Playing catch-up in the start-up funding race
Start-ups were previously saddled with uninterested VCs, conservative angels and banks that required a house and a first-born in return for a modest loan.
Of course, there were Australian investors that took risks. But the past 12 months has seen a welcome influx of “Silicon Valley thinking” – small seed funds which back nimble, innovative ventures with a low start-up cost base.
First up was Startmate, the seed and mentor fund based on the US’ YCombinator. Then they came thick and fast – PushStart, AngelCube, the York Butter Factory and so on.
This boom in “cool”, tech-orientated seed funds and incubators has shaken up Australia’s start-up industry. But where does this leave our more traditional funding providers?
The Australian Small Scale Offerings Board is one player that is attempting to revamp its rather staid, corporate image in order to keep pace with the new arrivals when it comes to snapping up the best start-up talent.
ASSOB is Australia’s largest capital-raising platform for high-growth unlisted companies. It has raised more than $120 million to date.
More than 200 companies have raised equity funds via the ASSOB platform, which matches entrepreneurs with investors.
ASSOB uses many of the techniques used by listed companies to enable unlisted companies to raise anywhere between $250,000 and $5 million.
“We are like a turtle, progressively funding start-ups at $1 million to $2 million a month, which is not as flashy or newsworthy as… incubators, angels, etc,” ASSOB chief executive Paul Niederer says.
“[However,] we have a number of listings doing well at the moment – one to ASX, another second-best IPO on AIM and of course iPowWow; an awesome Australian technology.”
According to Niederer, there are a number of benefits associated with the ASSOB platform, including its own legal department and a close relationship with ASIC.
StartupSmart recently attended an ASSOB breakfast, where nine innovative companies pitched to investors. Every company that attended is currently raising funds on the ASSOB platform.
“These companies are seeking funds, typically $600,000 to $2 million, to accelerate their national and international growth,” Niederer says.
“All of them have a story… They have got something they want to take into the world, but they also want to employ people, grow, move forward and develop.”
"What we’re noticing more and more is that people can come on and invest, and have some form of mentoring role in the company."
"As baby boomers get out of mainstream businesses, they’re looking for some form of start-up in which active investment is what’s going to happen. It wasn’t like that a few years ago."
Niederer admits that a perception shift is needed.
"We’re not good at the marketing – everything comes via word of mouth," he says. "There’s very little advertising we do."
"We’re moving away from being associated with the traditional end of business to actually being part of that incubator scene, perhaps as the next funding platform after incubators."
So can organisations like ASSOB remain viable in a market where investors are looking ever earlier for their best prospects?
StartupSmart spoke to three of the pitching standouts about their ideas and how they plan to attract funding to build their businesses.
NobleDentist describes itself as Australia’s first dental plan. It has already attracted support from more than 500 dentists and 20,000 customers.
StartupSmart spoke to executive chairman Dion Kramer.
What inspired the idea for NobleDentist and how does it work?
Here are some common complaints about extras insurance that get to the Private Health Insurance Ombudsman every year:
- It’s complicated and it’s difficult to understand.
- It’s difficult to choose – there are 37 health insurance companies and over 17,000 different policies on offer.
- You pay for services you don’t use.
- It’s expensive and may even get more so if the government decides to means test the extras insurance subsidy of 30%.
- There are waiting periods.
- Some treatments are excluded.
- There are benefit loops. Also, the benefits paid out often don’t cover the cost, leaving the consumer paying the gap.
NobleDentist works by joining online in just a few minutes. You then visit any of our participating dentists across Australia and your fees are reduced by up to 40%.
On our website, we actually put the fees for every state. So if you’re in Victoria and you attended a dental practice, you will see the fees for each dental item number.
Each year, NobleDentist calculates its fee. So when you go to any of our participating dentists, they’ve got it in their software system.
If you get a filling or a crown or whatever it is, their usual fee might be, say, $1,500. Because they’re a member of NobleDentist, it would only be $1,200.
