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The 3 things every start-up founder must do: Shark Tank’s Steve Baxter

I can still remember one of the most daunting decisions I ever made. It began during a conversation with my fiancé, in a car on the outskirts of Adelaide in the early 1990s. I had this crazy idea. I thought that there was a big opportunity to start an Internet business in South Australia. But to do it, I’d need to take our entire life savings: $11,000 that we had saved for a deposit on our first house.

Week in and week out on TEN’s Shark Tank we see entrepreneurs who have faced the same dilemma themselves: to startup, or not to startup?

I’ve worked with dozens of startup founders over the years, as a co-founder, investor, and mentor. I’ve found there are no hard and fast rules that determine what skill set or personality types make a successful entrepreneur. However, I have found some common actions that I see successful founders taking, as they endeavour to set up and grow their business.

1. RAZOR-SHARP FOCUS

Launching a startup isn’t easy. It takes a lot of blood, sweat and sleepless nights. It’s not just enough to love, live and breathe your industry or new venture. You need to have your energies and attention wholly devoted to making it work.

Jeff Philips of Grown Eyewear entered Shark Tank with a strong product and good numbers, so while sustainable fashion is definitely not in my usual investment territory, my curiosity was piqued. But as the Sharks dived deeper into his business, it became clear that Jeff was splitting his time between Grown Eyewear and a winter headgear business. He intended to use the investment to set up a full time manager on the Grown Eyewear brand, and continue to divide his time between the two businesses.

If a founder isn’t 100 per cent committed to the business I’m backing, it’s a deal-breaker for me. I only invest in startups I think have huge potential, so if a founder believes their other venture is as equally important, I’m going to doubt the opportunity. The increased risk is another key factor. An entrepreneur who has their finger in too many pies is far likelier to see one of them go bad.

2. TAKE THE SHORT-TERM PAIN FOR LONG-TERM GAIN

Nothing is more frustrating for me than seeing people “playing” at startup – and expecting things to be handed to them on a platter. It’s those rare entrepreneurs who will make sacrifices now, understanding that they’ll reap the benefits later, who are far more likely to succeed.

South Australia’s Oliver DuRieu is a fantastic example of this. He came to the Shark Tank to pitch his car-sharing platform, Lamule Australia.

Oliver was well spoken, enthusiastic and smart. He pitched well, and while his startup was a little too early-stage for the Sharks to invest, he made a big impression. What stood out for me was that he understood the big picture of being an entrepreneur. He’d sold his prized Ute, and turned down a high six-figure wage in the mines to start his venture.

Few people are willing to make these sacrifices, and who can blame them? But if Australia is ever going to transition to a knowledge economy led by high-tech businesses, we need more startup founders like Oliver willing to forgo the easy life for the hard yards.

3. LISTENING TO ADVICE AND CRITICISM

Nobody knows it all. You may be the smartest person in the room, but there will always be somebody there who can teach you more, if you’re willing to listen. Entrepreneurs tend to grow very close to their business. It is after all, their baby – they brought it into the world, and have been responsible for it from day one. And, just as parents don’t respond well to strangers offering parenting advice, startup founders can sometimes find advice and criticism confronting.

Being coachable is a key indicator of success for startup founders, and for most early stage investors it comes as a prerequisite. So keeping your calm, refusing to be ruffled by people who are questioning you or your business, and taking on board what potential investors are saying, can make the difference between “deal” or “no deal”.

Sitting in a car with my fiancé on a warm, South Australian evening over twenty years ago, I made the decision to leap into the unknown and start my first business. It ended up being the best decision I ever made.

My advice for people deciding whether to startup or not to startup is to ask yourself: “Can I be super focused, make short term sacrifices, and be willing to listen even to the harshest advice?” If the answer to those questions is yes, then don’t die wondering. Get out there and give it a go.

This article first appeared on Business Review Weekly. View the original here.

Don’t offer equity 6 times dearer than you just got from Startmate, and other ways founders can get real on investment

The best way to fund your business is from your customers – to get out and sell. This has the side effect of proving your product is something people are willing to pay for. It will also help answer one of the first questions an investor will ask you.

Investment is best used to pour petrol on the fire, to accelerate your plans. But if you’re just doing it for status in the startup blogs, or are trying to create buzz around your business – please quit while you’re ahead.

Getting investment should be about setting a goal, having a plan to work towards that goal, finding the capital needed to fund the cash shortfall due to the plan, and then executing the plan. If the plan starts to work, the value of your business will grow, allowing you to raise money at a higher valuation.

On last night’s episode of TEN’s Shark Tank we saw some great examples of how tough it can be to win investors over, no matter how good your idea or pitch is.

