In August, we decided to explore the many facets of capital raising and called the exercise Anthill’s Venture Capital month. The theme tossed up plenty of investment advice and discussion. But it also triggered some strong reactions from Australian inventors. Trevor Rose was among the most ardent, so we invited him to provide a 'right of reply'.
When I posted a comment to the article '5 must-sees before Australian VCs will invest', the truth is that I didn’t even need to read the article to know the gist of what it said. (No offense intended to the author, Steve Anderson. I don’t mean the article was predictable… but that business people are.)
When I actually did read it, I was not mistaken in my assumptions.
I consider this article as a literary kick in the privates for those who need it most.
In response to my comment, Anthill editor-in-chief James Tuckerman invited me to write about what I, as an inventor, want from investors.
It’s really quite simple.
- I want someone to develop a process for communication with investors that safeguards my intellectual property, so that I can begin talking to them in the first place.
- I want someone to risk money on pre-seed stagers like myself who don’t have enough resources of their own.
- I want VCs to be open to negotiation, instead of just dictating non-negotiable terms.
Regarding my first requirement, surely VCs have had years of experience with IP. And surely by now the investment industry must have come up with a nice neat process that lets inventors/entrepreneurs enter a room and have a conversation knowing that no one would dare try to steal their idea.
I can’t possibly be the first inventor or entrepreneur who has gone to a meeting with a VC and been unable to really provide the detail I wanted to give because the protection to have that candid conversation was absent.
Surely, to be good at being an investor you must have solved the common problems of people who come seeking your experience and advice?
Surely, you wouldn’t want to miss out on brilliant investment opportunities because you never even get to hear them in the first place?
And surely, you haven’t just been sitting on your arses doing absolutely nothing about this requirement for however many decades (over a century) that your industry has been in existence?
Oh, you have been sitting on your arses doing nothing about it?
Are you mental?!
Now, I know you are going to say either:
A. That’s your responsibility, not ours.
B. We can sign a non-disclosure agreement.
C. You have to trust someone sooner or later.
Well, that’s just not good enough for most innovators.
You are the ones who have been doing it so long; you should have an easy-to-follow no/low-cost process for this. And if you haven’t thought of one, here… allow me.
Don’t just stop at a non-disclosure agreement (which I notice that some of you don’t even start with), but back this signed agreement with a video camera recording the meeting and give a copy of it to the person who came to see you seeking financial backing.
The effect of doing this would be that anyone entering your office to discuss an idea with you would know that you are serious about making them feel secure about their IP so they can relax and actually tell you all about it.
I was asked more than once by someone I don’t even know to “trust them”… and I just think this is the laziest possible response.
Please tell me that you are not so ignorant of your own industry that you haven’t heard stories of people being ripped off, or pushed into unfair contractual situations. Why, oh why, would you think that someone smart and creative enough to invent something worthwhile is going to ignore this very obvious fact that the very last thing they should do is to trust you.
I will go one step further than that and tell you that my own personal philosophy about business is that, since so many people have proven themselves to be so dishonest in business, surely it makes no sense to trust anyone. What I trust is that you have done something about it, for this shows me that you are thinking, and that you are thinking about my needs, not just your own.
I would prefer to leave the trust until later, and to have a lot of reasons for actually giving it by that time.
The next thing on the list is that I want someone to risk their money on pre-seed stage projects.
What I need is for someone to decide that the concepts I have in mind are worthy of due diligence on a full business plan, and to provide me with the money I need to live and work on that full time, as if it was my job. There is precedence for this too, you know? Ever heard of a publishing contract? It’s basically the same idea that has been used in both the literature and music professions to support an artist while they produce their works.
I think it would take me at most a few months to complete such a full business plan (or at least enough of it to actually be a viable project or take it to the next stage), given the resources to focus on it and spend a little on research or a consultant’s advice where necessary.
The final thing I want is to have a realistic negotiation… and that means no preconditions without a justifiable reason.
For example, you might say a reasonable precondition is that the cost of recording the initial meeting is going to be charged retrospectively to the business (if it goes ahead) as a loan at a given interest rate. There is nothing unfair about that.
I also don’t think it would be unreasonable to say that, if I do get the pre-seed support to develop the business plan, this money also should be paid back by the business as a retrospectively applied loan.
Another reasonable request would be that all net profits go to repaying investors’ money before I can take anything myself (as a shareholder). I wouldn’t complain about that, and it does make up for the risk being taken with that money if there is a guaranteed rate of interest return.
You wouldn’t have risked the money in the first place if you didn’t think it was a worthy project, right?
Also, don’t expect to just walk in and say, “We want 40 percent,” (or whatever percentage it is that you are after). You keep the percentage share in accordance with the separate components that you have earned!
For example, if you have provided me with support while I complete the full business plan required to properly set out all the specifications of the project, then depending on the estimated size of the business income over the first five to ten years, you might argue for one to five percent of shares in the case of a very large business, or perhaps up to 10 percent if it is a smaller business. In this way, we can separate the allocation of ownership into chunks, and actually see a relevant value proposal for each of these investments.
Then, when it comes to providing the further capital for actually getting the business all rolling and following that plan, firstly you have only gotten to this stage if the previous stages have all been completed (so this is benefiting you, too, because it’s reducing your risk), and secondly it will be easier to see whether your expected percentage share at this stage is reasonable, and easier to seek that funding elsewhere if you are unwilling to be reasonable all of a sudden.
Which brings me to my final point of what I mean by “realistic negotiation”, which is that you cease this expectation that I am going to get out of the business entirely so that you end up with 100 percent of it. And the same thing goes for you taking a majority share just because you are risking the money. That is not reasonable, particularly not as a precondition that does not take into account the amount of money going into it versus the potential gains, and the actual vision behind the concept.
If you want me to hand over a business to you that I believe has the potential to become a multibillion dollar business, well the only way you are going to do that is by paying me multiple billions of dollars. Would you sell it for less?
And I know you will say, “It’s better to have five percent of something that 100 percent of nothing,” but I disagree. No, it isn’t. I would feel like a dipshit the rest of my life for letting you rip me off. Furthermore, I am a creative person and I have many more projects I want to get off the ground, so if you prove to me your trust-worthiness, then you will become my investor of choice for the future.
A couple of final points:
- I know VCs are not interested in the technical details of the project… but get interested. If you don’t show an interest and make an effort to understand it, then I don’t want you as my business partner, because I am going to think you are an idiot. You expect inventors to understand your world, so you have to make an effort to understand ours.
- I would also much prefer to be in business with someone who is not so stupid that they will sabotage elements of the project to make it more profitable. I don’t mind efficiency, but it can be taken too far so that it destroys some of the best parts of the project.
- Understand that if you don’t do this stuff I am asking for, then you aren’t offering me anything at all. If the only difference between one VC and the next is the serial number on the actual currency you give me, then you are just an annoying middle-man making unreasonable requests, and taking profits. By the time I am in the position that you want me to be in before you would invest, believe me the last thing I would do is come to you. I would just go raise the capital myself.
Trevor Rose is a creative and technical problem solver, an inventor, and a sales, strategy and systems consultant.
Photo: Nazir Amin