Angel investor

Behavioral Innovation, the Need To Pivot, Why We Don’t and What We Can Do About It

Written by Christine Thong and Evan Shellshear

When was the last time you seriously thought about your blue chip investments going broke? At what point will those shares be worth nothing? Although it may sound ridiculous, the question is serious because at the current rate of disruption, it has been predicted that half of the S&P 500 will be replaced over the next 10 years. Where does that leave your investments?

The need and act of a business pivoting is natural. It can almost be seen as a form of corporate evolution. Over the years, the largest businesses only keep their top spots by evolving and chasing the sunrise markets and leaving the sunsets. Intel famously pivoted from manufacturing memory sticks to microprocessors. HP pivoted from making precision oscillators to computers and peripherals. And Nokia has famously taken its business model from a paper mill to rubber goods and then finally to mobile phones until they crashed, failing to pivot in time.

However, for each success story there are hundreds of other businesses which failed to pivot and stuck with a dying business plan. Why?

In mature businesses there are a myriad of reasons – corporate culture, shareholder inertia, lack of capital, bureaucracy, etc. Many large companies can be forgiven for not having seen the woods for the trees and stuck to their guns in what they thought was a successful market. Companies which have less of an excuse are startups. Businesses with a sole purpose to exploit a single technology. They are portrayed as nimble, agile, market focused but many display characteristics opposite to that, sticking with a dying product until the company dies itself.

In the startup space, one study found around ten percent of all startups die due to a failure to pivot. Many of the most famous startups only exist because of a pivot – Twitter from Odeo, Paypal from Confinity, Instagram from Burbn, etc. Unlike in the large corporation case, it is much easier to hypothesize why a startup didn’t pivot and it has a lot to do with a cutting edge field of research called behavioral innovation.

Behavioral Innovation

Behavioral innovation is a field still in its infancy. At the moment, it suffers from having its main theoretical framework copied and pasted from behavioral economics. People typically take known behavioral biases from economics and simply apply them to an innovation framework. However, it should be more than this. The field should, at a minimum, be looking at the unique psychological shortcuts we take to be innovative and how this affects our innovation efforts both positively and negatively. It could take inspiration from many fields such as behavioral economics, psychology, innovation economics and more. By having a better grasp of these processes we can design better innovation policies, brainstorming activities, investment decisions and much more.

Innovation has become the zeitgeist of the 21st century and if there was one area that researchers should be focusing their efforts to bring about tangible positive change in society, then innovation is it. The fact that the field of behavioral innovation has been left as the ugly duckling of the behavioral economics swan needs to change because a better understanding of this new discipline will have profound effects on everything from macro policy setting to startup decision making.

There are a myriad of techniques and approaches to doing innovation; such as idea generation, co-designing with stakeholders, speaking to users and potential customers, mapping value propositions, collaborating across disciplines. This is widely taught across Universities. For example, at Design Factory Melbourne, Swinburne University, design, engineering and business students are educated to collaborate and use various innovation doing techniques applied to real project briefs with companies for many years.

However the techniques for innovation doing are not enough. We know an open mind-set is necessary for innovation and you are able to see peak creativity when you are happy and having fun, but how much do we really know about achieving this desired state of behavior in a business setting and how does this relate to the hard business decisions that need to be made?

Despite all the training, we still see startups refuse to pivot in spite of a failed product/market fit, a lack of market validation or minimal traction, then we can see an application of behavioral innovation in action. These companies are trying to innovate. They have the goal of successfully developing an innovative product on their agenda and they fail miserably. Why? The sunk cost fallacy of innovation. Although not the only possible cause of this behavior, it is one which interests us here.

In behavioral economics, the sunk cost fallacy of economics occurs when we ascribe an overly optimistic probability to the success of an outcome after we have invested in it. The probability just seems to change. For example, if an individual were to buy a theater ticket but then find out that the performance had changed to one which they no longer wanted to see, then they would be more likely to go to the show and waste their time than if they had not purchased a ticket.

Think about that. Instead of doing something else they enjoyed, people would incur an additional cost by going to watch a show they didn’t want to watch merely because they paid for the ticket!

