Unless you have deep pockets, your new venture is not going to get very far without a capital injection. Of course, different investment opportunities suit different investment types. We asked a bank loan broker, an angel investor and an early stage venture capitalist what they look for in an investment deal.
Interviewed, edited and condensed by Paul Ryan.
THE BANK-LOAN BROKER
Managing Director, Blooms Group International Finance
In the past six to nine months we’ve seen a huge change in the lending and banking sector due to the credit crunch caused by the sub-prime market collapse in the US. That certainly has trickled down to everyday SMEs. The banks have definitely tightened their lending guidelines. Their policies and guidelines have been retracted and it is harder to get funding.
Many SME business owners don’t know what’s out there in terms of the funding and facilities that are available to them. Whether it’s for start-up business, expanding growth, maintaining cash flow, acquiring new premises, they’re not educated about what products are available. Most business owners don’t know how to apply to get that funding. So they turn to family and friends to try and get the money together.
A lot of start-up and growth businesses don’t realise that some banks specialise in some industries while others don’t. It’s knowing where to take your particular deal that’s important. My job is to match the right client with the right bank. Because there is a lot of funding available.
If you take bits and pieces of information to a bank and ask for $100,000, don’t be surprised when you get knocked back. The bank wants to see cash flow and revenue projections, business plans, market research, competitor analysis and also your prior experience – what you are bringing to the business that will prevent it from going belly up. All these factors are fundamental.
A lot of start-up entrepreneurs launch businesses without having property as security. There are a lot of ways to get that money – whether its overdrafts, commercial bills, leasing, channel mortgages, lines of credit – but at the end of the day it’s about being absolutely prepared. We are dealing with bankers and credit assessors who don’t care about the idea in the way the entrepreneur does. They want to see concrete evidence that you are prepared to make this business succeed.
THE EARLY STAGE VENTURE CAPITALIST
CEO, Allen & Buckeridge Emerging Technologies Fund
The challenge in this industry has always been deal flow. There’s always money and there’s always a quality management team for a quality opportunity. If you wanted to solve the problem of the Australian venture industry, you’d focus on programs that create quality deal flow.
In any given year there might be 15 to 20 investment-worthy deals that any competent venture investor would want to invest in. For every one of those 15 deals you might reserve, as an industry, $10m to back it. That’s about $150m-$200m that you can put to work in any one year in this industry. If you’re looking to build a portfolio of 12 companies, you’re going to do that over a three-year period. So I would say that at any given time the size of the venture industry in Australia is probably around $650m-$700m – and that’s full saturation. That’s based on the current deal flow today. If you want to up that, you just up the quality of deal flow.
There’s no shortage of quality management talent in Australia. The problem is that they are working for Australia’s best organisations and corporations. It’s very hard to lure them into the shaky, ‘maybe if’ world of early-stage venture. What I do is very different to what a venture capitalist does. A lot of my time and money is spent taking pure research and development to the next phase: commercially-focused research and development.
Part of the answer to the challenge is specialist management teams like pre-seed funds and Uniseed. But the key is to increase the quality and quantity of deal flow and I do think public research is where thelion’s share of future deal flow will come from. Everybody bellyaches about the lack of money and management talent. But when you have a quality deal, those problems go away.
Executive Chairman, Australian Association of Angel Investors Founder/Chairman, Melbourne Angels
Angels are private people who are investing their own money and their own time in a growth business. In the past, most of the angel activity in Australia was done under the table, behind closed doors and very individually.
Trying to be an angel on your own is the riskiest way to do that sort of investing. From the angel’s point of view it is better practice to get into a group, because you get to share all of the resources. You get deeper and broader financial resources, but much more important than the money is the experience, expertise, skills and networks. And, ultimately, time.
One of the biggest failures in the market is that entrepreneurs don’t really know how to get an investment and prospective investors don’t really know how to make an investment. So they often meet, sort of like each other, but then it all falls over because they’re not really sure what to do next.
Successful angels believe the money they are investing is only going to be valuable to the deal if they can apply all of their other resources to go with that money. That’s what’s going to give them the best chance of having that business succeed and therefore turn their money into a bigger capital return.
Typically, VCs want to invest maybe $3 million in Australia in their first round. Angel groups are typically looking to invest between $100,000 and $500,000 in the first round of a deal, for which they are probably expecting to get a substantial non-majority share – in the 25-45 percent range – and a seat on the board.
It’s quite possible in today’s market to build a successful business by only two or three sub-million-dollar rounds of investment. That’s very good for the entrepreneur because it means a lot less dilution of their position in the business. They’re getting a much more closely managed style of support than other styles of investors can afford to give.