It was 20 years ago today: before the idea

The first in a series of posts about 1999 – the year I went from being an Economics teacher to dotcom entrepreneur…

‘It was 20 years ago today’ the Beatles famously sang on Sergeant Pepper in 1967. Well, more than half a century later I’m reminiscing and musing about 1999, 20 years ago.

1999 turned out to be quite a pivotal year for me. I had completed a full time MBA course at UWA the year before, which I did on first arriving in Perth, WA, from having lived and worked in Singapore since 1990.

By January 1999, the MBA course over and I was back in a full time teaching role. Lisa and I were DINKIES (double income, no kids), as she worked in the city.

I remember my parents coming for a visit and they were blown away by Perth.

‘You’ve landed on your feet here son,‘ said Dad, as we walked across the endless cricket ovals of Hale School, where I was Head of the Commerce.

I was coaching cricket too, and often the headmaster (and former Australian cricketer himself) John Inverarity would wander down to the nets to make some comments to the batsmen. Usually he would be accompanied by some legend or other of the game, such as Dennis Lillee, Geoff Marsh or even Barry Richards (who lived locally, and whose eldest son was in the 1st XI). I was just this rather average club cricketer from England. I sure had landed on my feet.

So 1999 was supposed to be the year I would relax back into a teaching role, after the previous two years spent emigrating, completing an MBA, fixing up our house, making new friends and settling into life in a new country.

Yet, by the end of it, I was running a tech startup (or ‘dotcom’ as they were then known).

Before an Idea… the Context

Remember 1999? The Y2K bug? The Dotcom Billionaires? GST being passed into law in 1999 (it would come into effect July 2000). John Howard PM. Richard Court Premier of WA. The referendum on moving from a monarchy to a republic went down. A certain Malcolm Turnbull was running the republican case. The Aussies won the cricket world cup (they were in the middle of a 16 year run of beating all comers). Stars Wars came out of hiding with the terrible Phantom Menace prequel, yet it topped the box office that year. The Sixth Sense and Toy Story 2 were also huge, as were The Matrix, American Beauty and Fight Club. Britney ruled supreme. The President was impeached (but not convicted). There was a shocking school shooting at Columbine. Sadly, some things have not changed in 20 years.

Having bought our first house when we moved to Perth two years earlier, I’d been amazed by the pain staking process of having to wait for the weekend papers (which had minimal information on each property listing, often no price or address), then trawling around the home opens, week after week. It was grossly inefficient, and only by chance really did we alight on the one we bought, courtesy of a great real estate agent, who then became a good friend, and colleague, Phil Knight. We still live in the same house today.

By 1999, dotcoms were being set up all the time, all over the place. The news was full of stories of the latest dotcom venture, billionaire, investor, and the rush to the ‘new millennium’. Boring old traditional bricks and mortar businesses were out of fashion. Every new business would most likely have an ‘e’ or ‘i’ in front of it and a ‘.com’ behind it, so we saw edocs.com, ebusiness.com, inature.com, etoys.com, boo.com, … gazillions were raised (and spent) by these and thousands of other businesses, worldwide. eBay, Amazon, Yahoo and others soared. The race was on. Share markets rose, the new millennium came and went (Y2K was not an issue) and stocks kept rising.

Certainly real estate was ripe for disruption. (It still is.) The information on listings was mainly held by the agents, with scant glimpses released by the weekend and local papers. Internet sites (such as existed in 1999) were limited and held a small proportion of the listings. They were clunky to use, and none showed where the properties actually were.

Push Me Pull You

Around this time I received a letter from UWA Business School that would stir up all these thoughts together.

Incredibly, the letter told me that I had topped the MBA, and after the formal graduation ceremony that April I would receive my award at a ceremony a few weeks later. This blew me away. I’d topped few classes at school, but nothing like this. My scores were set against all the clever business and professional people in Perth, and I had actually topped the whole blooming MBA graduating class of 1999.

‘This has currency’, I thought, ‘And next year there will be a new top graduate. For the moment, and for the next few months, I am it.’

As we moved towards the end of that first term I was somehow not having a good time at school. I can’t put my finger on why, but teaching was not doing it for me anymore.

I grew frustrated and bored. The students would simply regurgitate the class notes in boringly repetitive essays, and yet attain marks that would easily allow them to sail into UWA on a BComm course, which is where most of them were heading. A cardboard cutout could be teaching them. Or a trained monkey. The zing of teaching had gone. I was ready for a new challenge.

On holiday in Esperance in Easter 1999, Lisa and I were walking down a beautiful white sandy beach, and I stopped for a minute and said, “I don’t want to teach anymore… I want to go and do something else.”

It felt good to say it out loud.

Instead of trying to persuade me otherwise, or tell me I was being an idiot, Lisa simply said, “Go do it.”

[TIP: Don’t try and start a new business without an amazingly supportive partner.]

Trouble was, I had no idea what other thing I could do.

The traditional route for the MBA grad was to go into consulting, but how could I consult to business when I’d not done one myself? What other jobs were there for ex-teachers? I’d not gone into the MBA looking for a career change anyway. My idea was that it would be a good feather in my cap when I go for a headmaster interview. Head teachers end up running fairly large organisations. An MBA would be useful.

Should I now turn my back on the career I’d been building over the past 13 years?

I was confused, and frustrated. And at precisely this moment, Lisa and I would have a night out at the Regal Theatre that would open the next door…

To be continued…

~~

Photo by rawpixel.com

NEXT: Dame Edna pulls me on stage

How do I value my startup?

