absolutely critical if you want to make a JV work. Many Founders will have heard of an IPO and…I guess, let's take a step back. An IPO is an Initial Public Offering where a private company, becomes a public company making it shares available to the public for the first time. 


[00:10:09] It is really suited to businesses I would say, the majority of the time you've got really sound and predictable revenues, it can be a really interesting option to head towards. They don't necessarily have to be profitable, of course, if they're a tech company, then probably don't need to be at the starting point. But there needs to be a path towards profitability. And why would you do it? I mean, it can provide you with larger amounts of capital. Also, better liquidity for the shareholders. So, if you are able to buy and sell your shares more easily, notwithstanding the public are very interested if directors are selling shares as to why. So, yes, it's more liquid, but you know, still question mark as to how easy it's to get the money out depending on how far down the path you are. And it can certainly raise your profile, but it can also be very time consuming and costly. I was chatting to a Matt from Expon the other day who has got a public listing and I think he said it's probably cost about a million bucks a year, at least, and that doesn't include the initial setup cost, which will probably be that plus-plus. Because you've got investment bankers and all sorts of professionals involved in going public. So not the simplest thing. And if you've got a really lumpy business model where you kind of profitability comes and goes over time, not a great model for a public listing, generally speaking. 


[00:11:25] Okay, let's talk about some debt-equity blends. Therefore are a little less for dealer and they start to become pretty interesting. So, Convertible Notes, you may have heard of convertible notes. They are essentially like a debt instrument that can be converted to equity at a later date, usually when the company raises additional funding. So, the debt is accumulating interest and at the end of an agreed period you're paying the investor back their cash + interest, or they can convert that investment to equity at a discount to the valuation at that time. So, let's just say they want to loan you a hundred thousand dollars, or they want to invest a hundred thousand dollars. They're either getting an interest rate on top of that a hundred thousand at the end of say, two years or three years tops probably. They can have the a hundred thousand back plus the interest rate payment, and you owe it to them. Or they can convert that to equity in the business at the time based on its value at the time, but with a discount. So, it can be a really interesting model because it can provide you instant access to the cash. Of course, interest rate is going to be higher than you would typically get from bank debt because the investor is taking more risk. So, convertible notes are certainly becoming more and more common. 


[00:12:31] Venture debt. Not that many people have heard of venture debt or probably have had exposure to it. It's typically provided by a specialised lender, two Founders, often who've already raised capital, and it's like a two to four year term loan with a fixed interest rate, and that may also have an option at the end of that for the lender to purchase equity in your business. 


[00:12:50] So, it's not just a term loan. It usually the option for them to purchase equity, maybe not mandatory, but an option. And that can give you access to a kind of non-bank, fast to access solution that's probably going to be cheaper than raising equity and with greater flexibility and less restrictive covenants probably than a bank. Be mindful that interest rates are going to typically be higher than your bank options.

The last two for you are early stage options. So, lots of you who are listening are probably not in this category and probably not going to be interested or it's not going to be relevant. However, I do know a lot of Founders who have ended up spinning off a new entity, a new company because they've got a software idea, for example. There are ways to capitalise that entity differently and treat it differently to the core business. So, if you think about what angel investing is, that's typically an investment provided by a high net worth individual in an early stage business as an exchange for a stake in the business. But quite often then you're receiving additional support or mentoring from those investors. They’re pretty active, generally. They've got a lot of experience, usually. They've often been very successful and they'll usually seek to help because their money's in inside your business. You know, there's the potential for pretty reasonable cheque sizes usually 20,000 to 50,000, might be pretty common for angel investments.

Venture capital. Getting VC money is not easy, no matter how many success stories you've heard. And if you've ever met anybody who's been on the VC trail, having to raise money, it's pretty rare that it happens quickly. You know, like the general model is that it can take a significant amount of time, and you've got to think about why, that's not because VC's are bad people, not in the slightest, but they're taking a significant amount of risk. 