Startups and Behavioral Innovation

For startups we see the sunk cost fallacy of innovation occurring. It occurs when a new business follows an idea over the financial cliff because they have invested our time and effort (and often money!) in exploring it. When a startup fails to pivot, then I believe that a major contributing factor is the sunk cost fallacy of innovation. If we can beat this, then maybe we can save an extra ten percent of our startups. An easy win!

What can we do about this and how does one know that one has reached the point of no return?  The answer to this question is something investigated in the forthcoming book “Innovation Tools”, available on Amazon, and it comes down to finding the point where perseverance no longer makes sense.  This is the point is not difficult to find. It occurs when a startup asks its mentor or another independent third party, that if they had a choice between investing their time and money in the startup’s opportunity or using that money to do something else, and the advisor says do something else. At this point we are starting to sink. When someone else would not invest in your opportunity given the facts you have presented to them, then by going further you are displaying the sunk cost fallacy of innovation.

A word of warning: although we have framed it as something undesirable, if the psychological mechanisms behind the sunk cost bias cause you to be more resilient and tenacious, then in many startup situations this can be a good thing. It just depends on the context.

The sunk cost fallacy is only one of many biases which people can display and as a starting point to look at behavioral innovation, it is an obviously applicable one. However, as mentioned earlier, the field should be much bigger than this and its elucidation here will hopefully lead to others to explore more.

As stated earlier, the applications of behavioral economics biases to behavioral innovation like the above only scratches the surface of the possibilities in this field. The analysis above, like much previous work, is a direct translation from behavioral economics to innovation but it is clear that if researchers put their head to it, there are amazing possibilities right in front of us. And if the motivation to do some interesting research is not enough, then the trillion dollar imperative to transform the world’s economy to something sustainable should be.

Raising Capital & Term Sheets – what you must know before you sign

Photo Credit – Steve Jurvetson  Ed: The backstory to this photo is at the bottom of the page.

Congratulations, so you’ve found an investor interested in investing in your company? What next!

Paul Miller, corporate partner from Deutsch Miller a boutique law firm with experience in London and Sydney working with investors, venture capital firms and entrepreneurs steps you through some of the legal issues.

Introduction

An experienced investor or early stage fund will provide you with a “Term Sheet” for you to consider.  In certain situations you may be asked to provide a Term Sheet.  The principal terms of the Investor’s investment into your company will be set out in the Term Sheet and below we have set out some of the key issues, terms and items in a Term Sheet that you should understand and be familiar with.

Structuring the investment – What will the investors receive as consideration for giving the company money?

The first thing to consider is what will the Investors be receiving in consideration for their investment.  The options principally vary between equity (shares) on one hand and debt on the other hand.

The benefit of debt is on the downside. This is because if the company is not successful investors holding debt will receive their money back in priority of share (equity) holders in a winding up scenario.  Conversely, apart from receiving the agreed interest rate, debt holders will not enjoy the upside of a company becoming successful.

Consequently, by holding ordinary shares (pure equity) investors are in the same position and are aligned with the Founders so that they will enjoy the upside or suffer on the downside of the Company’s business together.

A hybrid between equity and debt are convertible notes and preference shares, both of which give investors protection on the downside but also the ability to enjoy the upside.

Below, I set out a brief summary of the options to consider:

  • Ordinary Shares:  an ordinary share represents equity ownership in a company and entitles the owner of that share to a vote in matters put before shareholders in proportion to their percentage ownership in the company. The interests of the investors and Founders (including rights to dividends and sharing any proceeds on a sale or winding up) will be aligned subject to other provisions in a shareholders agreement or in the constitution.
  • Convertible Notes:  a convertible note is a debt instrument with an ability to convert into equity. The Investor earns interest on the outstanding amount paid to acquire the note until the principal and all interest has been repaid. The “convertible” in convertible note means that the investor can convert the note into shares in the Company at a pre agreed conversion rate. The convertible note is a popular instrument in the US. (Ed: I have also seen them used locally especially in down rounds or bridging scenarios)
  • Preference Shares:  preference shares are equity with some debt characteristics.  The preferential rights may include the right to receive a preferential dividend before dividends can be payable to ordinary shareholders or that the right to receive moneys in priority to ordinary shareholders in the event of a sale or where the Company is wound up. Preference Shares may be structured to have the ability to  convert into ordinary shares at the election of the preference shareholder.  This gives the option for the preference shareholder on a sale event to receive its money back if the sale price is low or on a high price to convert into ordinary shares and enjoy the upside in alignment with the ordinary shareholders.
  • Loan (pure debt): the investors will lend money to the company and receive interest on the monies lent.