Valuing a tech startup is one of those ‘how long is a piece of string’ questions (which is no help at all), but it’s still an important factor in trying to raise money for your early stage venture…

Naturally, both sides will look at valuation in opposite ways.

The plucky founder will want to give away as little of the company as equity for as much cash as possible (the highest valuation), thus retaining more for themselves, their co-founders and any future funding rounds.

Meanwhile, the investors will want some meaningful slice of the company, so if things really do take off and the company is worth something in the future, they will get some kind of nice return on their money. As they may invest in several startups knowing most will fail, for each one they do invest in, they will want to see 10 times return on their money (to cover those that fail to give any return at all.)

Maybe, somewhere in there is a deal. Maybe not. You may have to speak to dozens of people before you raise a cent. It can take months. It might not happen at all.

But if you are venturing out to get some equity funding, my best advice is ‘be realistic‘. That means, don’t go crazy over your valuation, don’t do it slap dash (invest the time to do it properly), prepare yourself and practice.

I am assuming we are talking about a brand new, pre-revenue startup with no trading history. You have an idea, a business plan, maybe a prototype, have set up a company, put in some of your own money, and have something (an app, website, some users) to show for it. But you are otherwise brand spanking new.

Are you really going out with him/her?

Before worrying about valuation, please think carefully about WHO you get on board as an equity stakeholder in your business, and think WHETHER you actually need new shareholders at all.

Investors tend to hang around (as there are only limited opportunities to get them out). It can be very awkward if – later on – you think you’ve made a mistake. Also, some future investors won’t touch you if you have the wrong people on your share register. The same goes for co-founders and sometimes employees too. Be careful what you wish for.

You will be assessed by who you associate with, and having investors in your business is about ‘as associated’ as you are going to get in your life. Like a marriage, it can take a lot of nasty unravelling to undo.

Also, have a real think about how far you can go on your own.  With your own money, or some cash you can cobble together from some kind of early or trial revenues, partnering, R&D tax incentives, rich Uncle Tom Cobley and all.

Do you really need to raise money? Can you not get your customers to fund your business, at least a little bit further… to profitability? In many ways, that’s the best way.

But let’s say you’ve done all that and exhausted all other avenues. Equity fund raising it is. It will just take more money to give this thing the push it needs.

How to value it?

Simply put, the price of an early stage tech company is whatever the founder is willing to sell a piece for, and whatever someone is willing to pay for that piece. This is also not very helpful, but it’s true.

It’s a bit like selling your car, or your house. There is only one unique version, and a limited amount of buyers. But you only need one (or a few) brave buyers, and then the deal could be done.

If you need, say $50K, and are willing to sell 10% of your startup for this investment, and someone is willing to pay you $50K cash that for the stake, then, by definition, your company is valued at $500,000 pre-money.

Pre and Post Money Discussions

The ‘pre-money’ bit means that BEFORE they put the $50K in, your company was worth $500K (as $500K is 10% of $50K).

Note that AFTER they have put it in, it now ALSO has $50K in it, so technically your business is now worth $550,000 (‘post money’). Talking ‘pre-money’ is cleaner and easier to calculate in any valuation discussion. ‘Post money’ gets a bit fiddly.

With your startup now valued at $550K, the new investor does not actually have 10%, they have 9.09%. What was 10% pre-money is now 9.09% post money.

If they wanted 10% post money, then they’d have to put in $55K (which is 11% pre).

If you, as founder, owned 100% of the business beforehand, you now own 90.91% after the transaction. The issue of the new $50K of shares has diluted you a little. But you will have over 90%, which is almost as good as 100%. You have complete control, except you now have an investor, who one day hopes will get more than $50K back for their investment, hopefully half a mill or more. That is the point of investing, after all.

Now, with the $50K in the bank, you can get on with business and ring every last ounce of value out of that fresh investment. The hope is that if used wisely, future valuation will be way more than $500K by that stage. Which is the whole point. You and your investor wins.

Stuck in the Middle with You

Except, the investment is not liquid (they can’t get it out of a bank as cash) and you won’t be able to borrow against it. Effectively, it’s stuck in there until there is some ‘liquidity event’ (someway down the track) like the future sale of the whole company, an IPO or new investors come in allowing some original ones to exit some or all of their shares.

This latter eventuality is a rarity. What new investor wants to see their money used by original investors exiting stage right?

Another way of earning on shares is dividends, but I am assuming you are a long way out from profits.

Valuation Ranges

So, back to valuation. How do you come up with $500K, or $1M or many millions as the fair market valuation for your early stage tech business?

There’s a basic rule of thumb, which seems to be ‘accepted wisdom’ in these parts.

Assuming the business is a truly scaleable tech startup with a clear defensible position, a significant market to go after and with good founders…

1. If it’s just an idea and a slide deck, you can’t value yourself more than A$500K. That is, if you wanted $100K to build a prototype, then you’d have to sell off 20% for that (pre-money). Better to try to cobble together $100K, or whatever you need, or code it yourself, and get to MVP that way? Many startups can get to MVP on less than $20K if they are frugal and clever. Startups usually turn to “family, friends and fools” (the 3Fs) in this round. (Hint: don’t get fools.) If you expect your business to be worth a few million over time, why even start at a valuation so low, give away so much for so little and raise money on an idea? Go further.

2. If you have a MVP/prototype, but are still pre-revenue/launch, or perhaps have a trickle of early sales, then you may be valued in $1M-$2M range. So if you wanted, say $500K for growth/sales and gain market traction, then you’d be selling off 25%+ for that. Or ~10% for $200K, etc. This would be ‘Seed Angel’ round (pre-VC) from high net worth investors most likely. This is perhaps the hardest money to get, as you are still very early, and too small for VCs. Raising $20K is much easier, finding people who can part with a lazy $50K or $100K each takes more effort.

