Ideas boom

Ev­ery­one wants a slice of the pie

The Australian - The Deal - - Front Page - Story by: CLIONA O’DOWD

SUD­DENLY, it seems as if any­one who is not look­ing for start-up money is look­ing for a start-up spe­cial­ist – some­one who can point them to that in­no­va­tion pot of gold.

Since Mal­colm Turn­bull started talk­ing up the in­dus­try last year, and fol­lowed up with an in­no­va­tion state­ment, the field has be­come crowded as pro­fes­sional ser­vice, ac­coun­tancy and le­gal firms, along with the banks, rush to get in early to “own” the sec­tor. And with gov­ern­ments of­fer­ing a va­ri­ety of new fund­ing mod­els – such as equity crowd­fund­ing – the need for ex­perts to cut through the con­fu­sion has in­creased.

Brendan Lewis, who founded the Aus­tralian arm of en­trepreneur­ship fo­rum the Churchill Club, says ev­ery ac­count­ing and law firm now wants a start-up spe­cial­ist in its ranks.

“I spoke to a part­ner in a law firm re­cently and asked him why he was get­ting into start-ups when there’s no money there. ‘Ab­so­lutely right,’ he said. ‘There’s no money there but they’re a honey trap for in­vestors. We get to meet high-net-worth in­di­vid­u­als by sup­port­ing the start-ups’.”

Whole­sale In­vestor co-founder and chief ex­ec­u­tive Steve Torso be­lieves many or­gan­i­sa­tions are keen to get in at the right time to have an ad­van­tage when the start-up sec­tor gets its big break. The ac­count­ing and le­gal firms put struc­tures and le­gal frame­works in place be­cause they know that when it comes time for a sig­nif­i­cant trans­ac­tion – a large cap­i­tal rais­ing or an ac­qui­si­tion or an IPO – they’ll be favoured. But not ev­ery­one’s happy about the rise of the middle men and women.

“I’ve had phone calls from peo­ple who say they want to work with start-ups and help them by pre­par­ing them for cap­i­tal rais­ing and pitch­ing to ven­ture man­agers,” says Yasser ElAn­sary, CEO of the Aus­tralian Ven­ture Cap­i­tal As­so­ci­a­tion. “We would much pre­fer that those in­ter­me­di­aries don’t take a sig­nif­i­cant foothold in the seg­ment be­cause, at the end of the day, all that will hap­pen is start-ups may end up pay­ing some­one in the middle when, ul­ti­mately, a lot of the VCs are very happy to of­fer guid­ance and men­tor­ing ad­vice to start-ups and en­trepreneurs as they need it.”

And Brendan Lewis wor­ries about the surge in struc­tures. He says that when the Vic­to­rian govern­ment launched its new in­no­va­tion plat­form LaunchVic in Mel­bourne a few months back (see page 14) the room was packed. But many of those present were rel­a­tive new­com­ers.

“I would say 75 per cent of the room were what you would call ‘in­ter­me­di­aries’,” says Lewis. “I would also call them rentseek­ers. As more money comes into the sys­tem, es­pe­cially govern­ment money, there’s an aw­ful lot more rent-seek­ers. If the govern­ment re­ally wants to sup­port in­no­va­tive busi­nesses it should be sup­port­ing them di­rectly, not via a plethora of ad­vis­ers and in­ter­me­di­aries.”

Lewis’s view not­with­stand­ing, the re­al­ity is that as the sec­tor grows in sta­tus and scale, we are likely to see an in­creas­ing num­ber of peo­ple in­volved in get­ting good ideas linked to fund­ing and knowhow in or­der to pro­duce goods and ser­vices.

Al­ready, there are skilled and ex­pe­ri­enced prac­ti­tion­ers ded­i­cated to putting to­gether deals, some of whom fo­cus on their role as “match­mak­ers” – match­ing start-ups with in­vestors.

“I look very closely at the in­vestor re­quire­ments and the busi­ness re­quire­ments so that the match isn’t just about fund­ing but skills and net­works as well. I think skills and net­works are

more im­por­tant than fund­ing ac­tu­ally,” says Chris­tine Kaine, founder and CEO of Busi­ness An­gels.

“I’ve got fam­ily of­fices and niche ven­ture cap­i­tal firms as clients, but also ex­ec­u­tives look­ing to op­er­ate in a smaller busi­ness en­vi­ron­ment. I have a lot of in­vestors com­ing back look­ing for more busi­ness be­cause I’m dis­creet.”

