Entrepreneurs claim that securing capital for a business in its early stages is as difficult a challenge as getting a business to succeed. Banks and venture capitalists are no longer lending. Even the bailed out US banks are not lending. The apparent reason is the political and public pressure mounted on them. Analysts have argued that the banks should be loaning money to help stimulate the economy.

Corporate bodies need credit to expand and hire and consumers need credit to buy products and help grow the economy. The steep increase in defaults and non-performing loans are evidences that the economy will make it hard for banks to simultaneously set aside reserves and lend more money out. Small businesses will consider retrenching workers before they start missing loan payments, and the unemployed will find it hard to pay off their credit cards and car loan payments. Everywhere in the world, banks and venture capitalists are badly shaken. Who knows when they will be back on their feet?

How can business owners, developers and commercial property owners/operators map viable strategies for raising equity for their firm and their firm’s projects in today’s market?  Fortunately, there are several ways in which to fund the launch and growth of a business. In addition to the most basic approach to funding a business, an entrepreneur may secure capital from a variety of sources such as personal resources, other founders and managers, friends and families, strategic partnerships, debt financing, and equity capital.

Out of the options mentioned above, equity capital is becoming an ever more attractive option. The Australian Small Scale Offerings Board (ASSOB) is a safe business funding mechanism for SMEs.

ASSOB is Australia’s largest capital raising platform for growing, unlisted companies with over $120M raised helping to ensure that corporate bodies have longevity, while they are shielded from harsh funding situations.  Investors can choose which company they want to invest in on the platform of ASSOB. There are over 50 growing Australian companies that these investors can invest in. Companies listed on ASSOB meet initial and ongoing compliance requirements.

Companies listed on ASSOB can potentially raise between $250K and $5M equity capital from investors to finance growth through a simple, proven, rapid and affordable process. Some companies have been able to raise up to $5m across three rounds. It does not matter what sector your business is, it can get listed on ASSOB and start getting funds.

You can go here for a glimpse of some success stories. Apart from raising funds for corporate bodies, ASSOB also offers thoughtful insights into the economic climate and various investment opportunities.

If Equity Capital looks like an option for your business then why not give us a call on 1300 065 282 for an informal chat with SalesMonkey about how we help facilitate the ASSOB process.

Welcome to pre-IPO investing, a high-stakes game where who you know matters more than what you know, and where people and promoters are more important than production or profits. In this complex, often hidden world, investors take huge risk in the pursuit of huge return. Sometimes they fund companies that have little more than a PowerPoint presentation and a patch of dirt.

Mining start-ups are prominent in pre-IPO investing. They typically have at least two rounds of seed funding to build enough assets – and enough of a story – for an IPO. Early funding usually comes from friends, families, fans or fools, known to the company’s promoters or directors, or?through networks of brokers and boutique corporate advisers.

“Investing in exploration companies before they list is more about people than assets, although good assets obviously help,” says Professor Allan Trench, of the University of Western Australia’s Centre for Exploration Targeting.

“Pre-IPO investors are generally not seeking to still own their shares when the asset might hit production. They just want to know the assets are marketable to the IPO stage, and they have bought their shares at a decent discount to the likely IPO price.”

Other companies seeking pre-IPO funding are more established. A life-sciences venture that spends years developing a medical device might need funding to get to an IPO. A small manufacturer might have worked for years towards an IPO and a partial exit for its founders. Introductions can come through networks of brokers, accountants, lawyers or private bankers, and capital could be sourced from ordinary and sophisticated investors, family companies or entrepreneurs.

Some introductions are by chance. Fat Prophets chief executive Angus Geddes was an early investor in the private café and bakery chain Pie Face Holdings. Geddes met Pie Face CEO Wayne Homschek at a wedding in 2005. Geddes liked Homschek and Pie Face’s prospects, even though it had only two stores. Geddes became a cornerstone investor, after due diligence, and still owns 10?per cent.