3. If you have launched your product, have paying clients, revenues, growth and traction, you could value yourself more than $2M, and really the sky’s the limit the more of that (and the more time/evidence & unmet potential you have). Once you’ve been around for a while, have good market share, growth… you get more into normal business valuation metrics like annual total and growth of sales, net profit, clients, market share, etc… You’d need to know your ‘Cost of Client Acquisition’ numbers really well, as well as ‘Lifetime Value of Client’ etc.. Investors will be all over this. You may then be in VC and Series A territory, so would looking at investment here of at least $500K, probably $1M or several millions.

If you are a WA-based early stage tech startup and have an idea/deck and perhaps an MVP, and think you’re worth $4M or $5M+ then I would have to say ‘you’re dreaming’.

That’s not to say you won’t be able to raise money at all on that valuation. There’s always someone out there with more money than sense, and might be persuaded by a slick slide deck and some fine words. But even if you did get early stage money at that price, how can you sustain it? How will you be able to build an upside for your investor(s)?

Knowing how risky it is, most investors into early stage ventures are looking for a 10x return over time. If the valuation starts too high, that makes the 10x even less likely and they will shy away. Remember, it’s easy to buy things, but when you buy you are setting the base price from which you want to see a multiple. The buyer can make a profit when they buy, depending on the purchase price.

Finally, it’s more than money

Of course, this all depends what you want to do; how much money you need, what you want to sell it for, and (more importantly) the VALUE the investors bring besides money.

It’s YOUR company remember.

How much do these investors ADD in more ways than money? Can they open doors to your next round? to new clients or partners? Do they have experience commercialising what you are doing? Have they been there and done it before? How have their other investments gone? What are their real motivations for investing? Are they going to be active or passive investors? Involved, but not too much, or just plain annoying?

If you’re not happy, 100% rock solid happy with an investor, don’t take their money. Listen to your gut. It’s usually right. Making the wrong choice is simply not worth it, no matter how much money they throw at you.

~~

Photo by rawpixel.com from Pexels

We need to educate the investors

Startup-image

In the recent Business News corporate finance report for calendar year 2018, I added up over $9.58B worth of equity capital raisings for WA companies, across 548 deals. That’s $17M+ per deal. And this does not count another $41B+ in M&A (merger and acquisition) activity.

How much of the capital raising money went to early stage private (Pty Ltd) tech companies?

Go on, have a guess… no?

$28M.

That’s less than 0.3% of total raisings.

So, this proves there IS money in Perth ($9.5B of it in our calendar year!), but NOT yet for early stage private tech companies. Well, there’s $28M a year, which is not nothing (and MORE than there was a few years ago), but it’s still a drop in the relative ocean.

A company I came across recently – one of the best startups I have seen – told me they went to 130 meetings, and pitched their business 130 times before raising a cent. They had 129 ‘no’s; before a single yes. There was no one else I could introduce them too, they’d seen them all.

Where did they raise money from? Singapore. (Everyone in WA and Australia passed.)

Over the past 6 years we’ve seen the development of a pretty strong local ecosystem for startups – startup weekends, meetups, co working spaces, accelerators, incubators, pitch nights, media interest.. etc.

The education of startups & founders is happening and well entrenched. There’s no excuse now for your lonely tech entrepreneur not to know what they are doing – they could wander down to Perth Morning Startup, join the upcoming Startup Weekend or pitch at Perth Angels, Innovation Bay or plus-Eight tech accelerator. They should find their way, knowledge and people if they put their mind to it.

What we need now is the EDUCATION OF INVESTORS.

People with money to invest in businesses need to be taught HOW to do this in the early stage tech sector.

People who’ve made money will fall back on what has worked for them in the past. That’s perfectly natural. And if you are a Perth investor, then that probably means via ASX companies, mining investment & commercial property, whipped up by the brokers of West Perth.

We do not need much to swing the startups’ way to make a material difference.

If we could raise it from 0.3% to just 1% then we would be tripling the amount of investment. To $90M or so a year.

Imagine what that could do.

Not for ASX companies or rushing companies (too early) to a listing. For private, early stage, little or no revenue tech companies that could scale and become the next Canva.

99% can still go to ASX, mines and property. Just carve off 1% of early stage, scaleable businesses, that could “do a Canva” and grow to $1B valuation in 6 years.

By the way, Canva failed to raise money in WA too. They tried, for many years. In the end, a chance meeting with a visiting American VC in Perth set them off on their road, assisted by Lars Rasmussen (ex of Google Maps and then Facebook). Canva moved to Sydney.

Yes, we need more startup success stories. You can point to a mining billionaire or two in Perth, and several property or ASX multi-millionaires. Business News is full of them. You bump into them walking down the Terrace.

But to get more success stories, we need more early stage investment. We need to ‘throw more darts at the dartboard‘ to see if we can hit some bulls eyes.

I don’t know which ones will succeed, but I know within the 500 or so startups in Perth, there will be the next Canva, HealthEngine, Moodle, or whatever.

So, we need to EDUCATE the investors on HOW to invest in startups; how to value them; how to spot the potential wheat from the chaff; how to be patient; how to give advice; how to mentor.

The monied classes have a lot to give in this respect. They offer much more than money; they have hard won experience, contacts and savvy.

Perth Angels do their master classes – which is great! – but in a way they are preaching to the converted. Members of Angel groups.

