The Pit - IMI Trust

With a strong economy, a surging stock market and business confidence high, more and more companies are raising capital or seeking venture capital funding.

Every day we are speaking with business owners who are seeking investor funds for the business. To be honest, some of the ways in which people seeks to raise funds is attrocious and really it is embarrassing.

So here is some basic things to think about before you speak to anyone who can assist you with raising capital.

1) Establish what your core business is, and your competitive advantage. You need to be able to isolate exactly what it is which makes you unique. Saying that you have something which nobody else has (in a developed industry) is pathetic! You may have a unique aspect, but not something which nobody else has.

2) Establish how much money you need to raise in the short term and in the long term. I can not tell you how frustrating it is, when we meet with businesses and the answer to this question is “I dont know.”

3) Establish how the investors can potentially benefit financially from the growth of your company. In other words… how are they going to make money? Is it going to be through a stock exchange listing in the future, a sale to a larger establish firm (for example the sale of Youtube to Google) or are you looking to pay healthy dividends to the investors.

They are 3 key points to think about before you meet with anyone. Ideally, have a business plan outlining the vision for the company, the product range and how you plan to accelerate the growth of your business. This will demonstrate that you are serious about moving forward in this path.

In this industry, people have minimal time and they don’t believe in initial consultations where the client walks in with no clear idea about their business, the direction of it, how much money they require… and why!

I was studying some charts recently, and the above equation is so obvious when you look at the charts.

Now, this isn’t a political post, this is an observation which is clear to anyone who looks. More importantly there was an announcement in the US recently, which gave me an insight into the short to mid term direction of the markets.

Look at the chart below…..

So far the US alone has invested over $430 Billion into funding the war in Iraq. No, when you think about how war stimulates economic growth, some other factors come to mind. Firstly, in economic you are taught the ‘residual value of a dollar.’ For example, every $1 spent, a portion goes into someone else’s pocket, then they spend that money, and then it goesinto someone else’s pocket and the cycle continues.

So $1 spent, can have a total value to the economy of over $3 - $4. Why is this important? A few months ago the US Congress approved an additional $100 Billion in funding for the Iraq. The trend of the markets over the last few years in response to war, is a good indicator of future funding of the war and its impact on the markets.

On Wednesday 426,000 new trading accounts were reportedly opened in China. This amount was up on the average daily opening of accounts of 300,000.

That is insane! This is equivalant to the entire population of Australia opening an account over the next 50 days.

I am sure that there are kids coming up through Uni looking at Stock brokers as the new doctors. In fact, it is common place that social conversations through university students and adults, is based around the action taking place on the markets.

A couple of weeks ago, they announced a trippling of the taxes on trades being placed. Whilst the market took a 6% hit, it didn’t stop over 400,000 accounts being opened. Now the word bubble is starting to enter the market place. The Shanghai Index has nearly doubled this year alone.

What’s interesting is the contrast to the last exhchanges to experience a bubble, and have a dramatic pop. Whilst almost every exchange on the planet has their indices hitting all new highs, there a 2 notable absentees from that list. Tokyo’s Nikkei index and the US tech focused NASDAQ.

Both of these indices are a long way from their highs, and it has been severals years since they collapsed. What is more… they both have a long way to go, to reach previous highs. The companies which fill those indices are also a long way off their highest share prices.

With so much cash in the markets at the moment, any brief down turn are being corrected by share buy-backs or private equity. This is giving investors confidence in US markets, but it is the hype around IPO’s driving forward the excitement of the Chinese stocks. 

So whilst Chinese Stock Brokers are the flavour of the last few years, the future may hold some interesting challenges ahead. What is one to do when the hype which has inflated the market, is dramatically let out?

Imagine if you woke up stupid every day, with a hunger to learn, grow and evolve! That is the difference between the minds of innovators and routine.  Actually, it would probably be immensely frustrating that you have to start from scratch every day but in essence, innovators are those who wake up looking to pioneer.

Innovation is about looking at problems or gaps with new eyes.

When News Corp saw computerisation take hold they revolutionised the newspaper industry by streamlining and templating the whole process.

When Apple and Steve Jobs were being a thorn in the side of PC manufacturers Apple were busy conceiving how the music landscape would be changed forever.

It is interesting to look at the increase in Apples share price when Jobs is there… and when he is not.

1986 to 1998 Minus Steve Jobs - 120%

1998 til today with Steve Jobs - 1240%

Anyone else notice the difference innovation can make? What inspires you?

The flying kangaroo, Qantas is the talk of the investment town with speculation that private equity group, Texas Pacific Group, together with Macquarie Bank, may takeover the Australian icon.  This move would remove the ciompany from the ASX.  There is also talk that Fosters may be off the ASX soon if it is taken over.  The Seven Network and PBL have also been targeted by wealthy US-based private equity companies with deep, deep pockets.  Other blue chip stocks are following suit. 

The pattern for leaving the ASX started early in the year when, Rupert Murdoch’s News Corporation, the then biggest company on the ASX switched stateside.  Large companies in Australia are considered medium-sized (or smaller) to their counterparts on the NYSE and the Nasdaq.  Remuneration for the board of directors at companies like Pfizer for one year, for instance, would be more than the market capitalisation of the majority of Australian listed companies. 

The private equity companies involved like Texas Pacific Group (TPG) and Kohlberg Kravis Roberts (KKR) have nearly endless resources after decades of acquisition and growth.  These are just the big two.  There are literally hundreds of these companies with the ability and inclination to buy Australian growth assets. 

Rebranding Will Be Straightforward As Shown

Is the Australian stock market going to be white elephant in the eyes of global trading giants?  More importantly, are local investors going to be satisifed with the only B-grade or speculative investment opportunities?  

This trend is making life difficult for financial planners and fund managers in Australia.  Many conservative planners and managers rely on big ticket stocks across a variety of industries.  Now, more than ever, Banks and Resources underpin the Australian Stock Exchange but for how much longer. 

Will the up and coming companies succumb to the lure of the greenback and turn the ASX into a Sunday Market or Australian companies going to show some backbone and compete with the big fish in the global economy?