When we set up our tech startup back in 1999, we looked to angel investment to get our business off the ground.
Some new business ideas just need to be tried in the marketplace in order to see if they will work, and they cannot be launched without some financial support. Often the idea is so new and disruptive that it will take time to educate a new market in new ways, and allow the fledgling business to take hold.
It is about the riskiest investment you can make as an investor. It is not for your nest egg, and the most likely outcome is you will never see that money again. In fact, the odds are (even if you carefully sift through your potential investments, saying no to far more than you say yes to) that 7 or 8 out of every 10 will fail, 1 or 2 you may see your money back, and 1 in 10 may return a lot.
That’s the deal.
I remember telling our angel investors (high net worth individuals and others who had a punt on us) that they would most likely not see a return at all. We wrote a chapter in our business plan outlining all the things that could go wrong, and how they would not see their money again. We wanted them to be awake to this reality, and not treat us like a bank. They could not ring us up in a few months and ask for the money back. The money, by then, was gone. It was used to set up the website, database, consultants, software, computers, the office, pay rent and the first few months of staff costs.
By the time we’d launched 65% of our money raised was already spent. We had barely 5 months of money left to last. We had to immediately raise still more, which is what we did. It took 7 years before those initial investors received an option to sell.
This is the reality of the tech startup. If you are interested in being an angel investor, then you need to understand that this is possibly the riskiest investment you can make. It is only a part of your portfolio of investments, a small part, perhaps 2-5%.
Say you are quite well off and have $1 million to invest. You might put some in blue chip shares, more in a property syndicate, high return deposit or a managed fund. Perhaps $20,000 to $50,000 in a tech startup. If you have a few million, then you could afford to do a $20,000 to $50,000 investment every year for a few years. You might look at several opportunities before deciding to have a punt.
If this is you, then I have 5 reasons why you might be persuaded to have a go. I have no idea which startups will make money – if I did, I would be out farming cupcakes from unicorns.
However, as someone who’s been there and done it in startupland, may I be so bold as to venture the following:
- Low rate of funding, startups need you
Tech startups in Australia are woefully underfunded. Far more is bet on the Melbourne Cup every year, per capita, than is bet on tech startups. Report after report bemoans the low level of funding, and the exodus of great Aussie ideas to Singapore and Silicon Valley demonstrate the lost opportunities. These types of business have scaleable business models, and could be $10m or $100m businesses in a few years. This kind of rapid wealth creation was simply not possible in earlier generations. Now is the time.
2. The Economy needs you, because of digital disruption
25% of the GDP of Australia, and 40% of jobs, are under threat from digital disruption over the next 10 years. What kind of an economy will be left for our children and grandchildren? Where are the Aussie tech disruptors? Most of them hail from one country, pay little tax here, employ few people, yet are eating away at our economy.
3. You have a lot to share and give
You’ve made your money, are relatively well off, some might say wealthy. You have $1 million or more in various investments. How about carving out 2-5% of this for the tech startup scene? Take a a direct investment, and help seed a new business or three. Create jobs immediately, get involved and share some of your hard won advice gained over your own career in business. Pay it forward. Pass it on. Add value to this businesses, open doors. Have skin in the game.
4. You get a tax rebate, and are capital gains tax exempt
Even better, from this financial year onward, investments in eligible tech startups attract a 20% tax rebate (yes, money back) from the ATO. Plus, you get a 10 year capital gains exemption, with no ceiling. Meaning – if you make a million or even a billion on the shares, it is tax free. The government is actively encouraging you, and rewarding you, for having a go. What’s stopping you?
5. You’ll enjoy it
Why not have some fun? You never know, you might learn something, have some awesome dinner party conversation, and can enjoy the ride. Why can’t business be fun? In fact, it should be.
So, if these 5 reasons have inspired you to find yourself a tech startup to invest in, then get yourself down to Spacecubed, listen to this podcast, or peruse these 140 WA startups.
Imagine if 1,000 angels decided to invest between $20,000 and $50,000 in some tech startups every year for a few years. That would pump in $20 million to $50 million a year to get 1,000 startups going. Among them could be a hundred $10m businesses employing tens of thousands, and maybe the odd billion dollar unicorn. Then we’d see some action, and maybe we’d even save our economy in the process.