We need to reach more of those that have money, know they probably need to invest in tech, but have no idea how to start; but are willing.

How do we reach them I wonder?

~~

[Sources: Business News, Techboard]

The Coffee Meeting Pitch Mistake

I was speaking with an American CEO a few years ago, just after he had been in Perth a few months.

“What’s the biggest difference between doing business in the States and here?” I asked him.

“You guys sure love your coffee meetings,” he remarked, “Everyone just rings me up or emails and says ‘Let’s catch up for coffee!’ ‘Can we do coffee?’ ‘We should do a coffee!’

“If I said ‘yes’ to all those requests, I’d be able to sky uphill!”

Yep, that’s how we roll in the great state of WA. The coffee is great, the weather is lovely, and there are plenty of good coffee shops around. A $4.50 mug of skinny flat white can last an hour, and in that time you can get a lot of business done.

The Coffee Pitch

When I assess a likely startup or innovative project that comes to me for some grant funding, I like to start with a coffee meeting.

For starters, it’s a neutral venue, so is less stressful for either party. Stress is not conducive to learning the best about a particular idea or person. You want both sides to relax, and be themselves.

I also have a very fine coffee shop just a 3 minute walk from my house, which overlooks a lake. Very nice, very convenient.

If things go well, and there is something worth considering, then the next meeting may very well be at the company’s own office. But for now, we’re in a coffee shop near where they work, or by the lake.

So we sit down, order our drinks, and start a conversation.

This is where I get to observe the entrepreneur(s) in question. How well can they articulate their idea? How well can they explain their solution, and give me a potted history of their own experience to date. I want to hear about their team, and what they have built, and the market they are attacking.

But most of all, I want to hear one thing coming through – I want to hear them tell me all about the big, global problem their potential customers have, and why those customers will pay them to solve it.

Often, this is not what I hear about.

Too often, I am feature bashed with whatever gizmo they have built. They have fallen into the simplest and most obvious trap there is – falling in love with their product.

Of course you have to build a product or service for your customers. This is the thing they are going to buy right? It has to be wonderful, disruptive, novel with superb UI.

Sure, but building the product is the easy bit.

Selling it is going to be the hardest thing. And you will only make a sale if you are solving a big, hairy problem for your potential customers.

So, the first thing I want to hear from the coffee meeting, after the initial small talk is, what huge problem have they uncovered, that no one else has, and explain why customers will pay to have it solved, and solved by them.

Forget the product for now. As you take it to market, new information will arise and they will have to make product changes anyway. If they are wedded to the product, they will be less likely to change it. So don’t tell me how great it is, and all its features. It will change. It will have to.

Tell me about the customer problem. Tell me about the customers. Who are they? Why do they have this problem? Why will they want you to solve it for them? Why will they choose your solution? How are you going to reach your customers? Why will it be YOU that solves this, and not someone else? How many of them are there?

If you are pitching, over coffee or on stage or in a boardroom, START with the problem.  First slide. First sentence.

Spend most time on this, and the rest of your pitch will flow naturally.

Because only if the potential investor or government grantor believes there is a real deep customer problem will they believe there is someone who might pay to have it solved. And only if customers pay will you have revenue, and only if you have revenue will you have a business.

Why Startups are easy, hard and mostly fail

The romance of cycling into a co working space, armed with a skinny latte, tight jeans and hipster looks can draw many to the promise of giving a startup a go.

It could have been precipitated by being chucked out of that corporate job you always hated. Maybe you’ve struggled with an itch you just have to scratch. It might be the allure of untold riches that some startup founders accumulate.

Be forewarned, startups (and I mean a disruptive, scaleable tech startup here, not a Mum and Pop café business or some gardening franchise) are about the riskiest business you can set up.

Setting up your startup is the easy bit.

For some, raising money can be a breeze too. You either have some savings, can go a few months without earning anything or can convince some investors to pop some money in.

Spending that money, well, that’s easy too. We made this mistake when we set up our tech business many years ago. We raised money, quite quickly, and then we spent it. We had an office, some staff, a website… Ta Daaa, we had a startup!

Except we had no business. We had no clients. Well, none that would pay us anything. For a while at least. They were on free trials. And when they did pay, it was small bikkies compared to our monthly costs. Cash crises, sleepless nights and arguments ensued. We almost went under, a few times, but ultimately were saved by our investors, who propped us up (put more money in) while we shaved costs (me and my fellow cofounder took no salary for months) and worked out how to make it work. This was when the business really began.

Disrupting an industry, and the way it has been doing things, is hard. Change happens slowly.

But one thing is central, and never goes away, even when people forget this during the hype and excitement of a new business or disrupter.

You are only going to succeed in business if you find a big problem your customers will pay you to solve.

That’s it.

I have met so many (too many) startup founders who have forgotten this central truth – as I did, when I set out.

Because unless you solve a problem for your customers, they will not pay you, and if they won’t pay you, you haven’t got a business.

Too many founders like to tell me the wonderful features of their app or website, gushing about all the things it can do for its users. Too few tell me what problem they are solving, and how customers will pay them to solve it.

CB Insights have published a report into why startups fail, based on 101 post mortems.

What’s top of the list? No market need. 42% of failures cited this as their number 1 reason for failing.

In other words, the customers were telling them they weren’t going to pay for whatever service was being provided, in sufficient numbers.

The number 2 reason? Running out of cash. Which is the same reason as #1. You need to allocate funds wisely, and be sensible, but overall if you had enough customers willing to pay you to solve their problems, you’d find a way to stay in business.

