Top tips for investing in start-ups

Top tips for investing in start-ups

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The number one problem facing entrepreneurs is access to capital. The Australian investment community needs to get behind entrepreneurial businesses that do good for the world.

Jeremy LiddleCEO of start-up investment accelerator, CapitalPitchGuest speaker and panel member at our TechTank III event

The start-up ecosystem in Australia is

expanding and evolving. While not as

mature as the markets in the United States

and United Kingdom, we've

seen greater investment in recent times,

with a growing venture capital market and

federal government incentives that point to

increasing interest and opportunities to be

capitalised on.

Investing in a start-up can be risky

but can also offer attractive rewards.

Through our recent work with a broad range

of investors, venture capital funds and start-

up businesses themselves, including

portfolio companies we have worked with in

our TechTank events, we've seen some great

outcomes but also some lessons that

investors and businesses can learn from.

So what should people look out for?

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Seven tipsfor investors

Seven tips for investors

1. Diversify your approach

We know that roughly 95% of start-

ups fail, but those

that succeed often do so

spectacularly. Expectations here need

to be realistic – young, pre-revenue

companies can be high risk, and this

needs to be balanced with potential

returns. A diverse approach, (for

example, by investing through a

venture capital fund with multiple

investments) can help manage this

risk.

2. Consider your timing

The circumstances vary according to

what stage in the development cycle you

choose to invest. The earlier you invest,

the higher the risks but the greater the

opportunity to add real value where

companies are seeking guidance. The

later you invest, the lower the risk but

the opportunity for an investor to add

real value and have strategic influence

also diminishes.

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3. Consider the people behind

the company

Essential to a company's success is

the quality of the people behind it. Do

you believe they can do what they say

they will? Do they believe in

themselves? Are they passionate

about the product or project and will

they commit themselves fully to it (in

lieu of their day jobs)? There are a lot

of great ideas but they need substance

and the right people to implement

them.

4. Look for opportunities to

make a non-financial impact

Young companies are often looking for

more than funding, and frequently need

guidance on some of the unexpected

challenges and opportunities from those

with experience in the industry or

environment they’re operating in.

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5. Ask industry experts

A technical expert will help you

understand the industry you're looking

to invest in. For example, you may

want to understand the types of

technology the company is developing,

how it fits into the industry, what

problems they are trying to address

and if they in fact address these

problems.

6. Ensure the legal and tax structures

are correct

These need to be properly implemented,

and appropriate due diligence must be

undertaken to mitigate unnecessary risks.

Focus areas include:

The company’s legal and tax structure

Shareholder rights

Protection of technology/innovations/ideas

An understanding of how the company has

conducted business to date.

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7. Check for clean IP rights

Make sure the company you're investing in holds the intellectual property rights for

the technology, innovation or idea, and the appropriate documentation is in place

to prove this. You want to be sure that the company is the rightful owner of all of

the IP that it is representing it owns, and has appropriate and robust licences in

place in relation to any significant third party IP.

In particular, look at the issues relating to the development of IP. Depending on

the nature of the start-up's business, this can include employment and

consultancy agreements, research agreements (for either collaborative or contract

research), funding agreements and agreements for the acquisition of services.

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Eight tipsfor start-ups

Eight tips for start-ups

1. Be first to market

Finding the balance is critical – don't

wait until things are perfect but don't

launch too early if your product isn't

ready.

2. Find the right advisers

The right advisers will understand what

you're doing and can help you

throughout your journey. This isn't just

for financial advisers – board members,

for example, can bring a lot of

experience to the table and benefit your

business from their experiences.

Network widely – you never know who

can help you.

What can start-ups do to help secure investors?

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3. Retain control

Try to hold on to as much control of

the company as you can for as long

as you can. Your ability to do

this may depend on how quickly you

need to upscale (via a marketing

splash, etc).

4. Show that you have skin

in the game

Investors are far more likely to be

interested in your idea or business if you

have invested your own money into the

company and you have fully immersed

yourself in the project or product.


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5. Ensure the legal structures

are correct

Ensuring that your company

ownership and shareholding

structures are sound will protect your

business but will also make the

business more appealing to serious

investors.

6. Have a realistic valuation

Have a clear and tested valuation via a

process of discussion and commercial

negotiation. You need to be realistic

about your expectations and the

timeframe to achieve them. This will help

shorten the fundraising process.


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7. Be prepared to pivot

Key to success is being flexible and unblinkered in the approach to your project and

product. Be willing to take on board new ideas and alter the direction if necessary at

short notice.


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8. Obtain adequate IP protection

The growth and success of a start-up is often based on its inventions, ideas and

trade secrets that give it an edge over its competitors. It is also critical for the

company to develop and maintain a strong brand so that it can build its reputation in

the market. This means that obtaining and maintaining appropriate IP protection is

vital. Ensure, for example, that all rights to IP created by employers and contractors

is owned by the company, and that valuable confidential information is only disclosed

to third parties after they have signed a confidentiality agreement.

Aspects to address include patent, trade mark and design registration, portfolio

management and policies and procedures for protection of confidential information.


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When you need to seek legal adviceStart-ups can benefit from strategic guidance on legal and commercial matters

through all key lifecycle phases. This may include:

Strategic advice

Establishing a company or fund

Providing advice on structuring

Drafting shareholders’ agreement

Governance documents

Engaging employees / consultants

Structuring employee equity plans

Regulatory considerations

IT & IP licensing advice

IP policies & protection

Financing & funding

R&D tax incentive

Tax structuring

Capital raising

Corporate governance

Commercial contracting

Due diligence

Share & asset acquisitions

Offshore / cross border expansion

Trade sale or IPO

Structuring advice

Preparing business for exit

Prospectus drafting

Negotiations

Project management

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We can help

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EMAIL [email protected]

Paul KallenbachPartner

T +61 3 8608 2622

M +61 412 277 134

Kylie DiwellPartner

T +61 3 8608 2019

M +61 411 163 613

Matthew HibbinsPartner

T +61 3 8608 2856

M +61 407 857 107

Glen Sauer Partner

T +61 2 9921 4540

M +61 421 587 345

Anthony LloydPartner

T +61 2 9921 8648

M +61 411 275 811

Top tips for investing in start-ups

Small Business & Entrepreneurship

Transcript of Top tips for investing in start-ups