Strategic investors can help where banks fail

With Hong Kong banks reluctant to extend financing to entrepreneurs without loan guarantees, start-up companies should consider turning to strategic investors.

The life of a treasurer in a small company can be a far cry from that of a CFO running the finances of a large corporation. Securing the necessary financing and trusting the right people can be hard-learned lessons in any firm.

“But sometimes in a small company you don’t have the luxury of making such long-term decisions. When you are working in a corporation and the money flows in every month one way or the other, you have longer to survive,” said Ilse Massenbauer-Strafe, founder and executive director of Oxyvital, which is a provider of patented technology to clean indoor air.

Headquartered in Hong Kong, Oxyvital outsources the manufacturing of its core technology to firms in Germany and its casings to China. It also has distributors in Korea, Germany and the US.

The technology addresses what Massenbauer-Strafe views as a glaring gap in the market. Current air conditioning units do one of two things: heat or cool air, but they do not clean it. As many Hong Kongers know, the city’s concrete canyons effectively recycle dirty air (indoor air can be over twice as polluted as outdoor air) without any significant cleaning process. That is in part because humans emit carbon dioxide, computers generate electronic dust and furniture produces toxins. Save for respirable suspended particles (RSP), the eight gases identified by the WHO as dangerous (and responsible for so-called sick building syndrome) are free to come and go pretty much as they please. These gases include nitrogen dioxide, carbon monoxide and carbon dioxide.

In addition to the health implications, sick building syndrome comes at substantial costs to companies through high levels of absenteeism and sick leave. Massenbauer-Strafe claims that research shows her technology can reduce sick days by up to 70% by removing pollutants from circulation.

The company itself was valued at $18 million four years ago and has a turnover of $3 million. About two years ago the key decision was made to bring in strategic investors, not just for the actual investment, but also for the contacts. “If you go out asking for money you have to be sure that you remain the driving force. But once you are established you have to allow other people to come in. You see this a lot with new entrepreneurs: they don’t see the wood for the trees,” she added. In other words, it’s my baby and I’ll be cooked in oil before I let you get your hands on it.

This is precisely the wrong approach, she continued. “You have to be open-minded as a small company, particularly when you are introducing a new technology, and ask who could be a good strategic partner for your company. So for this first investment round we invited people connected to hotels, to properties and even governmental institutions. This was not an easy step as we don’t have this huge turnover every year, but people are banking on our technology.”

It’s an interesting and timely concept. If not exactly cheap (retrofitting existing air conditioners in the average classroom might cost as much as $2,500 to $3,300), neither is it ruinously expensive.

Moreover, health and environmental issues have never enjoyed more public and media attention. There are also precedents: after all, 10 to 15 years ago few people drank bottled water. “Even Hong Kong’s newest buildings are just taking outside air, cooling it, and flushing it through the system. Oxyvital is the only technology that can claim to produce excellent indoor air quality based on WHO standards,” said Massenbauer-Strafe.

Hong Kong’s unwilling banks

According to the company, its technology has now been installed in some 1.6 million square feet of public and private sector offices, spas and health facilities in Hong Kong. But any success that Oxyvital may have enjoyed during the past 10 years has come about through hard work, astute business sense and a bit of good fortune, but it has nothing to do with Hong Kong’s banks. The territory may be a great place to set up a company with plenty of capital behind it, but it is a very different story for smaller start-ups without those deep pockets.

The problem? Contrary to its image as a haven for entrepreneurs, Hong Kong banks are typically extremely reluctant to extend financing to start-up companies without loan guarantees. “I love Hong Kong and wouldn’t have lived here for so long if I didn’t,” said Massenbauer-Strafe, a 25-year veteran of Greater China. “But what really bothered me most was that despite some calling it an entrepreneurs’ city, effectively you can only start a company when you can prove you have guarantees for the loans. Luckily we have private income, but we would not have been able to be as aggressive if we had really had to live on the company.”

The difference is in marked contrast to the situation in (at least pre-global financial crisis) Europe, she added, where if the bank liked the idea, they would have taken on the risk themselves. Other Hong Kong entrepreneurs of Massenbauer- Strafe’s acquaintance have had similar experiences, living on a financial knife-edge and renting tiny apartments because nearly all revenues have to flow back into the company. Once office rent and salaries are paid, precious little remains for founders to live on.

“As a young company you really have to work with your cash flow, for instance, but sometimes your biggest clients will not pay you on time, and you can’t even get an overdraft in Hong Kong without a guarantee. In Europe you don’t have to put all your assets on the line, after all it is a limited company, but here there is no facility.”

Massenbauer-Strafe likens Oxyvital’s strategy to the Intel concept but for air conditioning units. By that she means if you think about IBM, it was fine on its own — but Intel’s technology made the computer better. She says that the future of the company lies in being a technology provider and not a manufacturer. In this theme, she is slowly working out a co-branding deal with two well-known air conditioning suppliers to include Oxyvital’s technology in their products, which would be a significant result for the company. “Entrepreneurs have to see the big picture. In our case, we are not competing against existing air filtering technology; we want to complement them and make them even better through our technology,” she said.

She’s learned if you can’t get the financing the traditional way -- by going to a bank -- you need to find powerful partners who can help out.


This story was first published in the December 2010/January 2011 issue of FinanceAsia magazine.

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