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"Prenup" guidelines show how to stay on the right side of the angels

Friday, 28 August 2015 | By Denham Sadler
Australian entrepreneurs are struggling to communicate properly with angel investors, leading them to be unable to extract the most value from these relationships, investors say.


That’s why KPMG teamed up with the Australian Association of Angel Investors to develop a new set of voluntary principles and guidelines for entrepreneurs to follow when dealing with angel investors.


The new guidelines were launched on Thursday by federal Minister for Small Business Bruce Billson, who said he’d “already learned a lot” by reading the publication.


“It’s a worthwhile, meaningful and above all practical contribution to this really important area of our economy,” Billson said at the launch.


The guidelines aim to provide practical guidance for founders based around principles of openness and transparency.


“The growth of angel investing (both informal and organised) together with the emergence of crowd-based equity funding makes now a pivotal time to provide reporting guidance for early-stage, high-growth companies that have attracted third party seed investors,” the guidelines read.


The guidelines provide several key messages for entrepreneurs, as well as practical advice for how to attract angels and keep them on board.


It’s like a prenuptial agreement

Bruce Billson introduced the guidelines as being like a prenuptial agreement of sorts between investors and entrepreneurs.


“It’s like a prenup framework for entrepreneurs to run through the things that matter and how important relationships are,” Billson said.


“I was surprised that the shelf life is a bit like a Hollywood marriage where they usually get exited within six to eight years as well.”


“This information supports a good dating service, a wise and thoughtful prenup and an understanding of what each other is seeking to do.”


You have to tell a story

When communicating with investors, it’s very important for founders to convey the narrative of their business, and back this up with facts and figures to justify why it’s a worthy investment.


Australian Association of Angel Investors chairman Jordan Green said this same story needs to form the underlying basis of all communication.


“The very core of what we recommend is narrative,” Green said.


“You start telling the story when you pitch for the money and you keep telling a story until the day you’re all sitting around with glasses of champagne toasting a wonderful exit.”


The guidelines outline how many Australian entrepreneurs are failing to properly communicate their business to potential investors, and the many issues that arise from this.


“For entrepreneurs, this can sabotage what should be highly beneficial relationships with their most valuable shareholders,” Green said.


“It’s by telling a story and maintaining a dialogue that you enlist the support and guidance of the people you’re working with.


“The story needs to be easy to read and needs to incorporate the relative facts and figures.”


Back up the narrative with figures

This narrative has to be soundly backed up by the financials, and the guidelines tell founders that it’s best to be as open and transparent as possible.


They list a number of key principles to follow during these conversations, including transparency, professionalism, timeliness and regularity.


The guidelines say entrepreneurs should be consistent with their reporting to investors, holding six to eight board meetings per year and releasing financial details quarterly, allowing them to get make their interactions with investors more rewarding.


“For those investors to actually be empowered they have to know what’s happening with these companies,” Green said.


“It’s rare for entrepreneurs to know what their investors can deliver, and that’s OK. But if they limit themselves only to what they know they can get, they’re cheating themselves out of the opportunity to get the most valuable, insightful and critical insights and input that leads to the great success stories.”


This is not restricted to just the rosy, good news either. The guidelines say entrepreneurs should have the “same threshold to share bad news” as well.


Be as transparent as possible with these financial figures

Communication with angels should be as transparent as possible, the guidelines state.


This “regular, structured reporting” of details like earnings, products, markets, customers, opportunities risks and KPIs, help to tell investors how they can best contribute to the company.


“Angel investors provide proactive assistance, but even then it can only be properly focused when the needs and progress of the business are known,” the guidelines read.


Financials should be released quarterly and audited annually, while financial information including profits and losses, cash flow, balance sheets and reforecasts should be shared within 30 days of year end.


According to the guidelines, things like hires, dismissals and resignation should be reported to investors “ad hoc” as they happen.


It’s all about getting the most out of the relationship for both parties

The guidelines aren’t just aimed at entrepreneurs, they also provide a way for investors to better deal with startup founders in order to maximise their contribution.


“The ambition of the principles is to bring together the ecosystem of investors and entrepreneurs and create a more structured way to work together to bring ideas and innovation to market both here in Australia and overseas,” KPMG director of private enterprise Bill Petreski said at the launch.


The principles of openness and transparency are just as important for investors, who should always be looking at how they can contribute, without intruding.


“These guidelines recommend that all angel-backed companies maintain regular, structured reporting that forms the basis of a dialogue,” Green said.


“It’s not a one-way thing; it’s not just casting out on the waters and forgetting about it. This is an ongoing discussion.”


At the launch Green also moved to counter the often-held view that large, global tech companies can’t emerge from Australia due to a lack of investment.


“We can, we will, we are building multi-billion dollar companies from startups to success in Australia,” he said.


Billson agrees and says the guidelines are another step in ensuring Australia remains a competitive startup ecosystem that encourages angel investing.


“These are the opportunities that are there for us to advance the goal of being the best place to start and grow a business,” he says.


“That’s what I get out of bed every day to do. Today’s launch is a contribution to that goal.”


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