#3 is “wrong team”. Businesses are run by humans after all, and if they can’t get on, or work together, or have complementary skills, then things can get tougher than otherwise. But you should be able to get rid of the bad people, and hire better ones.

#4 is “being outcompeted”. Someone else beat you to it. Their product is better made or sold or solved the customer problem better (there’s that customer problem again).

#5 was “pricing/costing issues”. Do you offer a free trial, for how long? What packages will then be on offer? How good is your onboarding, and conversion of free to paid? It’s a dark art, and also a science.

Most of these and other reasons are all versions of the same essential issue – not understanding the customer and their problem.

Interestingly, the venture capitalist Bill Gross gave a TED talk in 2015 on this subject. His research showed that the single biggest reason startups succeeded was timing.

Too late, and you’re dead. Too early is better than too late, but it can be hard. Getting the timing right, when the customers and industry are ripe for the disruption you bring, is gold.

Timing, says Gross, is more important than getting the right team together, or the brilliance of your idea, plan or business model, the execution of the strategy or adaptability and resilience.

Rebekah Campbell, Hey You and Posse founder,  writing last week in the Fin Review argued that her startup mistake was raising money in the first place. Don’t raise money at all, she said, but get out there nice and lean, and be close to your customers.

You can argue and debate all this until the cows come home, but in the end, it’s all about the customer. Don’t even think of setting up a startup until you have cracked the big, hairy problem your customers are going to pay you to solve for them.

The rest will then follow naturally.

The full top 20 list is below

Take it from Eddie Izzard – Quality is more important than Speed

Over the break I read Eddie Izzard’s excellent ‘Believe Me, a memoir of love, death and jazz chickens‘. Bill Gates, of all people, had recommended it as a top read, and I thought ‘now why would a serious bloke like Mr Gates be into the autobiography of an English cross-dressing comedian?’

Then I reached page 306, which I quote from heavily below.

Eddie Izzard was born a year before me, and was packed off to an English  private boarding school aged 6 after his mother died suddenly of cancer. He grew up with the same TV shows and music as I remember from the early 70s, and went to uni around the same time (although he dropped out to pursue his dream of performing).

As a teenager, while still at school, he decided one day to take a bus and a pay a visit – uninvited – to Pinewood Studios, just west of London (where they made James Bond movies and the like) walking right through the side door and exploring around all day pretending to be busy and part of things.

During his ‘lost decade’ of the 1980s he took various failed shows up to Edinburgh Fringe, then spent a few years as a street performer before finally getting into stand up. He explored and created, and slowly honed his craft. He put on shows himself, producing them from scratch and co-writing inventive nonsense with friends. Most of it simply did not work, but slowly he found his own voice and style and confidence and audience.

From the 1990s his stand up act took off and then he made it into films and TV. Now, in his mid 50s, looking back, his advice for creating new business is crystal clear …

“When I was 25, the direction of my career suddenly became shaped by my ‘Field of Dreams’ rule – if you build it, they will come. ‘It’ being quality and imaginative shows.

“Previously, this had not been my thinking. Quality was not high on my list. Speed was. But who the hell cares if you get somewhere fast? The only person who cares is you. 

“If you could get somewhere faster, then you’d just have a lot of money, a big house, a fast car and a big cat. The individual is the one who wants to get somewhere quickly. It’s what you want when you’re young. At nineteen I thought I would begin to cut through within a few years, but this was not the case. At 25 I was racing to get somewhere fast but getting nowhere.

“So I turned the plan upside down: don’t get somewhere as fast as possible. Get somewhere as good as possible.

“No one ever says, ‘This piece of creative work is crap, but it was made in a couple of weeks, so let’s go check it out.’ Contrariwise, no one ever says, ‘Now, this piece of creative work took 10 years to make and a lot of care and attention – so I must check it out because it took so long to make.’

“There is something fun about a fast trajectory, someone’s career taking off quickly. It’s all about the wind in their sails. But in the end, you want your work to last. And to do that, your work must be good…

“(My career) took 12 years to appear, and to me it felt like a bloody eternity… there was something I had to learn. It was stamina. And it was also the idea of quality over speed.

There is an eternal truth in this passage.

Do your best work, not your quickest work. It might take time. In fact, if you’re doing something new, wacky and disruptive, it will definitely take time. More time than you’d like. But in the end, only the best work wins. Keep plugging away, find your audience, keep innovating.

This experience and advice has obvious crossover to business and particularly startups. I think I can see why Bill Gates admires Mr Izzard.

Change is slow, and that’s good thing

Methuselah is a 4,849-year-old Great Basin bristlecone pine tree growing high in the White Mountains of Inyo County in eastern California.

An oft-heard refrain these days is a lament “Everything’s changing so fast!” and it would be easy to sign up to this notion.

Look how we totally rely on our smartphones these days, turning to them an average of 150 times a day. It makes one wonder what we did for entertainment, news and chat pre-2007. And yet, we’ve only had them for 10 years. It’s gone in a blink of an eye.

See how Uber and Airbnb have blasted into our market, totally disrupting and changing the way we move around the city, or stay in other cities (or have total strangers to stay with us). Uber only got going in Perth in 2014, and has over 20% of the market. Airbnb launched into Australia a couple of years earlier and has upwards of 30% across Australia these days.

And yet, even these stories prove that the best changes – the ones that stick – take time.

