Venture capital

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.

Is Your Startup Idea Worth Nothing?

The mantra of ideas being worthless can be heard from all corners of the globe. Venture capitalists back founders and not ideas. As mentioned in another blog, in 2009, the entrepreneur and author Seth Godin got the nine of his alternate MBA students to come up with 111 ideas each to create 999 business ideas. The point? To prove that “Ideas are a dime a dozen. The money is in the execution.” But is this correct? Your gut feeling demands that your best ideas are worth more than nothing, right? Right.

There are many reasons why people say ideas are worthless. Some claim that for VCs ideas are worthless so they can pay you less for your business early on. Others have seen so many ideas that they feel like there is an oversupply and so their value is nothing. The most common one, however, is that the value is not in the idea but in its realization. Take two companies with a similar idea, Google and AltaVista, one is the multibillion dollar envy of the tech world, the other a broke, wound up company bought out by Yahoo. The difference? The execution.

On the other hand, sure, lots of businesses fail but a great execution isn’t going to turn a rubbish idea into a success. Bad ideas that are driven to profitable businesses often turn out to be a sham, cheating people of their money and time.

Idea vs Execution

In this dichotomy, idea vs execution, people assume you only have two things you can control, your idea and your team (execution). Other factors such as timing, competition, etc are assumed out of one’s control. With only two things to decide upon, where does this leave us? Are ideas really worthless? The answer is no and it has been clearly demonstrated by a German company called Rocket Internet.

In 2007 three brothers, Marc, Oliver and Alexander Samwer founded the company Rocket Internet in Berlin, Germany. Its business model has been described as a “copycat” by the New York Times and its products would seem to confirm this. In 2012 Rocket Internet started FoodPanda, a food delivery service, copying the GrubHub (established 2004) business model from America. For most other popular business ideas, they have their own version. Uber – EasyTaxi, AirBnB – WidMu, Blue Apron – Hello Fresh, etc. The model is clear, take a successful American business and found a copycat somewhere else in the world where the business is not yet active. Mostly this means in their home country Germany but it can be anywhere else such as Sao Paolo for EasyTaxi.

Rocket Internet has demonstrated that ideas are worth a lot because they take the good ideas and repeat them with another team and a simple execution formula. The execution becomes routine, the teams are composed of whoever is available, so where does it leave the value? In the idea.

So It’s In the Idea?

But clearly ideas without a good team to execute them are worthless. Lacking good people, a good idea is like a stray dog looking for a master. The most famous example of this is the Shockley Semiconductor Laboratory. Started by the Nobel Prize winning William Shockley, the laboratory built some ingenious products in the semiconductor industry that were set to revolutionize the industry. The problem? Shockley himself.

Although his ideas were revolutionary, William’s management style has been described as abrasive and paranoid in many articles and books. He routinely insulted and belittled his staff making working with him near to impossible. As to be expected, his relationship with his initial backer disintegrated and Shockley was left to his own devices with the company floundering in 1969 as the transistor industry flourished.

If our ideas are worth something then how do we value them? TED speaker and author, Derek Sivers has suggested a tongue in cheek formula to compute the worth of an idea but convincing propositions are hard to come by. As we now know, a billion dollar idea in right hands is worth a billion dollars. In the wrong hands nothing.

What To Do?

My suggestion is the following: If you have a great team who can execute on your billion idea, then it is worth exactly that. Companies such as Rocket Internet have shown us that a good execution can be orchestrated. The wide range of businesses they have entered also show that being an expert in the given field is not necessary and so the value of the team is less. Once we realize that all the different parts can simply be clipped on to generate success, then all that is left to drive value is the idea. Each part of the business becomes a commodity apart from the one thing which isn’t formulaic.

A good idea is exactly that, good. People can create hundreds of ideas but this doesn’t mean any of them are good. Because so many of the parts of a startup have become systematic, the most valuable thing now is a tool to determine the value of an idea. What we need is an idea to value ideas. Now that is something valuable and worth much more than any single idea. It is something VCs have struggled with for years and still seem not to have cracked it. If you have one great idea, then this should be it. Any takers?

image credit: Flickr – Ramunas Geciauskas

Significant & Premium Investor Visas – The Australian Government’s Stroke of Genius No One Noticed

Yesterday after a massive week of budget hysteria the Australian Federal Government quietly announced new frameworks for the Significant Investor Visa & established a new class of Premium Investor Visa.

The Investor Visa changes are massive improvements for the Startup world. They are primarily aimed at attracting wealthy Asian investors by offering accelerated visas in exchange for significant investments into Australia and its businesses specifically setting a minimum of $500,000 to be invested into complying Venture Capital or Private Equity funds.

It’s not clear why these changes were not prominent in the budget, certainly they are a stroke of genius.

Perhaps programs that allow you to buy your way to permanent residency are not politically palatable and best left out of the media scrum that is the budget.

Arguably these changes are potentially far more impactful for the Australian Startup scene than anything announced in the last five years of budgets.

Significant Investors will be granted a visa for investing $5 million and Premium Investors will be granted permanent residency in 12 months for investing $15 million.

Essentially these visas allow wealthy immigrants to get accelerated permanent residency in exchange for investing significant capital into complying investments.

Under the old program, Significant Investor Visa requirements effectively precluded Investors from starting new businesses or funding Startups.

The new programs include a requirement that each investor must invest at least $500,000 in eligible Australian Venture Capital or Private Equity fund(s) that invest in start-up and small private companies.

The Government expects to increase this to $1 million for new applications within two years as the market responds.

While these are open to any Nationality they are aimed squarely at successful Chinese who want to gain permanent residency and an income stream outside China.

To date Chinese mainland and Hong Kong applicants make up 93% of all applications.

Staggering Numbers

The numbers of investors and the funds invested are staggering.

The table​ from the Department of Immigration and Border Protection shows statistics since commencement of the SIV on 24 November 2012 until 31 March 2015.

