Mike Sewell, director of Market Gap Investments, says for him to be interested in investing in a business it needs to have a “clear path to dollars”.
“It needs to be more than a good idea – something that actually solves a problem and either has potential clients or a real client. This is sometimes hard to determine.
He says entrepreneurs should still have a plan for how they will grow the business and be able to identify its transition from 10 to 100 to 1,000 customers – whether they’re based in Australia or globally.
“An investor needs to know if there is a customer, someone willing to pay and that there are more people who are going to be willing to pay quickly,” he says.
Sewell says many investors look for ideas which can go global, but he’s less concerned about its international potential and more about if there are people willing to pay for it.
It’s not all about the business plan though, Sewell says when he invests, he’s backing the person too and some of this is based on gut instinct.
“You’re backing a person too, so you need to know how you get along with them, how they present and what their work ethic looks like,” he says.
When it comes to the pitch, Sewell says entrepreneurs need to convey market clarity, have a clear vision for the future and be explicit in detailing what problem their product is solving.
“What the concept is, who the market is they’re looking to, what the problem is that it’s solving and where you see it going. It should also convey its uniqueness in solving an existing problem,” he says.
But Sewell says you don’t always have to be the first to market with an idea.
“First to market is important sometimes but not all the time. Innovation is incremental improvement and doing something just a little bit different.”
Ultimately, Sewell says he considers two main things: what the value is in the business and how it can create value for the investor.
“There are a lot of good ideas around, but it’s a mix of good ideas, the right person and market opportunities and that combination is difficult to find.
“I’m not as married to them having to have a real world application as Jordan. MYOB is an example of an electronic accounting package which made accounting easy. It’s probably been taken over by Xero now, but they are online, electronic solutions which have been successful,” he says.
Despite being happy to invest in online and electronic start-ups, Sewell says the app market is becoming too crowded.
“We went through a phase of seeing so many apps being developed, eventually there will be too many of them and they become non-investible because the market is too crowded. There will be too much choice for consumers, removing the uniqueness from your product,” he says.
Like Sewell, Ruth Drinkwater, director of the Australian Association of Angel Investors, says “it needs to be more than an idea”.
“Angel investors invest in businesses, not just ideas; it needs to solve a problem in the market, an industry or a customer problem and offer a workable solution with a competitive advantage.
“We look at their business model, who the founder is, and their team and how they’re going about approaching the business and building it. We need to know if it’s possible to work with them, do they respond to mentoring, how well they engage in conversation. It’s a mixture of quantitative and qualitative things,” she says.
When asking for funding, Drinkwater says the business needs to communicate they have a customer base, a plan of achievement, have identified an exit opportunity and have a clear and articulate message and vision.
She also says businesses need to convey an understanding of their market.
“Often you think you know your target market, but you need to test it with your customers. Go and do some market research on a small scale at first.
“I have been involved with several companies where markets have moved very quickly but, if they know this, they can actually change and find a new market at times, but they need to know how to do this,” she says.
Drinkwater says at least half the investments investors make will fail for a variety of reasons, making it important for investors to consider the return potential. This, she says, is done by having a clear idea of what they want to achieve from a business within five years.
“You look for if it’s going to be a game-changer in any particular industry. Investors invest their own money and their experiences through mentoring the entrepreneurs so they want to see them succeed, but they also need to get their money.
“There is some fantastic stuff in the pipeline, but sometimes they expect to receive money when it’s just an idea. They need to invest a lot of their own effort and money and put their own money on the line. They all need to have skin on the line.”
She says investors often have a hard time dealing with difficult entrepreneurs.
“This isn’t limited to Australians, but there are a lot of investors who have had some interesting challenges with the psychopathic inventors. There are a lot of them in the community and it’s a nightmare. They think they know everything and will take advantage of everyone and run for the hills with the money,” she says.
Investors want to be able to establish a good relationship with the inventor, Drinkwater says, but a healthy amount of confidence in your idea is also a necessity.
“There is a hell of a lot of ego, and if the founders and inventors didn’t have one, they wouldn’t be in it. Ego in this industry is a good thing.”
In terms of online businesses, she says it’s easier to start something in this realm, making it an attractive option for entrepreneurs, but she cautions people have started to move away from investing in online businesses.
“Everyone thinks this is the space they need to be in. They’re creating a bias in the dual flow. I’m a member of Brisbane angels and you see a lot of these deals go through, that’s not to say that some of these can’t make significant money. But investors are look at developing their own portfolio and most won’t want everything in the online [space],” she says.
