COMMENT:

You might've seen some headlines recently, with capital figures that defy belief - such as Uber raising a USD$9 billion (NZ$13.65 billion) investment round earlier this year.

As these sums become bigger and venture capital investment continues to grow to record highs, it poses the question: what do companies do with these huge sums of money?

The answer to this depends largely on the type of company you're dealing with and what it's trying to do.

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The unicorn

A company like Uber is one with significant international reach. In most airports around the world, you can hop off the plane and sure enough there'll be drivers clamouring to whisk you to your accommodation. Reaching and maintaining this global scale however, comes with a hefty price tag.

Uber has faced strong criticism from the taxi industry. Photo/Getty Images.
Uber has faced strong criticism from the taxi industry. Photo/Getty Images.

To operate across 72 countries and aggressively displace local taxi firms, Uber has had to spend a considerable amount of capital on building a technology platform that can handle a high number of users and transactions, while also undercutting the price of local ride services to attract customers to switch over to their service. Doing all of this at once takes a lot of investor dollars.

The corporate

Most readers will be well aware of the issues Fletcher Building has had executing some of their large-scale construction projects such as the SkyCity Convention Centre. This resulted in large losses for Fletcher, which meant the balance between debt and equity in the business was making debt lenders uncomfortable. Fletcher Building recently underwent a big investment round, raising NZ$750m from shareholders and new investors to re-address this balance, resulting in a more manageable level of bank debt. Similarly, New Zealand King Salmon, who listed in 2016, raised NZ$70m to pay down debt, pay out some existing shareholders, and fund a new salmon farm for growth.

The growth Kiwi business

The typical growth Kiwi business has built a great product, received validation in New Zealand, has made some strides abroad, and would be looking to push go on the large export button.

For example, Kiwi cider brand, Zeffer Cider has well-developed products and manufacturing capability in the Hawke's Bay, and has just raised NZ$2.4m to scale production capacity and grow sales in export markets, particularly in China. This raise will help them grow at a much faster rate than they would be able to do so organically.

The start-up

A fresh-faced company is most likely looking for capital to fund development and validation of its product. At this stage, companies are also looking for investors who might be able to add something beyond a dollar injection - such as advice, industry connections or to fill a board seat.

New Zealand tech start-up Dotterel Technologies raised AU$500,000 (NZ$553,000) last year for its drone noise reduction technology. This early stage funding allowed them to continue product development, protect the IP developed and meet potential investors, clients and partners at international events.

For any investor looking to invest in a company via a capital raise, it's important to know where the funds are earmarked to go. It should be a clear reflection of their growth strategy and often indicates the business' priorities. If it's not clear, it can be an easy way to identify a bad deal - like all Dick Smith investors eventually discovered.

Bill O'Boyle is the head of growth capital at Snowball Effectstrong>