Item Total
Expressions of Interest (EOI) submitted through SkillSelect 2287
Invitations to apply for a SIV issued as a result of applicants being nominated by a state or territory government 1972
Primary applications lodged 1679
Primary visas granted 751

As of 31 March 2015:

  • 47.6 per cent of primary visa applications have been on hand for less than three months. The service standard for the Business Innovation and Investment visa is 6-9 months.
  • AUD 3.755 billion has been invested in Complying Investments.
  • AUD 2.770 billion is proposed to be invested in Complying Investments.

Monthly applications financial year to date are up 15% on last year.

Based on the minimum requirement of $500,000 per application and the number of applications we expect that the Australian Venture Capital & Private Equity Industry will see an increase of new funds in the order of $200-1000 million per year.

Note the option of either Venture Capital or Private Equity, the trick now is for Australian Venture Capital Funds to convince Chinese Investors that they should invest in Venture Capital rather than Private Equity.

Certainly this is fantastic news for the Australian Startup scene and will almost certainly lead to the creation of more Venture Funds and the bolstering of existing funds.


In my day job I review and select inventions (over 500 in last two years) and run a small team to prototype and commercialise inventions.

In my spare time I mentor startups and publish

If you are an Entrepreneur, Investor or anyone involved in science, tech, medical or commercialisation please feel free to connect with me via Linkedin or follow me on

If you are Chinese or Hong Kong or other nationality seeking to apply for a Significant or Permanent Investor Visa and you wish to discuss the Australian Startup & Venture Capital Scene please contact me via Linkedin if I can assist you.



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SydStart 2014 Live

Feel free to use the images if you like them, please just send a credit back to


We are on the edge of a monumental opportunity for out nation and ourselves

State of the StartClover Moore

Clover Moore



Alex Greenwich Independent Member

Great to see local government looking to support business of the future rather than propping up industries of the past.

Wow a politician that gets it!!

Alex Greenwich

Alex Greenwich

Immigration reform

Attract Talent

Visas for Startup Entrepreneurs


Matt Barrie

Everything going to software

Matt Barrie

Matt Barrie


Need a scalable business, one that customers gorw fater than costs.

Incremental cost of introducing a customer is approaching zero for software

Not scalable – Human Services


Max number of students or customers, limited to the number of people you have on payroll.


A scalable business on the other hand might be software that powers a services business.


Looking for markets the size of Texas

If you had choice of Team, Market and Product you have to choose Market and Team first, product

No Problem

No Product

No Market


Secrets that no one knows about, what do you believe that no one else does?

Big uncomfortable secrets

How do you create products that change a million peoples lives.

Back of the Napkin Sanity Check


How do I sell $1m in revenue?

How do I make $1m in profit?

How do I avoid a one hit wonder?

What is the Sustainable Advantage?


Announced Freelancer had purchase Warrior Forum

Warrior Forum

Warrior Forum


Ric Richardson

Demonstrated a new invention that was a shutter over the top of the Google Glass camera window.


Ric Richardson


Melanie Perkins – Canva – Startup Myths


  • Myth 1 The best place to start is with a cool idea –
  • Big Problem is more important
  • Solve a problem that people care about
  • Myth 2 Successful companies are born overnight – Took 7 tears to get Canva started, 3 years in parents living room
  • Myth 3 The Goal is to raise investment ASAP – Lie, raising money is a time bomb, very dangerous position unless you have massive growth sooner or later your company will explode –
  • Dont raise investment prematurely
  • Myth 4 Getting Investment is quick and easy – Not true it takes a long time and many attempts – Lessons – Build relationships with investors early



Melanie Perkins-Canva

  • Myth 5 – Startup can be built in a weekend, if not successful just pivot – Startups take long time to get established

Mike Cannon-Brookes

Just ordered a Tesla –

Mike Cannon-Brookes-SydStart

Mike Cannon-Brookes @SydStart

Doing 300,000 builds a week, 10,000,000 users a week.

50% of new customers on SAAS systems, the rest are behind the firewall, 3x trials come from downloads behind the corporate firewall.

<30% of Revenue is SAAS, the rest is behind the firewall, IT Admins want control, they don’t want to lose control.

Got Accel Partners (VCs) on board for $50m, when you get bigger you end up with much bigger problems to solve that the original team cant deal with. In order to grow you need to start employing much better professional management and teams.

Money keeps you alive, but the contacts and the right investor and their network is what helps you grow and move through the problems you experience when you grow massively.

The feeling of meeting a major celebrity and realising they are just like you and that they were just as excited to see you.

Everyone is just making it up, everyone is feeling like they all are making it up and wonder why they made it (classic imposter syndrome) You live in fear that someone will show up one day and say you have been faking it for 10 years you are under arrest.

You will become legacy at some point, someone will try to replace you.

Some days it feels like you are checking every single box to make sure you have screwed up in every possible way.

If you can’t smell the fire burning you havent been looking hard enough, because in a growth company its happening somewhere.

Are we producing enough engineers in Australia? Mike: Not enough, its not even a real question, we have to be producing more engineers

We have no option to but to massively increase our engineering capability.

Hard for the Government to help, they can’t force people to do CompSci, however we could change school curriculum, Computer Science & engineering needs to be part of school from a young age.

When asked about regional startup programs, Mike mentioned that he thought most of the regional programs was bunkum, there isn’t sufficient critical mass, not even sure we have critical mass in Sydney but its getting there, so its just not possible to get the density in the regional people.

Tech industry needs a lot of radical atoms based in one area that are bouncing off each other and networking, this doesn’t work in a regional or remote setting.



Niki Scevak from Startmate+ Blackbird + Lauren from Lightfox

Needed a really good startup accelerator that could get people to the US, Blackbird came after getting runs on the board with Startmate.

Funding Situation: Now possible to raise $500k here, and very possible to get $5-10m but not much in between. Not enough depth in the market to do this.

Niki + Mike went to UNSW together and dropped out to start their first business together.

Good VCs often come from journalism backgrounds because they constantly have to assess new businesses.

Niki: Atlassian was the 100th bug tracker, Campaign Monitor was the 100th email, nothing new with any of them they just changed the existing model.

