Raising capital when you have a great business idea is sometimes closer to home than you think
"Brick" was a movie which struggled to get to production. The script was written back in the late 1990's. Accessing funds when you are just out of film school and unknown isn't easy. So says Rian Johnson it's writer and director. "The first draft of Brick, was written on a Mac SE on the poo coloured carpeted floor of a cramped Santa Monica apartment during a summer of post collegiate unemployment in 1996".
This seems a long stretch from winning the Special Jury Prize for Originality of Vision at the 2005 Sundance Film Festival and being nominated at the Independent Spirit Award 2006 for the John Cassavetes Award (best film production with a budget under USD 500,000).
Johnson says the reason for the length of the journey was a simple matter; a conspicious lack of money. In the end he simply resorted to family and friends to bankroll production of the movie.
Until recent times there were few options for the eager startup, who was hungry for seed capital. It was either family and friends or venture capital (VC) funds. Only in the 90's did 'business angels' arrive and establish a presence.
Who and what typifies a 'business angel'?
One of the interesting characteristics of business angels, which research has recently hightlighted in the USA, is that they prefer to invest close to home. Not just in terms of their business experience and background, but also in terms of geography. Professor Jeffrey Sohl's comments on this item, stating that typically it was "Within half a day's travel time. It's a very regional phenomenon."
Within Australia a similar travel constraint would allow for domestic flights to all our major cities. No impediment at all. Does that suggest that our local 'business angels' are continually touring our marketplace keeping across their investments? I would say not. Most angels prefer to invest just down the road, where their involvement if not physically, is at least mentally and emotionally 'hands-on'. A convenient drive would be nice.
Do angels typically get involved 'hands-on'? Jeffrey Sohl would say, "No!". They aren't involved operationally. They are often successful entrepreneurs, who have cashed out of their own businesses. They actively maintain their informal network of contacts and filter opportunities and piftalls amongst close and trusted associates. In terms of the investment landscape they operate with less formality and generally fit into the investment spectrum beneath and sometimes alongside the established VC companies in the same market.
Had Rian Johnson been able to hunt down some local Santa Monica 'angels', his start-up capital requirements would have nicely fitted their band of available funds. Jeffrey Sohl's findings have shown that business angels typically invest between the range of US$100,000 - US$1million. Where the average investment is in the order of $300,000-$400,000. It is above this level where the established VC companies get involved and often at a later phase in the life-stage of the business. The larger VC funds being available where more certain and shorter term returns are on offer. Such businesses have typically progressed beyond the adolescent lifestage.
Australia isn't exactly brimming with venture capital, but neither is it bereft. So what strategies can local entrepreneurs adopt?
1. Assess your need and objective. Is someone else expected to finance your weakness. Or do you have a well developed and objectively vetted growth strategy.
2. Do you have a proper perspective on the lifestage and growth challenges your business faces. And do you involve third party input to your management and operations. Either formally or informally.
3. Have you established your local credentials? Are you available and involved with your local community? There are numerous ways and means of developing a local profile. But a lack of involvement suggests a naive appreciation of your business's impact on it's local economy and marketplace.
4. Have you taken the initiative to 'connect' with other entrepreneurs and investors within and without your industry, whose association and network you actively cultivate?
5. Do you consider yourself a lifelong learner. Are you a reader? And are you actively pursuing a personal/professional development strategy?
It's healthy to accept that investors are buying you as much as they are buying your business opportunity at the evaluation stage. This odes well for the more considered, reflective and passionate business owner and less for the opportunist whose style could be considered perhaps a little too cavalier.
Jeffrey Sohl is the director, Center for Venture Research, Professor of Business Administration Whittemore School of Business and Economics, University of New Hampshire. A leading authority on 'business angel and venture capital' investments. David Forman who is a key contributor to The Australian Business Foundation website, recently met with Jeffrey Sohl to discuss the role of business angels with fast growth business startups. This conversation titled "An audience with Professor Jeffrey Sohl" is featured on the website.