Who’s your target market?
Right now, the target market for us is the 22 million people in this country because NobleDentist can be used as an alternative or in addition to extras insurance.
We want the 48% who don’t have extras or any insurance, but also it complements with extras insurance.
With NobleDentist and insurance working together, it’s reducing or eliminating the gap.
How has the concept been received?
Right now, without any advertising, we already have 20,000 members Australia-wide and that’s rising.
We already have almost 500 participating dentists throughout Australia – we’re in all the major cities now – and 300 on the wait list to join us as we expand.
Our member and revenue growth rate have been tripling year on year for the last five years. Our member growth rate is 14 times greater than health insurance currently.
Our renewing rate – that is our members who renew year after year – is approximately 80%, with 59% currently choosing to auto renew by direct credit.
What are your revenue projections?
We’ve been profitable since our very first year. Our objective is to create a business worth $250 million within the next five years.
In America right now, one third of their population is a member of a dental plan, so over 100 million people.
The equivalent in Australia would be a little over seven million. In the next five years, we aim just to achieve 500,000 of that potential seven million.
What that does is gives us an EBIT of about $15 million and a potential valuation, based on current multiples, of $250 million.
How much money are you hoping to raise?
NobleDentist came onto the platform in September with the fastest round one capital-raising on ASSOB for 2011. We closed our round one, $500k, within the first week.
We’re wanting to raise $1.6 million, for 14% of the company, for three things essentially:
- To implement practice integration system into the dental practices, which will create a barrier of entry. We’ve already started this work.
- We want to launch our national public relations and advertising campaign, which is already in the planning.
- To support the growth that we’re talking about, we need to recruit some additional staff.
Avado Organics designs, manufactures and sells Australian Certified Organic low-allergy personal care, baby and new mother products, using 100% natural ingredients.
StartupSmart spoke to company spokesperson Gregory Ferrett.
What inspired the idea for Avado Organics and how does it differ to other organic lines?
This is a family business – it’s been doing business since 2005. Tammy Fender, the founder of our business, had a child who was born with severe eczema.
She looked at products from all over Australia, all over the world – even products that were recommended by her doctor – and none of the products would work. She was not alone in this.
What we discovered in our research was that 57% of people have sensitive skin. This is not just adults but this is children and babies.
People are looking to go to specialist outlets to buy products there, and one of the things we discovered is that people will pay up to $38 for a 250ml shower gel or $42 for a 100ml cleanser, just to get a product that will work on the skin; a 100% natural product.
Competitors realised what was going on and then started trying to get the product prices lower.
They tried to create what we call “nature equivalents”, which are chemically-manufactured products that don’t meet the requirements of people with sensitive skin.
So we’ve developed a product range with two unique capabilities, or two unique positions.
Firstly, one of our products contains the only naturally occurring chemical that will reverse the effects of ageing on the skin.
The second unique position is our price point. Our objective is to create 100% natural products with certified organic ingredients at a supermarket price.
Tammy fender’s mother, Susan Harvey, has provided almost all the capital to date. She put a significant amount of money into the business to get it to where it is today.
Which markets do you operate in?
We have certification with Australia Certified Organic. That allows us to go into the Chinese, Japanese and many other markets without additional certification.
We formally trade in three countries, we have 750 retailers, but we also trade informally in 16 different countries. These are countries where we are approached by retailers to stock our products without having a formal distributor.
Our products are proudly Australian-made but we hold stock in Melbourne and in our warehouse in Los Angeles, and we have a well established Hong Kong distributor.
We have taken a contract with Priceline to stock a new product. We expect that over the next 12 months, we will sell something between 80 and 100,000 units of this particular product.
We’re having strong interest from the Asian markets and from the US markets as well.
What is your growth strategy?
Our revenue will come from three key markets – our home base in Australia, the US and in Asia.
In the US, our focus in the market there is going to be on the natural market. There is one company in the US which is specialising in premium-priced foods and personal care.
