Chapter 9: Finances: Raising Capital for New Ventures
Small and newly established firms took a severe hit within the London Stock market, during the recession of the early 2000s. Said firms particularly struggled to raise equity finance. With the complexion of the economy drastically changing and stock investors becoming extremely cautious, it was left to each individual firm to find new ways to raise capital. This case study follows the methods employed by Osmetech plc. Download the full case study here: Chapter 09 - Case study
Chapter 9: Questions
1. Section 9.2.2 of the text deals with borrowing. Why may borrowing from banks not have been an option for these businesses?
Guidance answer:
The amount of capital being required, the risk profile of the ventures and their existing borrowings may have all been factors that could have limited their financing options as far as banks were concerned. Also bear in mind that at the time of the 2002 stock market crisis, there was a general lack of capital for a range of different firms, banks could therefore choose to lend their money to the safest of propositions.
2. Section 9.5.2 deals with the nature of the return to investors. We have seen from the case above how existing equity investors may fear dilution. What factors do you think such investors may take into account when investing, in order to reduce the risks of dilution?
Guidance answer:
An important factor that potential equity investors may take into account is whether or not directors of the company also own shares and to what extent. If existing directors have their own capital committed to the venture in terms of equity investment, this is likely to mean that they will be less inclined to follow the path of heavy dilution as a means of raising capital in the future.
A second factor equity investors may need to take into account is the history of the venture in terms of raising capital, does it have a record of diluting existing shareholders? If it does, this may put off equity investors.
3. Why do you feel that existing equity investors in firms such as Osmetech and Sci Entertainment may have felt GEM financing deals to be a problem?
Guidance answer:
The structure of the deal was such that if the firm drew down capital at a time when the share price was low, this could lead to very high levels of dilution. Existing shareholders could therefore be diluted without having a say in the matter.