Valuation and the percentage of your company that the Investor will hold after the investment?

A Term Sheet will usually set out the amount of the investment round, the valuation of the Company pre and/or post the investment and the percentage of the Company that the Investor will obtain post the investment. The valuation and percentage are usually subject to negotiation.

The investor will want to know the percentage it will hold on a “fully diluted basis” on the assumption that all share options and convertible instruments have been exercised and converted.

I recommend that you produce a share capitalisation table so you see how you will be diluted in this and future fundraisings.  You may need to liaise with your accountant with this.

What rights will the Investor want?

Investors may want a range of rights as part of investing into your Company.  You should be familiar with the following rights:

  • Right to appoint a director:  It is very standard for the investor to want to have a right to appoint a director to the Company’s board.  I suggest this right be limited to where the investor holds an agreed minimum percentage of shares, say 10%.
  • Negative Control/Veto Rights: This is a key right that the investor is likely to require, in particular, if it is not controlling the board.  These rights will give the investor the right to veto a series of material decisions of the company before the company can proceed and implement them.  These decisions are usually listed out in a schedule to a shareholders agreement.  These rights can be contentious, such as whether an investor can veto a future investor in the company.
  • Pre-emption Rights on future share issues: Investors will want “pre-emption rights” on future share issues.  That is, if the company decides to issue more shares in the future, the Investor will have the right to be offered and purchase those shares on a pro rata basis, before they are offered to any third party. This is a standard protection for investors, it ensures that they have a chance to ensure that they maintain their percentage shareholding.

You should consider various carve outs to this right, such as the ability to issue shares pursuant to an approved employee share ownership plan (ESOP) or in relation to a strategic partnership.

  • Further anti dilution rights.  Investors may ask for this if they want protection if the company undertakes a future fundraising at a lower valuation than the valuation they invest in.   In such circumstances, a clause can be included in a shareholders agreement, which provides that in such circumstances the Investor is issued further shares as if they invested at that lower valuation.
  • Vesting of Founder Shares:  This is very common in the US and becoming more popular here in Australia.  The investor may request for a percentage of the Founders shares to be “unvested” and only vest subject to the Founders remaining and working in the company over a period of time, known as the vesting period.  If a Founder leaves the Company during the vesting period, the Founder’s unvested shares will be able to be “bought back” by the Company or recirculated to another employee or shareholder.
  • Lock up of “Founder Shares: The Investor may require there be a prohibition on Founders selling or transferring their shares for a certain period after the Investment.  This is another mechanism whereby the Investor can incentivise the Founders in whom they invested in remain with the Company.
  • Tag along rights: “Tag Along” rights are a minority shareholder protection that are activated if a certain percentage of majority shareholders are selling their shares to a third party.  In such a situation the minority shareholders have a right to “tag along” in such sale to a third party.  If the investor exercises their tag along right, the selling shareholders will be obligated to obtain the same offer from the third party to those remaining shareholders for their shares. (ED: VCs typically use this to ensure they get a deal if a founder has a buyer)
  • Protection from being “Dragged Along” in a sale: A Drag Along clause provides that if a certain majority of shareholders (or a obtain an offer from a third party to buy their shares, they can “drag along” the remaining shareholders and effectively force those shareholders to sell their shares to that third party on the same terms.  This is an important clause for Founders, who retain a majority of shares in the company.  An investor may require that they cannot be dragged along unless they receive a minimum return, say 2 or 3 times, on their investment. You may be able to negotiate that this investor protection only lasts for a period of time, such as two years. (ED: Investors can also use drag along clauses to force the sale of the company where the investor might hold preference shares but not have a majority shareholding and the sale outcome might be a poor result for the founder, such as a scenario where there are liquidity preferences  ie 2 or 3 x money back before conversion, or conversion discounts that end up with a massive leverage of the invested funds, essentially wiping out returns to founders, sad but happens, most acquihires are in this position)

