'It's What They DO - Insights to the entrepreneurial investment culture'

 

INTRODUCTION

Entrepreneurs risk their own, personal capital and assets in order to create wealth for themselves, their employees and their communities.

They do this in a hopelessly fragmented information environment where wealth-creation opportunities regularly pass them by without being seen or acted upon.

ACCESS TO CAPITAL

One of the constant cries from entrepreneurs across the world is: 'lack of access to capital'. However:

• Taking the UK as an example, the Cruickshank Report into Competition in UK Banking (2000) exposed that at any one time there are between 20,000 and 50,000 entrepreneurs looking for equity funding because they do not meet bank lending criteria. Few find it.
• Also in the UK, the number of high net worth (HNW) individuals or experienced investors who can self-certify as such under the Financial & Services Markets Act (FSMA) 2000 (Financial Promotion Orders 2001) Amendments 2005, and who are also directors and shareholders on at least one private company, fluctuates around 250,000, again at any one time. These parameters would indicate that they have achieved their HNWI status through their own entrepreneurial endeavours.
• Extrapolating these numbers worldwide produces ten million wealthy, successful entrepreneurs and, on the other side of the equation, one million companies unable to grow due to lack of capital, all at any one time. It is the instinctive nature of entrepreneurs to seek out wealth creation opportunities, particularly when they are cash rich.
• So the questions this White Paper is asking are, with such pronounced and obvious supply and demand sides to what is apparently a latent capital market:

1.       Why have aspiring entrepreneurs complained of 'lack of access to capital' for so long?

2.       Why does survey after survey indicate that those who want to invest do not find it easy to find opportunities to do so?

THE WAY WE WERE

Entrepreneurs have always understood risk moreso than any regulator or financial institution. Up until the mid-1980's capital-raising between entrepreneurs was a straightforward process where a business plan would be worked up with the accountant or other professional advisor.

This business plan would then be passed informally around the advisor's clients, invariably other entrepreneurs, which would in turn be passed along to those clients' own contacts.

Eventually, a dog-eared copy would be opened by someone who, through a myriad of circumstances unique to the entrepreneurial culture, had spare cash he could take a 'punt' with.

It was haphazard and it was informal but, to a large degree, it worked, simply because information was allowed to circulate unrestricted.

But then, in the 1980's there was hardly a country in the world that did not overhaul its financial regulations. These regulations were focused on 'protecting the investor' and, through various versions of 'Financial Promotion Orders', swept up the entire entrepreneurial culture, where risk is accepted and exploited, in their wake. Leaving a trail of permanently capital-starved enterprises, and no means for investors to identify them.

THE WAY WE ARE

• We are well into the second decade of an age where information can be targeted, received, processed and actioned instantaneously. The technology is exploited by every mainstream capital and investment market in the world. However, the raising of capital for growing companies remains in the information-stone-age and, since the 1980's, hog-tied by flawed legislation.
• Any venture fund or syndicate will tell you that they are submerged beneath a sea of unsolicited business plans. At the same time, capital raising companies and their advisors face a huge and time-consuming (hence expensive) effort to find an investor. Efforts that, mostly, fail.
• For obvious reasons HNW successful entrepreneurs, the most likely investors in this particular stratum (50k to 50m in whatever currency), jealously protect their identity. On the other hand, they want to know about these opportunities.

MARKETS AND COMMUNICATIONS

It is no coincidence that when a particular industry or profession clusters in one area, business thrives.

Take, for instance, the financial services industry where those making their living from it are drawn towards the key financial centres such as London, New York, Hong Kong etc. Even in provincial cities, there is always a 'central business district' where all the financial, legal and other professionals congregate:

• In any market, it is a natural instinct for a market-place to evolve and emerge, through which efficient communication channels can be established. No communication = no business. Imagine a business without any communications.

• More specific to this white paper is that every stock market in the world has its communications needs serviced by media which covers every conceivable nook and cranny of the mainstream investment markets.
• The latent global early-stage to pre-IPO capital market, populated by one million cash-starved enterprises on one side and ten million potential investors on the other, at any one time, has none of this.

'EQUITY GAP' OR 'INFORMATION GAP'?

