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    Actions speak louder


    Individually, they have built successful fast-growth companies, held prominent advisory roles in government and spent years as respected industry strategists. As Allen & Buckeridge (A&B), they have attracted $250 million in funds from some of Australia’s top superannuation funds and two global corporate investors, assisted 30 promising Australian companies to raise capital and have helped introduce some twenty of these to the international marketplace.

    While the technology sector has become a thorn in the side of many venture capital firms since the dot com correction, Allen and Buckeridge stand by the faith in this sector that gave life to their specialist ICT venture capital company in 1996.

    Roger Buckeridge (RB): Let me first give you some background about A&B. We do seed, start-up and early stage investments in ICT industry companies. That’s all we do. We tend to hand over the leadership of later rounds of expansion, mezzanine rounds, to other investors.

    The portfolio that we have been building over the last seven years has had two companies sold outright. All transactions have been after the end of the bubble, mid-2000 onwards.

    The others have been with us during what we all recognise as a recessed period in the ICT industry. The challenge has been to build these companies as viable, profit making enterprises, getting them to a positive cash flow, self-funding position, during a difficult time in the market cycle.

    Have you been able to do that?

    RB: Of the 28 remaining projects that we have been involved with, 2 have stopped trading and another 5 are inactive. Given that we are purely an ICT venture fund, this amount of attrition has not been too bad. In fact, it’s well above average.

    We are currently involved in 21 projects. We are the lead investor in 16 of them. Sometimes we own more than 50 per cent. Sometimes it’s around 20 per cent. But we usually take an active investor role with the management of our companies, no matter what the level of equity is.

    RB: The industry environment post-bubble. Basically, the ones that stopped trading simply ran out of revenue. The markets weren’t buying the services and products on offer, and that has been the fundamental reason why we have been unable to support those particular opportunities. In the end, the market speaks.

    What have been some of your more successful ventures, companies that anthill readers may be aware of?

    RB: One example of a company you may have heard of is e-choice, which is an online mortgage broker. It is tracking solidly and has reached cash flow breakeven. It is growing in a flat, or stabilising, consumer mortgage market.

    Another company that you may not have heard of is VaST Systems Technology Inc. VaST sells electronic design software tools especially for the computer chip and embedded systems industries.

    We have put about US$5 million into this one. It’s just completed its first round of venture funding with a US venture capitalist after five years with us. That’s how long it takes to incubate and grow a company, sometimes even longer in a depressed market.

    A professor of the University of New South Wales, who left the University to become CEO, founded it. He launched immediately in Silicon Valley, leaving only R&D and engineering in Sydney. It now exports to Japan.

    How do you go about meeting people like that? And how do you overcome the reluctance of entrepreneurs to share their ideas once you meet them, for fear of theft?

    Undue secrecy can also inhibit alliances. What is the importance of having good business partnerships when you are seeking venture capital?

    RB: Having good alliances is probably more important now than it was several years ago, because getting products to market when you are a small company with limited resources is absolutely critical. Every company needs an alliance of some sort or another.

    But another thing to be mindful of is that not all alliances will be good news. Alliances are complicated things and just because you get inside a company, it doesn’t mean that you are going to sell anything. We counsel our investee companies that an alliance is just a ticket to the dance. You then have to put a real amount of work into educating the partner�s people to think of your product ahead of the thousands of other products your partner already has access to.

    Roger Allen (RA): One of our companies, Aurema, is a good example. It has a major deal with IBM and a number of other companies as well. It has the deal. Now it must work very hard to turn that deal into something of real value.

    I mean, alliances are supposed to deliver revenues, getting your product to market. They will be critical if you are in Silicon Valley and they will be critical if you are coming from the other side of the world.

    Do alliances create credibility?

    How important is a quality team? Some entrepreneurs have the view that they will be replaced by the VC almost from the get-go. How do you address the occasional cynicism that the venture capitalist is out to “screw” the entrepreneur?