Niki: Looking for first time founders who look like a joke, looking for unique insights that no one else believes.

Lauren McCloud Flightfox- been through Startmate and YCombinator access to 30 or 40 different advisors.

Niki: Thinks location will become irrelevant, Silicon Valley is not the default choice anymore until after you have started to get traction.

Flightfox is a marketplace of genuine flight experts. These experts have an extraordinarily deep understanding of flight routing, loyalty programs and airfare pricing.

You can use Flightfox by launching a trip request for any of our experts. Your chosen expert will review your trip details, ask any necessary questions, and work as hard as they can to find you the absolute best flights.

Our most loyal customers use Flightfox because they want to travel father, wider, better and cheaper. They also save a planeload of money by leaving it to the professionals.

Mike: The Valley doesn’t do everything right, almost no successful e-commerce companies have come from Silicon Valley, thinks that we have per capita Centurions ($100m) or Unicorns ($1 billion) equal or better than the US.

Matt: Hears about companies everyday from AU that he has never heard of with $10-50 million revenue.

Niki: Thinks Envato is a $ Billion company that no one knows about, but along with a lot of other companies unless they do a financing round you dont have an external valuation or validation. Pepperstone FX $70b in Forex transactions a year.

Niki: is a new conference organised by Niki that has 9 founders of big growth companies talking about very early years.

Pete: What do you guys read or follow everyday?

Mike: Stratechery is a one man band

Niki: QUIB



Adir Shiffman Catapult

Every team and player in the AFL and ARL, half the NFL, Hockey League.

Whats the most interesting use case, the Judiciary in the AFL using it work out if an athlete has committed a foul from the deceleration data.

Around 500 customers worldwide. Next competitor 10% of that. Marketshare of 80-90% but still a very small market.

However still staying in Headquartered in Australia, engineers are better to work with her and less .

Mark Cuban invested alongside others total $6m. Great PR,

VC market is not developed enough, Super Angels are more common.

However there is a lot of Institutional Money that most people don’t know about, family funds and very quite funds which

None of their raise came from US or AU VCs, it was all private money.

If you want your pants down around your ankles go pubic, if you want to keep the business a little private then stay private.

Hates being number 1 in market, always have number 2 over your shoulder but you cant look behind you need to keep running and new innovation, however its the most rewarding position.

If you are starting a sports startup then you should do it, even though its probably going to fail, you should do it anyway if you are very passionate. You cant keep Australia as your market, needs to be global.

How did they get their first customer, lied and begged :).

3-5 Year Vision – 3-5% Global penetration. Market should be 100x in 5 years, its only execution risk, we want to stay the largest player in the sports market.

Dean McEvoy

You are not as good or bad as your idea, if some one says you are great, you shouldn’t take it to seriously, if someone thinks you are shit, same thing.

Matt Symon

If you have a great idea and are working on it, eventually investors will find you, when you need it you are going to struggle, nothing more desperate than an entrepreneurs hunting for cash.

Found that telling a personal story about his experience getting a loan when he came back to Australia and what a terrible customer experience it was the investors really understood the problem being solved.


Muru-D – Annie Parker & Charlotte Yarkoni & Mick Liubinskas

Mick Liubinskas

Mick Liubinskas

Charlotte – Telstra wasn’t sure what the journey was, brought over from the West Coast USA to look at new startup models.

More good Australian startups wandering the streets of the Valley than Sydney and Telstra felt that they needed to do something to drive the creation of new startups and to help Australia become a great place for entrepreneurs.

Annie ran seven different accelerator programs in Europe.



Annie – We give Startup capital to pay for noodles, a great workspace, 6 months of incubation to help you get from startup to first funding.

All 9 of the first round made it through, and all of them have a path to funding or already have funding, customers or some way to fund themselves.

Mike: Day one Global Businesses, with a focus on sales revenue from day one.

James Windon –

Worked at Facebook Causes with Sean Parker of Napster

20,000 non profits

2 billion tranasctions

James Windon -Bridgade

James Windon -Bridgade

A year ago teamed with Sean Parker to form a not for profit to address connecting citizens to the the mechanics of politics.


Needed to work how to get people to get involved in good causes, rather than make them feel like they had to do something, they managed to get them to work out how to make them want to get involved in supporting good causes.

Everyone knows they need to eat their Broccoli but everyone really just wants to feel good eating Bacon.

1. Make it something people want to do, not what the should do

2. Focus on end uses and networks to create leverage

3. Focus on creating a social effect – mutual reciprocity obligation feedback


Hugh O’Brien- Undaunted – A Life in Training

Fear struggle,

The only easy day was yesterday.

There is something innate in the attempt to do something difficult, without the prospect of award.

The Value Lies in the Attempt

Max Kraynov – JetRadar

Just raised $10m

Advice to help you secure an A Round financing.

Started with a $400 W0rdpress Blog

Startup Bus

Elias Bizannes. 46 buses Globally. Reason he runs the bus is that he sees engineers like Brando who started Instacart who has turned from a nervous engineer to running a $500 million business.

This weeks startups –

404 pages as a service to create a good experience from a 404 error page. Allows to you create a custom 404 page to to engage, monetise and capture customers that otherwise would have closed the browser on your site.

8 Customers since launching a few days ago, aiming at 100 by the end of the week.


Diner Companion

App to to geolocate and book a dining companion. Trying to eradicate loneliness.

Mick: Tinder for Business or Diner companion, how is the problem, depression, whats it worth.



Personalised Shopping and ordering service


People of the Sun

Bringing Investors together to invest in Solar Power on other peoples roofs. Allows Already has 3200 SQM of roof space committed. 30,000 Watts Solar Array ready to go, 100 investors ready to commit and have raised $20k in 4 days. Great

Custom 3D Printed Glasses

Ed: Love it



Bored with Board Meetings? Here is a new board game that can also add value to your company

© Ian Andrew Maxwell


For almost twenty years now I have been ‘enduring’ board meetings. This is a phenomenon that is rarely discussed by those of us that regularly sit on boards; most of us just silently ‘suck it up’.

