Tourism Investment Masterclass series: Webisode 2 – Equity funding options for private businesses

Tourism Investment Masterclass series: Webisode 2 – Equity funding options for private businesses


Welcome & thanks for taking the time to watch
this webisode on equity funding options. Before a private business owner embarks on
the process of raising equity it is vitally important that he
or she understands and is realistic about what the options are. In very broad terms, there are four traditional
sources of equity capital for private businesses, depending upon what stage of the life-cycle
the business is at and how big it is. The first of these is the Angel Investor. The Angel is a high net worth individual investing
his or her own money into early stage or start up businesses – typically not much more than
a few hundred thousand dollars per investment in return for an minority equity stake. Because of the inherent risk involved in investing
at such an early stage, Angel investors will target very high rates of return, often as
much as 10 times their original investment over a 3 to 5 year period. Whilst this sounds, and is, very expensive
its likely that of a portfolio of 10 investments, the vast majority wont achieve anywhere near
this level of return – the good ones therefore need to pay for the bad ones! Implicit in this is that you need to be able
to demonstrate significant growth potential to attract an angel investor. The next source of capital for companies in
the early stages of the life cycle is venture capital. In addition to angel investors, venture capital
is a good option for businesses with limited operating history that are too small to raise
capital in the public markets and have not reached the point where they are able to secure
a bank loan. Like Angel investors they target high returns
on investment over a 3 to 5 year period, and need to see that there will be significant
growth in the business. However they typically want to invest a greater
amount than an angel, normally between $1m and $5m per investment. Private equity is another version of venture
capital that operate a similar model to VCs and angel investors albeit they target much
larger businesses that have more of a proven track record of growth as well as further
growth potential. Private equity investors tend to want to want
to invest a minimum of $10m of equity per deal, however its important to realise that
this will often be accompanied by an element of debt as this is instrumental to them generating
their required level of returns. If you are targeting private equity as a source
of capital you need to be comfortable that you understand the level of debt the business
will be required to sustain post deal. Its fair to say, however, that the Tourism
industry in Australia has not been a hotbed of activity for angel investors, VCs or private
equity – there are a couple of reasons for this. Firstly, at the start up and early stage of
the life cycle Australia does not have the angel and VC community that is seen in the
likes of the US and the UK – essentially there is a shortage of available capital compared
to other geographies. Secondly, and perhaps more of the reason,
businesses operating in the tourism industry have struggled to demonstrate the significant
levels of earnings growth and returns that these investors traditionally seek, certainly
when compared to other industries such as technology. There are however a couple of other non-traditional
funding options that exist for private businesses operating in the tourism sector. The first is the Trophy Asset investor – it
is certainly the case that Australian tourism has an advantage over other industries when
it comes to attracting this type of funder – these are typically individuals with significant
wealth who are attracted to an investment opportunity because of the prestige that comes
with owning the business or asset rather than the financial returns it will generate for
them. In recent years there have been a number of
high profile investments in resorts and hotels for example that would probably struggle to
stack up under a traditional venture capital or private equity model. Furthermore trophy asset investors are not
as fixed when it comes to wanting to exit the business within a certain period and will
tend to be more passive in style than traditional financial investors.
This can suit certain business owners. In recent years we have also seen the Federal
Government introduce the Significant Investor Visa in order to attract investment from high
net worth individuals based overseas. The requirements are that the individual needs
to invest over $5m in an Australian business for a minimum of four years to be eligible
for a permanent visa. Clearly the motivations here are less to do
with generating high financial returns than they are obtaining residency in Australia
– great news for those businesses which would otherwise struggle to attract venture capital
or private equity funding. However, you should certainly not assume that
they will not want a return on their equity …
you are still competing with other businesses to attract their investment. Whilst these last two options provide a well
needed alternative source of capital for businesses operating in the Australian tourism industry,
its important to bear in mind that they represent a very different type of investor to traditional
private equity or venture capital. Remember that securing investment from any
funder is not just about the money, you are selecting a long term business partner and
you want to ensure that they are aligned with what you want for the business in the short,
medium and long term. This has been webisode ‘2’ of 5 in this series…
we hope it has been helpful for you… And don’t forget to download the additional information
on this topic located on this webisode’s landing page. For further information, please refer to the
contact details on your screen.

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