While Kaine goes down the tra­di­tional route of talk­ing to both in­vestors and en­trepreneurs to find the per­fect match, Torso’s Whole­sale In­vestor uses a dif­fer­ent ap­proach.

“We have an email ser­vice that we pro­vide,” he says. “We also have an on­line plat­form for in­vestors to look through the dif­fer­ent op­por­tu­ni­ties, and we host live events. Some com­pa­nies seem to at­tract more in­ter­est on­line. Then there are oth­ers that are much more suited to live in­vestor events where they get to hear di­rectly from the CEO and ask more di­rect ques­tions.”

The com­pany has an in­vestor base of 12,500, com­pris­ing a wide range of clients, from high-net-worth in­di­vid­u­als and fam­ily of­fices to in­vest­ment bankers.

“The ma­jor­ity of the com­pa­nies we speak to get re­ferred to us from our in­vestor base or from the di­rec­tors be­hind the com­pa­nies. We’re in­ter­ested to know the sec­tor that the com­pany op­er­ates in. If the sec­tor is get­ting a lot of at­ten­tion it makes it eas­ier on our side to in­tro­duce the com­pany to po­ten­tial in­vestors,” says Torso. “And then we look at who their clients are. If they’re a B2B com­pany it’s in­ter­est­ing to us if they have brand­name clients. Or if they’re deal­ing with con­sumers, we want to un­der­stand what the growth rate is.”

Whole­sale In­vestor also pub­lishes com­pany news an­nounce­ments so in­vestors can mon­i­tor their progress.

Busi­ness An­gels takes 3 per cent off the top of cap­i­tal raised as a re­sult of its match­mak­ing ser­vice, while Whole­sale In­vestor charges early-stage com­pa­nies a flat fee of be­tween $9000 and $16,000 for the email pro­mo­tions, live events, and web­site ex­po­sure. In­vestors reg­is­ter free on the web­site.

Other match­mak­ers in the mar­ket of­fer to match start-ups with more than just in­vestors.

“We also con­nect start-ups with cus­tomers and that’s prob­a­bly more im­por­tant,” says BlueChilli CEO Se­bastien Eck­er­s­ley-Maslin. “Start-ups want cus­tomers more than in­vestor cap­i­tal be­cause cus­tomer cap­i­tal is cheaper.”

BlueChilli works with cor­po­rate part­ners such as West­pac and Aus­tralia Post to iden­tify prob­lems com­pa­nies need solved and then starts a cam­paign to find start-ups that fit the bill.

“In our re­cent ex­pan­sion into Queens­land we part­nered with the Queens­land Cham­ber of Com­merce which has 400,000 mem­bers. We sur­veyed them to see what prob­lems they’re hav­ing, such as cus­tomer loy­alty or pay­roll dif­fi­cul­ties, and now we’re look­ing for 10 start-ups that can best solve those prob­lems.”

Once BlueChilli has iden­ti­fied start-ups to work with, it pro­vides them with seed cap­i­tal and places them into one of its ac­cel­er­a­tion pro­grams.

“We have 300 high-net-worth in­di­vid­u­als who we con­nect and pair into the start-ups. That’s done in one of three ways: firstly through our VC funds; se­condly through di­rect place­ment with our start-ups in the an­gel round; and thirdly as part of seed syn­di­cates we cre­ate around th­ese cor­po­rate op­por­tu­ni­ties.”

The ac­cel­er­a­tion pro­gram is very com­pet­i­tive, Eck­er­s­leyMaslin says, with only one com­pany cho­sen to join for ev­ery 100 ap­pli­ca­tions re­ceived.

BlueChilli makes its profit “from a cap­i­tal re­turn in the fu­ture as well as from pro­vid­ing ser­vices to cor­po­rates”.

“Cor­po­rates en­gage us and pay us to be able to pro­vide strate­gic ad­vice and di­rec­tion and to be able to run the cam­paigns to en­able start-ups to lev­er­age their dis­tri­bu­tion chan­nels. That’s a fee-for-ser­vice part. Ef­fec­tively we’re li­cens­ing our IP to cor­po­rates, and that’s where we make our mar­gins. We don’t make profit on the start-ups.”