For some people, e.g. independent board members, a board meeting can be an interesting monthly or bi-monthly diversion from their usual activities.

However for professional investors, such as venture capitalists, attending a board meeting can feel like Ground Hog Day.

For executives the preparations for a company board meeting can offer a useful opportunity that enforces a reporting and planning structure that otherwise just naturally drifts.

Yet even for executives, after a couple years in the job and when pushed on the subject, very few will admit to really enjoying board meetings; these are just seen as a necessary and unavoidable part of business.

So are board meetings always boring? Not always. Occasionally you get an entertaining one and the contrast to the run-of-the-mill meetings can highlight just how boring they usually are.

Here are some examples of when my board meetings got really interesting:

  • A technology start-up was raising venture capital funds with a big ‘down-round’ in valuation and some nasty ‘pay-to-play’ terms for existing shareholders. There were some non-participating (and very angry) shareholders that led a day-long shouting match. It was hugely entertaining and very hard to forget.
  • An operating company was going through an exit via a trade sale. There was a difference of opinions between board members (and the shareholders they represented) and the CEO as to whether the deal represented good value. Control rights in this particular company were pretty messy and some board members were ‘playing’ the situation in order to get certain concessions. This ended in days and days of board meetings with threats of legal action; it was one very large memorable game of ‘chicken’ (any hint of the dispute and the potential acquirer might have walked away).
  • A board had got its act together sufficiently to decide that the ‘problem’ in the company was the CEO. However they went about the process of firing the CEO without bothering to first secure a replacement. This can only be described as ‘juicily messy’ or as a ‘slow moving train wreck’.
  • A board decided to put a company into voluntary liquidation when it was still arguable that it was solvent and could (in a very, very unlikely scenario) trade its way out of its issues. The ‘pro’s’ argued that an orderly windup enhanced their (the liquidation preference shareholders) chances of getting full value for the assets. The ‘cons’ argued that they were going to get nothing anyway and they would prefer to give the wildcard option a go. This had to be the pinnacle of board-level emotion and an occasion like this is certainly not to be missed in any board career.
  • Sometimes interesting board meetings occur out of the blue for no good reason. I remember one board meeting where a bunch of board members spent two hours debating a slight change to the company logo for no good reason other than it was the first thing in a year that they felt like they could contribute to. It’s the downside of having the wrong board members, experience-wise. After two hours, had there been a baseball bat in the room, I assure you there would have been blood on the video-conference screen. Entertainment of sorts!

The less in charge the Chair is at these ‘interesting’ meetings the more ‘interesting’ the meetings get.

The genuinely interesting board meetings must represent less than 1% of all board meetings. This means that, in order to be a participant in the interesting meetings, the price one pays is to sit through the other 99% of boring meetings. Talk about a long tail!

It was in this context, one day a couple of years back, that I was sitting in a board meeting that could have been a carbon copy (note to Gen Y’s – this is what ‘cc’ stands for) of the previous five board meetings of this particular company, wondering what we as a board weren’t doing (other than turning the handle over and over and over) and why we weren’t doing anything different to what we have done before.

The answer was of course ‘the board members’. They (and me included) were just politely going through the processes, ignoring the fact that this company was missing some great opportunities for growth.

Of course in order to grab these opportunities we would have needed a new CEO, lots of new equity investment, and some working capital debt. At least half of the board members and the chair would have had to go and there would likely have been a shareholder stoush or two if we tried that on!

Which led me to wonder why the board members at this company were collectively so ineffective at challenging the status quo?

The self-interest of some of the board members partially answered the question. They were more focused on their golf or their sinecures.

For the others, well they (including me) were very busy people and none of us felt like we had the time or energy to muster up the collective interest to force a consideration of change. In any case this is a fraught process with many downside risks.

But after consideration I decided that there was more to it. Fundamentally it seemed to me that it was all about group dynamics and personality types.

Firstly I noted that many people can behave quite differently in a board meeting compared to at other times.

For example, your wise old coffee-drinking colleague might become an outspoken monster in board meetings. Or the extroverted venture capitalist may never say a single world in a meeting (a habit based on hard won experience maybe) until he shuts his notepad and says ‘I am done here’ and walks out never to be seen again.

People often ‘change’ in front in an audience – it seems to be human nature.

Therefore for the purposes of judging people as board members, personality types have to be measured in the context of participation at board meetings.

And of course there is the old saying ‘You can’t manage what you don’t measure’. So I decided to develop a way of measuring board-meeting personality types.

And this in turn led me to develop a whole structure (I had almost four hours after all) in which to evaluate the board members, their personalities at board meetings, and their efforts at participation at board meetings.

Below I will share the results of this four hour session, namely a structure for measuring personality types at board meetings together with some suggestions on how to use this information.

At worst, this structure offers a template for useful personal entertainment at boring board meetings and, at best, it will highlight what is wrong with your board and what you can do about it.

A Structure for Board Membership and Participation

What I developed in that boring board meeting is primarily aimed at a process to deliver the following outcomes:

  • Identifying the different individual board member types in order to see why they form sub-groups of self-interest, and
  • Checking if board membership is properly balanced for optimal outcomes, and
  • Ensuring that appropriate board leadership is in place

The basic structure that I came up with follows that of the well-known Myers Briggs Typing[1], although noting that there is no connection with Myers-Briggs at the psychology level (I checked with someone who claims to know this stuff).

I have used an analogous structure to that of Myers-Briggs because it has proven successful, with enough complexity to differentiate different personality Types, but not too complex such that it becomes unwieldy.

My Board Member[2] Types

  1. The Process Types

Bureaucrat (B) – Pragmatist (P)

People fall in between two extremes in the context of the process of the board meeting. Firstly there is the Bureaucrat (B) Type who believes the process which governs how a meeting is held is more important than the purpose of the meeting. The opposite of the Bureaucrat is the Pragmatist (P) Type who believes the process should be a slave to the purpose of the meeting.

