You’ve started a new proptech. You’ve got ambitions to revolutionise real estate, expand to the US and change the world. You just need some funding to realise the dream.
Chris Rolls, CEO of PieLab Venture Partners – Australia’s first residential property venture capital fund – spoke at the Proptech Popup unconference on the Gold Coast and gives his eight pieces of advice to start ups who want to change the way we buy, sell and rent property.
Build a great business – don’t make funding the goal
“One of the things I find a lot in entrepreneurial circles is it’s almost like the first problem startups identify is finding funding,” says Chris. “Funding is not the goal – the goal is to build a successful, valuable, profitable business.”
Chris says testing the viability of your idea with your own available cash – or credit is a great way to both get the idea off the ground, and prove to future investors that you have skin in the game.
The best place to get money from is yourself,” says Chris. “If you can raise money from your own loans, mortgages etc, that is a big signal to a future investor about your confidence and your commitment to getting the business up and running.”
“If I’m a venture capitalist I’m looking to invest in your business and you are in a eight hundred thousand dollar house that you’ve paid off and you’re not willing to borrow against that house to fund your own business, then why the hell would I put my money in there?”
The other advantage to using your own money is that it ensures your ownership is not diluted.
“If your business is successful, you’re going to own as much of it as you can for as long as possible. And that’s one of the things that you consider when you’re boot strapping, how can long can the line of funding run on in order to maximise the capital that stays within the founders.”
How will you use the money?
Chris says one of the key mistakes startups make is that they have only vague ideas about what they would do with any investment funds.
“Questions to ask yourself before going down the track of funding is first of all ‘do I really need investment money?’,” says Chris.
“If the answer is yes you do, then “How will that money be used?” is absolutely viable.”
You’ll need to show potential investors exactly how you intend to invest their capital and how it will generate a return.
Have you thought about control and being accountable?
“The moment you bring shareholders in, you are adding risk to your business,” says Chris. “You’re adding risk in the sense they could be lunatics, they could cause hassle for you – in fact they almost always will cause some level of hassle for you in the sense that you need to report to them and they’re going to ask you questions and want to know what’s going on.”
For entrepreneurs who have gone out on their own to escape reporting lines, this can be rather confronting.
“Are you comfortable with accountability? It’s a really important question for entrepreneurs,” asks Chris. “Something that a lot of people don’t realise, is the moment you take on investors, you are playing with other people’s money, and the reason they give it to you is because they want more money back than they gave to you, and that’s the whole purpose behind investing.
“A lot of people lose sight of the fact that when you raise capital from anybody, even your friends and family, they are expecting to get at least what they gave you back, and very often they don’t and that could cause its own issues at Christmas.”
Ensuring your company structure is strong is also important in the early days, advises Chris. Be careful not to dilute it with too many friends and family as this will make it difficult for other investors to come on board down the track.
Who is an ideal investor for your startup?
“All investors are different,” explains Chris. “A lot of people think funding means going to a venture capital company, and that’s not necessarily the case. In fact, most funding, particularly in earlier rounds, is not by venture capital firms.”
Other options include angel investors, friends and family, or just private investment from other businesses that may be interested in the technology you’re adopting.
Angel investors are typically business people who have an interest in the space but have not decided to go and do their own thing.
“They can actually be really useful, not just for their money, but strategically,” says Chris. “When you’re looking angel investors, find people that have invested before so you’ve got references to go and check, what they are like as investors?
“You want to know are they going to be a pain in the ass? Or are they actually really good to work with and connect you with people and opportunities?”
Venture capital versus private inquiry
Chris says that more venture capital has been raised in Australia over the past five years than in the past 25 altogether.
“There are 62 venture capital funds currently raising capital – there are more venture capital firms that have capital to invest, in Australia than at any time in the past,” he says.
But one of the mistakes many entrepreneurs make is to assume that failing to get investment means there is no money around.
“If you can’t raise capital it’s probably because you’re not very investible, which can be a hard truth to hear.”
For those, especially with a strong customer base, private inquiry may be a better option.
“Many people have not heard of the term private inquiry, but it’s similar to venture capital except that its investing in private business and is usually larger than venture capital,” says Chris.
