ASIC Pours Cold Water On Crowdfunding

Australia faces a particularly acute dilemma. Entrepreneurial fervour is at its zenith. However, sources of funding for such activities remain in short supply.

In other parts of the world, solutions are being found. Crowdfunding is performing a critical role in democratising funding for interesting, creative products that may have had difficulty getting off the ground through more traditional forms of financing such as bank loans, angels or venture capital. The United States is embracing this by passing legislation to empower such activities.

But in Australia what do the regulators do? They issue a warning that crowdfunding could lead to fines and jail time?

Brilliant marketing move! If crowdfunding wasn’t already on every Australia entrepreneur’s mind before, it sure is now.

Australia’s Technology Prowess: The Internet and Beyond

 

Asher Moses has written a wonderfully inspirational piece in the Sydney Morning Herald regarding the rise and rise of Australian entrepreneurial talent. In it he explores how well some of the Internet-focused startups born in Australia are doing in sourcing Silicon Valley venture capital.

It is a great story and touches on much of my experience over the past 15 years. Australia and, closer to home – Sydney, has an incredible wealth of entrepreneurs. But in Asher’s story there is also a hint at the dark side. Let me paint the picture in three ways:

1. Financial arrogance

While I was living in Silicon Valley I assisted a startup to raise its first round of funding from a tier one VC firm, in two weeks and right in the middle of the GFC. Fast forward to today and as Asher has eruditely pointed out, tier one VC’s from Sandhill Road are currently falling over themselves to get the attention of Australia web startups.

Against this backdrop, picture me meeting with a senior executive at one of Australia’s most successful investment banks in the past fortnight. In that meeting I was told how incredibly hard it is to find funding for technology businesses, how no-one is investing in this space in Australia and blah blah. Can you see the disconnect here?

I personally believe Australian ‘investors’ have a heightened level of financial arrogance driven by an absolute ignorance of technology and also tainted in their financial risk profiling by resource-based investing (mining etc).

As long as this position remains I can fully understand why Australian entrepreneurs are US-centric. For Australia though this amounts to a major loss as we are not only losing talent in droves, but also access to ROI as our entrepreneurs grow great businesses with other people’s money!

2. Technological bias

For as long as I can remember Australian government granting schemes and venture firms have had a bias against Internet-related companies. They have preferred to back biotech businesses and other science-heavy companies that are notoriously hard to scale globally and which usually have a hard time getting international attention due to the tyranny of distance.

It is heartening to see this position starting to shift and that web-focused ventures are in fact now getting more access to schemes like Commercialisation Australia.

3. Web-centrism

While I am ecstatic about Australia’s well deserved recognition (finally) for great entrepreneurial talent, I am somewhat concerned that we get seen as only producing web-centric talent and intellectual property.

The Australian Federal government pours some $9.8 billion into public research and there is incredible technology floating around within the countries 43 universities and even more public research institutes (by contrast the US only has 41 universities). However, most of this never sees the light of day. It gets locked up in over-protective tech transfer quagmires and/or stuck in the valley of death between research proof of principle and commercial proof of concept due to a massive lack of funding for this gap.

In contrast, in the UK companies like Imperial Innovations and the IP Group, and Allied Minds in the US, are absolutely going gangbusters building businesses around research intensive technologies and assisting IP through the valley of death.

Australia desperately needs a similar business and it is on my to do list for 2012 to see that one forms. We need to not only continue to support our web-centric entrepreneurs, but also inspire generations of Australians to become tech entrepreneurs in areas that can have major global impact such as energy and health!

 

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How To Successfully Pitch Angel Investors

Last week Innovation Bay Angels met for their quarterly dinner to hear pitches from a chosen few entrepreneurs. This was the fourth dinner of the year, a year in which we’ve assessed over 50 Australian companies and by the end of the evening we had heard live pitches from 14 entrepreneurs seeking angel investment this year.

As active angel investors (the group has invested multi millions of dollars to date), we see a lot of deals in different contexts and one thing we value above all is a quality pitch from entrepreneurs who are passionate and who have done their homework on their industry.