There had been smartphones well before 2017, and phones with access to the internet had been around for a while. The best marketing the iPhone did was to announce itself as the game changer, yet even the iPhone took a while to take off. Early versions’ battery life was poor, and not everyone liked using a finger to tap on a virtual keyboard through glass. The Blackberry ruled supreme, and had a built in keyboard. This was much closer to peoples’ existing experience, which was why it was named “the crackberry”. Its devotees were obsessed by it.

The iPhone 3 was the version that took off, launched as it was with the app store in 2009. It was this moment that saw the inexorable shift to the smartphone (which  really should have been termed the ‘app phone’, as phones had been smart before – it was the apps that made them different now). The creation of the cottage industry of app makers was the true revolution, and this underpinned the smart (sorry, app) phone’s rise. Soon Samsung and Google jumped on board.

Looking deeper into the Uber and Airbnb cases you can see that they did not exactly take off as over night successes either. Launched in 2007, it took til 2011 before Airbnb would launch in multiple cities and gain traction, on the back of some serious capital raises in 2010. Likewise, Uber, founded in 2009, took a couple of years and then a major seed round in 2011 before it could launch in various jurisdictions with UberX in 2012. Indeed, Uber was not the first ride-sharing service, and they held back looking at the rulings coming out regarding the legality or otherwise of this new form of transportation. (Others could argue that ride sharing had actually been created in the early 1900s, or even the 16th century, but that’s another story.)

The history of even these wildly successful game-changing disruptors started with relatively quiet 2 or 3 years where things were far from certain. They were learning, pivoting and inching their way to the best formula. When I meet tech founders who think they’ll take off immediately with hockey stick growth I tell them the real stories of hardship, years and years of struggle, before even the best break out. Are you up for that? Founding a startup may seem glamorous when you see the gazillionares adorn magazine covers, blaze around at Burning Man or stomp across tech conference floors delivering well honed keynotes in their black t-shirts, dark blue jeans and high end trainers. But they all had hard starts, and there were many failures, mistakes, missteps and sleepless nights. It’s not all glamour, believe me.

So I would argue that change is slow. Indeed, the best ideas always grow slowly, and that’s a good thing, because things that grow slowly tend to last a long time.

Just talk to a turtle (average age 100 years) or Methuselah, a Californian bristlecone pine tree that was seeded in 2,833 BC. She ain’t pretty, but she’s still here.

Slow is good. Slow and steady wins the race. It’s hard work. It’s not very glamorous. It’s a million small things you do, day after day after day, that get you there. There is no silver bullet. And that’s a good thing.

Raising funds? Ask for no and then 3 more

Reverse psychology can be powerful. Be kind when friends stuff up and they’ll be  shamed into doing better next time. Tell a family member “I’m fine!” through gritted teeth when clearing up and they’ll be honour bound to help.

And so it goes with early stage (seed) capital raisings for startups.  The best advice I was given when pitching my fledgling tech business to potential angel investors was “try to get them to say no.”

This works beautifully on so many levels.

Firstly, if they absolutely can’t say no, then they’re probably going to be a yes. If they’re vascillating, telling them a no is fine will let them off the hook.

Counter intuitively, if you tell a potential investor they don’t have to invest, they may be more interested in doing so. (‘I don’t want to miss out..’). It’s a classic closing move. It’s also a bit like putting someone on silence. They have a sudden urge to speak.

But you don’t want someone investing who is not that keen on investing. They will become a millstone around your neck.

What you want to do is to cut off the time wasters as quickly and diplomatically as you can. The “maybes” will suck the lifeblood out of you. They’ll say they need to talk to their partner, or think about it more, or … any number of reasons.

Ring me next week and we’ll chat” is not a “maybe”. It’s someone who is too weak or shy to say ‘no’ to your face and will give you the run around. What’s another week got to do with the price of fish in Denmark? Nothing.

Stop all this upfront. “It’s OK to say ‘no’, really. In fact I am happy with a clear cut no.”

When you get the no, do one more critical thing.

Say something like: “Thanks for your time today listening to my idea. Now you know what we’re doing, can you please give me 2 or 3 other people who you think might be interested in hearing about this opportunity?

You see, a “no” is totally fine. In fact, it eases the tension, and the angel investor will be almost honour bound to help introduce you to more people. It’s their quid pro quo for saying no.

While this no shuts one door, it should lead you to 3 more. The ‘no’ is just a paving stone along the road to funding your business. The more the merrier. It’s fine. 1 pitch becomes 3, 3 becomes 9, 9 becomes 27 and so on…. you’ll find your money along that road.

Back in 1999, I remember showing our idea to one high net worth individual down town. He listened respectfully to our 10-minute pitch. We then closed our laptop, looked at him and he simply said “No, this is not for me, but thank you for showing me your idea.”  I have seen him at various events these past 18 or so years and he is always smiling. He is as respectful, positive and friendly as ever. He passed me on the street the other day, stopped to chat and said how he knew I would do good things in my new role. This was someone who utterly rejected the investment opportunity I showed him and it is totally fine. A relationship (and perhaps mutual respect) was formed.

No’s are not to be taken personally. Encourage them. Use them. Don’t waste time with maybes. Get through the no’s and the yeses will be not far away. Because the yeses are always connected, somehow, to the no’s.

Picture Source: http://silicon-valley.wikia.com/wiki/Optimal_Tip-to-Tip_Efficiency

A watershed moment for Perth tech startups

Dr Marcus Tan addressing the ‘Digital Disruption in Health’ YOLK event, last week

This week it was revealed that local tech business, HealthEngine, had raised $26 million from global venture capitalist Sequoia Capital.

