Category: Venture Capital

Tracks in the Dirt

Posted on by Steve Sammartino

Not the type left by a Range Rover. A physical product, example of service, a flagship customer or sales revenue. Serious investors need to see these. In our initial investor presentations everything was theoretical. We didn’t bomb strategically, but failed to get traction. Are you sensing a theme yet?

We had exceptionally well developed plans. Costs, bottom up sales forecasts, 3 years of financials, customer agreements to sell, but nothing physical. Not much has changed in business since the first markets appeared 3000 years ago. People need to see, touch, smell and feel what you are doing. They believe what they see. There world view is shaped by personal and often physical experiences. So to in business investing and capital raising. Put simply, the further you are down the development the track the more serious you seem.

  • If you have thorough business plans: Ok

  • If you have a prototype product: Good

  • If you have a commercial grade sample: Great

  • If you have sales revenue from your widget: Excellent 

The message a plan sends is: “Were serious only if you give us money”.

The message a prototype sends is: “We have put some money on the line to show you it works”

The message sales revenue sends is: “We believe in this. We have invested substantial funds to get to this stage. So far it’s working, and we are serious” 

We are at protoype stage, so it is a much harder task to raise capital. We need to move up the food chain to get our Angel and we know it. What message are you sending your investors?

Send me an Angel

Posted on by Steve Sammartino

On a previous blog entry ‘Who Funds Who’ I mentioned the Angel Investor. What does (a good) one look like? In my experience as follows:

  • High net worth individual ($10m plus AUD)

  • Experienced in starting a firm. Not just running a company

  • They are not an employee

  • Fingers not in too many pies

  • Well connected

  • Can give you at least an hour a week

Most of all, they must want to mentor. You will sense if they have this capacity in your first meeting. Some clues include sharing information which seems confidential, they will disclose personal financials, stories of failures and provide deep insightful advice, for no self benefit. They may also say something like… “I want to put something pack into the world.  I have made my money, you remind me a lot of myself at your age.”  They should be altruistic because the reality is you have a good chance of losing their money and they know it.

When people have had financial success they understand depth beyond money. It is this knowledge that assists in its accumulation.

One potential VC partner is the person described above. We hope he chooses to take us on. For a start up, getting the cash is the second most important thing.

Premature Incorporation

Posted on by Steve Sammartino

A potential investor asked if we have a company registered. I answered an honest “No”. Turns out, this is a good thing. Depending on the deal your strike company structures vary significantly. If you already have one in place it just makes it harder.

structure

Investors prefer a clean slate and honesty. Not two blokes in a garage pretending to be a company who still haven’t sold anything.

Government Sledge

Posted on by Steve Sammartino

Don’t waste your time chasing government grants in Australia. You are wasting your valuable time.

Unless you have a unique technology or patent, they simply don’t want to know you. If you don’t make anything in a factory or employ people, they don’t get it. The type of business that has a chance in the new world they won’t rate. They fail to understand the knowledge economy. They’re bureaucrats for heavens sake, of course they don’t get it. Forget the fact you will be paying your 30% corporate tax rate, or potentially providing employment. It’s also irrelevant that you may have paid hundreds of thousands in tax in the preceding 10 years. No give and take, just take. There is no cash available for people trying to improve themselves or be less reliant on society. Sorry, cash in Australia is only handed out to people who make no economic contribution. 

Any business concept that has a chance in the new world, wouldn’t get Gov funding. Your business needs to live on the precipice. They don’t understand consumer innovation, only production innovation.

 We spend the best part of two months chasing a specific Australian Grant called COMET. The maximum funding available was $50,000, of which it had to be paid back, once the business could afford to do so. It simply turned into a phone call circus and department re-routing exercise.

They want to see two things:

  1. Revenue
  2. Employees

Oxymoronic,  for a start up.

Type of business’ they want to see:

  • Anything to do with China
  • Alternative energy
  • Assisting indigenous populations
  • Apprenticeships
  • Patents
  • Environmental technologies

All valid in their own right. However, does this mean all future opportunities in the globe pertain to these domains only? No. Don’t let this discourage you. If you feel your passion and ideas are strong. Chase it. I am guessing the Government get it wrong occasionally!