Our modus has been to ask entrepreneurs to submit an initial 90-second video pitch. That may not seem like a lot of time, but remember that most television ads only run for 29 seconds!

Those entrepreneurs who are chosen to actually present to the group at the quarterly dinners are given six minutes to pitch and may answer questions from the room for another six minutes.

Why all these time constraints and formats?

We’ve tried the unstructured, open ended approach and it simply does not work. Anyone can bang together a business plan or executive summary on a word processor and make it look good – but getting a message across via video in 90 seconds takes skill.

Standing in front of a room of 40 successful businesspeople and selling a business in six minutes takes further skill, discipline and practice.

Besides, investors have only so much bandwidth to hear from an individual entrepreneur and rattling on for 15 – 20 minutes won’t solidify your investment case, nor would it be fair on others who also want to garner the group’s attention.

What should your video be aiming to achieve?

One of the best comments made recently by one of our angels sums this up succintly:

“Short, sharp, punchy. Gives enough to establish credentials. There is enough in this quick summary to make me want to found our more.”

The videos we receive are placed on a private forum and members of the group are able to ask questions of the entrepreneurs who submitted them, and they have the ability to respond. From these comments (for the last round there were well over 300 comments) and the questions asked at the dinners, we’ve collated a set of Frequently Asked Questions, which I’ve set out below.

Entrepreneurs should know the answers to as many of these as possible and while they may not be able to cover off on each and every one in their videos, we would expect them to do so by the time they finish their six minute pitch.

THE ANGEL FAQs

PROBLEM/SOLUTION
How big is the problem you are trying to solve

What is your core value proposition

MARKET/CUSTOMERS
What is your customer make up – geographically and by industry

What is the return on investment (ROI) for customers

Can you give a bottom up outline of the market size rather than “a % of a $bn market”

How do you define your target segment, how many potential customers are there in this segment and what are they willing to pay for your product or service

What is the cost to acquire customers

If you are initially targeting a niche of early adopters, how will you get across to mass market adoption

Are there any regulatory or entrenched business practice barriers you need to overcome

Is there something about your space that means we need a local solution rather than a modified US solution

Are there any analogies you can use to explain your product, eg “the Farmville of Health Education” or “Groupon meets Zynga”

If you are initially targeting a niche of early adopters, how will you get across to mass market adoption

Are there any regulatory or entrenched business practice barriers you need to overcome

COMPETITION
What is your sustainable competitive advantage

Which are your major competitors and what do you do different

Not for everyone but: why are you best placed to win in this torturously overcrowded and undifferentiated space

While your product may in fact be different from others in the market, how do you get around the perception that it is the same as other products out there

TEAM/THE BUSINESS
Who owns the IP

Who will be on the team for executing

What are your views on the LeanStartup Model

What are the backgrounds of the founders

What is your backstory – how did you come to tackle this problem/market

Does your product exist already – if so, will you be able to demo it

BUSINESS MODEL
Outline some key figures – revenue predictions, staff

How do you make money, what is your revenue model

What is your distribution strategy

Are revenues primarily from product or services. How will that change in the future.

What are your plans for scaling the business (what are the requirements and obstacles to scale)

How are/will you handle the huge amounts of data that you need to gather

THE FUNDING NEED
How will you spend the money

What your investors should contribute in addition to money

THE DEAL
How much equity are you offering to Angels

What will equity split be

EXIT STRATEGY
What’s your exit strategy

One final point – don’t go asking investors to sign a non disclosure agreement. You’ll likely get short shrift.

I hope these pointers assist you in your quest for funding and good luck growing your businesses!

Restoring Liquidity in the Australian Venture Capital Industry: NVCA 4 Pillars Approach

I endorse the recommendations made by the US National Venture Capital Association to address the capital markets crisis for venture-backed companies in the United States and wish to further extend those recommendations to apply specifically to Australia.

