Ian A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as a partner at Zetta Research and an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian
It seems that just about every day I get some young, or not so young, tech entrepreneur wandering into my office at Surry Hills looking for advice as to how to get their new ‘company’ funded. I say ‘company’ in quotation marks because at least half of these companies are simply concepts and there isn’t even a business plan or a Powerpoint summary, let alone a corporate entity.
I view these entrepreneurs through a number of filters:
- The Internet and ‘the rest’. The Internet guys all want to do, for example, some groovy game concept, a B2B disintermediation play, or a web/phone app. ‘The rest’ is composed of ‘old school’ ideas such as medical devices, scientific instruments, electronics, clean-tech, you name it.
- In the Internet camp about 99.99% are ‘me too’ and only the odd individual actually has a new idea in an area of ‘white space’. This doesn’t worry anyone since they are all convinced that their particular spin on the area will be naturally loved by the webizens and that they will be the winners.
- A large proportion of the entrepreneurs have zero experience in the industry that they want to launch themselves into, so it’s a good guess that their ideas have little or no value. I do find the odd person who has actually worked in an industry and spotted a real and verifiable problem or opportunity to work on.
- Very few of the entrepreneurs have done an ‘apprenticeship’. That is, worked in someone else’s start-up in any role, and learnt on someone else’s coin and time. Many think that a couple of books read, maybe a course or a forum or two, a couple of weeks in an incubator space, a few coffees with some grey beards and, presto, they know it all. I try to explain to them that it’s not what you know, but how you act, often under pressure, that counts and that this can only be learned on the job. I give the analogy to plumbing or sailing, also jobs where an apprenticeship is needed.
- Experience aside, not too many of my visiting entrepreneurs have what I would call the ‘right stuff’. This is very hard to define, but after 14 years in venture capital and start-ups I can spot an individual who will ‘die in a ditch’ to make their company successful, and these are rare individuals, often driven by what the psychologists would call ‘issues’. These people are great for investors but rubbish for their families. It’s a case of being careful what you wish for.
- Some entrepreneurs have few responsibilities, being young, unmarried and also with a few dollars in the bank. These guys can afford to spend a year or two living on the smell of an oily rag whilst they try to get their company up and running. I really feel for the more entrenched guys that have a mortgage (in Sydney no less!), a couple of kids in private school, and a penchant for a corporate salary. This latter category has so many more constraints on them with respect to getting a start-up funded. (ED: Pretty sure you are describing me)
- Most, say 90%, do not have any idea how to develop a plan to execute their business ideas. They need help, and lots of it, from people with a lot more experience.
- More worryingly, out of the hundreds that I have shouted a coffee , I have probably only one guy that had a clear idea of how to build enterprise value and who was going to buy his company, and why. The rest had no idea that the company itself is a product to investors.
- A very large fraction of the entrepreneurs are men or boys. There are very few women wanting to be tech entrepreneurs in Australia. A discussion of this fact represents a rabbit hole that I do not wish to enter. But do please excuse me for any gender bias in the language of this article resulting from this observation.
Show me the Money…
The one concern that all the entrepreneurs want to discuss with me is how to get funded. They know some of the options and this all comes out in the first five minutes of our coffee:
“What do you think of crowd funding?”
“Is there anyone actually investing venture capital money in Australia?”
“What do you think of [so and so] Angel Investor group?”
“Do you know much about [so and so] government grant body?”
“Would you advise us to go to Silicon Valley?”
“Do you think we should go for [so and so] entrepreneur of the year award?”
“Our [so and so] University commercialization group is suggesting [such and such]. What do you think?”
Just for completeness, my answers are; hate it, no, hate them, yes, sometimes, never, oh dear!
They never ask three other pertinent questions, namely:
“Do you think we can bootstrap our company?”
“Do you know any corporate investors that would be interested in what we are doing?”
“What do you think of China?”
My answers are; sometimes, sometimes, mixed.
So now that I have set this up, here is my investment advice. This is given so that I can refer potential coffee partners to this article, ahead of the coffee, in an attempt to cut down on these meetings. I am very time poor and this might save me a few coffees. My wife thinks I am addicted – she may be right; but it’s the coffee I am addicted to and not the proffering of free advice.