  1. The Outcome Types

Utilitarian (U) – Factionalist (F)

With regards to the desired outcomes of the meeting there are two extreme Types. The Utilitarian (U) Type believes in creating the greater good for the greater many (as defined in the broadest sense for the company and its stakeholders). Whereas the Factionalist (F) Type believes in the greater good for a small faction, typically one he or she is involved with.

  1. The Group Dynamics Types

Individual (I) – Consensus (C)

With regards to group dynamics there are those who revel in being outspoken individuals and/or being different from the majority of the group – this is the Individual (I) Type. Others however prefer not to stand out, they seek agreement amongst many members, they associate with the collective view, and they like to go into a meeting having previously had ‘one-on-one’s’ to ensure that there is no board conflict – this is the Consensus (C) Type.

  1. The Strategy Types

Strategic (S) – Tactical (T)

With regards to the conduct of a meeting or any group decision-making process there are those who prefer to consider longer-term strategic issues, the Strategic (S) Types. Then there are those who prefer the meeting to dwell on the very near term issues, and these people are Tactical (T) Types.


A Summary of the Group Types

Bureaucratic Factionalists Pragmatic


The primary Types are the Process Types and the Outcome Types. The primary Types describe fundamental psychological or learned preferences that determine behaviour in the group/meeting setting.

The secondary Types are the Group Dynamics Types and the Strategy Types. The impact of the secondary Types can be attenuated by good team leadership, mediation or self-awareness.

Just like Myers-Briggs, on any specific dimension of Type an individual can be anywhere between 0% and 100%. For example one individual may be 100% Bureaucratic Type whereas another might measure 60% Bureaucratic and 40% Pragmatic.

I haven’t gone to the effort of putting together a Myers-Briggs style questionnaire because of two reasons. Firstly, when you start thinking about people in terms of the structure it’s pretty easy to estimate their Types with some accuracy. Secondly, I have many other better things to do.


Commentary on Group Types

It must be stressed that there are no ‘good’ or ‘bad’ personality Types for board members.

I believe that all Types have a role in boards but that a self-awareness of one’s Type will certainly help an individual contribute more positively.

I suspect that problems arise when there are imbalances of the Types of people on boards. For example when there are too many similar Types or there are inappropriate Types in certain key roles.

Here are some common problems with board membership that I have observed:

  • The Affinity Group Problem: When boards get into ‘group-think’ it is likely that they are dominated by Factionalists and Consensus Types, possibly also with a shorter term (Tactical) views. If this is the case the tendency towards Consensus behaviour prevents any Individual questioning whatever the group believes, especially if there are no Individual Types to question the orthodox view. Similarly Factionalist Types are more likely to be aligned to a shared view so long as they represent the same faction of interest. Longer-term thinking associated with Strategic Types leads to behaviours which challenge group-think, specifically the introduction of ‘scenario analysis’ of short-term tactical choices in order to test how these might impact the probabilities of the achieving the desired long-term strategic outcomes of the company.
  • The Wrong Chair Problem: The best Chairs of boards are in my opinion the Pragmatic Utilitarian Consensus Strategic (PUCS) Types. Pragmatism in a leader ensures the process does not get in the way of the purpose of the board. However, a good leader must also ensure that due process is followed so that other members respect the ‘institution’ of the board. Therefore I believe that the best Chair is ‘just’ a Pragmatic Type over Bureaucratic Type. By being the Utilitarian Type a Chair is motivated to ensure that factional interests do not dominate. Consensus Type behaviour is important in a Chair; however the best Chairs are also outspoken and bossy when they need to be and in this context the best Chairs are ‘just’ the Consensus Type over Individual Type. And finally a Strategic Type leader will allow others (e.g. the Tactical Types) to detail the short-term needs but at the same time ensure the board and the company has a longer-term strategic focus.
  • The ‘Ignore the Shareholders’ Problem: When a company board is not serving shareholder’s interests very well it usually because the board members are serving their own needs first. This is usually because a bunch of self-serving Factionalist Types have control of the board. The problem is exacerbated if there is a weak (e.g. Bureaucratic Type) Chair and also if there is an absence of any outspoken Individual Types to ‘call’ the issues.
  • The Loudmouth Problem: We have all been on boards where you get that one BFIT (Bureaucratic Factionalist Individual Tactical) Type that drives everyone mad.Outspoken, self-serving, process-driven and with short-term thinking; you would think that such a person should be sent to a salt mine in Siberia. But even so, with appropriate leadership and team balance these individuals can make useful and unique contributions. They just have to be very well managed.
  • The ‘WTF?’ Problem: For the boring 99% of your board meetings it doesn’t really matter who is on your board – you could have a bunch of soft toys and it would make little impact, either positive or negative. However it is those one-percenters, the ‘interesting’ meetings, when the big decisions are made that you might be surprised at the irrational or self-serving behaviour of one or more of your board members. The whole purpose of a board is to serve all of the shareholders’ needs (or ‘stakeholders’ for the organic types) using collective wisdom rather than individual greed. Because many people reserve their dark-side behaviour for the times that ‘matter’ the only defence against this unknown is to structure your board appropriately so that the collective is armed and ready to shoot (the misbehaving individual(s)).

There are many other common board problems and most of them can be tracked back to the behaviour and personality of board members; what they are willing to do and what they are not willing to do.

The primary purpose of the structure I have documented here (apart from providing a template for board ‘sport’ if you are bored in a board meeting) is to help set up boards with the optimal balance of membership, or to identify when boards have issues relating to their membership.

Now here is the universal truth – the best time to address these issues is before the company itself has issues!

Now here is the universal truth – the best time to address these issues is before the company itself has issues!

But if the company is a victim of, say board group-think, how do you even get the board to accept that they have a problem?

One option is to introduce a formal process under the guise of good HR practice. Possibly using a mediator, the imbalances can be formally identified. This is the first required step before any change can be effected.

A mediator could for example ask every board member to identify their own four Types and also those of the other board members. This process could be very quick and it would provide a complete 360 degree view of the board.

