CEO

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.

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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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@Upstart – Crowdfunding for promising people – Your own personal Angel Round

Upstart.com

Getting through college is tough and even more so in a recession. The Consumer Financial Protection Board (CFPB) estimates that Americans are currently carrying $165 billion worth of private student loans and nearly a total of $1.2 trillion worth of student debt.

Dave Girouard - CEO Upstart - Credit Linkedin.com

Dave Girouard – CEO Upstart – Credit Linkedin.com

I recently spoke with Dave Girouard, former president of Google Enterprise and now the founder and CEO of Upstart, a crowdfunding service that helps people who are just starting their careers raise capital from backers in exchange for a small share of their future income.

Upstart provides a way for students not to default on their loans and retire their debts in a timely manner, to invest further on their education, or even to raise seed capital for their startup venture. It creates yet another way for crowdfunding to fill in the gap by getting investors to back not just brilliant business ideas but also the people who could be creating those ideas in the future.

Ed: The crowdfunding market and aggregation of debt is hotting up with many players in the space with AngelList, Lending Club, Crowdcube.com   Tuition.io,  zerobound.com,  YouveGotFunds.com,  FundAnything.com, GrowVC, all receiving either funding or major press coverage.

David Drake: Upstart’s concept is selling your future salary income for cash today. Your firm sets the term of five to ten years from the date that earnings commence, with a minimum $30,000 per year threshold, or the timetable can be extended. You also only allow entrepreneurs or individuals to offer up to seven percent of their future earnings in total, with an average ask of $25,000 and an average received of $17,000. These fund raises take 30-90 days, and Upstart manages the collection and investor relations for the investors and the lenders. Is that all correct?

Dave Girouard: It’s not technically “selling” anything. Upstart is about raising capital (or borrowing) with repayment defined as a fixed and small fraction of income earned, instead of a fixed interest rate. Upstarts can choose either a five-year or 10-year agreement and can share as much as seven percent of their income (they can raise approximately twice as much for the 10-year as the 5-year contract). The average upstart aims to raise about $30,000, and nets about $25,000. They have 60 days to fund. And we manage all distribution of funds, collection and redistribution of repayments etc. Our investors are referred to as “backers.”

Drake: Technically you are crowdfunding future earnings, for which you do not need to register as a security under SEC regulation. Tell us how you see this working.

Girouard: We are a private offering under SEC rules, only available to accredited investors as of today.

ED: Crowdfunding in the Asia Pacific region is still somewhat limited with Government Legislation struggling to keep up. Australia has a new discussion paper (which means changes to legislation are a long way off), there is a good review here http://www.smh.com.au/it-pro/it-opinion/crowdfunding-rules-to-change-help-australian-entrepreneurs-20130916-hv1pn.html and a discussion website launched by Andrew Ward here http://www.csef-australia.com.au/

Drake: In your first year last April, you had 83 “upstarts” backed by 135 “backers” with 555 offers, and a total value of $1,030,740. Who are these backers? Do they have to be accredited or can anyone offer to put money in?

Girouard:  As of now, we have 130 upstarts, 200 backers, and 1,000 offers made for about $1.8 million. Backers are a varied lot: successful entrepreneurs, venture capitalists, other types of investors. You do need to be an accredited investor today. We hope to change this over the next few months by registering the security interest with the SEC, similar to what Lending Club and Prosper did in 2008.

Drake: You’ve raised $7.65 million in funding to date, and previously spent eight years at Google. Where do you want the scale to be 18 months from now? Is it domestic mainly or will it be global?

Girouard: I expect to focus on the U.S. for the next couple of years. Each country has entirely different regulations in this area, so I’d rather get it right in one big market before spreading to others. We’d like to have several thousand upstarts funded within a couple of years.

Drake: Who should be looking to raise money against their future earnings on your site?

Girouard: We’re focused today on people early in their careers who need capital to invest in themselves and their careers. This can include eradicating student debt, starting a business, or investing in their skills in opportunities such as learn-to-code programs that are becoming really popular. We see a huge part of our population that has little or no access to capital on reasonable terms, but who could benefit enormously from a bit of economic freedom.

Drake: Who are the ideal investors that should get the most out of this program?

Girouard: Upstart isn’t about donations or philanthropy, but we are mission-driven. Ideal investors are those who are compelled by a novel new financial instrument, are interested in generating a compelling return, but also want to participate in a network designed to help young people succeed and do compelling things with their careers.

Drake: How do you scale this business, as you clearly have to underwrite all the individuals applying, and what are the challenges to growth for your firm?

Girouard: We’re quickly automating many aspects of the underwriting: the identify proof, credit verification, verifying academic credentials, and more. We are confident we can scale that part of our business very quickly. The biggest challenge in a two-sided market like Upstart is to balance supply and demand, to make sure the marketplace works well for all participants. In our short life, we’ve already experienced times when there are too many backers and not enough upstarts, and vice versa.

Drake: How do you differentiate your service from other crowdfunding platforms out there?

Girouard: Upstart is 180 degrees different than other crowdfunding sites because it has real economics underpinning it. On the upstart side, the idea of borrowing from your future self is liberating and has far-reaching potential to unlock value in the economy. On the investor side, the opportunity to invest in the wages and income of a diverse group of people has been discussed for decades, has a risk/return profile that is really compelling, and provides a way to hedge against your own future earnings. The idea of human capital contracts (the economist’s term for what we do) goes back to Milton Friedman, and has potential to create an entirely new asset class for the next 100 years.

@ David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity firm, and The Soho Loft, a global event-driven financial media company helping firms advertise for investors. He writes regularly for Forbes and Thomson Reuters. You can reach him directly at David@LDJCapital.com or make connect on  linkedin.com/in/ldjcapital

David Drake - CEO - LDJ Capital - Credit Linkedin.com

David Drake – CEO – LDJ Capital – Credit Linkedin.com

This article was first published at Venturebeat.com and was republished with permission of the author.

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