Capital raising for early stage companies who need a bigger balance sheet. If, like most business owners or investors, this sentence drives fear and confusion into your heart then pour a cuppa and read on – because here’s the story.
Back in 2010, we had the United Nations of early stage business support going on – and yes, the winner was Sydney and Australian women. Together with a Canadian Management Consultant, an Australian vet turned start up incubator, an American Media Executive and another American Venture Capitalist, I had just founded Heads over Heels; the first Australian social enterprise to support exclusively female high potential entrepreneurs.
Back then, we had about 9 companies already in the portfolio, and 4 sponsors delivering the balance sheet funding for our social enterprise. To support the venture I was also a mentor and female thought leader for MEGA, a NSW government initiative to support tech companies, and same for PushStartAU, which was similar in nature. I saw a LOT of start ups and sat through a LOT of pitches; some great, some woeful. Other than my female co-founders, there weren’t too many women in the start-up space and tech was the only thing everyone wanted.
“Give us digital scale or go away” was the main refrain.
Then in 2011, I kicked around the notion of starting a women’s business hub, but the financials didn’t add up; so we ditched that and went back to basics. I got a bit ahead of myself (although not, actually, with hindsight) and wanted to start a funding business like Golden Seeds.
It was a wonder that I couldn’t rally enough support to do so at the time; although it was not so much to do with investor support, more with infrastructure support as it was too much to do alone. How things have changed – now people are knocking down my door to do it. The universe sent me in another direction and I have another successful business to bed down.
But… back then, funding women-led companies was very much on my mind and at all turns, we women were forging a lonelypath in a very, very masculine, geek driven environment. Coincidentally, there were a lot of men asking why we weren’t doing the same for them, “what’s this ‘women’s club’ and why can’t we join?”
“You have a ‘club’ we’d say, it’s called the workplace/golf club!” (insert location depending on volubility). That said gentlemen… you know where the train is headed; so jump on board or miss it – and jump on board they did. Ha!
We filled our first event with 40 guests. 2 of them were male and we had 3 companies pitch their ideas to us. An investment bank hosted the space, French champagne, oysters et al. It was stunning. I’ve got some photos somewhere… goodness knows where.
Two of those companies who pitched are still going and one has shut up shop, with the founder recently snaring a top C level job at a major tv station as a result of her start up learnings – and dare I say – her start up fail. More power to her for her courage, and I know she wouldn’t mind me saying that, we’ve become great friends.
Now in 2013 the train is well and truly rolling, even CBA have jumped on board the Start-Up Express, so it must have traction to have got through all those sign offs! Now you’ll see up to about a 70% male contingent at women’s start up events all in the name of supporting female entrepreneurs. Happy Days. I’ve stepped down from the board of Head Over Heels, but am still closely involved behind the scenes, simply because it’s a buzz and I’m still a control freak.
A word of warning; if you’re a founder/CEO seeking capital, this in some ways is a good time but caveat emptor, or buyer beware. If you’re new to this game on either side of the table, in many ways it’s not so good and you need to be shrewd. The back story driving demand is that investors are seeking returns over and above historically low interest rates, volatile fixed interest assets and shares which are offering slow growth for long term buy and hold investors. And property which is illiquid, with often ridiculous transaction costs and taxes. Traders as investors, are a different story as they seek arbitrage not growth per se. I wrote about that here – if you want to read more.
But back to angels and their search for heavenly start-ups.
Because so many angels are looking for greater returns, they’re attracted to the start up space and many are overpaying for their share in the company. The process becomes like an auction and they sometimes overpay to secure the equity. As a founder, you might think this is a good thing. Yay, someone wants to overpay for my company. Result! Not so and here’s why.
Angels want to exit. They want their cash back. Typically within 3-5 years tops unless it’s a cash cow and keeps paying top dollar dividends out of profit yet keeps growing. (Thanks, I’ll have a portfolio of those please).
No, it’s usually a capital invested plus growth, play. When they come to sell after 3-5 years, they need a buyer for their stake. Typically it might then be a venture capitalist or a more experienced angel who knows the risks, is putting up more capital and has the power. They will NOT overpay.
So ultimately, the original investors who need to liquidate are forced sellers and often settle for a lower return on their capital. You end up with a devalued company coming off an overvalued start point, hacked off first round investors and a reputation and brand that’s shot. I’ve seen it happen; valuations of stupid amounts for companies with no revenue, no path to market and an inexperienced founding and management team. Come on, tech bubble anyone, remember? On that topic too, tech and digital plays is passé, which is good news for all you traditional business owners.
Good luck getting out of that steaming pile of valuations, everyone who piled in.
Fund raising can be a fabulous journey but get good advice, right?
- Do your homework, this is a serious, oh so serious decision for all parties. Like marriage but with the potential for a whole lot more financial damage (and that’s saying something in the Age of Divorcius).
- Do not be swayed by Adam, or Eve, waving a big fat cheque. It doesn’t matter what gender we are, as investors we all want the same thing unless it’s philanthropy, and that’s return on investment (ROI). If you can prove that culture and the soft skills drive ROI, then all power to you, put it in your pitch. Remember though this is a numbers game. Oh – and all angel investors are not always rich people. I know a heap of them and they’re often just ordinary people with a high-risk tolerance.
So just remember, it may feel as though you have reached start-up Heaven – but the tumble from Paradise can be swift and hellish. Because angels do fall, remember
This information is of general nature only and is not intended as a personal advice. It does not take into account your particular investment objectives, financial situation and needs. Before making a financial decision you should assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. We recommend you consult a professional financial adviser who will assist you.As at the date of this article, Sara Lucas was a licensed professional financial adviser, an Authorised Representative of Fitzpatricks Dealer Group Pty Limited ABN 33 093 667 595 AFSL 247429 .
Copyright Sara Lucas www.saralucas.com.au firstname.lastname@example.org