In terms of processing the data from such a review these would be the key outcomes:

  • Any disparities between self-assessment and the group’s view of an individual would help that individual realise their shortcomings
  • When a whole board or team is in denial about their Types, then the outside assessment from the mediator (or even a stakeholder) should highlight this and drive the process to address it
  • If there are too many similarities of Types then there may be an ‘affinity group’. These are much less effective than a well-balanced team because of the missing capabilities that balance board efforts
  • A board should have appropriate leadership in place – preferably a Pragmatic Utilitarian Consensus (PUCS) Type or similar

Of course the best time to consider all of this is when boards are first being formed. I have had one opportunity to do this.

On this particular occasion I quietly used this Type structure to ensure that the board membership was well-balanced and had an appropriate chair (me).

In the process we got to avoid a few ‘clangers’ (board members that would have been disasters) and the board, since formation, has performed very well.

This is really worth doing!


[1] The Myers-Briggs Type Indicator (MBTI) measures psychological preferences in how people perceive the world and make decisions – see

[2] I say ‘board’ but the Types I describe pretty much exist in any group meeting. Boards just happen to be where the personality traits impact most because boards usually operate without reference to the ‘rules’ of an organisation which often are designed to attenuate the impact of personalities on meeting outcomes.

All articles on Startup88 are the copyright of their authors © Ian Andrew Maxwell

Photo by tiarescott

Ian Maxwell

Ian Maxwell


Ian A. Maxwell is a Technology Entrepreneur and Investor. He is currently CEO of BT Imaging, Chair of Instrument Works and

Co-Founder of Accordia IP and Ian Maxwell Consulting, as well as an Adjunct Professor at RMIT. He has a PhD in Chemistry

and has either founded or worked at Memtec, Allen & Buckeridge Venture Capital, Redfern Photonics (Venture Capital),

Sydney University Polymer Centre, Eindhoven University, DuPont, James Hardie, Viva Blu, Enikos, Wriota and RPO. You can

connect with him on Linkedin

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.


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.


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 Jones, MIT Tech Review, TechCrunch,SpaceNews, VentureBeat)

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….



Many start-up entrepreneurs think that patents are a waste of time; the data suggests otherwise

I was recently asked why so many entrepreneurs and investors in the modern era appear to have no interest in patents and sometimes are actually quite negative on the value of patents in start-ups.

So I did a ‘soft’ survey of a few entrepreneurs and investors in my home city of Sydney.

What I heard back was that patents are a ‘waste of time and money’ in this era of software and internet start-ups.

The arguments to support this position were typically very qualitative, full of apparent misinformation and certainly using data-points that were cherry-picked.

As were the counter arguments proposed by parties with vested interests in patents (such as patent attorneys).

I have previously written on the subject of why start-ups should have patents[1] but in doing so I had assumed that the rationale for having patents would simply be accepted by any entrepreneur or investor that had at least finished high school.

It seems that I have been wrong in this assumption. So I turned to Google to put together a quick summary on the financial value of patents in start-ups, from the perspective of both entrepreneurs and investors.

Of course all the data is already there; it just doesn’t seem to have been brought together nor analysed in a simple-to-digest fashion. Firstly, a quantitative study by Mann et al[2] (the Mann study) has shown that software start-ups that develop patent portfolios have much better returns for investors and entrepreneurs.

The 2007 study examined 877 venture-backed software companies in the US that received venture funding between 1997 and 1999.

Only 9% of these companies obtained a patent before their first financing but many may have filed unpublished patent applications beforehand.

In line with this assertion, by 2005 over 24% of the companies in the study had at least one patent.

This correlates well with the industry norms; at that time about 30% of top 500 largest software companies in the US also held patents (it would likely be much higher now).

It makes sense for mature start-ups to own patents at roughly the same proportion as the industry giants that they wish to be acquired by, or to compete with (take note entrepreneurs!).

The key results from the Mann study were that:

  • Companies with patents received about 73% more funding than those without patents, representing an average funding gap of $10.7m
  • Companies without patents are twice as likely to go bankrupt compared to companies with patents
  • 13% of the companies in the study with patents went to IPO compared to only 3% of companies that did not have patents. That is, the companies with patents were more than 4x more likely to go to an IPO!

Unfortunately the Mann study did not appear to have access to data on the financial returns (by IRR or multiples on capital) to investors in, or founders of the companies in the study.

However we can be sure that the companies with patents had a higher financial return because of these four factors:

  • IPOs usually represent the most lucrative return for venture investors; for example the median IRR for investors from IPOs was 3.2x greater compared to IRR for exits via trade sales for a selection of 531 start-ups in the period between 1971 and 2003.[3] In addition the median dollar value of the exits by IPOs was over 4x greater than exits by trade sales in a study of 3,047 exits in the US for a period up between 1997 and 2004.[4] That is, startups with patents are 4x more likely to go to an IPO where the financial returns are 4x greater; does this point need to be made any clearer?
  • The much lower rate of bankruptcy for companies with patents means better portfolio returns for venture investors. Typically it can be difficult for venture capitalists to get their funds to “profitability” (typically requiring anIRR greater than 20%) where there are multiple bankruptcies within a portfolio (composed of, say, between 10-15 companies).In fact it is my personal experience that, in the instance of portfolio company bankruptcy, patents offer the highest value assets to help recoup investment losses; especially considering that most venture capital investments are in liquidation preference shares (meaning all proceeds from liquidation of assets go to the investors up to a figure representing at least the investors’ cumulative investment in a company).
  • In the original study by Mann et al. the software companies with patents received 73% more funding.This is because these companies with patents represent much better business investment opportunities, both on the upside return and also on the downside risk. Venture Capital funding flows based on perceptions of risks versus return; because these perceptions are self-correcting, through the impacts of fund profitability and the follow-on impact on capital raisings into subsequent VC funds, it can be argued quite unambiguously that companies with patents are much better investment opportunities with better risk and return profiles.

I would also note that, on average, the companies with patents in the Mann study had just 3 patent families. The cost of developing 3 patent families is typically not more than $50,000 per annum which is effectively inconsequential when compared to the extra $10.7m typically raised by these companies.