As an entrepreneur invest tour time talking to potential partners, customers, business angels. They will help you get your cash quickest. They are opportunists. The Government are administrators.

Advise, don’t depend on the government. In a politically stable environment such as
Australia they will not determine your success.

Family Car Theory

Posted on by Steve Sammartino

Today we met with a Venture capitalist and potential business partner. He arrived in a Range Rover 4WD. A flash car in any country.

Got me thinking about his general financial position. Cars create strong impressions about wealth and success. If a potential business partner arrives in a 20 year old junk heap you can’t be blamed for thinking you don’t want to deal with him.

Your best bet is a new-ish family sedan such as a Ford or Holden. It removes the question from peoples mind on both sides of the equation.Commodre

You want to remain confident in their ability, but you certainly don’t want to believe they are about to stitch you up and buy a new car with the profits.

What message does your vehicle send to your investors?

Close Knit Consortium

Posted on by Steve Sammartino

During the struggle to get the cash the ‘close knit consortium’ was proposed. It works as follows;

Decide on the size of the raise. Determine how much equity you are prepared to forgo. Determine the number of participants. For example $500k for 40% share, from 20 people. Hence, one parcel of $25,000 would then equate to a 2% stake in the firm. Participants can buy multiple parcels.

Important: More than 20 investors requires a prospectus. 

Your best bet is colleagues. Those who’ve been telling you for 10 years to go out on your own.

The reason is 2 fold:

  1. They believe in you and your potential.
  2. Vicarious living is alluring.

In addition, you’ll feel less guilty losing the money of a grand standing corporate vassal.

Family – I wouldn’t take their money, as I value our relationship more than their bank balance. If you can only get it from them, you might need to question your business proposition. Two guys in a garage must realise that Macquarie Bank  is hardly about to invite you into their boardroom. You have to leverage connections and be audacious.

When engaging prospects tell them about the 90/9/1 reality:

  • A 90% chance of losing their money
  • A 9% chance of getting it back
  • A 1% chance of making 10 times their cash

The law of candor is largely underrated.  

You will be able to reduce your cost of capital considerably by selling risk in smaller chunks. Risk is bought exponentially. The larger the chunk of risk, the higher the cost of capital.

This is easier than you think. While broaching the topic of funding many of my colleagues have said they will invest a small bundle of cash of $10k – $20k. This is a small risk for bragging rights and the potential to own a bit of the dream. it could be likened to owning shares in a race horse.

Currently we have a list of 20 names ready to go. However, It’s our backup plan. Remember 20 colleagues funding your widget won’t give you expert mentoring, but you may end up with 20 unwanted CEO’s.

It is also possible to put in buy back clauses for their share. Who wouldn’t be hapy with 5 times their initial investment in 2 years?

If any friends are telling you to just do it and stop mucking around, just say “Sure thing, write me cheque for $500K and I will start tomorrow!”

Who funds who?

Posted on by Steve Sammartino

We have discovered we need $500K to fund our project. So far this has proven to be our biggest obstacle. We haven’t the cash ourselves. To investors we are asking for too little to be taken seriously. This is what you get by being diligent. Forecasting to the dollar, and finding innovative ways to produce and promote your business.

VC’s incorrectly believe that the size of the opportunity is proportionate to the size of the capital required. They are stuck in the post war TV industrial complex . Heard of Google? They started in 1996 with $100K USD. It would have been the easiest thing in the world to put a $7 million advertising launch campaign into the financials. Thereby boosting our cash requirements to $7.5 million. Would the VC’s then stand up and look? If they do, you don’t want their cash. They simply don’t ‘get it’.

Business funding in Australia can be place into 4 categories:

  1. Family & Friends ($50k – $500K)
  2. No Mans Land  ($500k – $1m)
  3. Angel Capital ($1m- $3m)
  4. Venture Capital ($3m+)

Attitudes vary significantly by category. We realized quickly that we were not in traditional VC territory. Only in no mans land can you invent your own funding rules. However, you need to move up or down the funding food chain to make it happen. You need to ask if you can ‘bootstrap’ the idea with less cash, or sell the dream to some hardened investors. Also, not to be underestimated is the ‘close knit consortium’. Topic of the next blog.