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On the 11th July, Hanrick Curran partnered with East Coast Forums to host an event aptly titled Shark Tank Uncensored. An engaging, frank discussion with Shark Tank investors Steve Baxter and Dr Glen Richards was expertly moderated by successful entrepreneur, RedEye CEO Wayne Gerard.

Wayne’s opening line, (“Entrepreneurs are strange creatures!”) set the scene for some valuable insights. The Q&A style event provided guests with a unique opportunity to understand the business background of Steve and Glen, why they invest, what they look for in investment opportunities, tips for entrepreneurs and their views on how investors should engage.

Some key highlights for future reference included:

Reality check for start-up investors

  • Choose your investments building on your knowledge and strength, to ensure you’re able to deliver the founders more than simply capital.
  • Lift an entrepreneur’s line of sight beyond Australia, start-ups today should be ‘born global’.
  • Invest alongside the founders, keep them engaged and incentivised to strive for success. If too much equity is diluted, you risk founder capitulation.
  • Use appropriate mechanisms in shareholder agreements to secure future upside for investors and founders. But don't be too clever or greedy - you want to avoid the start-up becoming unattractive to future investors whose capital is often needed to deliver the value multiplier.

Tips for entrepreneurs

  • Qualities that investors look for in start-up founders that attract them include:
    • Conduct themselves with integrity (demonstrated honesty and transparency is crucial),
    • Passionate, focused and good at relationships to attract the best talent,
    • Know their industry, target market and their numbers that drive the business success,
    • You need basic business management, technical knowledge and skill (not just an idea), but also know when you need external advice.
  • Steve and Glen defined the ideal pitch as:
    • Articulate the problem first, nail this in the first 2 minutes
    • Summarise the team and their technical skills behind the solution
    • Concisely outline the solution
    • Be able to address who, what, why, when and finally how.
  • Surround yourself with the right team needed to achieve business success. RedEye founder Wayne Gerard hand selected a board of advisers, motivated them with 2.5% each of the company and ensured they complimented his skills bringing:
    • The ‘voice of the customer’,
    • Experience in growing a global company and successfully negotiating a trade sale,
    • Experience in growing a global company and listing it on the stock exchange,
    • Alignment to the culture he wanted in his company.
  • Get started in your business idea, start small, gain traction, learn from the market, fund growth from revenue at the outset to get runs on the board before seeking investors.
  • When raising early seed capital, be very careful about equity instruments that will be a roadblock to later capital raising (e.g., preference shares, anti-dilution clauses, down-round clauses, exploding convertible shares, and super pre-emptive rights).

Considerations for valuing a start-up business

Investors see ‘potential’ in an idea, but ‘value’ in the ability to execute. “Idea Positive” is a far cry from “Cashflow Positive”. With prevailing conditions for a start up continually changing, which in turn impacts upon reliability of forecasts, the concept of valuing a start up requires an investor to:

  • Predict where the market will take the business and what their free cashflow will be 5 years out
  • How long they’ll be in ‘cash burn’ before turning a profit
  • What will the operating margin be once fully operational
  • Applying a discount on cash flows at the 5 year mark
  • Evidence of an ability to achieve growth by leveraging technology is critical to the valuation. (Alternatively, a start-up with limited ability to leverage technology for growth will be valued at a much lower amount.)

Raising money for an investment means operating in a market, with many buyers and sellers. In these markets there are going to be some rules of thumb that are used for valuation. Steve provided the example of Silicon Valley with the "rule” that a start-up with turnover of $2-3 million in annual recurring revenue and 12-15% month-on-month growth could likely attract investment at a US$30 million pre-money valuation. The tip for start-up founders is not to give away too much of the company too quickly.

Brisbane start-up ecosystem and opportunities to participate

We have an incredible startup community (ecosystem) in Brisbane that is well worth being active in for both potential investors, entrepreneurs and service providers to the community.

  • River City Labs is now 5 years old and has played a crucial role in developing the Brisbane start-up community. Events include:
    • River Pitch, next event 2 August 2017;
    • Start Up Catalyst provides unique opportunities to entrepreneurs for a ‘cultural transformation’.
    • RCL Accelerator established to fund 30 start ups in 3 years, applications opening 3 August 2017.
  • Collaborate in a range of co-working spaces for start-ups including:
  • Apply for Grants, tax incentives and accelerator programs:

Hanrick Curran have expertise to assist entrepreneurs and investors in their business ventures, from access to early stage start-up mentoring through RiverCityLabs to tax structuring for a global business, submitting grant applications, performing due diligence and business valuation pre investment. For assistance please contact Matthew Green, Jamie Towers, Matthew BeasleyNathanael Lee, Angela Winton or Robert Pitt on 07 3218 3900.

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.