This is notable for a few reasons:

  • it’s the largest private sector investment in a local tech startup
  • the first such investment from this Silicon Valley VC in Western Australia, and their second in Australia (after investing in Melbourne-originated LIFX)
  • the same VC that has invested in such global successes as Google, Apple, Whatsapp, Stripe and AirBnB
  • the business is headquartered and will remain (as far as we know) in Perth
  • the investment reduces the need for the company to do an IPO & keeps the business private

On so many levels, this is a knock-it-out-of-the-park deal, made all the the more notable in that the co-founder and CEO, Marcus Tan, has been a fixture on the local startup scene for 7 years or so.

I remember first meeting Marcus when he was a fellow mentor on Perth’s first Startup Weekend in September 2012. The 10th such event will be held next month. The more I got to know Marcus, the more impressed I was.

Not only a cofounder and CEO (he’d put together the HealthEngine startup in 2006, developing it from his lounge room), he was also an angel investor himself, and a philanthropist (being behind the Global Meridian fund raiser for local worthy causes). He was one of those who set up Perth’s second co-working space for techies, Sync Labs (now run by Spacecubed). He has been basically everywhere in and around the sector in the past decade, as well as a practising GP. Is there nothing he can’t do?

A week last Friday I moderated a session down at the Old Swan Brewery (see photo above), on the topic of digital disruption in health, and he was quite brilliant on the panel. His deep intelligence and soft spoken authority came across (as always), and anyone that met him and heard him cannot but be impressed.

A few years ago I invited him to be a guest speaker in my eBusiness MBA class. Along with many gems of advice, I remember him saying that that Australia is of a certain size that one online business can totally dominate a sector. Realestate.com.au (REA Group) has done this in real estate, and is one of the most profitable online real estate businesses globally. A larger country, such as the States, he argued, is almost too large to have one business dominate. It was clear he was out to dominate Australia, and this week’s funding probably allows him to complete that mission, while looking out for regional and global market expansions.

It could not happen to a better person, and I wish him and HealthEngine all the best.

What this also does is demonstrate to other local tech startup aspirants that a good tech idea, well executed, can be built from Perth. Apart from traditional ICT businesses like Amcom and iiNet, we’ve not seen evidence of this being done. You can also bet Sequoia and others will be looking at Australia, and maybe even Perth. To Atlassian and Canva (Perth originated, but now Sydney based), HealthEngine is now added as the next possible Aussie ‘unicorn’.

Be inspired Perth tech startups up, for you could join the list sometime soon…

Let them eat cake

Asking for startup money

Legend has it the wife of King Louis XVI of France, Marie Antionette, uttered the words “let them eat cake” on hearing the starving peasants were in revolt against bread shortages. We’re talking late 18th century, and although the Queen would have probably said the words in French (something like ‘Qu’ils mangent de la brioche‘) there’s no evidence that she actually said this at all. The saying actually predates her birth.

But the attribution persists, and has been used to show how out of touch the nobility were at the time, resulting in the French Revolution, and King Louis losing his head.

The words rung in my head this week as I indulged in a discussion I’d had many times before, relating to Perth’s burgeoning startup sector. The weight of opinion agreed that there’s not enough early stage funding deals going on. As to why, there was a distinct divergence of views.

I’d like to explode a few myths if I can …

Myth 1 – If they were good deals, they’d get funded

I hear this one a lot. If they were good deals, the argument goes, then eventually (or even swiftly) they would get funded, as an investor would see the opportunity was too good to miss. Some may pass, but eventually a good startup business would attract money.

However, this argument rests on the Perth market for startup funding acting perfectly, which (let an old economist like me remind you) only exists where there are a large number of buyers and sellers, such that no one buyer or seller can influence price. Perfect markets also rely on a perfect spread of information, freely available to all, and homogeneous (exactly the same) products.

Perth’s startup sector is no perfect market. While there are a good number of startups to choose from (300 at last count?), there are a very limited number of private investors willing to back them. There is one VC fund (and that’s already fully invested, 2/3rds in biotech) and one angel group which meets 4 times a year and maybe does 5 or 6 deals annually. Meanwhile, there are plenty of potential investors dripping with (business, mining or property) money removed from startupland.

Neither is there a perfect spread of information, with only a privileged few getting in front of the investors, and as they are all very different, each startup investment opportunity needs to be considered individually, one by one, a bit like buying an investment property. It’s time consuming, uneven and sporadic, at best.

I have no idea what makes a good startup investment (well, I have some idea, but I am not arrogant enough to say I know which one will be a unicorn and which will fade to nothing), but I believe there are many more out there worth a $25,000 or $50,000 investment that are currently being funded. I am seeing too many move away from Perth for funding (and securing funds) and too little getting funded here; and yet, Perth has far more high net worth individuals per capita than anywhere in Australia, and is one of the top places in the world for multi-millionaires.

There is a distinct disconnect between those that might have spare money to invest and those that could do with a decent little early stage investment that could give them 6 to 9 months of road, get them to market and revenues to see if there is something viable there.

Myth 2 – They shouldn’t be raising money anyway

This argument goes that startups should forget about raising money anyway (far too many think the capital raise IS the end game, clearly it is not) and should start pitching to customers instead. Get to minimum viable product (MVP), get early clients on board, earn revenues, and maybe they’ll find that they won’t even need investors at all, or if they do, they’d secure a better price, be able to raise more money and give away less equity in the bargain.

Bingo – I agree 100%.

However, most startups are either doing exactly that (out of necessity) or cannot get any further without something else investing upfront. They’ve piled in their own cash, savings, credit card debt, taken money from family and friends, spent months on the idea, with no pay back, giving it their all. They have got somewhere, and now are looking for some extra help.

