The speed at which Pollenizer invests in a business is matched by the speed of activity that the group expects from its investments. Co-founder Mick Liubinskas says that if a potential investment cannot be viably tested in terms of getting some paying customers within 12 weeks, Pollenizer is not interested.
“There is just too much risk in those other businesses and it just takes too long to see if anyone actually cares,” Liubinskas says.
That means the founders must also be able to sell. Liubinskas calls this the Lamington Test.
“We should be able to give them a box of Lamingtons and have them go out on the street and come back with $20,” he says.
Several important shifts have combined to make this expectation possible. Firstly, technologies such as cloud computing and open source software mean it is both cheap and fast to put together a beta site and test it out. Secondly, many of Pollenizer’s investments are in eCommerce businesses, which have benefitted from Australian consumers having reached a tipping point in terms of the numbers who are shopping online.
Liubinskas says Pollenizer also only works with founders who are comfortable with the idea of failure – something that most investors run a mile from.
“This is probably the hardest thing,” Liubinskas says. “And the reason we reject business more than anything else is that if the founder can’t embrace failure. If that’s the case we don’t want to work with them, because they are just going to be too slow because they are going to want to push for perfection, when it is not about that.”
“You don’t have to create a billion dollar company. If you build a business and sell it in two years for $10 million, that’s a great return. And that’s possible.”
Examples of recent Pollenizer investments include TravelCandy, which provides exclusive deals on holiday accommodation; the automotive group buying site CarMates; and a site which lists unrenovated properties for sale, unrenovated.com.au.
If there are similarities between the companies that Pollenizer invests in, it is not alone in sticking to what it knows.
Adrian Vanzyl says in Australia today there are communities of investors with similar interests, particularly in his preferred field of early-stage digital media companies, and this has helped him make investment decisions.
“You can take a deal to people who are on the same wavelength, because you can get a deal done very quickly because you know they are going to get it,” Vanzyl says. “If someone you know and respect brings you a deal and they have spent a lot of time doing diligence on it, then that’s a big hurdle to get through, to see a pre-qualified deal, and there are going to be some good board members involved.”
Like the Pollenizer team, Vanzyl looks for companies that are exploiting the capital efficiency of cloud computing and open source software. Other preferred traits are the utilisation of cheaper offshore skills, the use of social media tools to reduce marketing costs, and the use eCommerce to generate revenue quickly.
“If you meet those five or six criteria, then you have a pretty interesting business,” Vanzyl says. “The customer acquisition cost is a tenth of what it used to be, and you’re not waiting for a million eyeballs before you build a sales force to sell display ads.”
The downside of course is that not many of these businesses have defendable intellectual property. Indeed, in the case of Pollenizer investee Spreets, which was sold to Yahoo!7 earlier this year for approximately $40 million, its model was broadly based on another company, US-based Groupon.
Vanzyl says early-stage investors need to let go of their propensity to look for patents and defendable IP.
“You will sell your business long before your first patents are issued, and if you haven’t you have either done something fatally wrong, or you are building another Facebook and your patents don’t matter,” Vanzyl says.