In 2010-11, Pie Face had 56 stores and $18.1?million in corporate revenue and wants 140 stores and $55?million in revenue by 2012-13. Revenue is now $40?million from 72 stores. Homschek, who founded Pie Face with his wife, chief operating officer Betty Fong, believes it could support 500 stores in Australia. Pie Face opened its first New York store this year.

The $10?million capital raising in May 2011 valued the company at $56?million and attracted Macquarie Group and private investors such as investment banker and chairman Trevor Rowe and retailing entrepreneur Brett Blundy. The offer was made to sophisticated and professional investors under the Corporations Act.

Pie Face will be worth much more if it achieves its store and revenue goals before a planned IPO on the Australian Securities Exchange later this year or next. Yet even its latest capital raising – bigger than most IPOs in 2011 and accompanied by a?comprehensive information memorandum – relied on the networks of Homschek and other Pie Face investors. The “smart money” got set long before the public will.

Investors might ask how they too can access pre-IPO opportunities. The good news is more organisations are providing structured access to private investment opportunities, some through informal or formal services that match companies seeking capital with investors.

Smaller and specialist exchanges also give investors access to earlier-stage listed companies, without the legal restrictions of small-scale offers or requirements that mean only sophisticated or professional investors can subscribe to a capital raising. The growth of these exchanges could fill a void between small-scale offers and large exchanges in Australia and overseas.

Expect more private companies to shake the tin for equity capital this year and next. A difficult IPO market and challenging debt markets, as bank funding costs rise, could see more small and medium-size enterprises turn to private investors for funding. There seems an obvious need for emerging Australian companies to have better access to?investors, and vice versa.

But for every Pie Face, dozens of private companies lurch from one capital raising to the next and burn investor funds. There may be no liquidity in the investment for years and minority investors must hope the company’s founders do the right thing by all shareholders.

Lack of regular, formal investor communication in pre-IPO private companies can be another problem. Less market scrutiny can lure sharks who raise funds to repay director loans or who treat monies raised like a personal ATM account.

The IPO itself might not be the pot of gold seed investors hope for. Many private companies, for instance, do not make it to an IPO, especially in a weak sharemarket where even nano-cap explorers are struggling to raise funds. Last year, 18 companies withdrew their listing application, unable to raise the minimum subscription or secure enough investors to meet ASX Listing Rules, after spending months and tens of thousands of shareholder dollars on the offer. Dozens more extended or abandoned planned IPOs, leaving their investors in limbo.

Escrow provisions are another key issue in pre-IPO investing. Novice investors can be seduced by the prospect of buying 5¢ shares in a company a year or two out from an IPO, when its shares will be offered at 20¢ (typical for small mining IPOs). Yet they may not be able to sell shares until a year or two after listing, if their shareholding meets certain ASX tests.

The ASX deems shares owned by seed investors, promoters, consultants, vendors or other related parties as restricted securities, to be held in escrow for one or two years. Even seed investors who are not related parties of the company or promoter, and who paid less than 80 per cent of the IPO issue price, have a portion of shares that cannot be sold for a year after listing. This escrow period can feel like an eternity for investors in thinly traded, volatile small mining stocks, especially with seven in 10 IPOs from 2011 ending the year below their issue price.

Another argument against pre-IPO investing is the large number of early stage companies already listed on the ASX. In a small market such as Australia, which does not have extensive venture capital funding, many private companies list earlier than they should. More than half of the 2226 ASX-listed companies are capitalised at less than $30 million, giving speculators a “long tail” of stocks to choose from, and better protection by investing in listed companies bound by ASX Listing Rules and exchange regulation.

Pre-IPO investing is also poorly defined. It is different from angel investing, which often involves professional investors who consider dozens of opportunities each year, usually take a mentoring or advisory role in companies they invest in, and often exit when the company is sold.