“Venture capital is just an arm of private inquiry that typically is at the smaller end of the scale as venture capitalists usually make smaller bids in a wider range of companies earlier in the stage, so they’ve got a higher risk, higher return profile.
If you’re looking to raise capital from venture capitalists, the key thing to look at before approaching them is their mandate.
“What is their area of speciality?” asks Chris. “One thing to be very, very clear on is different venture capitalist organisations have different areas of specialty and most of them, while they’ll play in a couple of industries, we’ll steer clear of other industries.”
Checking out their website will identify the industries they play in before you put in a call or reach out.
Understand what investors are looking for
More than the excitement of the idea, or amazement around the technology, return on investment is one of the most important things investors look for in startups, but it’s the thing most entrepreneurs most often overlook.
“Fundamentally, return on investment is what an investor is looking for so the first thing to consider when you’re taking an investment opportunity to them is to ask yourself do you think you can grow this business, create value, and return that money to those investors.
The second thing says Chris is a CEO and founding team that are coachable and willing to learn.
“The truth of the matter is that nobody knows everything about running a business,” he says. “One of the most important things in entrepreneurial success is the CEO, founder, to be vulnerable, to be open to saying, “I don’t really know how to do this, can you give me a hand?” and being open to feedback.”
The idea of a CEO going from startup to multi billion dollar business is a myth and dictatorial CEOs almost always fail, he says.
“The reason they make movies about people like that is because it almost never happens,” Chris says. “Even organisations like Google, for example, got to a certain level and they brought in a new CEO who was effectively capable at taking that business to the next level until the founders were able to upscale and ten years later, they took it back over again.”
Consider your track record
When it comes to VC funding, a track record is a bonus, but not a necessity, he says.
“What is a necessity is a big market. Investors who might be putting $500,000 or a million dollars into a investment opportunity need to be able to see a way where that business, in a market, could return fifty times their capital.
“That’s a really impressive return on investment, but you have to consider the likelihood of that happening and actually getting nothing back is extremely high.”
Where VCs make their money is in spreading the risk. The best returning funds make all their money from 20% of their investments. And in fact, 60% of their investments they get absolutely nothing back from it at all, so therefore if your strategy as a venture capitalist is to invest in things where you’re expecting to get a two or three x return, if 60% of them fail then your not going to get all your money back and be able to return that to your investors.
An IPO is not an exit
One of the most misunderstood elements of investing amongst startups was the aim of an IPO, says Chris.
“What a lot of people don’t realise is an IPO is a capital raising event – it is generally not an exit event for founders,” he says. “But what it does is it creates equity for all the investors, making the investors all of a sudden to have a market to sell their shares.”
But most founders will not be allowed to sell their shares when a business goes to IPO – they will be tied to the business to support its growth plans to achieve the return on investment that is expected.
Understand the real risk of an overseas market
Many proptechs are tempted by the promise of expanding to the US. But if there is one lesson that Purplebricks has taught the industry is the risk of moving into unfamiliar markets.
“There’s no doubt evaluations of tech companies in the US are higher than Australia and that’s because the opportunity in Australia is much more difficult than it is in the US,” says Chris.
But businesses are always at an advantage in their home market.
“If you’ve got a product and you’ve shown that you’ve got some traction here in the Australian market, one of the things that have probably helped you get that traction is the fact that you’ve got a network, people here, you’ve got contacts, you understand how the Australian market works,” he says.
“The reality is in most technology start-ups when they go overseas there is a significant risk because of unknowns about how the market works, and that risk represents a lot of risk-return percentage for VCs.”
The solution is to demonstrate to potential investors that you can get that traction in the US. This then solves that risk point in terms of cross border migration and will support a higher valuation. This is one of the reasons why the NAR Reach program is proving an increasingly way for Australian proptechs to break into the US market.
- Chris Rolls spoke at the Proptech Popup, an event created to support the Australian proptech community, organised by Kylie Davis and Lara Scott.
Content marketing strategist, researcher, journalist and presenter specialising in the real estate industry. I'm passionate about proptech, digital disruption and all things property, big data, leadership and entrepreneurial ideas, have an MBA and specialise in social and digital media content creation and automation.