Arriving slightly jet-lagged in Argentina, I was warmly welcomed by the representative of the travel agent, says Malcolm Durham from Flexible Directors. I went through my itinerary, about 6,000 km and four flights. So what to do if they were late? Well use WhatsApp of course. The App that I have come to know and love, is just as ubiquitous seven thousand miles away as it is here. Not the greatest surprise - we know that software can be distributed quickly wherever there is internet and Argentina is very much part of the connected world.
Travelling alone gave me time to reflect on this inter-connectedness – how much easier it is to communicate with almost anyone, almost anywhere and almost anyhow: presentations, videos, texts; why there’s even a voice app on my phone which allows me to, er, telephone people.
Being in Argentina, the land of silver, led me to think about raising capital, as you do. I wondered why the communication tools sometimes get thrown away when private companies raise equity from the public? Public company flotations usually involve a “book-building phase” when the sponsor discusses the investee with investors and reaches some consensus over a price range. And when private equity firms consider investment in growing businesses there will be a discussion over the projected value and the percentage to be acquired by the investor. Granted, some transactions fail because the parties are too far apart, but there is a clear process of communication. But in early-stage financings where there is often no sponsor and valuations are hard to validate because the track record to date is short and often bears no relation to future projections of 10x growth, the price is often fixed, usually by the founders’ view on what % of the company they are prepared to “give away”. I would like to ban the word “give” when it comes to investment (and company sales too where purchasers often grandiosely offer to “give” £x in exchange for a lifetime’s work and a hefty income stream).
Early stage businesses would benefit from listening to those people who point out the risk attached to the business, the alternative returns that investors can get from other assets (including other private companies) and either defer raising finance until the project is better proven or recognise the very high level of risk involved. The founder’s belief in the project isn’t a risk reducing factor, nor is experience really – they are essential pre-conditions to consider the investment. Even for the new WhatsApp there are a lot of hard yards to travel initially before the business is worth a substantial sum and can expand.
Argentina has been a basket case, suffered much corruption and the tyranny of a fixed exchange rate. But it’s resolved a lot of that and is part of the global community, so much so that it hosts this year’s G20 summit. It seems to have listened and learned, two activities I find most valuable. Why there's even an App for it: have a look at LearnAmp.