Technology companies are producing some of Australia’s wealthiest under-40s, with tech investors accounting for almost a quarter of BRW Young Rich listers last year.
But if you want to get in on the ground floor of a budding tech firm as an investor, you’ll need either a whole lot of money, expertise, or both.
Here’s some advice from people with skin in the game:
Step 1. Be prepared to lose
Investing in start-ups is risky – incubator Pollenizer told Business Insider earlier this year that its 65% success rate was “very, very good”, compared to a 5-10% success rate with other funds.
Atlassian founder Mike Cannon-Brookes has joked that his wife referred to his start-up investments as “charity”. Co-founder Scott Farquhar said the duo aimed to help out the industry, but “you have to be willing to lose”.
Step 2. Know the right people
Many investors say that when you put money into a start-up, you’re investing in the people, not the idea.
The right person may turn an unprofitable business into a new venture – for example, look at how Jonathan Barouch dumped location-based recommendations app Roamz this month to focus on its revenue-generating, business-to-business successor, Local Measure.
“It’s all about people – the commodity is the idea,” says UberGlobal founder Michael McGoogan, who at 26 years old has invested sums of $30,000 to $250,000 in a handful of businesses, including his own.
“I want to understand what makes them tick, so I ask them about their partner, parents, kids. If you’ve got someone with 4 dependent children and has worked in a traditional job their entire life, they may not have the capacity to execute.”
Step 3. Have enough money
One Sydney-based investment banker-turned-venture capitalist who didn’t want to be named told Business Insider that most early stage investors have “silly amounts of money” to play with.
Entrepreneurs don’t want to spend hours preparing presentations and pitching to investors for increments of $5,000 or even $10,000, he says.
You’ll need to be able to tip in at least $25,000, and preferably have much more to contribute in later stages of capital raising.
Step 4. Have some business experience
Much of the capital available to Australian start-ups today is from established fund managers or entrepreneurs who have made it big, like Spreets’ Dean McEvoy, the Atlassian co-founders and UberGlobal’s McGoogan.
“I’m not just writing cheques,” says McGoogan. “I buy into businesses and industries that I understand, and where I think I can add some value with my experience and contacts.”
Step 5. Talk the talk
According to the former investment banker, there are a few questions you’ll need to ask when discussing potential investments:
- What’s the context: how big is the market?
- What’s the specific opportunity? “With a bit of experience, you should know what doesn’t work,” he says.
- Who’s the team?
- What’s the deal: how much equity are you getting in exchange for your time and/or dollars?
He notes that he doesn’t know “anything about coding”, but he does have IT experts on call if there are any details he needs to clarify.
Other ways in
If you haven’t got dollars to invest or contacts or experience to contribute, you can shoot for stock options or “sweat equity” – shares that are awarded to staff for working on a company in its early stages.
Shadow treasurer Joe Hockey has promised to introduce tax rules that will make employee share option schemes more attractive for start-ups if a Coalition government is elected later this year.
Consider attending some of the many events for Sydney entrepreneurs to meet potential co-founders: SydStart and Silicon Beach meetups are some examples.
Or you could tip a small amount of money into the very, very early “friends, family and fools” stage of fund raising. Would-be entrepreneurs typically look to raise up to $200,000 – often times a lot less – from people they know in order to build a prototype.