I find this data so compelling that I would advise entrepreneurs to only invest their time and effort into businesses (internet, software or otherwise) where it makes sense to patent certain inventions.

That is, they should only invest time and effort into segments of the market where it is possible and likely to achieve significant patent protection for new business opportunities (and related products and services).

Unlike their investors, entrepreneurs usually have only one business opportunity in a single time period (typically this is 5 years or more) and therefore it is incumbent upon them to only invest their time in the highest value business propositions.

The outcomes for entrepreneurs are unfortunately quite binary; either they get a financial return from their businesses or they do not.

Unlike investors there is no protection as offered by a portfolio of business investments nor is their ten years’ worth of management fees.

The data presented here clearly shows that the highest returns and lowest risks are achieved for businesses with patents and any entrepreneur that chooses to invest their time and energy into a business that cannot or does not have patents is wilfully destroying financial opportunities for themselves.

Shame on them.

For investors the same advice applies with the additional benefit that, in the instance of the bankruptcy of a portfolio company, start-up patent portfolios offer a good opportunity to recoup losses through the monetization of patent assets.

This can be done by the sale of patents, licensing from a holding company, or even enforcement of patent rights against operating companies (often in partnership with specialist law firms in the US).

Indeed I would argue that the patent assets of a start-up not only offer the benefits to a start-up as described above but in the modern era they also represent an alternative higher value business proposition to that of an operating company.

There are numerous examples of start-ups that have reinvented themselves as Patent Assertion Entities (or Patent Trolls) and gone on to make more than $1b for their investors.

Another thing that worries investors is patent assertion against their start-ups by patent trolls;[5] this can represent a substantial loss of time and money for start-ups. A start-up with patents is going to be far more aware of the patent landscape it is operating in and will be far more insulated against spurious assertion by avoiding certain infringing activities, by licensing key technologies, by creating corporate partnerships, by seeking indemnity insurance against patent infringement, or by joining defensive patent funds. Patent awareness is the key here, and this reduces unnecessary risks of investment.

I can already hear the counter-arguments coming my way. The main one will be that the data I have used is almost a decade old and that the business world has ‘changed’ in the interim – the main area of investment is now in ‘internet and mobile’ space.

Well this can’t be helped – this type of data can only be collated sometime after the fact because the average period from seed investment to exit is about 7 years.

My gut instinct is that with the uptick in patent assertion by the major companies in the key areas of current venture investment that the value of patents to start-ups has only increased in recent times.

For example the number of patent infringement suits filed in the U.S. increased 59 percent between 2001 and 2011 — from 2,520 cases in 2001 to 4,015 cases in 2011.[6] In the same period the number of patents granted increased by 35 percent; most of those gains in exactly the same market segments that venture capitalists are ploughing their funds into.

To investors and entrepreneurs that still want to argue against the data presented in this essay I would remind them that relying on subjective arguments in the venture capital and start-up space simply adds unknown and unnecessary risks.

Of course I have also been asked whether the relationships between startup success and patents, as documented in the essay, are ’cause or effect’; the answer is both, and complex. However I believe that it comes down to one key factor – great patents can only be achieved in technologies areas that are new or ‘white space’. These areas also happen to be where there are the highest returns on investment, which in turn attract the best teams and the best investors. That is, patents are a proxy for the ‘experience’ of the team and investors of a start-up.

And yet, for any entrepreneur out there I would say that the only way to get the right experience, in the context of patenting, is to start patenting even if it’s new to you. The process of patenting will teach you much, much more than just how to go about getting patents. And this is what a lot of people who decry patents simply do not understand.

And, finally, I would note that patents are a necessary factor for maximising start-up returns and reducing risks, but by themselves they are not in any way sufficient.

[1] IP Strategy for Start-ups, Ian Maxwell,

[2] “Patents, venture capital, and software start-ups”, Ronald J. Mann, Thomas W. Sager, Research Policy 36 (2007) 193–208

[3] “A pecking order of venture capital exits – What determines the optimal exit channel for venture capital backed ventures?”, Carsten Bienz,

[4] “Value Creation in Venture Capital”, Hellmann et al., 2005

[5] “Patent Demands & Startup Companies: The View from the Venture Capital Community”, Robin Feldman, 2013 –

[6] “Myths of the Patent Wars: An “Explosion Of Patent Litigation” Greater Than Any in History?”, David Kline and Bernard J. Cassidy,

Photo by The U.S. National Archives



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 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

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New Australian Venture Capital Funds are actively chasing deal flow – The Nuclear Winter is Thawing

I sense the nuclear winter of startup funding in Australia is finally thawing. In the last few months we have had a number of funds and investors actively launching pitching events and promotions and are actively chasing deals and trying to generate deal flow. Even back in the dot com boom I don’t recall VCs having to be so proactive to bring in new deal flow.

As I have said many times I think we have a big problem with Startups solving non problems and making things that no one really cares about however for those that are fundable I can’t recall a time when the funding environment looked better, certainly it takes me back to the DotCom boom days, not that I think the market is frothy, just there is money to be had if you have a fundable idea.

This hasn’t been the case for many years.

So I had to think hard about who is out there, a few years ago you could count the number of early stage VCs that still had funds to invest on one hand, however there has been numerous fund announcements and raisings in the last year, here are most of the Angel, Seed and VC funds which are actively operating in Australia.

They are in no particular order, possibly the most recently active are listed first.

I know I will have missed some of you, I am sure there are some biotech, medtech and cleantech specialist funds that may have slipped past my apologies in advance, if you want to be added please feel free to comment at the bottom or use the contact us form and I will include them.

Oxygen Ventures

Oxygen Ventures is offering up to $5,000,000 and on-demand Oxygen Ventures resources and running its first “The BIG Pitch” event on June 17, 2014. The Melbourne-based investment fund is putting out the call to all digital SMEs, offering funding, mentoring and operational support.

In addition, mentoring will be provided by entrepreneur Larry Kestelman (Founder of Dodo) and his team, providing insights from his own brand of business know-how in a unique opportunity for founders.