ANSWER THE HARD QUESTIONS BEFORE THEY’RE ASKED

Entrepreneurs need to have a strategy for every investor pitch meeting they enter, and a big part of that is tackling the hard questions upfront, preferably before they are even asked. Hugh and Richard from Nexus Notes entered dangerous territory when they came to the table asking for $300,000 for 7.5 per cent equity, weeks after they had been accepted into leading Aussie accelerator Startmate, requiring them to sell 7.5 per cent for just $50,000.

There is no denying that Nexus Notes delivered an excellent pitch. They had a strong team and their business has already started to see traction. But what Nexus Notes offered the Sharks was a day one loss of epic proportion, and they tried to hide that fact rather than put it right on the table.

Getting into Startmate is a fantastic achievement; it is a great program that is helping companies find global success. But to put any investor into a down round, and then show a wilful lack of understanding about what you have done, demonstrates a massive lack of business maturity – something I know Startmate will fix.

Entrepreneurs need to understand how investors value startups and know the risk of locking investors in at an early stage at an inflated valuation. This can mean entering the scary world of the down round – when you need to raise more cash later, and your valuation is lower than for previous rounds. Many investors have anti-dilution clauses to ensure that their shareholding stays the same in the down round or if targets are missed. This means that the math for founders is scary. Somebody has to lose out, and it will be invariably be the founders’ shareholding that takes a hit.

My offer to Hugh and Richard was serious, even though it came from the annoyed part of my brain. It is a great business, so I offered them the exact valuation they had already agreed with another investor.

DON’T OVERCOOK YOUR VALUATION EARLY ON

Early stage investors are used to seeing startups pull a valuation number from thin air using a justification that they have a massive market or a “world first product”.

But when Hani and Meray of Charli Chair announced their baby-shower chair business was worth $4 million, despite the fact they had only produced and shipped 500 units – I have to admit I was shocked.

If you want to get investors over the line you need to be able to validate your valuation. Silence when an investor pushes you on why you’re worth $4 million will never be met with a ‘there, there’ pat on the back and a blank cheque.

When I was part of the founding team at PIPE Networks, we brought our first external investors on at a $550,000 investment at a valuation of $5.5 million. At the time, we had a net profit of almost $900,000. Sure, we could have pushed for a higher valuation but we knew that the investment was critical for our growth plans. We knew it would bring on the right investors for long-term capital needs, and most importantly set us up to play the big game. The business later floated on the ASX, and then sold for over $370 million.

Sydney’s “The Dinner Ladies” came to the Shark Tank with a strong, established business and plans for an exciting new project. The catch was that they didn’t want to include the whole business in their investment. This is a rookie error. No investors want to see their entrepreneurs distracted and a subsidiary’s ability to take focus from the main game is a recipe for an unhealthy business arrangement.

An entrepreneur’s long-term plan should include diluting equity to bring the right investors on board – not splitting up the business to gamble on new ventures and only offering investors the riskier part.

This article first appeared on Business Review Weekly. View the original here.

Shark Tank’s Steve Baxter shares five lessons for valuing a start-up

There’s an old saying that “5 per cent of something is better than 100 per cent of nothing” and it’s an important factor to keep in mind when it comes to giving up equity in your firstborn start-up. At the same time, that 5 per cent can equal vastly different amounts of money, depending on the stage and size of a business.

Understanding how the different equity possibilities can play out is fundamental to good deal making.

Take Kim Huynh from online marketplace WeTeachMe who pitched on TEN’s Shark Tank last Sunday night. Still in its early stages, WeTeachMe has turned over $400,000 in revenue to date, but this did not stop Kim from giving the business an exorbitant valuation of $8 million.

Calling Kim out on his unrealistic offer of $200,000 cash in exchange for 2.5 per cent equity, Shark Andrew Banks made Kim a counter-offer of $200,000 for a 45 per cent stake. Andrew warned Kim that he wouldn’t be impressed by the offer but this still didn’t prepare Kim for the much larger equity percentage Andrew was after.

Standing in front of an investor with substantial revenue and an improving balance sheet puts an entrepreneur at a big advantage. But coming to the table with a more educated view of valuation and when to give up equity and how much to give up will help more entrepreneurs walk away with a deal they know they can be pleased with.

Here are a few guidelines around you valuation process and understanding your equity position:

1. BACK UP YOUR VALUATION: Help an investor understand why you think you are worth what you say you are. You need to believe your valuation number so be prepared to defend it and explain it. Don’t pull a number from thin air – there is always a methodical way of getting to a reasonable valuation. For example, if you are a tech start-up without a track record of revenue you may dispense with financial metrics and instead look at traction – how many users and how fast you are getting them, what it costs you to acquire and retain users, the size of market etc. You need to demonstrate this with solid numbers. A claim about your traction without evidence of numbers is a hypothetical few investors will be interested in.