Over the course of the past ten years the number of initial public offerings (IPOs) by venture-backed companies has seriously declined. A key form of exit for venture investors, IPOs have all but dried up with very few serious listings. In fact, in the US only six such companies entered the public markets in 2008, with none in Australia.

The contribution of venture-backed companies to economic growth is proven, and a concerted effort is needed by a range of participants in the capital markets ecosystem in order to restore a viable IPO environment. A change in approach by both the private sector and government is essential.

It is critical to both Australia’s competitiveness and the country’s economic recovery to boost the venture-backed IPO market. One can extrapolate that the same would apply to Australia when considering the figures in a report to be released in early May by Global Insight that estimates that in 2008 public companies that were once venture-backed accounted for more than 12 million U.S. jobs and $2.9 trillion in revenues, which equates to 21 percent of U.S. GDP. Further, it is estimated that 92 percent of job growth at these companies occurs once the company enters the public markets.

As Mark Heesen, the president of the NVCA says, “This capital markets issue is not just a venture capital industry problem; it is a U.S. economic concern. If America wants to maintain its economic leadership and continue to grow and innovate, we must re-invigorate the public markets and strive towards healthier IPO levels similar to that which our country enjoyed in the 1980s and 1990s. Without this activity, we can expect job growth to disappear over time.”

In Australia this is a more pointed issue. Much of the country’s core intellectual property finds itself being commercialised offshore with minimal economic, environmental or social benefit back to Australia. Without a viable Australian IPO market, there is little chance that there will be a comparable venture capital ecosystem in place and much of the country’s incredible research will either be stillborn or shift offshore.

I agree wholeheartedly with the NVCA’s Four Pillar Plan as set out below and call on my Australian colleagues to rally around formulating a uniquely Australian solution to the crisis faced here.

The NVCA Four Pillar Plan to Restore the Venture-Backed IPO Market
At the core of the issue is a recognition that today’s market environment is challenging with respect to the issuance of small cap IPOs. There are multiple reasons as to why this is the case including the high costs of going public, the constituents involved in the process, and the restrictions placed on potential public companies. The NVCA recommendations, which seek to address these issues, comprise four categories or pillars, two which focus on changing behavior in the venture capital market and two which involve the government exploring policies conducive to venture-backed IPOs.


Pillar I: Ecosystem Partners
Within the last decade, venture-backed companies have been faced with fewer choices as it relates to investment banks and accounting firms that will assist in the IPO process. While the major investment banks continue to operate, the “four horsemen” boutique investment banks of the 1990s (Alex Brown, Hambrecht & Quist, Montgomery Securities, and Robertson Stephens), which specialized in IPOs of venture-backed companies, no longer exist. Further, the fall of Arthur Andersen and the resulting pressure placed on the Big Four accounting firms has, in many markets, left a void in terms of quality auditing services available for these smaller companies.


Against this backdrop, the NVCA believes that the venture capital industry must do more to promote alternative ecosystem partners while engaging with existing members to identify ways to better serve the needs of emerging growth companies. The Association has begun to engage in talks with boutique and major investment banks as well as the Big Four and other public accounting firms about how they can also better serve the needs of small cap companies. The NVCA also intends to encourage the use of a broader array of service providers such as the “Global Six” including Deloitte LLP, Ernst & Young LLP, Grant Thornton LLP, KPMG LLP, PricewaterhouseCoopers LLP and BDO Seidman LLP.


Pillar II: Enhanced Liquidity Paths
There is consensus among many within the capital markets ecosystem that the distribution system that connects sellers and buyers of venture-backed company new issues is broken. There are many drivers behind this disconnect including mismatched expectations in terms of issue size, the lack of sell side analysts, and the propensity of hedge funds to buy and sell stock quickly. All of these factors contribute to a lack of an adequate distribution channel and considerable post-IPO market volatility.