Representations and warranties

Investors will usually require the Company and the Founders to make representations and warranties about the state of the Company at the time that they invest in the Company. These representations and warranties are usually included in a Subscription Agreement and will include:

  • the Company owns the intellectual property used in the business free from any third party interests;
  • the Company does not infringe any intellectual property rights of any third party;
  • the shareholdings in the Company are as set out in schedule to the shareholders agreement;
  • there are no options or rights of conversion over shares save as disclosed to the Investor;
  • all material/key contracts of the Company are enforceable;
  • the Company is not party to any litigation and is not aware of any potential disputes or litigation; and
  • information provided to the Investor by the Company during its due diligence exercise is true and accurate and not misleading.

Exclusivity

Investors may want to ensure that their negotiations with the Company are exclusive for a certain period of time, usually 4 weeks from the date of signing the Term Sheet.  This is to give the Investor comfort that for a certain period of time it can incur the costs of undertaking a due diligence exercise and negotiating long form documents, without the Company being able to negotiate or discuss terms with another investor.

General Process

A Term Sheet is generally not legally binding except for the clauses that deal with exclusivity (discussed above) and costs with respect to the preparation of the Term Sheet.

If the investment goes ahead, it is usual for the parties to move forward to longer form documents with respect to the deal, this will usually include:

  • a Shareholder’s Agreement;
  • a Subscription Agreement (which will include representations and warranties that are usually given jointly and severally by the Company and the Founder(s));
  • a Constitution; and
  • an Executive Service Agreement with respect to the Founder(s) ongoing engagement with the Company,.

The above is not an exhaustive explanation of clauses that might go into a market practice Term Sheet on an investment.  If you want further information or specific advice, contact Paul Miller of Deutsch Miller.

NOTE: This is general and informational only it does not constitute legal advice.

Paul Miller

Paul Miller

Paul is a Corporate Partner at corporate and commercial boutique Sydney law firm Deutsch Miller, that specialises in transactional, advisory and dispute resolution work.

Paul has over 10 years experience as a partner at top firms in both Australia and the UK advising a variety of companies and investors on various fundraising transactions. 

Paul has significant transactional experience obtained in the Sydney and London markets across the full spectrum of transactional and advisory work, in areas that include capital raisings, floatations, joint ventures, mergers & acquisitions, MBOs, venture capital/private equity and a variety of commercial contracts. Paul has extensive experience in advising technology companies and companies in the online space. You can contact Paul via Linkedin 

 

About the Image

Ed: There is an interesting backstory to the guys with the Term Sheet in the feature image, see below, thanks to DFJ VC Steve Jurvetson

I have never seen a company go so far in stealth mode on a Series A… to space in this case. Twice. Here are the Planet founders, Chris, Will and Robbie, with a bottle of my favorite J Curve bubbly. They took this photo during a little signing ceremony of our Series A term sheet.

The blue marble of Apollo 17 provides a wonderful backdrop for the company as they are taking a radically different approach to Earth imaging satellites to boost the frequency and universality of coverage to new levels. The data will be open for developers of cloud services from beyond the cloud!

Planet Labs

Planet Labs

They have a passion for humanitarian applications: instead of lamenting illegal fishing or deforestation in the Amazon months after the fact, imagine being able to catch them in the moment. When a natural disaster occurs somewhere on the planet, it often is in an area that was not an imaging hot spot and so it can be difficult to get timely before and after imagery surrounding the event. Imagine every farmer in the developing world having access to crop health and over-watering data, like the rich farmers do today. Existing imaging markets want better frequency and coverage, and if you push it far enough, entirely new markets will arise. The sky is not the limit. =)

Planet Labs announced their existence this morning with a revealing imagery from their first two satellites. (SpaceReview,Dow JonesMIT Tech ReviewTechCrunch,SpaceNewsVentureBeat)

 Stepping back a bit, we are seeing unprecedented innovation in the space industry, triggered by SpaceX lowering the cost of access, and now with companies like Planet Labs revolutionizing how a satellite company should operate in this new space market.