2. FOUNDERS ARE FUNDAMENTAL: The “founder risk premium” factors into the way I value a majority of my potential investments. Founders matter to me – if I don’t like you then you don’t even get in the door. If you can’t demonstrate impressive skills in your space then the conversation ends. If you fail to articulate the problem and get me excited about the space, then I am out as well. As the entrepreneur you are the face of the business, if I’m not sold on you, I’m not interested in what you’re selling.

3. THINK THROUGH YOUR FUTURE CAPITAL REQUIREMENT: Investors want to understand where start-up founders want to take their business before collaborating with them on a potential future requirement for capital. This is where a well mapped business plan is key. You need to ensure subsequent capital raisings do not jeopardise the future of your business. A smart investor needs to know you’ll be in the business until it has its feet – so if future investment dilutes you past the point of caring, that’s a huge risk to the business.

The biggest rookie error an entrepreneur can make during the negotiation process with a potential investor is to offer to lower their cash requirement in order to maintain a certain level of equity for themselves. This is misguided. Your business timeline is dependent on your funding from the outset. Sacrificing your initial investment request only signals to an investor that you’ve failed to account for every step in your business plan and have not considered the bigger picture.

4. SWEAT FOR EQUITY? When you are starting out, one of the fastest and most obvious ways to grow your team is to offer people an equity position in your business. Whilst this can seem like cheap labour in the early stages of a start up, if not managed appropriately, it can quickly cause confusion and distress amongst the early-stage team – leading to walk-outs, legal battles and in extreme cases the collapse of the company. If you do go down the sweat-for-equity path, take advice on the appropriate amount to give away (usually in the 0.5-1.0 per cent range), and have a vesting scheme that ensures the work happens satisfactorily before the person walks away with their shares. Places like River City Labs in Brisbane or Fishburners in Sydney hold events around these sorts of topics all the time. Have a look around your city and see if you can attend a session that may offer some free advice on a rather thorny issue.

5. MAINTAIN CONTROL – BUT HOW MUCH? There’s no hard and fast rule for determining how much of the company you should retain. For me, it is basically about ensuring you as an entrepreneur have enough skin in the game to make the sacrifices worthwhile. I get nervous any time I see an entrepreneur within their first few rounds of funding with a less than 50 per cent equity holding. By the time founders are ready for an exit (when things have gone really well) you want them in for a collective equity percentage of between 20 per cent and 40 per cent. (Note to founders – fund your business from customers and you get to keep a lot more equity). Control does not have to be asserted via an equity holding but can be agreed as part of a shareholders agreement. Whilst under the Corporations Act there are some things you can’t do there are lots of things you can. Retaining effective control by agreement can be a way around an otherwise daunting dilution.

This article first appeared on Business Review Weekly. View the original here.

How Hummingbirds made me move outside my investment comfort zone

Every investor knows the best portfolios are built on solid, rational business choices, an in-depth understanding of the market, and more than a little bit of luck.

But, for those of us who have got the start-up bug, we often need to look beyond traditional methods. For early stage businesses, especially tech start-ups – you look at the founders, their skill and drive, the potential of the company, the problem they are solving, the market potential and the quality of the product and the intellectual property.

Many of the most successful start-up investors started their journey as entrepreneurs. Because we know what’s it’s like to risk everything to launch a company, and put in the hard yards to make it work, we understand where the people we are investing in are coming from. It also helps that we know the market, and the steps it takes for an entrepreneur to go from first hire to initial public offering. I’m a predominantly tech investor, I like big scalable businesses run by tech-savvy founders who want to take on the world.

Perhaps that’s why many people were surprised by the latest episode of TEN’s Shark Tank, which saw me and my fellow shark John McGrath invest in Hummingbirds, a childcare business for children with special needs.

I can understand this. If you told me a year ago that I would be investing in the childcare industry, I’d have laughed you out the door. However, when Leah James and Rebecca Glover entered the Shark Tank, they came not just with a moving personal story about what they’ve done to ensure a better future for their children, and other children effected by disabilities. They came with a sharp, well-thought and viable business proposition.

Hummingbirds are operating in a hugely under-serviced niche in their sector. They have a massive waiting list in their Queensland home area. The company founders are smart, articulate businesspeople who have in-depth expertise of what their customers are experiencing. And they have a fire and passion to succeed which reminds me of myself when I started SE Net and then PIPE Networks.

As a former entrepreneur myself, I let myself be swayed by the commitment, skill and passion of the founders I invest in. Then I look at the numbers behind the business, the quality of the product compared, and the size of the addressable market. But above and beyond that, it’s true to say that an entrepreneur’s authenticity and capability are the not-so-secret sauce of early stage investment.

This holds true for any sector, not just tech start-ups. In fact, Leah and Rebecca remind me of two other entrepreneurs who came to me with a big idea. They were ex-army personal and highly experienced skydivers. They had a passion to create a wholly new experience – and could show that people would pay for it. Four years later Indoor Skydive Australia (ASX:IDZ) is a reality with multi-million dollar facilities in operation in Penrith, and soon to open in Gold Coast, Adelaide and Perth.