In the mid-1990's the 'business angel' brand caught the imagination of government 'enterprise' and 'small business' agencies around the world. It was seen as a means of releasing the pent-up demand for an early-stage investment market, which those same governments had themselves demolished a decade earlier.

• Every new business angel agency created yet another fracture in an already hopelessly fragmented information market. Growthwire argues that there was never an 'equity gap' and that it was always, in fact, an 'information gap'.
• The fragmentation they themselves caused led to many business angel agencies doing no more than one or two deals a year. Even more did none.
• History demonstrates that the business angel movement, as executed by government departments around the world, exacerbated an already crippling burden on the entrepreneurial culture. All entrepreneurs ever wanted was a means to distribute information - relevant to them - efficiently between themselves. We can leave the rest to them.

THE 'BUSINESS ANGEL' MYTH

In 1995 an American professor, Charles E Wetzel Jnr, conducted a survey into the entrepreneurial culture in the USA. He discovered that a small number were investing in growing companies, and branded them 'business angels'.

• His conclusion had no validity outside of the sample he used. Had he gone back to exactly the same sample a year or two later, he would have found a similar number doing exactly the same thing but few, if any, of the same names. It is simply what entrepreneurs do.
• It is fair to say that there is a comparatively small element within the culture that does operate in this way and they could, perhaps, be called business angels. They might equally be called serial entrepreneurs.
• The vast majority of prospective investors in growth companies are simply other entrepreneurs investing in opportunities that their instincts and experience tell them are vehicles for capital gain.

EVOLVING REGULATION

In recent years, financial regulators introduced new or amended legislation to liberate the flow of information between capital raisers and the HNW entrepreneurs (as well as the growing number of funds) who want to invest in them.

The approach has been varied.

• In the USA it is necessary to register as a qualified or accredited investor either nationally or at state level depending on if you want to invest outside the state of residence.
• In Australia, the onus is on the capital raiser checking that potential investors qualify as a wealthy and experienced investor, an untenable burden of liability. At the time of writing, the Australian Securities & Investments Commission is being lobbied to move more towards the 'self-certification' model.
• In the author's view, the most elegant is the self-certification amendments to the UK's FSMA 2000 (Financial Promotion Orders 2001) introduced in March 2005, which Growthwire uses to qualify its investor subscribers. It simply exempts the self-certifier from the protections offered to mainstream investors by the Act.

MAINSTREAM MEDIA AND ENTREPRENEURS

Until recently, and with some honourable exceptions, mainstream media had a tendency to treat the entrepreneur stratum as being always in need of start-up advice when, at any one time, these represent no more than 2% or 3% of the culture as a whole.

• The 'honourable exceptions' are mostly in the Asia Pacific (AP) region, where economies are largely SME driven and this is reflected in the knowledge base of the media. Also, in the USA, advice is rarely on the editorial schedule.
• The reality of the entrepreneur audience is that the overwhelming majority have been in business for more than three years prior to which, according to which estimate you believe, between 40% and 60% of start-ups fail (despite all the advice on offer).
• Because they contribute more than half of GDP and employment in all developed economies, it should be accepted that entrepreneurs know what they are doing. They are seasoned, experienced and successful (to varying degrees) and want 'grown up' editorial, relevant to their needs and on which they can act where appropriate. Many in the mainstream media are now waking up to this with much improved editorial formats.

BRIDGING THE INFORMATION GAP

• From the outset, it was important to recognise that entrepreneurs are a 'culture', not a 'market'. It is populated by those who are just starting out, those at the peak of their careers and those retiring - as in any other culture.
• Most critically, investment deals are individually negotiated (using the business plan as the core document) between the capital raiser and investor. Larger deals are usually based on an investment memorandum or similar document.
• In this culture, the onus of due diligence falls squarely on the investor, and not the issuer, as in an IPO prospectus (the core document in the mainstream markets).

The challenge was to find a way to source, aggregate and distribute the overwhelming volume of information generated by the entrepreneurial investment culture.

To release the flow of information so the flow of capital can follow naturally.

The challenge for Growthwire, before it could even consider the technology, was to address the three key issues of sourcing, aggregating and then distributing the vast mass of information generated by the low-cap/high volume deal-flow investment stratum it was seeking to serve.

