Why I’m slowing down my rate of investing …

I’m making a conscious decision to invest in fewer startups. Well, at least thinking about it. Am I worried about a tech bubble? Nope.

It’s far more fundamental than that …

To understand what’s going on, I need to share a story about my first angel investment.

I didn’t have a history of investing in anything other than real-estate (and, my own business) until I sold my business.

In fact, selling my business was the first M&A transaction that I was ever exposed to - until then, I lead a sheltered existence as a lone entrepreneur, I guess.

Actually, selling was the second M&A transaction, the first one that I was heavily involved in was a joint venture agreement in New Zealand, quickly followed by a much bigger one in the USA.

But, a few years later I sold my businesses to a UK listed company in a series of 4 transactions (two London stock exchange announcements during 2006, each with a separate earn-out agreement: 4 in total).

I then learned a lot about mergers & acquisitions, as I stayed on for a while to head up a key US division of my acquiring company as we embarked on a short-lived spending spree: I left the USA in 2008, amid the financial crisis which put a lid on M&A activity for us, and just about everybody else on the planet.

It was around then that, cashed up, I made my very first angel investment.

The founder was a serial entrepreneur with one exit already under his belt; the other founders were PhD’s at one of the best colleges in the country with a hot new (& patented) network performance monitoring technology in their hands; and, the market was every Fortune 1000 enterprise with a network i.e. ALL of them.

On the surface, it sounds like a well planned and executed investment: right people; right product; right market.

And the result was a 20x cash return after just 5 years (with upside still to come). What a way to start an angel investing career!

Still, the reality is far more banal: one of my close friends told me that he was getting back into the game and asked if I would like to invest in his first round. 

Since he was a close friend, I said (virtually sight unseen): “sure”.

I didn’t read the docs, didn’t even know what a convertible note was, and I didn’t really understand the company or its technology.

But, he was - and is - a close friend and it all worked out.

Here’s the obvious problem: I was lucky.

So, now I know a bit more about startups and investing … and, I even read some of the legal docs that are thrown in front of me.

But, I need to slow down, because I’ve realised that I’m no smarter than any other investor, and nowhere near as smart as many.

In his new book (out today), an investor who is smart, New York ‘Super Angel’ David S Rose says:

At least 75% of startups really, truly, shouldn’t be funded … by anyone, under any circumstances.

How did I know that my friend’s company wasn’t one of those? 

I didn’t.

With every investment you make, no matter the criteria that you apply, there is one undeniable fact:

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Fully half of all angel investments fail to return the angel investment made

And, most of the other half return ‘just’ 1x to 5x the angel’s money invested.

So, what is the real reason why I’m slowing down after having made a 20x cash return on my first ever angel investment?

Regression to the mean

Every now and then, you can get lucky or unlucky, but - over the long haul - you can’t fight the math … 

Balancing the gender divide in Australian startups …

So there’s no mistake, let me start by saying that I have NO idea how to balance the apparent gender divide in the Australian startup scene!

But, I think I can do something to help those that think they do …

My inspiration comes from Founders Fund:

In 2011, we introduced the Female Founder Fellowship program, which would allow females to apply to the Founder Institute for free ($50 value), and also provide a free Course Fees to our best female applicant in each city ($1,100 value).

IMHO, it’s a token gesture, made up of $50 discounts and a single $1.1k prize to one female led startup in Melbourne each intake; with his resources, and a little well-meaning prompting, I think Adeo Ressi could do something even more meaningful.

Still, it’s a good start and got me thinking: how could I do better? More importantly, how could we - Melbourne’s startup community  - do better?  

The real answer is: I have no idea … but, I’m betting that someone will know.

So, I discussed this with my wife (a pioneering female ‘techie’ in her own right) and we decided to:

A. Make one grant of $1,000 for the best female led startup that makes it into the AngelCube program in 2014. This is an unashamed knock-off of the Founders Institute offer.

BTW: this will be a personal donation, in addition to the $20k that AC already offers to all successful applicant teams.

B. Make a matching $10k grant where I think it will provide the most benefit to ALL the future female tech entrepreneurs in Melbourne i.e. to Startup Victoria.

Startup Vic will need to apply this grant, if somebody wins it on their behalf, to programs aimed specifically at supporting (or increasing the number of) female tech entrepreneurs in Victoria during 2014 and/or 2015.

And, I’m hoping that the person (or people) in Melbourne who do have some ideas on how rebalance the ecosystem here will put their hands up and help Startup Vic light the way on this issue.

I’m also hoping that by leading the way (supported by our cheque), Startup Vic will be able to find corporate and vested-interest sponsors to follow with their own financial and other assistance. It’s much easier to get money if you already have a little.

But, this ‘grant’ has to be won!

I strongly believe that you can only help somebody - or a group of somebodies - who first help/s themselves …

By this, I mean that female led teams (at least, startup teams that include a female in a key founder role) need to show that they are indeed willing and able to help other female tech entrepreneurs succeed by applying to AngelCube, then succeeding in being selected into our 2014 program.

