Since launching Catalist, our team has talked to many businesses who want to either raise capital, increase liquidity for their investors, or widen their investor-base. Though all provide their own unique challenges, when it comes to capital raising, business owners have expressed just how difficult it can be knowing where to start or what options there are.
Luckily, there are now a variety of ways to raise capital in New Zealand, covering everything from start-up funding, through to listing on a public stock market. In a space where there was once a huge gap, Catalist has brought something new to New Zealand’s capital markets ecosystem, simplifying the capital raising process for small and medium-sized businesses (SMEs).
Regardless of what size your business is though, it’s important to know about all the options, so you can choose one that’s best suited to your needs. So, if you’re wanting to raise growth capital for your business and wondering what choices you have, read on.
The first question you need to ask yourself is whether you want to raise debt capital or equity capital. Although there are many different types of debt capital, it essentially involves borrowing money with the promise of repaying it in the future, usually with an agreed interest rate. Debt capital could be from the bank (a loan), friends and family, peer-to-peer debt, or from external investors (e.g. bonds). It can even come with more complex features, such as the ability to convert into equity at a future time. You can read more about debt capital from investors in our blog post, what are debt securities and why would you invest in them?
Equity capital, on the other hand, involves selling part of your business to investors, usually by issuing shares. For example, a business that is currently valued at $8 million, could raise an additional $2 million for growth by selling shares representing 20% of the business (at a total value of $10 million, after the capital raise, $2 million would represent 20% of the business).
Whether you choose a debt or equity raise, or a mixture of both, will depend on a combination of factors unique to your business. Each type of capital has advantages and disadvantages. If you’re certain your business can meet regular interest payments, then debt capital might be a good option for you, as it doesn’t involve selling part of your business. However, equity capital often gives you greater flexibility, and equity investors may provide further support if your business needs to raise additional capital at a later stage.
Below we’ve summarised the main capital raising options in New Zealand.
Often, a founder’s first point of call for early financing is from their own savings, or from networks of friends and family. The close personal connection of friends or family members makes them a convenient source of initial funding. However, it’s important to follow formalities, such as getting official documents drawn up, to avoid any future conflict or confusion, and to ensure there is a proper foundation for future investment. The law firm Kendrik Partners publish some useful resources for start-up companies.
Companies in some sectors, often in the start-up or early-stage phase, may have the opportunity to enter incubators or accelerators. Incubators and accelerators often take the form of a course or programme to help establish, fund and support businesses with growth potential, through business networks and by utilising supporting resources. Check out the Callaghan funded options here.
There are a wide range of angel investment groups throughout the country, aligned with Angel Association New Zealand. Angel investors provide financial backing for promising start-ups and early-stage businesses. They typically take a fee of up to 6% of the capital raised, often supporting founders through business networks and governance. Catalist can work with angel investment groups, helping businesses source investment and facilitating the online transfer of investments.
Some of the most active angel associations in New Zealand include:
There are a number of VCs now operating in Aotearoa. Venture capital is a form of private equity financing that is provided to start-ups and emerging companies, but is generally only available to those with very high growth potential. VCs use fund managers to invest on behalf of their underlying investors, who share the profit of the investment. They generally invest in sectors where they have relevant experience to add, so make sure you understand the focus of a particular VC firm before approaching them for investment.
Some of the VC investors operating in New Zealand include:
There are many private investment options, including some of the above options, like friends and family, angel investment or venture capital. Other types of private investment to consider are high net worth individuals and family-controlled investment funds known as ‘family offices’. Regardless of the type of private investment, Catalist can help set up a private market and registry to keep track of your investors and to allow them to invest electronically through our approved Electronic Transfer System. Our private markets can also facilitate trading amongst investors which can help to improve your shareholder liquidity. This is an important consideration for investors as it helps them realise the value of their investment.
If you’re looking to take your capital raise a step further, perhaps to work towards a public stock exchange listing (such as the Catalist Public Market or the NZX), Catalist can invite additional wholesale investors into your private market. This means our private market services work well in conjunction with other private capital raising options.
Crowdfunding is a term most are familiar with through platforms such as Kickstarter, where projects, charitable causes or businesses raise money from the public, in the form of donations, or in exchange for goods, services, tickets or credits.
Equity crowdfunding is slightly different, where businesses raise funds from the public by selling shares in their business. The Financial Markets Conduct Act enables Kiwi businesses to raise up to $2 million per year, without having to issue a product disclosure statement – but this must be completed through a licensed crowdfunding service provider, such as PledgeMe, Snowball Effect or Equitise, to name a few.
Businesses using equity crowdfunding are often young, small, high-growth companies and can benefit from the lighter disclosure obligations that apply to crowdfunded share offers. However, listings on crowdfunding platforms are “buyer beware”, in the sense that businesses do not have to disclose all material information (such as potential bad news) to investors. There are fewer protections and higher risks for investors. For this reason, professional investors do not usually invest through crowdfunding platforms.
Catalist can work with businesses who have completed crowdfunding capital raises to help give ongoing liquidity to their shareholders.
A licensed public market, commonly known as a stock market or stock exchange, is a platform where financial products, such as shares and debt securities, can be publicly bought and sold (traded). This can be in the form of a capital raise, where businesses sell to investors (primary market trading), or where investors trade amongst themselves (secondary market trading). The first time a business lists on a stock exchange to raise capital, is called an initial public offering or IPO.
There are two licensed stock exchanges in New Zealand. The first is the NZX, intended for larger companies (often considered to be most appropriate for companies over a $100 million valuation), due to the costs and compliance obligations associated with being listed.
However, for small to medium-sized businesses who are not yet big enough to consider an NZX listing, New Zealand’s other licensed stock exchange is Catalist. Designed specifically for small and medium-sized businesses, Catalist lessens the costs, administration and regulatory burden for listed businesses, acting as a “steppingstone” market to the NZX or other traditional stock exchanges. Listings on the Catalist markets also have access to our registry service, electronic transfer system, and portfolio reporting tools for simple investor management and reporting requirements.
As a licensed and regulated stock exchange, Catalist provides investors with protections from market manipulation and insider trading, as well as comprehensive information disclosures. This can help to increase investor confidence, encouraging more investment and making capital raising easier to complete.
So, whilst there are plenty of options for businesses to consider when capital raising, different options are suitable for different businesses, so you’ll need to do your homework! If you would like to discuss Catalist and how we can help your business raise capital, get in touch with the team. Catalist has been designed to work collaboratively with other service providers, so we’re happy to help you understand the different options available to your business.
By Michelle Polglase