If you are an Australian entrepreneur with an idea that you just can’t let pass by, then here is an investment how-to guide, to be followed in strict order from Steps 1 through to 5.
Step 1. Silicon Valley
If it’s a good idea and needs lots of capital to be successful then go straight to Silicon Valley, do not pass go, and collect $200m. How do you know if your business needs tens or hundreds of millions of dollars? Well look at comparable companies that are getting funded in Silicon Valley and see how much capital they are raising. If they are raising a lot then so must you or else you will be dead before you start. Going ‘viral’ is effectively a myth – it all comes down to marketing dollars.
Just as an aside, if there are no comparable companies being funded in Silicon Valley then go to Step 2 or stop right now and give up. Remember Silicon Valley attracts deals from all over the world. It is not US-centric; it is the Venture Capital center for the world. So please don’t do yourself a disservice by dealing with a want-to-be branch office. And if Silicon Valley isn’t investing in your space that is because they aren’t getting the required returns on their investment in your space – take note.
When you do go to Silicon Valley you actually have to move there and not just visit occasionally. Get networked. Most likely they will hate your idea and hate you even more, but they will never tell you this. This is the time to morph the deal into something else, find an experienced CEO and Chairperson, and keep at it.
A final word on Silicon Valley; what they have its lot of venture capital and amazing networking opportunities (to corporations and individuals). This doesn’t mean it’s all good – there is a huge spread of capabilities among Silicon Valley venture capitalists. But the Americans are awfully good at solving problems and grasping opportunities with the use of excessive capital – a skill that doesn’t exist in Australia.
Step 2. Bootstrap
If your type of company isn’t being funded in Silicon Valley then you either give up, OR you can decide to ‘bootstrap’ the business. No, this is not Kickstarter; this is a little known and very old concept where you grow the business slowly, get profitable on some small & genuine sales, and then reinvest all the profits into continued growth. The initial capital to get the business off the ground is your own, or from friends and family (that should be paid back and not become equity holders). In this model you never get investors that take a large slab of your equity. After a few years our banks might even lend you a dollar or two, if you are lucky.
If this appeals to you then you probably still need to get acquainted with some experienced entrepreneurs that can help you develop a business strategy and plan. Let them have some equity, maybe even invest a little play capital – it will be well worth it.
Step 3. Corporate Funded
If your type of company isn’t being funded in Silicon Valley but it needs too much capital, prior to revenues, to bootstrap, and you are still convinced that you want to do it, then you should contact the large corporations in your space and ask for funding. Some actually have venture groups and many others are willing to get into operational and S&M partnerships with start-ups. Normally to make this work you will need some people working with you that have credibly in the market space and that are known to the corporations that you want to approach. Find these people and try to convince them – you will learn a lot from the experience.
Step 4. Chinese Investors
If none of the above appeal to you and you just happen to be of Chinese heritage, then you can always opt to consider China as a source of investment. Just note though, the Chinese aren’t all that keen on investing in Australian businesses unless they are lifestyle, agri- or resources deals. So if you have great technology concept and you really want to get investment from Chinese sources then you are going to have to really take it to China; lock, stock and barrel. They love their local IPO’s. My ‘how-to’ advice for going to China is pretty much the same as that for Silicon Valley – so refer above.
Step 5. Government Grants
If you got to Step 2 or Step 3 and stopped, then by all means tap the myriad of Australian Federal and State government grant schemes in order to extract all that you can. If you head to Silicon Valley or China this won’t be necessary.
A Final Word
I will leave my critique of crowd-funding, angels investors, local venture capitalists, the myriad of Australian tech awards (with or without cash prizes), and university tech offices for another day, or maybe not. To be honest, I can’t see any value in offending them. But, be warned, here there be monsters.
A final word; you all need to realize that living in Australia is a great lifestyle choice but it’s a crap choice for building a tech start-up. If you stay here then you are in a swimming race with weights strapped to your body. On the flip side, to loosely quote Frank Sinatra, if you can make it here then you can make it anywhere!