    RA: The venture capital industry is all about relationships. You wouldn’t enter a marriage without getting to know your future partner. We spend a lot of time, before we put any money to work, making sure the cultural fit is there, establishing our expectations and the expectations of the investee company. It is best to sort these things out as transparently and honestly as you can, right from the start. I mean, frankly, quality entrepreneurs know exactly the value-add they get from a venture capitalist and trust our judgement.

    RB: Entrepreneurs and venture capitalists should never have conflicting interests. I think, if entrepreneurs express concern about negative things that a venture capitalist could do to them that really does suggest a lot of inexperience and some naivety on the part of the entrepreneur.

    If you look at it the other way, it is extraordinarily difficult to convince investors to invest money in these early stage companies. Entrepreneurs need to understand that investors have a huge number of choices for investment. In order to make it work for an investor, you have to balance the risk, you have to take a significant stake in the equity of the company. And if entrepreneurs don’t really understand that, because that’s the way the world goes round, you may not want to deal with them anyway.

    RA: Dilution is a reality of the game. Nobody likes it. I’ve been through it myself. But you have to respect the weight of money and the variety of choice. It’s an investor’s market and investors also have to manage their money intelligently and with caution.

    What’s the upside?

    RB: Once you get through the valuation debate, you are both operating from the same side of the table. We are only going to succeed if the companies we invest in succeed. A good entrepreneur will know this and how to use our interest in their success.

    Some have the attitude that a venture capitalist is there to hand out money and then piss-off. The smarter ones are at you constantly and will take 100 per cent of your time if they can get it. I just had one of my companies on the phone asking me whether I could get on a plane and fly with him to Taiwan to help him close a deal.

    RA: A good relationship has a good management team, our job is not to be the CEO, COO and the Board, our job is to help and advise and use our relationships to build the business. There may be some points in the life of the company that we will need to jump in and be very hands on. But you can’t do that all the time or you would neglect your other companies.

    RB: We have a much stronger operating focus than many other VCs, which is particularly important in Australia where you don’t have anything like the depth of experience, the serial entrepreneurs, that you can get overseas. And most of our companies are going global from day one, which is an extraordinary stretch for any company, even if you have been operating for many years. And it’s bloody hard when you are just starting up.

    To finish up, what are the three things you will look at when evaluating a company?

    RA: The first thing I look for is world-class technology. That is a necessary, but not sufficient condition. That’s your foundation. Even if a company intends to only do business in Australia, they will still face competition from elsewhere in the world. We operate in a truly global market. So you really do have to be best in the world in your niche. And that’s a hard ask. Your niche will have to be very narrow.

    Secondly, you have to have a product or service where there is an absolutely real customer demand. It must solve a real customer problem in a very hard-nosed, quantifiable way. The programmers always think they are solving a problem, but too often when they drill down and talk to prospective customers, they find out it’s a “nice to have” and that there are three other solutions in the market.

    The third question you must ask is, how are you going to get it to market? Is it something that you need to partner with? Is it a direct sales model? Will you sell it over the web? Then once you know how you’re going to get to the customer, you need to ask how much is it going to cost? Again, that’s hard.

    RB: And, of course, you need the team. The team that can walk in the door and answer the above questions is the dream team you are after. We do not want to spend three to six months trying to help potential investee companies answer these questions. They must understand how difficult the process is. They must be absolutely objective.

    RA: They need to have thought through these questions. We don’t want glib answers to these questions, which either means that they haven’t thought it through or they just don’t understand the problem. I look for the scars and hard-nutted realism about what it takes.

    What do the next few years hold in store for A&B and your portfolio?

    RB: The time that we will actually exit our investment in the companies is fairly hard to predict. We are not in any hurry, while the value of these enterprises continues to increase. So, if you ask me about the last few years and the next few years, it’s business as usual. It’s all about building enterprise value, this time in a very tough phase of the market cycle.

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