Pre-IPO investors are typically less involved in their companies and back those with a clear path to an IPO, although the time to get there varies greatly. Some exploration companies go from incorporation to IPO in less than a year. Others, such as Pie Face, take years.

In spite of these risks, hundreds of?millions of dollars are raised for pre-IPO investments each year, often much more in strong markets. No one knows for sure just how much is raised; there is no central market for pre-IPO investments, and only a handful of small organisations provide structured access to these opportunities. Even in the weak 2011 IPO market, when less than $2 billion was raised for just over 100 IPOs, seed investors would have chipped in at least $100 million beforehand.

The appeal is obvious: getting in on the ground floor when shares are cheap. An investor in an exploration opportunity might subscribe for shares at 2¢ each when monies are raised to form the company, at 5¢ in the next seed funding when the lead asset is acquired, and again at 10¢ if more funds are needed to develop the assets, before an IPO where shares are valued at 20¢. There is no standard path to capital raising and it varies by industry, but a few rounds of pre-IPO funding is normal.

Often, the investment is about backing people. “The first eight or nine investors are often friends, families and fans of the founders or sponsors,” says Australian Small Scale Offerings Board (ASSOB) chief executive Paul Niederer. “When funds are raised and the company gets traction, the sponsors approach other high-net-worth investors and private-equity funders.”

Another attraction is a closer relationship with companies. Fat Prophets’ Geddes, a Pie Face non-executive director, has had a first-hand view of the cafes. “It’s been amazing to see the company and its people develop from a tiny start-up to a significant quick-service restaurant chain,” he says.

Geddes has also invested in fast-growing manufacturer Fitch Metals Engineering, sharemarket newsletter Marcus Today, and Powerhouse Energy, a clean-tech company that backdoor listed on the London Stock Exchange AIM market last year.

Geddes focuses less on short-term valuations and more on people when choosing private investments. “You have to assume there will be no short-term liquidity event where you can get your money out, and it may take years before you exit through an IPO or other mechanism,” he says. “You have to be very confident in the people and their ability to grow it.” Geddes takes a board seat on companies he invests in, but most pre-IPO investors are more passive.

Lack of market scrutiny is an issue for investors in private companies. Unlike IPOs, some private investment offers do not require a prospectus, and are usually not scrutinised by broking firms, research analysts, fund managers and the media. The Corporations Act says small-scale offerings over a 12-month period below $2 million, to up to 20 investors, or to sophisticated, professional or offshore investors can be issued without registering a prospectus.

Organisations that match capital-seeking companies and investors vet offers, to varying degrees. Private investment service Wholesale Investor screens companies seeking capital (but does not endorse them) before it publishes the offer to its database of 9200 professional and high-net-worth investors. It does not receive a fee for successful capital raisings or a slice of the amount raised; companies pay to advertise to investors on its database and it provides events and investor relations services to private and small listed companies.

Wholesale Investor managing director Steve Torso estimates about $50?million has been raised through the service since its 2008 launch. “There’s this perception that fast-growing, emerging companies have lots of people wanting to invest in them, and high-net-worth investors have lots of deals brought to them,” he says. “The reality is, lots of private companies have to work very hard to attract investors, and investors work very hard to find the right deal.”

Torso adds: “It’s a fragmented space. There’s no central source for capital raisings that can range from $20,000 to a few million. We saw an opportunity to help capital-seeking companies raise their visibility, and help investors better identify these opportunities.” Torso has noticed more investment bankers and corporate advisers attending Wholesale Investor events this year, to spot promising companies.

Junk deals can give the space a bad name. “We rejected one private company that wanted to raise $100,000 from investors and use $80,000 of that to repay the director’s personal debt,” he says. “Another company was trying to raise money to punt on the sharemarket using options strategies. You need to be very sure about the quality of the company, its board and management, and their record of hitting milestones. You need to ask upfront about the company’s communication process with shareholders.”

