Understanding The Financial Health Of Early Stage Tech Startups

When your business starts to grow, there’s an entirely new set of alternatives for future growth. The owners may wish to remain private or consider going public. This can mean issuing official shares of stock to stakeholders. This is not a place for the amateur business startup.

To boil it down, you have to understand your numbers and you have to be ready to answer all of the hard questions. Watch our video to get the real details on the numbers, concepts and calculations that determine a winning investment.

Video Transcript:

Listing on the Australian Securities Exchange

At the end of the year there is going to be a lot of changes. So the Australian Securities Exchange is making it a lot more difficult for early stage tech startups to list.

Why is that the case? On the one hand they’re tired of seeing very early stage businesses listed on the ASX, and then shareholders and retail investors lose their money.

An example is Refined. Refined RFN went from 20c all the way to $2 and now it’s 7c. Refined kept on touting that they’ve got a lot of enterprise software clients – they mentioned domain.com, McDonald’s etc. But the fact of the matter is, when the quarterly reports came out (every three months as an ASX company you need to provide reports) there weren’t any revenues or not much revenue. The market was seeing all these big names and thinking, hang on a second, these are paying clients. But at the end of the day they only generate $50,000, $100,000, $150,000 for the month. That is not a lot of revenue for a business that at $2 was valued at $200 million.

What do you need to do to list?

So the ASX is making it a lot more difficult for early stage tech startups to list. On the one hand that is a good thing. On the opposite side it’s not.

What they’re looking for right now to list is:

  • the asset test, and
  • the profit test

I won’t go into that.

You do need a minimum of 20% free float. What ‘free float’ means is you need to sell a minimum 20% of your entity to list on the ASX. You can keep 80%, but as long as there is a minimum 20% free float, that is ok.

You need to have at least 300-400 shareholders as spread. What I mean by that is, retail investors who have committed a minimum of $2000. That $2000 might go to $5000 by the end of the year. A company needs, in order to meet some of the thresholds, 400 shareholders at $5000 a pop. It’s likely it’s going to reduce from 400 to 300.

You need audited accounts for the last three financial years. If ASX doesn’t like what you do, they do have the discretion to not list you.

That is what has happened to Guevera. Has everyone heard of Spotify? Guevera tried to do what Spotify does or Pandora, but they were valued at a billion dollars and losing $80 million a year. Would you invest in that business? No. Would we invest in that business? No. Would we put the Peak brand behind that business? No. The ASX said, guys, no chance we’re listing this business. So that is an example of a business the ASX sanctioned.

Sometimes, even the best projections just scratch the surface for indications of the best reasons to invest in a startup. Whether you need to understand your own numbers, or are considering tech companies to invest in, you want to be armed with the inside scoop on the most successful backers. Now that you have a reference point to work from, you can start applying this knowledge to your own particular journey.

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