However, they do generate revenue twice the size of Coles here in Australia and they have 900 stores.
In the US, we are already in most of the major online retailers, including Amazon.com, and we have our first traditional retailer – a small, 60-strong pharmacy chain in the Midwest.
We know that our products are well accepted in Asia. In Asia, people are looking for that label that says “Not made in China”.
In Australia, we plan to extend our product range into Woolworths and to add to our current range in Coles and Priceline.
We will expand our profile in Australia with the medical fraternity, who recommend our products.
Right now, we need funds to produce products for the next period. For November to December, we expect strong revenue through Priceline and through Coles for our products.
We plan to launch in South Korea in 2012 in January, and in Australia we want to expand our marketing programs.
We’re looking for investors who want to either just be a shareholder or may even want to become part of the business.
What is the biggest risk you face and how will you minimise this?
Nothing stops somebody else from taking our product and looking at the list of ingredients and producing them. In the US, probably our strongest competitor will be California Baby.
The way we put together our products, and the way we manufacture them and the experience we have in organics in particular, gives us an ability to produce products 5-15% below [the cost of] California Baby or our other key competitors.
It’s the way we produce the products that gives us a strong competitive advantage.
Do you have an exit strategy?
We’re building the business for a trade sale in approximately 2015-16.
History has shown that in this particular marketplace, investors will pay a premium for a company with strong revenue growth and a unique product that larger players can’t produce.
To support our strategy of a trade sale, we are planning to reinvest most of our profits from 2012-13 back into the business.
Ocular Robotics markets high-performance optical scanning systems, which it develops from its patented scanning technology, with a focus on mining and defence.
StartupSmart spoke to chief executive officer Mark Bishop.
Can you explain the concept behind Ocular Robotics?
Ocular Robotics specialises in the design and development of ultra high performance, two axis sensor-pointing solutions.
Pointing a sensor with the speed, agility and accuracy required of demanding operational imperatives is a complex engineering challenge.
Ocular Robotics has overcome this challenge with its patented RobotEye technology. Rather than pointing the sensor, RobotEye systems point the sensor’s field of vision.
The sensor, all drive components and control electronics remain stationary inside the system enclosure. Only the RobotEye scanning head is exposed.
The agility and responsiveness of RobotEye systems offers a groundbreaking contribution to multi axis sensing, unmatched by current solutions.
Ocular brings all these benefits of the RobotEye technology to the market through its off-the-shelf product range, RobotEye system customisation, and full custom system development.
We lodged the initial patent application in late 2005. The company’s been operating as a business, in effect, for about the last two years.
As far as actual cash funds invested in the business, [it’s] in the order of $700,000 at the moment.
Which markets do you operate in?
We’re targeting automation, mining and defence, and we’ve done a great deal in the work we’ve done so far.
We’ve fully developed the RobotEye technology and we’ve brought products to market, with more in the pipeline.
We’ve branded United States and Australian patents, with applications in the EU, Japan and China. This represents two thirds of the world economy and all of our most important markets.
Our business model is about building relationships with OEM partners, with technology partners, with distribution partners and with our user customers.
We’re going to launch our marketing strategy and we’re negotiating an OEM agreement with a South East Asian military technology supplier.
We’ve also delivered development systems to the likes of Rio Tinto and Toyota.
What are your revenue projections?
We’re projecting strong growth and revenues as we develop multiple relationships with each of the verticals in which the company will operate.
We expect projecting revenues to grow to $27 million by year five, but it should be noted that a single, significant relationship will deliver these sorts of revenues alone.
We’re offering 17% of the company for an investment of $1 million, structured in three rounds.
Do you have an exit strategy?
Management expects a trade sale is the most likely exit for the company within a three to five-year timeframe.
And given the fact that the whole group of rights to the RobotEye technology will have a very significant advantage in the marketplace, we expect strong competition and a high multiple to be achieved.