Martin: Welcome to the business owners podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I represent Mills Oakley’s Private Advisory team.
Well everyone we’re here at our final episode on our season about disruption and innovation, so welcome back everybody and welcome back to our expert panel of Steve Glaveski and Simon Quirk.
Martin: Just to quickly introduce the guys, Steve is the co-founder and CEO of Collective Campus which is an organisation that helps mature businesses to innovate and do it in a smart way. Simon is a strategy consultant who has also set up and invested in and grown a number of business start-ups including VidVersity and Strategy Fusion.
So this is our final one in the season as I mentioned and we’ve spent some really useful time talking about issues around disruption and innovation, we’ve spoken about the need for mature businesses to innovate and to do so with a sense of urgency, we’ve given you guys some strategies about how you might do that, and we’ve also done a case study around Mills Oakley’s, foray into the world of innovation through the Mills Oakley Accelerator which we’re delighted to partnering with both Steve and Simon on and in relation to!
For this final episode, and I want to keep it a kind of quick and rapid fire episode, it’s a little bit tangential, but it’s on a similar theme in that I know that a lot of our clients out there who are listening to this podcast, yes they’ve got their core business, but they like to invest in things and they like to allocate an appropriate portion of their assets, not to bet the farm but they might allocate 5%, 10% of their assets on more speculative plays, and that’s a really, really good strategy, particularly in the context of the disruption that might hit their core business. And it’s also a lot of fun, I think! So look I couldn’t waste the opportunity. We’ve got two guys here who have done it numerous times themselves, they’ve not only helped people to raise capital, but they’ve themselves raised capital for their own business and they’ve invested in businesses so they’ve seen the whole cycle. I’m keen to get some rapid-fire insights for how our clients out there should invest in business start-ups.
So Simon I’ll start with you. Say if I’m a business owner I’m looking at investing in something, what would be some of the common mistakes you would see? Maybe give me three examples (and I’m really putting you on the spot now) of common mistakes where investors have not done it smart and they’ve been burnt.
Simon: Well I think the number one is to just feel that if you’re investing in a start-up that has some element of technology to it, that that’s all you need to do.
I’ve seen high-net worth individuals and business owners repeatedly in some cases they know someone in the start-up or they’re introduced to them and they think oh well, this is the next thing and they’ve ended up in some cases doing most or even all of their money. So the idea is, and it’s even more difficult these days because start-ups are everywhere, it’s never been cheap or easy to start up a business. There’s a lot of noise out there, it’s very difficult to sift through which are the right ones. There’s the three F’s: friends family and fools! So what that refers to, it might sound a little bit derogatory but it kind of refers to that phenomenon and that is that when you know someone, they’ve got a start up, they need some money so you offer it to them. The reason is there’s probably not a lot of due diligence done, you just know the person, that’s where the third F ‘fools’ kind of comes into it, and it’s not to say that it is foolish, some of these investments can be very good but they’re generally done without a lot of due diligence. Some of the best investments that I’ve seen in start-ups adjacent to or outside of existing businesses, is where they understand the industry.
So that’s quite important, they understand. Similar to Mills Oakley, they understand the legal industry, they understand that disruption’s coming, they set up the Accelerator because they know they can’t disrupt it and they’re not going to be the ones to do it. So I think it’s important that they understand the industry or they’re partnering the people who do understand the industry to not necessarily say that they’re going to get it right, but at least then it’s not just ‘well that all sounds really amazing and you’re going to be the next Facebook, wow, where do I sign?!’. So I think that’s quite important. Someone in your investing team needs to understand the industry that they’re trying to disrupt.
I think the team is also very important. We’ve talked about it in previous episodes, it’s really important to get the right team. This is a team that has to be able to be resilient, commit to it, but they’re driven by it. I think that’s an important one. The resilience I think comes from someone who really is curious, who loves to solve problems, and I know for myself that is the thing that drives me to do start-ups at this time of my life when it’s risky and its hard. I have to do a lot of my work between the hours of putting the kids down and 12 and 1am, so I work kind of every night so I have to balance it with the other things in my life. I’m really driven by, when you have a problem that you see and you have a solution and people go “yes!” that’s a different way, that’s for me the drug that keeps driving me to do these things. You need to find someone who’s got that, I’m not saying that I’m the archetypal start-up person, that’s just what drives me to do something which I’ve spent countless hours on and hasn’t paid me yet. So you need to find that person and the team need to be a well-rounded team, they need to be curious learners and you need to see that there’s something in there that’s going to drive them through the hard times and make the best of your investment.
Martin: That’s great, thank you Simon. Steve?
Steve: Sure so, three things come to mind. Validation, previous experience and smart learning.
So first, what I’ve seen a lot of investors slip up on is investing in first time entrepreneurs who have an idea and not much else, and perhaps they’re Baby Boomers and they get excited by shiny things and this young 20-something is pitching some technology that’s going to revolutionise some industry and the Baby Boomer sees all this talk on the television about Silicon Valley and everything else and thinks well I’m going to be part of the next Facebook! But they’re probably not thinking about how big this landscape is and how high the risks are and everything else, and they might be high-net worth individuals and they’ll say sure, I’ll give you $100,000 for 20% and that’s also a bad thing because you’ve also taken too much equity away from that start-up. As per a previous episode, that start-up’s going to find it hard to raise follow-on funding from reputable venture capitalists. So, you want to see that this start-up’s at least got some form of validation and going back to our talk about the lean start-up, people don’t necessarily need a lot of money to do that. In the year 2000 it cost over a million dollars to start a tech company. Today, $100. You’ve got Amazon Web Services you can get going pretty much in an instant. So you want to see that, okay, tell me more about your business model. What problems are you solving? Who is your customer segment? What validation have you done? What tests have you run to determine that this actually is a problem? Go do that, get me some metrics, then we can discuss investment. So having some form of validation is absolutely critical before you give this start-up a dollar.