 I first met them while launching rockets in the Black Rock Desert with my son, where these NASA scientists came to test fly a Google Android phone as a satellite….

 

 

Syndicated Equity Crowdfunding for Startups takes off in UK & Europe

David-Drake-CEO-LDJ-CapitalThe following guest post is by David Drake, founder and chairman of LDJ Capital, a New York City private equity firm, and The Soho Loft, a financial media company.

How does one become an angel investor?

There is no university where one can learn angel investing. However, crowdfunding is creating a unique path for learning through a system calledsyndicate funding. A growing trend in the U.K. and other parts of Europe, such as Belgium and Italy, this system allows professional business angels and crowd investors to participate on the same deals.

Syndicate Room (SR) and the Cambridge Capital Group (CCG) joined together third quarter of this year to leverage crowdfunding for the first time. CCG, an ultra-exclusive by-invitation business angel group of around 50 investors and private venture funds that annually invest £1-2 million each to its current portfolio of more than 30 high-tech start-up companies, became lead investors to Syndicate Room’s member investors.

Cambridge Capital Group

Cambridge Capital Group

“Membership in Syndicate Room is free,” says its founder and CEO Goncalo de Vasconcelos. As an SR investor, the member can invest as little as £500 ($800) directly into real business angel investments.

The site launched its online presence last August and recently closed its first deal with a £590,000 ($960,000) investment in Eagle Genomics. The lead investor, requesting anonymity, led the round with £300,000 ($480,000). Syndicate Room’s requirement is that a lead investor, or investors, puts in a minimum £50,000 ($80,000), or 25% of the company value, whichever is lower. Ideally, its focus are on firms in need of £500,000 to £1,000,000 ($800,000-$1,600,000).

While Syndicate Room investors will not be able to influence a startup company’s direction and strategy, they will get exactly the same economic deal, as well as make the same profit pound for pound, as the experienced and larger business angels of CCG.

Knowing that these angel investors only invest their own money into businesses they believe will give them a great return, it’s only smart for the crowd to follow where the angels lead. With their professional guidance, due diligence is done and deal quality is increased with proper valuations in place.

Angel networks benefit from this setup as this allows them to invest comfortably in a single deal while having a crowd of small investors to fill up the rest of the amount needed for seed funding.

The platform also allows the angel networks to find and train new angels from the crowd. Investors from the crowd will eventually learn the ropes, become angel investors themselves, and join the angel networks.

When angels get involved with crowdfunding platforms and in systems like syndicate funding, they take a proactive step in growing the angel network globally.
Are you joining to become one?

You can reach Drake directly at David@LDJCapital.com.

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AngelEd Sydney 2013 – Teaching Angel Investors to make better technology investments

AngelEd-2013

In Australia too often Angel Investors have to play the role of a Venture Capitalist for technology startups, given we have only a handful VC funds in Australia with capital for very early stage ventures. (drive around the car park at the end of Sandhill Rd in Silicon Valley and you will find more VC firms than we have in Australia).

We simply don’t have the depth of institution money for this asset class to justify a big field of venture capitalist’s and I believe that between the growth of Angel Investors and Crowdfunding,  the Australian Venture Capitalist will become less relevant as time goes on.

Over the years I have been both impressed and dismayed by Angels Investors in Australia. To be clear I am not talking about high tech founders that are putting their exit funds back into new investments, these guys can look after themselves.

I am primarily talking about the Angel with good net wealth probably from the sale of a traditional business or family money or a successful corporate career looking for something interesting and exciting.

Financially astute? Mostly. Experienced in technology startup investments, much less so.

To the Angels credit they are very active and constantly running conferences and pitchfests, on the other from deals that I see they often seem unaware of the risks of very early stage technology companies and the life cycle of a funded tech company.

From my perspective having started my first startup in 1999, I have a good historical perspective and it seems to me that the startup scene and the number of investable startups has grown significantly in the last 5 years.

