Both have recently fallen foul of the ASX’s continuing disclosure requirements and face uncertain futures. While both have earned the ire of shareholders and the regulator for different reasons, their problems ultimately boil down to the same thing – they simply weren’t ready to go public.
Whichever way you slice it, they were either not mature enough in terms of growth capability or business model, or they didn’t have the right structure or expertise (or both) required to successfully run a public company.
They’re both guilty of arguably the worst sins a listed company can be guilty of – either over-promising and under-delivering, or overselling what they have delivered. Their issues come at a time when there is growing negative sentiment toward “a segment of trash” currently trading on the ASX – bluntly, tech startups that have promised the world but delivered little.
This has driven an argument from some quarters that the ASX itself needs to lift its game in terms of diligence and admission standards and indeed they have recently announced tighter disclosure rules. As I see it though, the same rule that applies to investors should also apply to businesses looking to raise capital – take some personal responsibility.
There are numerous creative capital raising avenues available to startups during their critical growth phases. Enthusiastic entrepreneurs can easily be besotted by the bright lights of the ASX, while businesses which fail to attract the attention of venture capital funds see the ASX as an alternative.
As the saying goes, however, there is more than one way to skin a cat.
It comes back to having a realistic view of where you and your business are at and what is the best course of action for growth. Having the right advice is of course also a no-brainer.
Considering these recent tales, it’s worth having a look at some alternative sources of capital to the ASX and traditional venture capital and some of the success stories that have come with them.
Family Groups/ Wealthy Individuals
Whilst Venture Capital and the ASX are popular sources, a fast-growing opportunity for startups are the wealthy family groups. These groups are different to “angel” investors, who are mainly geared towards smaller (sub-$500k) investments.
Family groups and wealthy individuals invest in a range of businesses. Many have made their money in property, or from a large exit, and are always on the lookout for the next opportunity. In my experience, there is significant interest in tech, with some caveats.
Some of them have been burnt by tech startups that have under-performed and not delivered a return in the past. Others have been burnt because their startup investments are taking up too much of their resources and attention. However, many do maintain a very disciplined approach to – and appetite for – tech.
Many will employ a “gate-keeper”; someone employed to manage their investments. Ultimately this person will be the maker or breaker of your bid for capital.
However, unlike angel investors, family groups often have deeper wealth with the ability to follow on.
A great Australian example is BlueChilli – a well-known venture accelerator who this week announced a joint venture with Singapore-based venture capital firm Hatcher, which will see them hand pick more than 200 new startups for its accelerator program.
BlueChilli has been privately funded by some of the most respected family offices in Australia and the US. This has enabled them to focus on growing their accelerator business and continue to create great startups with their founders.
However, family groups are not without their drawbacks. They don’t necessarily follow the same deal structure as venture capital firms. They also can be more demanding if things don’t go well. Venture capital firms often jettison failures, whereas family groups and high net worth individuals like to step in and take control. They also have their own individual personalities and idiosyncrasies which can vary from group to group.
So, at the end of the day, whether a family group or high net worth individual is right for you will very much depend on where you are in your growth cycle. Moreover, a good personality match between you as founder and the representatives of the group is integral.
Corporate Venture Capital
Recent years have seen an explosion of interest from large corporates in the tech sector. Many are getting involved by establishing their own venture capital funds, sponsoring incubators or accelerator programmes or assisting tech businesses with selling to the corporate themselves or their corporate network.
A great example of a corporate capital beneficiary is Australian startup, Hivery.
The Sydney-based company helps Coca-Cola bottlers around the world better understand sales patterns in their vast vending machine network worldwide. Coke initially liked the idea of the tech application and then took steps to invest in it themselves.
Coke has indicated that thanks to Hivery’s Vending Analytics’ predictive software, they have seen a 20% revenue jump per optimised vending machine as a result of knowing which machines should be stocked with what products.
Hivery are a great Australian success story. Their technology was originally created by our own government incubator, CSIRO’s Data 61 (formerly NICTA), and together with the backing of the world’s largest beverage maker, they have enjoyed significant success with even stronger prospects for future growth, as they expand their offering into more lucrative retail use cases.
Angel investment is somewhat different again from venture capital and other investment vehicles. There are angel investment groups such as Melbourne Angels and Sydney Angels, based in different cities – as the names suggest.
Angels however tend to be wealthy individuals or groups, without any form of corporate structure, who invest in startups.
Whilst Angels may love your idea and have faith in it, and they bring initial capital and experience to the table, the downside is the often do not have the ability to provide further injections of capital. Also, because this can be an important investment for them, they can sometimes be high maintenance investors.
Crowdfunding is a more recent phenomenon whereby startups seek funding from “the crowd”, or in other words, the general public. This can be done via licensed crowdfunding platforms, or via investor groups who invest via a representative entity.
Crowdfunding platforms are still in their infancy in Australia with only a small number being licensed and they haven’t been operating long enough to properly gauge their success. Ultimately for any startup looking to use them as a funding source, the chances of success will simply depend on the number and quality of investors on the platform, and of course the startup’s own investment credentials.
The advantage of having many investors via crowdfunding is that no single investor will have the control rights which any family group, venture capital fund or large corporate will demand. However, at the same time you do have to deal with a “crowd”, which can of itself be distracting.
Initial Coin Offerings
ICOs seem to be the flavour of the month for the startup community. On the surface they are attractive – you issue tokens, not shares, and in return have the opportunity for a potentially significant return. You don’t have shareholders, convertible note holders or other investors to deal with – just holders of your tokens.
Whilst there have been a number of successful Australian ICOs (see for example Powerledger, Canya and Shping), many other ICOs fail. In fact, multiple sources report that up to half of all ICOs fail (but then again there are other sources which say that this is “kinda fake news”). Irrespective if you are considering an ICO, you also need to consider the high cost of undertaking one, and also the current regulatory uncertainty. But if you can get over those hurdles, the returns can be significant.
Ultimately, there are options for start-ups outside the ASX and traditional venture capital. Whichever funding source you choose to pursue, the strength of your product and your founder management team should speak for itself in every capacity and will determine how far a start-up may get. However, it’s critically important to be aware of your own business’s size, structure and most importantly, it’s limitations.
About the author
Darren Sommers is a Principal Solicitor at Melbourne’s KHQ Lawyers. He has more than 20 years’ experience providing general commercial legal advice and specialist technology law advice to clients in the IT industry and other technology industries.