Equity-based crowd­fund­ing is an­other way for early-stage com­pa­nies to get ac­cess to cash and for retail in­vestors to par­tic­i­pate in the in­no­va­tion boom. Used widely in the US and Bri­tain, it al­lows a large num­ber of in­vestors to in­vest small amounts of money, and could take off in Aus­tralia thanks to pro­posed leg­is­la­tion re­leased as part of the fed­eral govern­ment’s in­no­va­tion pack­age. There are a small num­ber of play­ers in the mar­ket, in­clud­ing the Aus­tralian Small Scale Of­fer­ings Board (ASSOB), al­though the Cor­po­ra­tions Act lim­its its op­er­a­tion.

“Com­pa­nies come to our plat­form to have broader ac­cess to cap­i­tal rais­ing op­tions, to the types of cap­i­tal raises that tra­di­tion­ally would have had to go through the in­sti­tu­tional and whole­sale net­work,” founder Will Leitch says.

Over the past few months ASSOB has seen a marked in­crease in com­pa­nies look­ing to list, but Leitch says ul­ti­mately it’s guided by what in­vestors are pre­pared to in­vest in.

“We go through an in-depth re­view process and anal­y­sis. Only if we be­lieve there is a ca­pac­ity for in­vestors to want to in­vest in them will we put them up on the plat­form. There’s no point spend­ing a lot of time and money and find­ing there are no in­vestors on the other side.”

ASSOB has raised more than $145 mil­lion for 300 early-stage com­pa­nies and charges a per­cent­age fee on the cap­i­tal raised. Leitch says the new leg­is­la­tion “will have a huge im­pact be­cause it will shine a light on a sec­tor of the econ­omy that needs help”.

Aside from the few for­mal match­mak­ing ser­vices, most con­tact be­tween in­vestors and start-ups is made through more in­for­mal net­works. Net­work­ing al­lows in­vestors to of­fer coun­sel, guid­ance and coach­ing to en­trepreneurs with­out en­ter­ing into a for­mal fi­nan­cial re­la­tion­ship.

Net­work­ing group In­no­va­tion Bay is one such com­pany con­nect­ing start-ups with in­vestors through events. Since it was founded in 2003, the not-for-profit has helped tech­nol­o­gy­fo­cused start-ups raise more than $10 mil­lion in seed cap­i­tal thanks to quar­terly din­ner events with an­gel in­vestors and busi­ness men­tors. En­trepreneurs sub­mit a pitch to In­no­va­tion Bay and even­tu­ally the list is whit­tled down to the five suc­cess­ful start-ups that get to pitch at the din­ners.

“We don’t in­vest in the com­pa­nies,” says In­no­va­tion Bay gen­eral man­ager Sue Ho­gan. “We sim­ply pro­vide a plat­form for an­gels and en­trepreneurs to net­work and get to­gether, ex­pos­ing the an­gels to a new busi­ness idea and maybe even an in­vest­ment.”

In a bid to bet­ter sup­port fe­male founders, In­no­va­tion Bay has re­cently in­tro­duced the “women’s wild­card ini­tia­tive”, guar­an­tee­ing at least one start-up with a fe­male founder will get to pitch at each din­ner. Ho­gan says af­ter test­ing the ini­tia­tive in Syd­ney and Mel­bourne, it will be rolled out na­tion­ally this year.

AVCAL’s El-An­sary says he is see­ing much more in­ter­est in net­work­ing events con­nect­ing start-ups with ven­ture cap­i­tal.

“It’s not nec­es­sar­ily fo­cused on build­ing a one-on-one com­mer­cial re­la­tion­ship around a VC in­vest­ing in the start-up,” he says. “It’s more about hav­ing a di­a­logue and build­ing a net­work of con­tacts. I think it’s a smart way for the ecosys­tem to grow, rather than hav­ing a whole bunch of peo­ple in the middle who are mo­ti­vated by fi­nan­cial out­comes.”

“I would also call them rent-seek­ers. As more money comes into the sys­tem, es­pe­cially govern­ment money, there’s an aw­ful lot more rent-seek­ers”

Brendan Lewis

Con­nect­ing in­no­va­tors with cash, from far left: Sue Ho­gan, gen­eral man­ager of In­no­va­tion Bay; BlueChilli CEO Se­bastien Eck­er­s­ley-Maslin; and Will Leitch, founder and CEO of the Aus­tralian Small Scale Of­fer­ings Board

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