IN the first part of Business News Australia's exclusive interview with Shark Tank's Steve Baxter, the tech guru told our readers the hard truth about what it takes to become a true entrepreneur.
Now, the man behind Brisbane incubator River City Labs dishes out another dose of tough love when it comes to securing and keeping investors.
According to Baxter, not only do startups need to be savvy and educated, they also need to show a good deal of humility and transparency in order to survive.
When an entrepreneur is told that their startup doesn't have legs, it may be a bitter pill to swallow. However, in most cases, Baxter believes it's the best medicine, especially when it comes to keeping investors on board.
In regards to the startup climate in Australia, some commentators suggest most investors these days are coming from America or China, and that Australian investors are still a little bit shy. What do you make of that?
I'd probably agree with the second part. Until the last six months, I don't think we had enough data on investors in Australia. A lot of people come to me asking for money. And I've had quite a few say to me 'well you're wrong, I'm going to go to Silicon Valley where the streets are paved with gold and I'm going to get investment.'
Guess what, out of about twenty-five who said that, no one had made it.
Essentially, their idea is shit. Either they're shit, their problem is shit, something is shit.
When you seek investment, it's actually a business transaction. You take equity in your company and you go to a potential buyer and you say 'would you like to buy my thing?' and they say 'no', and start-ups in this space arrogantly say 'oh but you're wrong'.
How does that work? They misunderstand the transaction when it comes fto investment. They think it's some sort of gift, like they deserve the gift of investment. It's not. Someone else is buying a part of your company because they think there's something of value there, and if that person doesn't buy that means they've assessed the value at zero. That's the reality. Move on to the next person.
Are there any industries that stand out as really struggling for capital?No. Nobody really funds industries. However, there's lots of incentives out there, the federal government's actually done well it's called the 'early stage investment' which amounts to a 20 per cent tax offset. That's very good for early stage businesses. The government has reduced some of the thresholds for the bigger companies, I think, from $10 million to $5 million. They've done some good work there, to be honest. It does need time for the industry to understand if it's working. Talking about the crowd-sourced industry stuff? That's something that no one really understands, and there's a lot of crap being spoken about it.
Would you say crowd funding is not all it's cracked up to be?Well, I think that if you understand how to raise money legally in Australia, you've got to wonder why there's a requirement for crowd-funding at all. You can raise money without any sort of legal structured documentation. Every year you can raise up to $2 million from up to 20 people. It doesn't matter about their wealth status. If that person happens to be a high-net wealth individual, which is someone that earns more than $250,000 a year, or someone that has more than $2.5 million in assets, there's no limit. You can go to a hundred of those people.
So, you now have a hundred high-net wealth individuals investing in your start-up. You can do that beforehand without all the crowd-sourcing stuff. There are issues around how you promote it and various bits and pieces but there is nothing stopping people from actually starting crowd funding beforehand, people just don't really understand how it works.
So, would you say there is a lack of education in this space?Oh yeah, lack of education big time. With the crowd-sourced equity funding, they've only made it available to public companies. That's to protect mum and dad investors.
If you're polite, you should report to your shareholders at least four times a year. Most venture capital agreements, if you get venture capital, will require you to report every month as a private company and we have people complaining about having to do it twice year. There's such a lack of education. There's a lot of 'someone met someone down at the pub and heard something and then they'll repeat it and it just becomes fact'.
I'm not too sure that the crowd-sourcing stuff is going to fill any investment hole. I actually see it not so much in the tech start-up space, however I think it's brilliant for more traditional businesses. No one's really turned their mind to that at this point in time.
If an entrepreneur fails, after devoting ten years of their lives, should they start over?
Well I wouldn't. They typically wouldn't fail after ten years, you typically fail in the first few. So, if you get an unsuccessful startup after 10 years, you've got really patient shareholders.
You've got to know when to let go. It's why I talk about backing people with the right mindset and the right technical skills. Those types of people will look at the business and see 'we've got change it' or 'this really isn't working, we've got to stop'.
Would you say it all comes down to education and communication?
Communication with investors is paramount. You will find that investors will count on founders who keep them in the loop, even if they have failed time and time again. I have startups who treat me like an ATM machine. I won't hear from them for a year, and then I'll finally get an update.
You can't treat your investors like ATM machines. Every month, you should get out that report and fill it with the good and the bad.
Bring investors on your journey. They'll enjoy it, and they'll double down if they have to.
If you keep your shareholders and stakeholders engaged, and you keep them educated and informed along the way, they'll probably sit there and say 'well, shit. The last five years; well done. You did everything right except there was just no one to buy it.'
Under those circumstances, you might find your investors will back you again.
Click here to read Part 1 of Business News Australia's exclusive interview with Steve Baxter
Read our other stories from Shark Tank here:
Richards looking for scaleup potential in next Shark Tank class
Janine Allis' special blend to boost success
Shark Tank's Naomi Simson reveals the first question she asks of startup entrepreneurs
Shark Andrew Banks on why Australian startups need to get a bit of American attitude
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