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Is the economy slowing and, if so, how will that affect start-up investment?

Wednesday, 7 November 2012 | By Philip Alexander

There’s a bit of talk about at the moment about a slowdown in the Australian economy. How will this impact investment in Australia?

 

Are start-up investors looking to pull back? Or are they optimistic about the next few years?

Yes, some sectors of the Australian economy are slowing down but these are mostly sectors that are being challenged by disruptive online models, a high dollar or high fixed costs (or all three).

 

But I have not seen evidence of start-up investors reducing their interest or capacity to support new ventures. However, investors are certainly being more careful and more risk averse.

 

They are taking longer to commit to a deal and valuations are a bit lower, but the obvious rule remains – if you have a good investment proposition, you will attract investment.

 

So why do some early stage companies attract investment when most do not?

 

Many founders simply do not prepare themselves professionally for the capital raising process.

 

Before they approach potential investors they need to be “investor ready” – meaning having the right business structure, legal documents, and tax advice to underpin an external capital injection.

 

More importantly, they need to have real commercial traction for their new business.

 

They need a team of mentors, staff, customers, and suppliers who display that the founder has more than an “idea”.

 

Where are the sources of early stage funds in Australia?

 

There are regular networking events in Sydney, Melbourne and Perth with increasing levels of activity, from Twitter-coordinated coffee mornings to monthly Mobile Monday drinks, to industry events held by Innovation Bay.

 

Angel investors are typically the first port of call for external capital as entrepreneurs move beyond personal funds and friends and family seed funding.

 

Angel investors are increasingly working together via formally organised networks, such as Sydney Angels (over 60 members who collectively have invested in about 20 start-ups in the past three years), Melbourne Angels, Capital Angels, and Hunter Angels.

 

Many start-ups also find their funds via informal networks of high net worth angel investors.

 

In a recent development, a number of tech incubators have appeared on the landscape, assisting entrepreneurs with support, services and cash, including organisations such as Pollenizer, Startmate, PushStart, and Blue Chilli.

 

Australian entrepreneurs have many more options today than before, especially at the seed and sometimes early follow-on rounds.

 

However, as they grow, they often become undercapitalised and underfunded. At this point, the next stage in funding for high growth tech businesses should come from larger venture capital (VC) funds with the scale and ambition to accelerate growth, but the sector remains underdeveloped in Australia.

 

Despite recent growth in the number and activity level of VCs in Australia, investment levels remain low and many businesses struggle with organic growth when they might otherwise be ready to scale aggressively if they were able to more readily source investment growth capital.

 

Australian investors still tend to be conservative when viewing pre-revenue or pre-earnings investment opportunities.

 

A number of Australian entrepreneurs have successfully sought US-based investors and capital to further their growth ambitions (Atlassian, OzForex, 99dresses, Linqia).

 

But this route is only open to the largest players.

 

So has the local market cooled for early stage investment?

 

No, I don’t think it has. Certainly there is investor caution but good, smart founders are attracting good, smart investors.

 

The main message – be prepared when you approach investors, and then prepare again.