As banks tighten lending, funding for resellers is more critical than ever before.
According to a JP Morgan and Fujitsu Australia survey, the big banks have tightened their grip over the SME sector.
That's likely to continue, with average costs of funding expected to rise for banks over the next five years.
The alternative is to reinvest profits and forego salary, and many small businesses pursue that path. But by doing that, they are making themselves more dependent on creating value from the business to fund their retirement.
The size of the reseller market here means that there are few tales of resellers getting funded by private equity, angel investors or venture capital. The industry is young and so is unlikely to go down any complicated path to get funding.
And yet, venture capital, private equity and angel investors offer the potential for funding that they would not otherwise get, potentially fuelling growth and opportunities for the merging reseller market.
There are government grants for SMEs. These include the Enterprise Connect grant of up to $20,000 and the Techfast grant of up to $50,000 for new products creating turnover between $1-100 million. Resellers can check out sites like Business.gov.au and Ausindustry.gov.au
Private equity appears to have retreated during the downturn but is showing strong signs of a return. Brisbane-based private equity firm Blue Sky, for example, whose investments include toilet rental business Viking Rentals and national food chain Lenard's Chicken, has launched a $50 million fund that will attempt to take advantage of a shortage of bank finance by targeting profitable SMEs with solid growth potential.
The venture capital sector, though, seems to be shrinking. The GFC has ruined the appetite for risk among VC firms.
The growth seems to be coming from angel investors, often wealthy individuals with a successful track record who invest their own money, usually in a related field. Their backing may not be purely financial - in exchange for cash and equity, the angel investor tries to add value to the business by providing contacts, sitting on the board, introducing the entrepreneur to networks and helping with their governance. Some create advisory boards for the company.
The key difference between angel investors and venture capitalists is that angels invest their own money. VCs, by contrast, typically invest the money of others and seek to deliver their investors a return within a set timeline. This means VCs will typically look to businesses that have the potential to scale quickly and into large markets. Unless a reseller fits that category, it is better to go for an angel.
A recent survey from the Australian Association of Angel Investors reveals that in 2009, angels invested $1.4 billion in more than 5000 companies, creating 26,500 jobs. Most of these investments were in seed and start-up companies with a heavy focus on biotechnology and IT, communications and web-based software.
Angels invested either as individuals or in syndicates using unit trusts. They spent over 40 hours a month on their investment activities, with half that time spent advising the entrepreneurs.
According to the survey, the number of angel groups in Australia is increasing. Four years ago, there were three angel groups; at the end of 2009, there were 12. The web site (http://www.aaai.net.au) lists several angel groups; typically, each of these would see 50 to 100 deals a year.
Key for the reseller is convincing investors they are not throwing their money away. This means a value proposition with a clearly defined target market. Are large corporates the key market? Or the financial services sector? Does it lie with medium sized commercial clients that are looking to expand? Or do universities, schools and colleges provide the right niche?
The key point to remember is that the investor - whether private equity, venture capital or an angel - is not there to "give the business a go". The investor is looking to make money, pure and simple.
This means the reseller needs to understand what is driving the investor. Do they expect a healthy profit in three to five years? Are they going to be passive? Or do they want a more hands-on role building the business, taking it to new places and creating markets? How much time are they looking to put into the business? What skills, contacts, networks and experience does the investor bring to the table?
Just as importantly, how long do they plan to back the company? What is their exit strategy? What are the other companies they have backed? Are they complementary or are they competitors?
Australia's reseller sector is an emerging industry. Over the next few years, opportunities and new markets will present themselves. To get there, resellers might have to look at alternative funding sources.
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