I went along to the Mobile Monday meeting on Business Angels in South Australia. Pretty good event, all up.
Nick Foskett gave a pretty good and honest talk about the state of Angel investment in South Australia. A quick summary from memory only : SA Angles Inc was formed in 2007, but spent quite a while figuring out how they should do investments (solution: don’t form a fund) and who should be involved. They have 17 people who are actively seeking investment opportunities.
Since they formed they have had 41 pitches and made one investment. I can’t remember the exact amount invested (I think it was 400K), but it was by a number of members who all invested in the region of 25K each.
Nick mentioned that a number of the early pitches were under-prepared. People couldn’t give answers on basic financial predictions, and had no idea how much money they wanted or how much of the company they would give up for that amount.
He also mentioned a couple of other reasons why investments were declined:
- People trying to create jobs for themselves.
I’m paraphrasing here, but this was about people who had a reasonable idea for a small business, but not something that would generate enough returns to be an attractive business. To me, this was about developing a scalable business model.
- Nothing more than an idea
Apparently people think investors will give them a million dollars for a good idea. I had thought that had died out ten years ago, but maybe not.
- Lack of defensible advantage
Nick mentioned how easy it is to outsource writing code, and talked about how important it is for your idea to have something that would stop others replicating your success and taking your money. When he was talking about this I thought he meant traditional forms of IP protection (Patents, etc), but speaking to him later it was clear that applications where there was a genuine first-mover advantage and/or network effects are also ok.
Then it was question time. Umm yeah.
The most interesting question was one Michael Kubler asked about the expected returns. The short answer was 5 times the investment in 5 years was too long, but many would be happy with 5x in a couple of years.
But the first “question” was something different. Some guy and his business (?) partner decided it would be useful for the room to hear their long rant about how terrible it was no one would invest in them and that people in the US would love them but they wanted to stay here and how terrible it was that the SA Angels group had received 41 pitches and only invested in one etc etc etc.
There is no denying that 1/41 isn’t a great ratio, but Nick had already spent quite a while talking about the reasons for it, and they sounded reasonable to me. I’m sure there are some opportunities they should have taken (and speaking to Nick later he confirmed that), but it seems pointless to blame investors for being overly conservative when people come asking for investment and don’t even have an idea of what kind of revenue they think they will get.
More importantly, the overly aggressive and downright rude way the questioner’s point was presented was offputting.
One exchange went something like this:
Questioner: Why are investors here so conservative when we KNOW we could get money in the States very easily.
Nick: Well if you can get money from the US….
Questioner’s partner (interjecting): Oh.. we could
Nick: then that is something you should pursue.
Of course, this may have been part of the little known “be rude to potential investors and make them hate you before you ask them for money” strategy. Someone should study the success of that method some more.
Anyway, on a better note I was fortunate enough to talk briefly to Nick afterwards, and asked about (very) early stage investment – ie, pre-revenue. He was quite open to that, but rightly pointed out that it is much riskier, so would cost a larger stake in the company.