Booming share market the bane of SME start ups?

Entrepreneurs with innovative ideas are finding it more difficult than usual to source start-up capital - and the culprit in recent times has been the stock market.

This was highlighted to me in a recent conversation I had with a learned friend who plays in the field of start-up capital. Here is the problem: An investment in the stock market made on June 30 last year (lets say you invested in the All Ordinaries Index) would be now worth roughly 25% more today - and that's ignoring the re-investment of dividends. An investment in Woolworths 12 months ago would be today worth over 40% more today (visit a chart at the ASX for more specific data). If Woolworths was a horse going around Royal Randwick of a Saturday, you would expect the price to be very short - because it is not generally perceived to be a risky proposition. Think of comparing Woolworths' "form" to that of an untested (no matter how well researched) start-up. But if "horses" like Woolies are paying over the odds, the "maidens" start to look unattractive to all but insiders.

No matter how you rate the risk of the market, it would usually be considered much safer than investing in start-ups. The returns available in the stock market are simply wooing investors away from start-ups. Traditionally start-ups offer around 36% per annum in return (as a rough guide) for seed investors. Compare this with the 40% offered by Woolworths, and you get to the nub of the problem.

Exacerbating this problem has been the trend in recent years for venture capital funds to chase bigger and bigger deals and to look more to mergers and acquisitions and to shun start-ups. This shift happened because the VC's look to hit pay-dirt (usually) via an IPO within 5 years of their initial investment. Much easier to do when the investment is bigger in the first place and the cash flows are more certain - as they are in an established business.

All of the above is of course, anecdotal only. And as Isaac Newton once said, what goes up, must come down, so this phenomenon won't always be around. Looking forward to your feedback.

PS - none of the above is meant to be investment advice, so don't even think about suing me if your stock market investments turn sour!