He believes investors should not back private companies unless they can add value. “I’m not saying you need to be involved like an angel investor, but you should meet management and try to help the company. This might be giving advice in your area of expertise or promoting the company to your network when it next needs to raise capital. You can’t be too passive.”

ASSOB provides a much more structured platform for companies seeking capital and investors seeking private investment opportunities. More than $120?million has been raised through ASSOB since 2006. About $2?million is raised each month and the average parcel size of shares is $38,000.

It is a pure matching service for companies and investors. ASSOB provides a secondary sales board for investors who want to sell shares, but does not electronically match buyers and sellers. About 40 companies are usually on ASSOB, with another 20 in the wings. It has an exemption to publish offers up to $5 million to its database of 22,000 investors.

ASSOB’s key selling point is its registration rules. Companies comply with reasonably tough upfront and ongoing rules to stay on the board. The offer must be from an Australian public company that has at least three directors and audited accounts. It must produce a compliance offer document, commit to a certain level of reporting, provide a quarterly solvency report, and directors must agree not to sell more than 10 per cent of their shareholding after they obtain new shareholders from an ASSOB offer. It deregisters or suspends companies that breach its rules.

“These rules are designed to ensure only serious legitimate offers from established companies are made, and to protect investors,” says Niederer. “ASSOB does not endorse the offers; we are simply a matching service. But investors know capital raisings via ASSOB have to comply with several rules, and it helps companies prepare for an exchange listing here or overseas, or trade sale.”

The success of overseas investment platforms shows the potential in secondary markets. One of the best known, SecondMarket, was founded in 2004 in the US to connect buyers and sellers. It has completed billions of dollars of deals, brought together 75,000 investors and institutions and boasts Facebook as a trophy client.

A dead IPO market in the US was another factor in SecondMarket’s growth. Emerging companies that could not raise capital via IPOs sought alternative investment platforms, as did shareholders who needed a liquidity mechanism to sell their shares. A weak IPO market in Australia might see a similar trend emerge, although strong growth is unlikely unless some prominent companies use ASSOB or other platforms before their IPO.

The growth of other exchanges in Australia also has potential to better link listed emerging companies and investors, before listing on the ASX or overseas. The National Stock Exchange of Australia (NSX) is still largely unrecognised in the mainstream investment community and media after years of hard work.

Although most of the 116 NSX-listed securities are valued at less than $5?million and many barely trade each month, interest from investors, brokers and potential listing companies is growing. NSX had record interest in February with 1081 trades worth $66?million.

New ownership and management has given NSX fresh momentum. FEX Equity Markets made a successful takeover bid for NSX at 23.5¢ a share, which concluded in December, for a 50.43?per cent stake. Chief executive Emlyn Scott was appointed in October. All NSX-listed securities will soon be offered via Paritech, an online trading system, which will provide direct internet access and increase interest among investors. NSX is marketing to more broking firms and by mid-year will launch investor relations services.

Specialist exchanges will also help?investors access emerging companies that might have stayed private longer, or struggled to raise funds via IPOs on larger exchanges. After securing its exchange licence in 2010 and finalising its electronic trading platform in July 2011, specialist Australian clean-tech exchange, SIM Venture Security Exchange, had its first two compliance listings late last year and?has a third on the way.

CEO Ann Bowering expects 20 listings within 12 months. “Having clean-tech companies list on a specialist exchange will, over time, provide much more profile for them,” she says. “It creates a hub for emerging and established companies, financial advisers, researchers and investors who are interested in clean technology.”

SIM VSE focuses on green technology and life-science companies in biotech and medical devices. “These type of enterprises often struggle to get enough funding in Australia,” she says.

Bowering says SIM VSE wants to attract Asian capital to Australian clean-tech companies through an Australian-regulated exchange. “We need to be a bridge between local companies and offshore investors, especially in China, who are eager to invest in clean-tech.”