The over-riding objective was to get capital raising propositions from those innovative entrepreneur-driven enterprises around the world, so often hampered by insufficient capital, in front of those other entrepreneurs who want to invest in them.

• Source: Every capital raising private enterprise employs a professional advisor. Depending on the size of the project this could be a local business consultant, a regional or global corporate finance firm or other professional discipline. Capital-raising crosses most of them.

Growthwire sources its information directly from these professionals who, in turn, can offer their clients increased exposure for their capital raisings. This structure also ensures quality control in the production of business plans and provides a professional interface to the transactions for investors. Professional advisors subscribe as Growthwire Authorised Advisors.

• Aggregate: There are a number of investment stages to which investors respond and these range from start-up thru mezzanine to pre-IPO and, following that, either (mostly) trade sale or IPO as the exit route. All this, along with industry sector and geography were also taken into account in building the Growthwire engine.
• Distribute: Growthwire content is distributed to investors, who can respond directly to propositions and also, critically, media - who can use it as to business and investment editorial. Growthwire believes that, in time, news items tagged with 'Source: Growthwire' will be viewed as compelling editorial content by entrepreneur, wealth management, business leader and private investor audience strata.

These news items include the professional advisor handling the case as the contact as, in many jurisdictions, for a private company to publish its name in a capital raising context can be viewed as an unauthorized public offering. Growthwire feels that this should remain the status quo to avoid mainstream, inexperienced investors being drawn into the market.

GROWTH MARKETS ORGANISATION (GMO)

Every investor has an eye to an exit. Historically, the majority of these are through trade sale or venture backed buy-out, although many aspire to IPO. Growthwire has met these two needs by offering a 'For Sale/Exit' facility on the newswire itself but also, and more important, by establishing a unique relationship with the Growth Markets Organisation (GMO).

GMO was established in 2007 to promote awareness of, IPO output from and liquidity for the world's growth company/small-cap stock exchanges. The prospective investors in these markets, estimated to be 100+ worldwide, are the same ten million risk-keen, entrepreneurial investors as those who seek out opportunities in the off-exchange markets served by Growthwire.

Through Growthwire they will be able to include listed stock from these growth exchanges within their wider portfolio's and will invest not only from what they see in the prospectus, but usually from a sure knowledge of the company's positioning within the market it serves. Their own experience will tell them, instinctively, whether an investment is good or bad - for them.

At the same time, Growthwire's unique relationship with GMO enables all the GMO Member Exchanges to offer themselves as a ready-made exit route for off-exchange investors. Between them Growthwire and GMO therefore cover the complete investment cycle for growth companies from start-up to IPO, benefiting capital raisers and investors alike.

Growthwire will be carrying IPO filings on these exchanges as well as news items from their listed companies, creating a unique information channel for the global entrepreneurial investment stratum covering investment news from start-up propositions to growth exchange IPO filings, followed by news on how those listed companies are progressing.

STANDARDS

All Growthwire Authorised Advisors automatically become GMO Members. A committee is now in process of being formed to introduce common standards and protocols across the growth/mid-tier capital raising markets.

GMO will also be lobbying the world's regulators to harmonise regulations for growth company stock exchanges across the world.

A GENERIC MEDIUM

This White Paper has attempted to present the reasoning behind and the justifications for the introduction of Growthwire. It is recognised that some of its content will be seen as contentious and in conflict with the status quo. So be it.

The vindication, however, is the investors, professional advisors, capital-raisers and media now exploiting Growthwire and the information channels it opens for them, to their own advantage.

That is as it should be. Growthwire is a generic medium for a culture that, until now, has never had one.

THE AUTHOR

David G Rose is CEO of Growthwire. He comes from a 30-year career immersed in the entrepreneurial culture as an advisor and publisher, including the launch and sale of three magazines. He has also provided marcoms and capital raising services to countless growing companies as well as working with major corporations such as BT and AOL, government departments including the Western Australian Dept of Commerce & Trade and IGO's such as the OECD and UN (Commission for International Trade Law).

His early career was in telecoms in the Royal Navy followed by a period in the City of London. His interests are travel, writing and music (he is a member of his local choral society). He has written articles on varying issues for many business magazines. He has also contributed to features in the Australian Financial Review, Indian Economic Times and FT.

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July 2008