Due to the efforts of people like Pollenizer, Startmate, Pushstart, Incubate, Innovation Bay, ATP, Sydstart Australia now has a thriving startup scene.

The challenge is that without cash to fund these businesses and only a small venture capital base many of the investable companies will struggle to grow or have to move to the USA to get funding.

So it seems to me that any attempt to educate Angels and expand the base of Angel investors has to be a good thing for both the Angels and for the Australian Startup scene.

AngelEd 2013

Innovation Bay (Ian Gardiner) and Pushstart (Kim Heras, Roger Kermode & John Hains) have joined forces to help educate and grow the base of Angel Investors in Australia by launching the inaugural AngelEd 2013 on Thursday 7th November.

Both these teams have played a significant role in growing the startup scene locally and are now aiming to help grow the investor base in the same way.

If you’ve thought about investing in tech startups but you’re not sure how to, you are not alone.  Some of the questions AngelEd aims to answer

  • Where do you start?
  • Where do you go to find the startups to invest in?  
  • What do you need to be aware of?  
  • Is there a science to it?
  • How successful are tech angels in Australia and what’s their approach?  
  • Is angel investing a legitimate asset class worthy of consideration?

If you are not involved in the startup scene on a daily basis, you may find it difficult to get good deal flow.

AngelEd 2013 aims to introduce new Angel investors to the process of investing in high tech startups, getting access to good quality investable deals and minimising the risks of investing while increasing the chances of picking a winning startup.

Why are they doing it?

There are many indicators that point to the fact that there are loads more startups but not enough angels who actively invest, and therefore not enough money to support tech startup innovation.

Put simply, “we are making more, better companies at a rate that exceeds the country’s ability to support and fund their growth”, as identified by Pollenizer based on the Startup Genome Report and Angel Investing Survey finding.

AngelEd aims to build a greater pool of knowledgeable angels to better support our high-tech entrepreneurial community and create more international success stories.

You can register here

Great list of speakers.

Agenda

Thursday, 7 November

2.30 – 3.00pm
Registration

3.00 – 3.15pm
Welcome and Introduction
Ian Gardiner, Innovation Bay & Kim Heras, PushStart

3.15 – 3.45pm
Angel Investment:  Market Update and World Trends
Bill Bartee, Blackbird Ventures

3.45 – 4.45pm
Angel Know How – The Secrets to Success:  Learn from seasoned tech investors

3.45pm  Andrey Shirben
4.05pm  Alison Deans, Netus
4.25pm  Luke Carruthers

4.45 – 5.30pm
How to invest it?  Funds, syndicates, direct….
(Panel discussion)

  • Kate Carruthers (moderator)
  • Niki Scevak, StartMate & Blackbird Ventures
  • Tony Faure, Chairman – Pollenizer, The Sound Alliance, Torque, Soda Card/Dealised
  • Melissa Widner, General Partner & Co-Founder, Seapoint Ventures
  • Anthony Pascoe, Angel Investor & Chair, ImageBrief

5.30 – 5.45pm
Short break – tea, coffee, snacks

5.45 – 6.05pm
“A Date with an Angel”:  The entrepreneur’s perspective
Dean McEvoy, Co-Founder & ex-CEO, Spreets

6.05 – 6.35pm
Tech Start-up Pitch: Innovation Bay Style
Two tech startups – 5 min pitch followed by panel Q&A

  • Ian Gardiner (moderator)
  • Brett Kelly, Kelly & Partners

6.35 – 7.00pm
The Dry but Essential: Legal, Tax & Due Diligence Considerations for angel investors

  • Legal: Paul Miller, Deutsch Miller
  • Tax:  Paul Masters, Tax Leader, Deloitte Private
  • Due Diligence:  Macquarie Private Wealth

7.00pm
Session concludes

 

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Start-up Advice for Australian Entrepreneurs – Ian Maxwell

Ian Maxwell

Ian Maxwell

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

Introduction

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.

Picture1b

BT Imaging’s QS-W2 – used by Chinese Solar Cell Manufacturers

I view these entrepreneurs through a number of filters:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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)
  7. 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.
  8. 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.
  9. 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!

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