If you are a young or aspiring technology company, you may have visions of someday getting investors to help grow your business. This may be the perfect thing for your world-changing idea. But, before you take a single step into a meeting with an investor, make sure you understand their thinking.
What are they hoping to get in return for their investment? Are they just as excited about your vision as you are? Or, do they see an opportunity to inflate your value early on so they can pounce on a quick profit? Learn about the type of investor who will get your dream to the finish line by watching our video.
Types of tech startup investors – discussion
David: I have had one experience with someone who wanted to buy my company before. I looked into it and it seemed to be a trend, and it might just be certain types of venture capitalists or tech startup investor, they have an idea that either they’re going to kill the business or it’s going to grow. They overheat it to a point where if it doesn’t get that continual funding it will die very quickly and everybody walks away with nothing. Or it’s going to be really successful.
Question: Have you found that to be something that still happens a lot?
Niv (Peak Asset Management, Executive Director): Venture capitalist guys coming in specifically?
David: Yes. We want at least a 10 x return or 20 x return, whatever it is. So we’ll throw $10 million at you. We want you to burn that pretty quickly over the next year. You’re going to need some more before then, so we’re going to have to pump more money into your business. We’ll continue to pump more money in until it doesn’t looks like it’s going to work and then everybody loses because you have to fire everybody because there is no money. So a good business is destroyed through greed.
Niv: I see a lot of that with really good businesses with a huge upside. It’s usually the other way round, I’ll be honest with you. It’s usually businesses need capital and just don’t get it and that’s when they lose a bit of traction. It’s not, here’s $10 million. The tech startup investors who are bringing in $10 million of funding are doing so because they want to get a return on their investment. They believe the $10 million business is worth a minimum of five or ten times for the risk they are getting. Normally we do see the other way round. It would be interesting to talk afterwards about the case study that occurred and things that worked for you and didn’t.
Questioner: I got involved in a previous organisation with merger activity type discussions. It didn’t go anywhere in the end. The greatest challenge was that the organisations we were approaching had an over-inflated sense of the value of their businesses. Primarily because they had that passion, they had built and grown it from the start. One guy for example who had been operating the business for fourteen years; it was making a loss, it was in a downward decline with modest revenues; but he wanted a ten times return on it.
Question: Do you have any hints for dealing with people who have a completely over-inflated sense of the value of their business?
Niv: We see a lot of guys out there who are very greedy. That example that I gave of the Domino’s Pizza opportunity and the Israeli company; the corporate advisor on that transaction as part of his fee issued himself 6 million shares at 20c. That is not a bad fee and that doesn’t include the capital raising fee on top of it.
When you sit in the room with these types of companies and you’ve got the corporate advisors and management paying themselves silly money, but also in the money or at the money options, you just have to say, it’s not for us.
Everyone’s interest needs to be 100% aligned, and especially management need more skin in the game. Toby Chandler of SeaFoam, not only does he have 50 million shares, but for him to buy another million shares at market on the first day of listing, that shows a positive signal . That is when it is up 200%. That is what you want to see.
Ben (Alliance Software, Founder & CEO): My experience in that space, because we acquired one other business, is that they approached us in a period of desperation. It is when they’re well motivated, you see it all the time.
Look at Alliance Software. In rough numbers we turn over $3 million, we’re running a 10% margin. I feel like it’s worth a lot more than $300,000. But services companies trade at about one to one and a half times their profit. It would be heartbreaking if that is all it was worth. For me to sell that and give up the ego, I’d probably have to be in a pretty desperate position. Otherwise I would never do it.
Not all investors are alike. Some are focused on the long-term and others are looking for a fast turnover for big profits. The right kind of investment can take your company straight to the top and the wrong deal can suck the life right out of your dreams. Make sure you have a firm understanding of every aspect of an agreement before you sign on the dotted line.
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