You can apply here

M.H. Carnegie & Co

Mark Carnegie & Co have recently run Carnegies Den a quarterly pitch event covered by mainstream media looking to generate deal flow.

Whilst Carnegie has been active in the space for some years and has $200 million under management and presumably could raise more if they wanted, the Carnegies Den events are clearly trying to generate new deal flow and have a Shark Tank style to them.

Blackbird Ventures

Blackbird is a $30 million fund with a team from Southern Cross Ventures Bill Bartee, John Scull and Niki Scevak and Rick Baker and backed by 35 investors including Dave Mcclure from 500 Startups and Bill Tao the kite surfing VC.

Notable deals include early stage investments in Canva and Ninjablocks.

One Ventures

When Michelle Deaker told me she was going to raise a venture fund 7 years ago, I wasn’t sure how it would turn out, but she did manage to get a $40 million IIF fund raised when the majority of the proposed funds failed to raise matching funding. Notable investments include Paloma (headed by Jennifer Zanich who has a good track record) and Smart Sparrow.One Ventures


The Australian Small Scale Offering Board has raised over $133 million for startups, this is essentially an early form of Crowdfunding with a developed platform and many angel and professional investors on board. Generally speaking it tends towards companies that have traction and not as early stage tech focused as many of the investors on this list. ASSOB


GBS Ventures

GBS Ventures serious player in the Life Sciences space, has raised $400 million since 1996 with numerous exits.

Sydney Seed Fund

Garry Visontay, Ari Klinger, Benjamin Chong launched Sydney Seed Fund last year with $2 million to seed fund 20 businesses. They have run a number of pitching events as well as managing the local chapter of Founders Institute.

Square Peg Capital

Square Peg Capital was formed after the merger of two funds Square Peg Ventures and Victoria Capital last year. Paul Basset the founder of Seek and the Lieberman family with the backing of the Packers are planning to invest a few hundred million over the next few years.

Artesian Capital Management

Artesian Capital Management is an alternative investments management company spun out of ANZ Banking Group’s capital markets business in 2004, with backing from ANZ Private Equity. They run a number of the smaller funds including Slingshot, Sydney Angels Sidecar fund, iAccelerate, Bluechilli and Ilab.

Tank Stream Ventures

$20 million fund founded by Markus Kahlbetzer son of Rich Lister John Kahlbetzer, notable deals include early stakes in Gocatch and Pocketbook. TankstreamVentures

Telstra Applications Venture Group

I couldn’t find any corporate announcements about the size of the Telstra Ventures fund, however it’s been rumoured that AVG has multiple hundreds of millions $ of funding to invest, given its first few investments add up to over $60 million (see Crunchbase) it is probably true although they have stated that much of this will be spent offshore. Telstra Ventures

Bluesky Funds

Bluesky is an ASX listed entity and applied for an IIF fund, Venture Capital appears to be one of their capability along with Private Equity, Real Estate and general equities investments. Despite the IIF application its not clear from their website if they are actively currently investing in early stage.

Talu Ventures

Talu Ventures is the successor to CM Capital not a lot of detail on their site about the size of their fund however they have a few notable successes including ThreatMetrix Talu Ventures

Reinventure & Westpac

With $50M in committed funds, Westpac is the largest investor in the Reinventure Fund. The fund is operated independently by the managers, Danny Gilligan and Simon Cant, who are also co-investors in the fund. ReInventure


$200 million fund across Asia Pacific with a local Australian office, notable recent success includes a series C stake in Maker Studios which sold to Disney for $500 million + up to $450 million in performance payments. Innov8

Starfish Ventures

One of the older and larger funds on the list, Starfish Ventures was established in 2001 and has raised three funds: the PreSeed Fund and Technology Funds I and II, totalling over AU$400M in funds raised.

The team has invested in over 60 companies to date with 14 trade sales and IPOs, including listings on the NASDAQ, AIM and ASX and if you look through their portfolio you will find substantial business or tech/science plays that are generally solving very hard problems.

It appears they are still funding companies, although given they raised their last reported fund in 2008, its not clear how much longer they will be making new investments for the existing fund or if they are keeping their powder dry for the inevitable follow on rounds.

Sydney Angels – Sidecar Fund

The Sydney Angels Sidecar Fund is a $10 million investment fund that invests solely in early stage business ventures as a co-investor alongside Sydney Angel member investors and as a follow on fund for Angel investments.

Notable investments include Buzznumbers which was sold for an undisclosed amount and NinjaBlocks arguably our most successful Internet of Things hardware play.


Not really a Venture fund but given the founder Andrey Shirben has made 40 + startup investments in the last ~5 years he is worth talking to. SydVentures

Incubators & Accelerators

Whilst not Venture funds, many of these are backed by venture or corporate funds and are providing small seed funding to get a business started.

Muru-D which is backed by Telstra offers $40,000 seed funding + office space and mentoring for very early stage pre revenue, possibly pre product startups.

Innov8 which is backed by Optus/Singtel is aimed at startups which have some evidence of customer traction offers co-working, mentoring plus upto $250,000 seed funding.

ATP Innovations one of the older incubators and has runs on the board $113 million in capital raisings for its companies, $45m pa in revenue from member companies last year, $28 million in Government Grants and 8 exits. Strong focus on life sciences and biotech with very sophisticated facilities.

ANZ InnovyzSTART SA based

Startmate $50,000 related to Blackbird Ventures so probably a good follow on funding available if successful

Founder Institute

Pollenizer has had some good wins including Spreets sale for $40m

Blue Chilli

iAccelerate based at University of Wollongong

River City Labs

Startup Tasmania

iLab Originally launching at The University of Sydney Incubate is now national with backing from Google Ventures


The Singaporean Government just announced they are pumping $50 million + into local Venture Capital Funds

Its 0nly 8 hours away and they are doing everything they can to attract new tech businesses to establish there, there is no Capital Gains Tax, you can get a visa on the strength of a business plan and they will do everything to help you get going, my prediction is this will be a popular alternative to Silicon Valley for Australian startups.

Photo by tobyct

Photo by jenny downing

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