THERE are several business considerations that keep entrepreneurs up at night. Customer service, product quality, talent retention, and competition are but a few of them. But the most critical aspect involves the life blood of any organisation: cash flow generation.
When faced with an unexpected and serious capital shortfall, many entrepreneurs tend to be caught unawares. Accessing capital is all about readiness. You should build up your funds when you don't need them. Wherever you are in your business life cycle, you have to be constantly mindful of your firm's financing requirements to support both ongoing and future needs.
Knowing where you are in your business life cycle
Cognisant of how access to financing is crucial for businesses in implementing their growth or restructuring plans, Singapore has in place a variety of grants and measures to provide financial assistance to startups and enterprises to help them chart through the various stages of their business life cycle.
For seed or early-stage funding, entrepreneurs can tap grants such as the Business Angel Scheme, the SPRING Startup Enterprise Development Scheme, or the ACE Startups Grant. Small and medium-size enterprises (SMEs) looking to leverage technology to boost productivity and growth can apply for the Automation Support Package or Enhanced iSPRINT (Increase SME Productivity With Infocomm Adoption & Transformation).
To help firms navigate the myriad of grant options available, the government has even launched the Business Grant Portal to help firms access the many grants from various agencies more easily.
Seeking alternative financing routes
Many SMEs require financing throughout their development life cycle - from seed capital during start-up, through to growth investment in their development stage. Most seek bank loans or dip into their own funds or borrow from family and friends. However, there are SMEs which may find it harder to obtain bank financing.
These may be SMEs which have yet to generate any cash flow or those which lack measurable business plans with detailed financial projections. Some SMEs have little or no fixed assets as collateral. They too may find it a challenge getting banks to extend a line of credit.
For these SMEs, there are alternative funding routes available such as angel funds, venture capital, private equity, or even crowdfunding. In fact, some of the most successful local SMEs gravitate towards these alternative funding routes.
Homegrown online supermarket RedMart raised S$55.1 million through venture capital and angel investment, while interior design firm Mezzo Interiors raised close to S$2 million through debt-based crowdfunding.
Turning to capital markets
While these sources can be valuable for young SMEs in their early growth stages, they may not be adequate over the long term due to the dilutive effect that such financing has in terms of equity interest. Companies then typically turn to the capital markets for their funding needs.
However, fundraising from the capital markets involves substantial transaction and compliance costs, meeting stringent admission standards, and adhering to complex legal and regulatory requirements and corporate governance codes. This option is best suited for SMEs which have achieved stable revenue, rising profitability, and positive operational cash flow. Investors in the capital markets are more prepared to provide expansion capital rather than fund development risks. Investors will assess historical growth rates in the top and bottom lines, and trend information to gauge future growth as part of their decision-making process.
Raising funds from external investors
We are often asked by companies how they can be better prepared to raise funding from external investors. Our recommendation is that companies should clearly document their investment attractiveness and competitive strengths, their historical development and achievements, management experience and capabilities, business operations, current and potential market size, positioning and growth potential both locally and, where possible, regionally. They also need to prepare a business plan with detailed historical financials and financial projections which take into account the use of incoming funds.
Investors are most enticed when companies have a clear growth strategy and carefully thought-out action plans to meet their desired goals.
It is important to have the right finance team or engage the services of a competent financial adviser to reach out to these investors and negotiate the best possible terms for the company.
Is capital market financing right for you?
Consultation and having a thorough understanding of the capital market financing process is crucial. Costs involved include transaction and compliance costs, and the cost of equity, which is typically in excess of 20 per cent per annum as this is the target annual return on investment for equity market investors. Hence, we usually advise that SMEs should explore all avenues of debt financing before considering raising equity from the private and public capital markets.
Taking a company public also necessitates a change in mindset. There will be external shareholders, independent directors and sponsors (for SGX Catalist-listed companies) coming on board. Many SME leaders are initially overwhelmed at having to work with these external parties and complying with the listing rules and regulations, disclosure requirements, corporate governance code, and transparency and public accountability measures. With a proper mindset and positive attitude, however, these inconveniences can be addressed over the course of the listing process.
Therefore, preparation is key - a company intending to seek a public listing needs to select the right professional team and set up a project team with senior management oversight to work with the professional team in different work streams. Launching an initial public offering and listing is a time-consuming and complicated exercise. Our advice is to be prepared early and make your submission when the IPO window opens.
Begin with the end in mind
Being listed on the Singapore Exchange (SGX) provides a competitive advantage for companies going regional or global. To reap the fullest benefits of a public listing, companies should price their IPO shares appropriately. It is unwise for companies to "stretch the value" of their shares - that is, benchmark themselves at the average valuation of comparable companies currently listed.
What results is usually little after-market support, and shares trading below IPO price. We tend to see subscribers in such situations rushing to sell their shares on debut or shortly after listing - either to make a quick flip or, more likely, to cut their losses. These companies typically struggle to find investor support for their follow-on fundraising needs - defeating the benefit of using a public listing as a platform to repeatedly tap the markets for growth.
Hence, it is critical that from the outset, companies are clear about their listing objectives - be it tapping the capital markets for expansion; using shares as consideration for acquisitions; research and development; creating public awareness of the company; or even attracting talent to strengthen the management team or for succession planning.
Ultimately, the completion of an IPO is the start of the next chapter of a company's journey - not the end of the story.
- The writers are chief executive officer, RHT Holdings, and chief executive officer, RHT Capital, respectively.