Sunday, May 9, 2010

Bill Payne and Andrew Hamilton: Why NZ needs to be on the side of the angels - Opinion - NZ Herald News

Bill Payne and Andrew Hamilton: Why NZ needs to be on the side of the angels - Opinion - NZ Herald News


Funding for start up companies is an ongoing problem. Venture Capital works on a 1 in 10 basis. Out of every 10 startups roughly 1 in 10 will return capital many times. 3 will make a reasonable return and 6 will fail to return on the capital invested.
Banks will only lend to startups on the owners mortgage or other solid assets.
The cost of capital for businesses from banks and finance companies is often prohibitive, especially as New Zealand interest and exchange rates are usually artificially high compared with overseas competitors. (Due to externalities of the reserve bank act).
Many new businesses founder from lack of capital at the first stage of expansion, after the owners mortgage equity is exhausted, despite being basically viable.

Shareholder funding is only available after a certain stage is reached. Also shareholders do not normally contribute anything to funding, in the way a private owner does, after their initial share purchase. Shareholders then become a cost to the business. Often demanding excessive borrowing to maintain dividends.
The demand for increasing share value is a social cost because a shareholder owned business requires constant growth. Continual growth is not sustainable.
Shareholders often close down and asset strip businesses even though they are making fair incomes because they see an opportunity to make more elsewhere. Lately elsewhere has been funny financial products.

We need a new funding model which allows for steady state sustainable businesses.

The New Zealand business man with the bach,beamer and boat is not a bad aspiration. Small/medium steady state businesses are the mainstay of our economy.

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