StartupWeek Sydney brings together people with ideas – entrepreneurs, innovators and disrupters. A collaborative festival, it hosts 150 speakers, 60 events at 22 venues across Sydney to teach startups how to commercialise their ideas.
On Monday evening, LegalVision’s Surry Hills Head Office held a free capital-raising seminar. Over 50 attendees gathered to consume 16 pizzas and drink wine while listening to LegalVision’s two co-founders step them through capital raising’s commercial realities and its often overlooked legals.
LegalVision CEO, Lachlan McKnight and General Counsel, Ursula Hogben have raised over $2 million in venture capital and so were in a unique position to provide the audience with first-hand tips and tricks. So what were the key takeaways?
1. Are You in a Business that Someone Would Want to Invest In?
If you are the start-up’s CEO, capital raising is your full-time job. And the job description requires somebody ambitious, commercially savvy and committed to investing their time and energy to secure investors. Growing your start-up then requires raising money or generating revenue.
McKnight pointed out that it is almost impossible in Australia to raise money without a business generating revenue. Silicon Valley success stories, including user sharing apps Uber and Airbnb, would not be profitable in Australia’s current conservative start-up climate.
In describing his role as LegalVision’s CEO, McKnight said he was responsible for making sure that the business is “making enough money” and “growing at the desired rate”. He also acknowledged the necessity of a strong team. Ensuring that there are other people in your business that can do whatever else needs doing allows you to concentrate your energy on raising capital.
2. Ask Yourself Uncomfortable Questions, and Answer Honestly.
McKnight went on to encourage his audience to ask themselves questions when they are fine-tuning their pitch. Would someone else want to invest in the business? Is the business the type that would raise venture capital? Are you undervaluing your start-up? It is not uncommon that new start-ups adopt the mentality that their business is not worth anything. And resultantly, give away entire chunks. This mentality will not scale your start-up. Investors owning too much of your business provides few incentives for founders and employees to stay and continue growing it. When seeking equity, it can be difficult, however, straddling the line between recognising your start-up’s potential for growth and not being too greedy.
You should also ask whether your personal capital raising ambitions reconcile with that of your potential investors? Raising $10 million may be personally satisfying. Investors, however, view their investments as a portfolio. They knowingly sink millions of dollars in start-ups that fail so the rare success needs to provide a sizeable return.
3. How Do you Obtain Investment?
Hogben took to the floor later in the evening and discussed obtaining investment for start-ups. She quickly dismissed as unworkable reliance on marrying Beyoncé to secure finance. Reportedly, the Queen Bee is rather happily married to Jay Z. Hogben asked in lieu of this, what could attendees actually do to raise capital.
Crowdfunding is, contrary to popular belief, illegal in Australia. Start-ups cannot receive small amounts of money from hundreds of people, or sell small numbers of shares to people across the country. In Australia, start-ups can raise up to $2 million from 20 investors in a 12-month period. That’s it. You cannot publically advertise your offer, and you cannot spam people.
You can, however, obtain investment from Angel Investors (also known as ‘sophisticated investors’) or Professional Investors. The term ‘angel investors’ gained notoriety through Channel Ten’s Shark Tank. They are sophisticated investors with net assets of $2.5 million or have had an annual income of $250,000 for several years.
But what do these investors want to know about your start-up? And how can you craft a successful pitch? Investors want to know your story. They want to know why is your product or service needed, what problem are you helping to solve and who is on your team.
They also want to know what is your exit strategy. An investor is not your spouse. And they will not stick around for better or worse. They want to invest, make a profit, and then get out. You will need to be able to clearly and succinctly explain who you will your start-up to and how – will it be to another business or will you list on the stock exchange?
There is, however, no rulebook or guaranteed route to successfully raising capital.It’s a real job. And you need to commit to selling. Your idea, your business, your brand and yourself.