[00:14:31] You know, they are usually making a pretty big bet in an early stage company and they don't want to lose their money. So, they scrutinise a lot of deals to find the ones that are going to back. And so, you could ask yourself if you're going to go after VC money, have you succeeded in a similar venture before this one? Like in a similar style of business. Do you have a strong and a backable team that they are going to believe in? Is there at least a hundred million valuation opportunity in this business in based on the market size you're going after in the business model? You might know your industry, but are you willing to do the 70, 80, 90 hours a week to make it work that they would expect? If you're a 40 or 50 year old Founder with a family and you are pretty comfortable in your life and you don't want to do those kinds of hours and you don't have the background and like, their alternatives are, you know, 23 year olds with an amazing idea, with a no risk, absolutely fully in and willing to just work themselves to the ground. 


[00:15:23] That's very attractive to a VC investor because those people will work hard and they've got no backstop, right? They've got to make this thing work or that's it, that's quite attractive to a VC. If you're in the typical audience for us, you may not be attractive to a VC. So, Venture Capital is absolutely available but it can take a fair bit of time to raise, because the investors risk losing a hundred percent of their money on a regular basis. So, they've got to be pretty careful. And so, it can be a bit tricky to find a VC who is a good fit for your business. So, don't let me turn you off VC funding entirely, but please don't walk into the idea of just going, oh yeah, we'll just raise some VC money and it'll be fine and we'll just get it going. It's like, it's not that easy. It's possible, but it's not that easy.

So, that are 14 different capital options for you to consider today. The question is, which option makes sense for you to help you fund your growth? 


[00:16:12] And so, I obviously can't give you the guidance on which model is right for you, but I've got some questions for you that might prompt your thinking on which options might be suitable for you. First of all, what are your longer-term goals for the business and how solid is your strategy to get there? Because those investors in finance are going to want to see that strategy if they're going to want to believe in them. How much do you actually need and over what timeframe? Is it actually a really short-term cash requirement that you've got? Or is it a long-term ongoing? Like, when are you going to need the money and how much and what are you going to use it for? 


[00:16:41] How much control are you willing to give up? Some people do not want partners in their business, and when you take on equity partners, they have some expectation reasonably because they are now shareholders. Their money is at risk in being involved in some way, or having a view or getting insight. You may not want that pressure. But at the flip side, they can often bring incredible skills into your business that perhaps you don't have. So, how much control are you willing to give up? How much risk are you willing to take on? The amount of capital, some people take on far too much capital too quickly, which can be a real problem in for you generating a return and being able to deploy in an efficient enough way. So usually it's like, what's the minimum amount of capital I need to get through to the next stage? And then maybe let me worry about the next stage of financing, that's one way to think about it. Of course, you need to be thinking about what are the cost in terms of the financing options that you've got in front of you, and how strong is the history and the projections of your growth and your profitability. Yeah, that has everything to do with, you know, if you've got a low profit business, you're not going to have any banks jumping up and down to give you money because they're going to expect a certain amount of EBITDA, so certain amount of profitability to ensure that you can cover the interest repayments. They're not in the game of taking big bets and big risks. So that's a few questions for you to ask. There is no ‘one size fits all’ answer when it comes to capital structures. The best choice is always going to depend on your unique circumstances, which is why talking to a CFO, a virtual CFO, if you don't have one, like, you know, there are plenty of people who will provide advice on an hourly basis and get to know your business part-time, contract, whatever you need, your accountant, finance brokers, they can all help you understand those choices, how they work, the mechanics, and which might be best for your business. But you do need to seek professional.

One thing I would leave you with today. I hope that's been useful for you and stimulated some questions and some ideas for you. The question for you though is to think about, and it was something I alluded to in those questions, is what are you actually going to show to the investor or the lender? You know, if you are actually thinking about seriously raising capital. One of the questions that you need to be asking is, how solid is your plan to get there, because they are going to want to see that plan. The vast majority of them. Like, if I'm going to lend you some money, what are you going to spend it on? Well, you need to have a solid strategy to get there. And if you don't already have a great plan. I have got something to get you started, which is our free checklist - How to build a Kick Ass Growth Strategy, which is available by going to seansteel.com.au/checklist. That's Seansteel.com.au/checklist. It gives you a nice, easy guide to follow that will help you ask better questions if you want to build out a more solid strategy to get the most out to the next three years. 


[00:19:14] I hope today was valuable, and I'll be speaking with you next week.