If just one such team succeeds (and wins the $1k ‘grant’), my wife and I will step in to help more succeed (by donating $10k to Startup Vic). It’s as simple as that!

Note: this is not an official AngelCube program; as of this writing, I haven’t even discussed it with my cofounders, but I did break character to first discuss it with my wife. Needless to say, she broke character and agreed ;)

 

Should you relocate to Silicon Valley?

There’s been a bit of press, Twitter, biz blog buzz (I like the aliteration!) lately  about the Aussie ‘brain drain’.

I don’t want to weigh into any of that, other than saying that I don’t want to see any startup leave Australia because the infrastructure (be it legal, economic, taxation, investment, and so on) is sub-par.

I’m doing some work on all of this through my association with Investors Org and will post here when we have something worth sharing.

What I do want to address right now is: should early-stage Australian startups relocate to San Francisco (or, anywhere else) as a natural outflow of starting their business?

I had the pleasure of joining a few of Melbourne’s startup glitterazzi at a small breakfast with Paul Chen from DLA Piper’s Palo Alto office, where he told me that he advocated that Aussie startups don’t rush to the ‘valley.

Paul later shared his views with Rose Powell from StartupSmart:

You do need a centralised decision-making team in the United States, but we advocate startups or technology companies leave some of their management and IP in Australia”

But, Paul is largely talking about startups that already have seed funding and are looking for their Series-A.

It’s also important to note that what we call Series-A in Australia is really just a ‘seed round’ (i.e. < $1m - $2m) in the USA … certainly Silicon Valley, where a Series-A is “$2m - $5m”, according to Paul Chen.

This is not a new debate. Almost 18 months ago, Rebekah Campbell wrote an article for StartupSmart outlining the problems that she was facing trying to balance the benefits of Posse - her startup - being based in Australia (Commercialisation Australia Grants, testing new products ‘under the radar’) against the problems (relative lack of funding, small market size, distance).

Clearly, many Australian startups have conquered the world from Australia: Atlassian (now, on the move); SitePoint/99designs; and, RetailMeNot ( acquired by a US company and successfully IPO’ed over there) are the obvious examples … there are many others.

So, where do I stand?

Well, I had no trouble picking up my family of 4 (plus the dog!) and relocating to Chicago for nearly 5 years to follow my business dream, so I am relatively unsympathetic to those founders who don’t want to move.

But, one can argue that I’m a dinosaur and the Internet has removed all barriers to conquering global markets from home.

The question remains: should you move?

To help answer that, I simply ask: where are your customers?

I feel that you should always be close to your customers

And, for most startups that I come across lately, it seems that the bulk of their hoped-for users will come from the USA.

The culture in the USA, despite all the canned TV that we receive from the studios in LA and elsewhere, is really quite different to that of Australia.

If you don’t truly understand that culture, it makes it all that much harder - obviously, not impossible - to win the hearts and minds of the users that you need.

This was all brought home to me when I first hit the ground in Chicago in 2004. I saw a sign on the side of a bus shelter that read something like:

"Take at least one week’s vacation this year; it’s healthy"

Coming from Australia, where we simply handed our staff 50 days off a year (instead of bothering with all the red tape around approving: annual leave; public holidays; sick leave; rostered days off), to the USA where one of my employees had 20 years vacation owing (!), this cultural difference came as quote a shock … the first of many (for example: most Americans have no idea who ‘Bob’ is and why he’s your ‘Uncle’)!

So, my question remains: if the US is your intended market, what’s stopping you from basing yourself there?

Do what Paul suggests: build your team in both the US and Australia and, once you exit, come back, have lots of babies, spend your hard-earned money in Australian shops and supermarkets, and help the next generation of entrepreneurs follow in your footsteps.

Why?

Because Australia’s the best place on earth to live, and the food in most parts of the USA is inedible.

The e-mail that finally got me writing!

I decided to start blogging so that aspiring Aussie entrepreneurs can learn what it really takes do a startup here in Australia.

So far, I’ve backed 19 startups through the AngelCube accelerator, and quite a few more on my own (just don’t tell my wife!), so I might have a couple of ideas worth sharing …

Here’s the e-mail that triggered it all:

"I think I have an idea for a Twitter-linked social platform that I believe would have traction within a global market across web and mobile environments, but I am unsure where to start in terms of developing an interface/website.

I was wondering whether you would have any suggestions for a direction in which I should aim, in order to present some kind of realistic application to your company? My thoughts were along the lines of a graphic representation of my idea that I could generate through a program such as Adobe Illustrator?”

What is wrong with this email? 

Two things (amongst many others):

1. No validation

2. No tech cofounder

[In another post, I’ll tell you why ideas are worthless]

Here’s my reply to Thomas:

"Social ideas generally go big or go bust (more likely the latter than the former); in order to go big, you’ll eventually need to be able to convince a major venture capitalist (VC) to support you with a series of investments that will most likely start well above $1 mill.

But, if you can’t convince a cofounder with amazing coding skills to join you NOW, how on earth are you ever going to be able to convince a hard-nosed VC to back you LATER?!
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