Second: previous experience. So most venture capitalists tend to invest in start-ups and entrepreneurs who have failed previously. More often than not, well surely if they succeeded previously even better but, if it’s their first start-up, then they’re not battle-hardened. Building a start-up is notoriously tough stuff. If they have failed previously then they are much less likely to make the same mistakes. They would have learnt a hell of a lot and they’re going to be battle hardened and they’re going to be performing at a higher level and guys like Elon Musk say that if you’re not failing you’re not innovating, and that goes both for the product that you’re working on but also if you haven’t failed previously – Musk failed previously, so many other world class entrepreneurs like Jeff Bezos failed previously, but eventually they take those learnings, they’re battle-hardened and they come out on top, so, you want to see some form of previous experience – if not in the start-ups then they’ve got to have an advisory board or something behind them with people who can make sure they don’t make the same mistakes and don’t spend two years or three years trying to figure out the start-up game before actually executing on their business model. So, previous experience and finally, smart money.
Simon kind of touched on this saying you’ve got to understand the industry. It’s one thing to invest in a start-up, but what start-ups need most of all is smart money which kind of brings us full circle with the Mills Oakley Accelerator because you’re getting not just funding, not just a workspace but you’re getting mentorship, you’re getting access to a law firm with networks, with domain expertise to help them along that journey. So I’m investing in a start-up and say I built up my wealth in real estate. Perhaps I should be looking at real estate start-ups who are looking to disrupt that space, because I’ve got no doubt a network in that area that can help them test their idea, that can help them get their idea out there and actually grow – but if I am investing in a completely different industry, which, you know, diversity is good and if you want to invest small amounts then that’s fine, but if you’re looking to invest just say 50,000 – 100,000 in one start-up, then perhaps you should look at a start-up that you can actually help, rather than a start-up you can just give money to.
Simon: I’ll put that the other way Steve, that’s a really good point. If I was a start-up raising, I would take a less favourable valuation just if you had two options, someone with just money, not smart money – just funding – can’t help you, may not have the networks, doesn’t have domain expertise, I would suggest, as long as the gulf was not massive, I would give way more of my equity to someone who had money plus smarts and it could be fair differential for me just to say no, I can’t stomach that, because if someone who can guide you, link you to other networks, the value of that can be astronomical, it can be game-changing. That’s the smart money point, so I think that’s a really important one. So if you flip that for your listeners, then to Steve’s point, if you’re in an area where you can actually help the start-up, then that’s going to de-risk and perhaps multiply your returns as well.
Martin: That’s such a great point Simon, thank you.
I just wanted to ask one final thing, which is in relation to disclosure, what should an investor expect to see? And it maybe it sounds like an obvious point, but it goes to some of these themes I think that we’ve discussed across the season around the old way and the new way. The old way, and you know I’ve advised on many, many capital raises in my time and in the old way you’ve got an IM which is a very detailed document and you’ve got some detailed financial projections going out a few years, done in different ways, and you’ve got the normal underlying assumptions and the hypothesis and the like, is that how it’s done these days in the start-up world?
Steve: Well to a degree a lot of that stuff exists, I call that ‘doing the dance’. Often times start-ups still need to come up with some form of financial projection when they’re pitching to say Angel investment networks and things like that, which often serve the purpose of just demonstrating that they’ve got some form of financial literacy. I don’t think anybody actually believes those numbers! So, what investors should expect in the first year if they’re serious about investing in start-ups is not so much where’s the return on investment, it’s more about those key metrics that they’re measuring against. What are their business assumptions? How have they gone about getting from zero to 100 people signing up on their website to 10 out of 100. Just understanding where they are month to month in terms of those key metrics, so, understanding how the start-up’s going to measure success, what those metrics look like, where they are today and then every month are they getting warmer? What are they doing to get warmer and are they changing their approach or are they just doing the same thing every month? You know the Albert Einstein saying ‘insanity is doing the same thing every day and expecting different results’. So if you see your investee doing that then you need to ask questions.
Simon: On the investment side, really now if I was investing in terms of just documentation I’d want an extended pitch deck really, where you have some financials but look, you know, I’d rather, if I was investing in something I wouldn’t want them spending weeks, especially if it was early-stage, on sophisticated financial models just to show me. I would like to just see that they understand the key metrics. To your point they’ve got some financial literacy or if they don’t, how they’re going to plug that gap. But really, what they’ve achieved, what traction they’ve got, and some of those key things and it would really come down to the discussion. So we’re moving towards not needing the thud on the desk type IMs, thankfully, but I think we’re in a transition period at the moment.
Martin: Thank you. I’m going to try to tie that all up with a legal insight for you. I think that it does go to the heart of the lawyer’s role in setting up these investments, and actually what is important to protect our clients because maybe it’s not the warranties about all of that stuff that we stack up these documents with, maybe it’s actually about that first year – and just as you say, Steve, that really kind of critical point and what are my expectations as an investor? What are the benchmarks we expect to see hit and they may not be of a financial nature. They might be around quite different metrics. But I’m thinking what a great shareholders agreement that would be for an investor. Let’s forget some of that traditional stuff, but let’s have a really rock solid plan for year 1, and lets keep everybody accountable to that plan and maybe that’s what’s going to give this thing the very best prospect of giving the investor a return.
Simon: I think that’s a really good insight. It would be great to see lawyers move that way and think that way.
Martin: Thank you so much gentlemen, it’s been a wonderful season, we feel very lucky to work with both of you in our business and I’m sure that our listeners would have got so much value out of the last four episodes, so, Steve Glaveski, Simon Quirk, thank you very much.
Both: Thank you.