In 2004, Swiss national Thomas Flohr founded Vistajet, a private jet charter company operating just three aircrafts. By 2008 Vistajet had a fleet of 19 jets and today they have 55, and growing. Operating worldwide, they have also recently secured an impressive investment of $300 million.
There are several funding options available if you’re looking to raise capital to fund similar ambitious growth plans for your business.
Vistajet used the perhaps less de rigueur ‘debt financing’, rather than the alternative and perhaps more popular ‘equity’ financing.
Debt financing, or a good old-fashioned loan, is typically used in the aviation industry and there are some good lessons to be learnt, especially from the Vistajet case study, for those in other sectors looking at fund raising options.
Who’s in the Cockpit?
Vistajet was launched in response to the founder's frustration at the lack of consistent quality in the luxury air charter sector. Vistajet own almost all of their fleet as a way of staying in the driving seat, or cockpit, to maintain control of the quality of their service offering.
Maintaining control and ownership of their business and to fund raise against a watertight sales forecast has been the keystone to their fundraising success.
Debt vs. Equity Financing
Vistajet chose to raise capital to expand their business using ‘debt’ investment rather than ‘equity’ financing.
Raising investment through debt financing means your only obligation to the investor is to make sure you make repayments on time, which can be burdensome to a start-up with low cash flow.
Whilst you don’t have budget-wearing repayment and interest payments to consider with equity funding, the price you pay is losing sole ownership of your company and a share of your profits.
Debt securities are a priority over equity finance in the case of liquidation, therefore, generally they’re seen as safer and so you have a better chance of securing the funds you need going down this route.
Secured vs. Unsecured Debt
Following in the mantra of maintaining close control of the business, Vistajet’s investment came from an ‘unsecured’ loan which is harder to obtain than ‘secured’ loan, but means you do not risk losing your assets, and this is particularly important if you have a highly valuable asset base like a fleet of luxury jet planes.
Unsecured ‘notes’ rely on a very strong credit rating and attracts higher interest rates than secured debt where the investors take asset as collateral to reduce the lending risk. Your debt interest rate is generally based on your perceived repayability, with more favorable rates going to those with the better credit rating. Reputation is vital!
Again, the lesson here is to have faith in your financial model and not to be scared of unsecured debt by establishing a ‘visible revenue’ at least 12 months ahead so you’re confident in meeting debt repayments.
When looking to attract investment into a debt security you must give investors confidence that your business can financially meet its obligations and the best way to do this is to use a reputable corporate credit ratings company such as Moody's, Standard & Poor's (S&P's) and Fitch Ratings who are regarded as the top three in the world.
Whilst AAA represents the highest and most attractive corporate rating, Vistajet’s ratings were B+/Stable and B/Stable. To help improve your chances and confidence in your credit position get ratings from two or more firms.
Junior vs. Senior Notes
You’re investment is most likely to get support if you offer ‘senior’ debt as it has priority over other types of debt in the case of bankruptcy.
David vs. Goliath
Vistajet are clearly seen as a sure bet in an industry that is often viewed as ‘uninvestable’ and this is why there is a lot to be learnt from their successful $300m fund raise.
“I like a good David versus Goliath fight,” claims Flohr.
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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