If you’re like a lot of aspiring software developers, you need a way to finance your goals and dreams. The landscape of funding options can be tough to navigate. Are you able to find the means to fund your own path for your vision, or is the risk better balanced by the right kind of cash injection? Watch our video to get some ideas for your startup, and start planning the direction for growing your business.
Presenter: Niv Dagan, Peak Asset Management Executive Director
Intro (Ben Stickland, Alliance Software Founder & CEO)
One of the things a lot of people talk about when you’re running a software or tech start up is how do you fund it? We’ve always done boot strapping with our tech startup financing, which is effectively to fund it ourselves. I was out to dinner through some circumstances with Niv and he and I got into an interesting discussion about all the ways funding works. I discovered he has an incredibly rich background in this. So he’s going to come and speak to us today. He is going to speak to us about all things to do with venture capital, the funding, and the different things that funders are looking for. I think that should be a really nice way to fill in the picture for something that we have really very little knowledge about, but it is great to get an expert in.
The tech startup financing cycle
I’ve come from an insto sales background. I started my career at Macquarie bank on the institutional side; working predominantly with domestic offshore funds, selling the research, portfolio management, and asset management.
I left Macquarie at the start of 2010 to head up a group called Halifax Investments; the capital markets division. I was responsible for what is known as statistical arbitrage or pairs trading. We then got a group called the Australian Stock Report and Board as clients. They had a very small boutique broking firm called HC Securities. At the age of twenty-seven I went in and ran that business; I grew that business up. Then they tried to float the business, they tried to sell that business. At that point I said, this isn’t going to work and set up Peak Asset Management.
We’re a very small boutique broking, investment management business based in Melbourne in the CBD. There are four of us; we’re agile, we’re boutique. When you look at Peak Asset Management, there are three sides to the business.
- One is distribution, or traditional broking.
- The second part is our corporate side. We have a lot of businesses. Some are early stage businesses, some are later stage businesses, capital raising, IPOs, road shows to institutional investors.
- The other side is our funds. We’ve set up a fund which is zero management fees or performance based. We’re saying the only way we’re going to make money is out of performance.
Tom runs the funds management side. He comes from a UBS Goldman’s background. Richard runs the strategic side (Bell Potter) and Fais has been on board for a year and a half, he has a Bachelor of Commerce, and is very good on the statistical side.
What I want to talk to you a little bit more about is the capital raising side and really keep it open and conversational. I bought a few information memorandums to go through towards the end.
Investment cycle overview – early stage 1 (seeking capital)
When you look at the life cycle of investments, you do start from an early stage and we see a lot of companies. An example of an early stage company is Pecko.
Pecko Example. Pecko has been around for four or five years. They have developed a device that plugs into a cash register. So if you go to a JB HiFi, Metcash or Cellarbration, it gives you real time information and loyalty about that customer.
The issue with Pecko right now, they’re in that valley of death scenario where they don’t have the resources to expand but they have a great product. They are in trials with JB HiFi, they are in trials with Metcash in the US, in Macy’s; but they just don’t have the manpower and the money to really expand their operations. Their founder is a very hard working guy. He gets up at five in the morning, speaks to the guys in the US and then goes out and flies back here to Melbourne. He has meetings with JB HiFi, he tries to do anything and everything. At that point they did talk to us.
The issue with tech startup financing for early stage businesses is that it is very risky. They are either going to be a success or their investors are going to lose money. When it comes to that perspective, you really need to undertake your due diligence very thoroughly.
Investment cycle overview – early stage 2 (with capital)
Once you do get that capital, let’s say we do decide we are going to fund Pecko. Has anyone heard of Expert 360?
Expert 360 Example. Expert 360 is another early stage company. It’s a company that was established by two Bain and Co consultants. Bain and Co, or McKinsey, is a management consulting firm. What they found was a big gap in finding work for high end consultants who don’t want to do nine to five. They developed a platform, Expert 360 who were hiring consultants such as ex Bain and Co, ex McKinsey, ex KPMG, Macquarie executives who can work in consultancy work and projects and get paid very well.
We looked at that business, it was probably around about after the valley of death phase, they had already done a seed round and early stage. They then went to us and we introduced them to Frontier Ventures, which is a venture capital fund out of Russia; and Rampersand, which is a technology venture capital firm; and helped them raise capital.
We got involved at round that $8,000,000 valuation mark. They then got Allan Moss on board who used to run the Macquarie Bank, Gail Kelly from Westpac etc. They went through and at this point they’re probably at break even or step number one. They’ve expanded operations, they’re looking at the US market and they’re doing all the right things.
Investment cycle overview – Later stage
At the later stage, we look at companies more specifically and say, are you ready for an IPO? For those in the room who don’t know, an IPO is when a company goes from a private business to a public business. There are essentially three ways to exit.
- There is a management buy out. A management buy out is where the managers go into the room and say we’ll take you out, we’ll buy you out.
- The second way is to publicise the business for investors through a trade sale or acquisition.
- The third way is to come to guys like us through an initial public offering or an IPO on the ASX or a different market.
We did cover a few of these. The pre seed and seed are early stage rounds when the team is still small; it’s agile, it’s maybe just starting to generate revenue. So when you’re looking at Pecko, for example, and comparing it to an Expert 360; Pecko, even through it’s been around for 3-5 years, it’s still in the early stage.
Whereas Expert 360, when we first invested in that business it was doing $100,000 or $120,000 month on month revenue, which is not bad. Fast forward two years later and with the right capital, the right funding and the right strategic advice; last month they did about $1,500,000 in revenue.
Understanding the vast options available when it comes to raising capital for your tech venture is the first step in the right direction. Making the right decision about funding early on can be the first stage of success or the first of many failures. Along the way, the choices you make can determine how other investors look at the value of the company, and even align with your initial goals to continue to grow, go public, or position yourself for a sell-off. Consider the choices carefully before moving ahead.
Do you need input about the best way to handle your next move for your software development venture? Contact us today.