For many businesses, funding is one of the obstacles that keep businesses from scaling and to grow. Like all living things, in business, you either grow or die. Not expanding in a competitive business environment could mean certain death. Many businesses will find itself unable to grow at the desired pace if it’s only dependent on internally generated funds.
Without proper funding and sufficient cash flow, small and mid-size businesses may even find themselves struggling in these few situations:
- Unable to expand their businesses geographically
- Strapped budget to add new product lines or services
- Not enough funds to market and promote their products or services
- Unable to attract high-quality talents into their businesses
Eventually, these challenges may lead them losing market share to their competitors and customers turning away from them.
It’s Not Easy To Get Funds from Banks
Obtaining funds from banks isn’t easy in today’s uncertain economic condition, as banks have tightened their lending policies.
While banks will usually want to know what you’re going to do with their money, the key restriction is whether they think you’re capable and willing to pay it back in future. In other words, the banks want you to show them how strong your track record and profitability to prove your credibility.
“A bank is a place that will lend you money if you can prove that you don’t need it” – Bob Hope, American Comedian.
But if a business is that strong, it may not need the funding from the banks. Thus, it is causing small and medium-size business owners to find alternative sources of funds such as venture capital, PE funds, Angels, IPOs, and crowdfunding.
The possibility of a business to get funding from all these avenues is, amongst many other criteria is your ability to show future potentials.
Companies With Huge Losses Can Get High Valuation
In the current market, strong profit record is no longer the only metric that investors require to invest in a company. They are also concerned with brand recognition and growth potential. In other words, the traditional PE ratio (Price to Earnings) serves primarily as a guideline.
That’s why home-sharing company Airbnb was projected to reach $24 billion of valuation, despite it having an operating loss of about $150 million for 2015.
Airbnb had only recently started to show profits these two years. Earlier of this year, Airbnb says it was profitable on an EBITDA (earnings before interest, taxes, depreciation and amortisation) basis for the second year in a row in 2018.
Another example is Uber. The US ride-hailing giant recently publicly filed for its IPO. Although the company has lost US$10 billion from operations since 2016, it will raise approximately $10 billion from its IPO; it is expected to be the biggest U.S. listing this year. The offering could value Uber at around $100 billion.
Create Value For Your Shareholder
As a business owner, profit is not the only thing that you should focus on to create value for your business. There are other areas you need to look into in order to increase the value of your business. After all the basic responsibility of management is to create value for the shareholder. One of the fastest ways to create value is to get listed.
Keep it in mind that listing not only will create value for the shareholder but also create an exit opportunity for investors and a channel to get funds from investors (through IPO, private placement and right issue exercises).
When it comes to listing, you are probably thinking about these questions:
- Do only big corporations go through IPO?
- Are we not qualified to fulfil high IPO requirements?
- How costly is IPO?
- IPO is a very complicated process, are we are ready?
If you have the above concerns, then the Alternative Investment Market (AIM) may be a good option for your company to get listed, instead of the main board. AIM is a stepping layer to fill in the funding gap, such as GEM board (Hong Kong), Catalyst market (Singapore), ACE market (Malaysia), MAI (Thailand) and the US OTC.
The process for a company listing on AIM follows much the same path as a traditional IPO, just with less stringent requirements. It allows smaller, less viable companies to float shares with a more flexible regulatory system more than is applicable to the main market.
The earliest AIM is created in 1994 in the United States is now known as the US OTC. This market is regulated by the United States Securities & Exchanges Commission (SEC), providing a securitisation platform for small and medium-sized companies to raise funds.
The US OTC is viewed as a stepping stone to uplift to the New York Stock Exchange (NYSE) or the NASDAQ stock market.
Misinformation of IPO
There is misinformation when it comes to IPO. People often have misperceptions that a company must have a strong track record and be profitable in order to be listed.
It’s not entirely true, especially when more stock exchanges introduce new listing platforms for small businesses to raise fund, such as Bursa Malaysia’s Leading Entrepreneur Accelerator Platform (LEAP). There is no requirement for profit track records or operating history for LEAP Market listings.
In fact, Malaysia is not the only country in ASEAN that build a new platform to help the start-up or small businesses to raise funds. Thailand and Indonesia also do the same thing but in different ways.
Last year, the Stock Exchange of Thailand (SET) has officially launched the first crowdfunding platform in the country for start-ups and SMEs. This platform provides the Over-the-Counter (OTC) trading service for the businesses to access capital funding.
As for Indonesia, the local bourse – Indonesia Stock Exchange (IDX) and Indonesia Financial Services Authority (OJK) initiated the start-up incubation programme – IDX Incubator in 2017. This serves to help develop start-ups in Indonesia in terms of business, legal and funding to allow them to list on the stock exchange. There were two start-ups had been listed at IDX, PT. Yelooo Integra Datanet Tbk (YELO) and PT Kioson Komersial Indonesia Tbk.
Hong Kong, the international financial hub also joined the line-up to woo technology start-ups. Last year, the Hong Kong Exchanges and Clearing (HKEX) launched its biggest listing reform in 25 years. Under the reform process, it allows biotechnology companies that have not established a track record of revenues and profits, to list in the city.
This opens up an opportunity for pre-revenue biotech firms to raise capital and give more option to investors to invest in the ‘new economy’.
There are more and more alternative investment markets for start-ups or small businesses to get listed, which will allow them to get funds from investors and create a visible value (share price and market capitalisation) for your business.
From the current market trends, it’s not just the big fish eats small fish, but also the fast outrun the slow. Thus, raising money to grow and establish brand recognition through listing is critical for a company to grow faster and surpass its competitors.