To offer small venture-backed companies an enhanced distribution system for the sale of initial stock, the NVCA endorses concepts such as Inside Venture which is a private market platform that connects qualified companies that intend to IPO within 18 months with pre-screened cross-over investors. These buyers commit to buy and hold these stocks for the long term. Other providers with similar models include Portal Alliance (NASDAQ), SecondMarket and Xchange. Additionally, the NVCA will help raise awareness about pro-active M&A roll up strategies of smaller portfolio companies to achieve IPO critical mass and global alternatives to the U.S. public markets.


Pillar III: Tax Incentives
The NVCA has long asserted that the government must support a tax structure that fosters capital formation and rewards long term measured risk taking. To support a more vibrant IPO market, the U.S. must maintain tax policies that have been proven to encourage venture capital investment so that the pipeline of promising IPOs is as robust as possible. Further, Congress should consider adopting new tax incentives which would stimulate IPOs, at least in the short term.


The NVCA will continue to advocate strongly for a capital gains tax rate that is globally competitive and preserves a meaningful differential from the ordinary income rate. The Association asserts that venture capitalists who are successful in building new companies should continue to be taxed at a capital gains rate for any carried interest that is earned over the long term. The Association also intends to explore the possibility of a one time tax incentive for buyers and holders of IPOs as well as increasing the holding rate for capital gains status to two or more years.


Pillar IV: Regulatory Review
From a regulatory perspective, the last decade has been characterized by a series of broad sweeping regulations aimed at curbing serious abuses within the financial system but fraught with unintended consequences for small pre-public and public companies. From Sarbanes Oxley (SOX) to the Global Settlement to Reg FD, small venture-backed companies have been faced with costly compliance and increasing obstacles to enter the public markets as a result of regulations intended for larger multi-national corporations. The NVCA strongly supports regulation and protecting investors where necessary but does not support a “one-size-fits-all” regulatory approach.


To wit, the NVCA will advocate for a full systematic review by the Securities and Exchange Commission of recent regulations which impact small cap companies. This review would include interpretations of SOX, pre-IPO financial reporting requirements, the separation of analyst and investment banking functions, and private placement requirements. There are opportunities within existing regulations to tier compliance so as not to overburden emerging growth pre-public and public companies at a time when they need support from the government, their auditors, and the markets.


“We are optimistic that the recommendations included in the Four Pillar Plan will contribute to a more vibrant IPO market for venture-backed companies over the long term,” concluded Doll. “The NVCA remains committed to fostering an environment that fuels significant economic growth and job creation. The adoption of our recommendations is a critical element of our country’s continued global leadership and ability to bring high growth, innovative public companies to market.”

Metarand is hatched on Halloween

I’ve recently been interviewed by HatchThat’s Ross Hill.

It’s a broad ranged discussion covering:

  • the areas I think are hot (mobile,web, virtual and real worlds — mashed);
  • UGC and CICS;
  • the importance of business planning versus bplans;
  • iterative, extremely agile leverage of existing platforms (Facebook, Open Social); and
  • the state of venture capital 2.0 (and the lack of it in Australia).

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New Venture Oriented Startup Factories

It sounds strange — should’nt Startup Factories be new venture oriented by definition. They may well be, but my experience is that in many instances they are too risk averse, too keen to follow the madding crowd, and hence they are not sufficiently new venture oriented. Let me explain a bit more: by “new venture” I mean in every respect – the word adventure would most likely be a better adjective for describing the kind of mentality required for startup factories. Taking a path less travelled, or better still, beating a path where others thought passage is impossible is the right journey to embark on.

So why the rant? Kristen Le Mesurier has written a piece in the Sydney Morning Herald in which she asks the question whether startup factories deliver….one of the key points picked up on in the article as well as in the comments is the one I am honing in on above.

In my view there is a lot that can be done to create the right climate for building successful startup factories.

I’ll let others drone on about how dumb it is that all of Australia’s superannuation funding is being invested offshore at the cost of innovation at home, how close minded most Australian government administrators are in their support for entrepreneurialism and how private equity has killed the Australia venture capital star – what I will stress though is that the first, and most important step, that Australia (or any nation) can take is getting people thinking right – thinking new venture.

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