Some ideas just need money to get off the ground. You have to spend something to build it, you have to get out there to see if it works, and this may take $50k or more beyond the funds available to the founders.

Most successful startups have had early stage money. Very few are profitable or cash flow positive from day one (or after the family and friends money has gone). Often there are dead ends, false starts, wasted attempts, and this is all the cost of learning. If you’re doing something very new, disruptive and game changing (surely what the investors want to see?) then it simply takes some funds upfront. Like buying the investment property.

It also takes time. The successful ones will tell you it took 5 or more years to make money. It certainly took my startup this length of time, and others like realestate.com.au, carsales.com.au and others took 7 or 8 before profits appeared.

Mel and Cliff from Canva understood this. There they are today, smiling out at us from the front page of the local weekend paper. They’ve raised millions and millions of funds  – are they profitable, or cash flow positive yet? They were helped off with a cool $3 million raise a few years ago, which took them away from Perth to Sydney, and have since raised many millions more. Nick and Al from Simply Wall Street could not raise money in Perth, but have successfully raised $750k from angel investors, also in Sydney (why not in Perth?). Talking to their lead angel at a lunch function a few months ago, he told me that in their case, they had an idea so disruptive, “you just had to give it a go to see if it worked.”

Exactly.

Not all startups deserve money, some may not be at the right stage, but somewhere along the line, many do, and the vast majority of these simply aren’t getting the funds they need, despite there being ample in our city. Water water everywhere, nor any drop to drink.

Myth 3 – The entrepreneurs are unrealistic 

Sure, owners of anything are unrealistic about their valuation. I think my property is worth more than it is, and also my car. The price is determined only when someone is willing to pay for it what I am willing to sell it for.

But with a limited number of genuine local startup investors the power is weighted heavily on the buy side, such that in some cases the negotiation is more like staged bullying (running down the efforts of the down trodden entrepreneur, and finding all sorts of reasons not to invest). Meanwhile, the poor startup trudges back to their lean canvas to see if they can eke out another month or two.

Perth investors have grown fat on the ability to exit their investment through an ASX-listed entity. We have seen 60 ‘back door’ listings announced over the last 2 years, as the mining downturn takes hold and now empty shell companies look to evolve into a tech company. This is a highly expensive and dangerous way for a genuine startup to raise funds. While potentially fine for a commercialised organisation with revenues and a clear growth path, it is clearly not suitable for the early stage venture (or only in very rare cases – FMG was in fact a back door listing, but I wouldn’t classify that as a tech startup.)

Sure entrepreneurs are unrealistic, but so are investors. You can’t have it both ways, you can’t have your cake (or bread) and eat it. It’s a punt. It’s a riverboat gamble. It’s like betting on the horses. You will probably not see that money again. Yes, it’s probably illiquid, for years. But if you win, you win big, so it’s best to make a few bets, to cover yourself. The more you make, the more you spread your risk. You may say ‘no’ to 20 before saying ‘yes’ to your first. But you might do 2 or 3 a year.

Myth 4 – It’s good they get money elsewhere & leave

The argument goes that we should not worry about our best and brightest startup ideas leaving our shores to get funded elsewhere. Sometimes they just need to spread their wings, bless them, and once they make their money they will return and help our ecosystem back here.

OK, maybe. But why can perfectly good Perth ideas get funded in Sydney, Singapore or San Francisco and not here? Why should they have to leave to get funded when we have so much money in the hands of private individuals in our fair city (and come July a nice little tax deduction too)? Why should they have to leave our great lifestyle, family and friends… unless they really want to?

To me, this argument is lazy. While it’s perfectly fine for businesses to go wherever they want (fly my darlings fly), it is not fine to have so few early stage funding deals that jobs and income that could have been created here (and stayed here) are exported to other cities or countries. We are competing in a global marketplace, the gloves are off, it’s either get nimble and innovative, disrupt your own market or someone else will do it for you. Where is the post mining diversification we so badly crave? Even during the boom, people were worried about us becoming a one trick pony. Now that pony has well and truly run its race, where are the up and coming industries? They need to be backed. We have no idea what great businesses might flourish and grow unless we give them a helping hand.

~~

Startup investment is not for the faint hearted. It’s not a slam dunk. It’s not for your nest egg, it’s play money. Many thousands of high net worths in Perth could make two or three $25k to $50k investments a year, and not even notice it. Conservatively, that’s $250 to $500 million of available funds a year, that would make a tiny fraction of a dent in the portfolios of many, yet revolutionise our local economy.

Perth could become a regional tech startup sector, offering a great lifestyle, climate and investment funds to plucky entrepreneurs who want to cash in on a place that just happens to sit in the same time zone as 60% of the world’s population.

It would be almost criminal (and certainly negligible) if we don’t do this.

Why a tech startup? Because the best ones have highly scalable business models. Those guys and gals down at Spacecubed hammering away at their idea on a laptop could have $100 million businesses in a few years (just as Canva does today after a relatively short 4 year journey). This type of growth is hard to do with traditional bricks and mortar businesses.

It’s the most speculative investment these investors will make, but for many of them, it’s the best fun they can have. They can add some value to the startup (sharing hard won advice on commercialisation, open some doors) and it can give them plenty of dinner party conversation.

If we can throw enough darts at the dart board here in Perth, we will hit some bulls eyes. It’s a numbers game. It’s a funders’ game.

So, let them eat bread. Cake will come later. Perhaps.

Photo Credit: Flickr.com, Heather Katsoulis