The potential growth of NSX and SIM VSE, and investment platforms such as ASSOB and Wholesale Investor, will provide more capital-raising options for emerging companies that are not ready to list on larger exchanges, and more opportunities for investors in private and small listed companies.

But nothing will ever take the place of personal networks. The early supporters who get the drop on outstanding companies can?make millions.

While the world waits for Mark Zuckerberg to ring the bell of social networking giant Facebook’s listing, a Brisbane-based social network with designs on being the Australian equivalent has released a prospectus to attract retail investors as the start of a planned $10 million raising.

The company, called Kondoot, is a venture founded by college friends Mark Cracknell and Nathan Hoad, and describes itself as a video social network, based on its users broadcasting live video to their network of friends.

It has been described previously as a combination of Facebook, Skype and YouTube, where users of the network broadcast themselves to the world. Despite being infinitely smaller than Facebook, its founders are talking up their potential to break out on the global stage.

“Kondoot has the potential to be the most successful social media website in the world and we look forward to sharing the many opportunities our company has to offer with new investors,” Mr Cracknell said.

“[It] has developed a unique concept that we believe has the potential to change the way the world communicates, opening up huge opportunities in areas of promotion, education and sharing personal moments with friends and family around the world.”

For its raising Kondoot is offering are 83,333,334 new Kondoot shares offered under the Prospectus at $0.12 each. All applications for shares under the Prospectus must be for a minimum of 16,667 Shares or $2000.

Mr Cracknell told The Australian Financial Review that the decision to open up its register and enable sale of stock through registry services meant more mum and dad investors could buy into the company, as the minimum investment level by non-sophisticated investors had dropped from $30,000 to $2000.

Kondoot is not yet profitable, but Mr Cracknell said it has a clear business model based on paid broadcasting, where users can charge a fee to watch a video, with Kondoot taking 20 per cent of the ticket price.

As an example, a company could stream a conference online, and charge $50 a ticket, netting Kondoot $10 per sale, or a record company could sell tickets to an online concert.

In a statement the company said Kondoot would enable celebrities, musicians, businesses and the general public to publish live and recorded broadcasts as well as video chat and instant messaging.

Mr Cracknell said the site had investigated the possibilities for further monetising the site through advertising, but was looking to build traffic over the coming months before introducing it.

He said the eventual exit strategy for his business had not been determined, but that he was open to all possibilities.

“We have said from the beginning that we have to build a business that can run for a hundred years and be sold tomorrow,” Mr Cracknell said.

“Even if Google offered us $10 billion we would still have to sit back and work out if it was the right thing to do.”

He said the initial focus for Kondoot was the US and Australian market, but that it had already begun to add subscribers in South East Asia and had plans to push into Europe.

In January The Brisbane Times reported that 21-year-old Cracknell and 25-year-old Hoad recently returned from the site’s US launch, with $3.2 million in funding. It also attracted the interest of popular US technology websites like CNET, which reported that Kondoot was taking off in 137 countries.

Mr Cracknell said in the earlier article that he had struggled to attract investors in Australia, but found the US investment scene much more open to internet-based ventures.

The doubt in the back of all technology entrepreneurs’ minds is the fear that with the click of a mouse a new rival can appear from nowhere and steal your thunder. Mr Cracknell said both he and Mr Hoad were aware of the risk, but didn’t expect to see Facebook introducing a replica service to Kondoot any time soon.

“They couldn’t just click their fingers and do it, that is why we have a good technology team working on keeping ourselves ahead,” he said.

He said he didn’t envisage a mass global migration from Facebook to Kondoot, but said the site was benefitting from people who left the largest social network due to privacy concerns. He said privacy controls had been built into the core of the website, so that users had much more control of their profile than they did on other sites.

“Some people have chosen to de-activate their accounts on Facebook, and other people, like me, use multiple social platforms,” Mr Cracknell said.

“The potential numbers of users out there are massive.”

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