As I said in Shark Tank, Hummingbirds was a deal too important not to be done. Leah and Rebecca’s vision is truly inspiring and as a father to a young daughter myself I could not help but be moved by the their personal stories. But as investors we are not here to give people money so that they can feel fulfilled. We’re here to help accelerate fast-growing companies, and create wealth and jobs for Australia. I’m not in the business of making charitable start-up investments.

But, with a little money and a lot of mentoring and guidance, I believe myself and John can help Hummingbirds transform the face of childcare in Australia for children with disabilities. I believe the business can become a viable and profitable enterprise, one that creates social good and decent profits. After all, why can’t a business be a good investment and help people at the same time? I may have moved out of my comfort zone and into the childcare industry, but I haven’t given up my investment principles.

This article first appeared on Business Review Weekly. View the original here.

Don’t call Naomi Simson ‘darling’, and 3 other investor pitch no-nos: Shark Tank’s Steve Baxter

As those who have been following TEN’s Shark Tank will appreciate, there are times in a pitch when the entrepreneur makes everyone feel a little nervous.

Whilst a degree of pitch anxiety is expected, this normally wears off after a few moments of conversation. When that feeling lasts the length of the pitch it can be deadly for a deal.

Take Kerry, the fast-talking inventor from Newcastle who pitched us the world’s brightest dynamo bicycle light combined with a USB.

A clever inventor who is passionate about the cycling market, this entrepreneur lost my confidence early on with some hyped up claims about his product that didn’t appear to stand up to scrutiny.

For example, after referencing a global market of over 100 million new bicycles per year, he went on to predict that this world-first invention, which costs well over $500 (compared to a regular bike light at $25) would find an enormous market. However, the panel felt a very niche percentage of this global market (the wealthy long-distance cyclists) would be tempted to spend that kind of money on his product.

It seemed Kerry had his pricing wrong, and whilst that’s a red flag, it’s not beyond correction if all the other elements are in place and someone is open to working with an investor to build more confidence in this area.

Kerry had enthusiasm in spades – which is great. But at times his demeanour and his responses were so over the top, he ran the risk of coming across as someone who could be challenging to work with – particularly for seasoned investors who are time-poor or prefer a more measured approach.

There are also times when an excellent pitch goes horribly, suddenly wrong. The feeling is palpable. Take the family from Evil Corp who blew us away with their awesome horror-themed presentation. When one of the presenters came at us with a bloodied chainsaw we definitely felt uncomfortable, but that was purely a demonstration of their ability to wow their customers with fear.

I loved their bold vision to fill a gap in the entertainment market with a scary theme park. And, of course they were from Queensland, which instantly got my attention.

Towards the closing moments of their pitch, I asked what was to become the deal-breaking question: what do you base your projected customer numbers on? They told us that Movie World in Queensland (a well established gigantic attraction) was the main competitor and that they aimed to match their performance.

Their exaggerated plans to take on Movie World saw this family business snatch defeat from the jaws of victory and sadly walk away without a deal. The answer, quite frankly, was scarier than their pitch for anyone thinking of going into an investment partnership with them.

There are many important things to do in a pitch – like communicating your vision and your expertise, being across your numbers and having an appropriate ask. And, of course, you need to come to the conversation with a great business idea and ideally some existing revenue. Assuming those fundamentals are in place, here are a few things to never do in a pitch environment.

1. DON’T OVERSELL – it makes people nervous: Investors want entrepreneurs to be persuasive and clear about their business, but they don’t respond well to someone putting on the fast and loud talking display of a stereotypical used car salesman. Let your great idea, solid plans and expert credentials do the selling for you. And remember, investors generally want you to succeed – otherwise they wouldn’t have you in the room.

2. DON’T OVER-CLAIM: Exaggerated, unsubstantiated claims from a young, untested business like “this will obliterate Facebook” or “we will make a million dollar profit in the first three months” will only undermine your credibility and shut down the conversation early. Investors are more likely to be persuaded by a calm and rational presentation of the sales projections, even if they are still small, with a vision for how you plan to scale the business. This signals they are dealing with someone they can trust, who is more likely to under-promise and over-deliver than the reverse.

3. DON’T BE INAUTHENTIC: getting into partnership with an investor is a marriage of sorts (albeit a shorter one). Bring yourself and your experiences into the room, not a hyped-up version of who you think you need to be to get the deal. Faking the first-date is a bad idea – it’s likely to instantly repel the experienced investor, who can smell inauthenticity a mile off. And, if you did end up with a deal, you may well find yourself poorly matched with a person who has very different expectations of who you are and how you will manage your business.

4. DON’T BE COCKY OR OVER-FAMILIAR: When Kerry called Shark Naomi Simson “darling” on last week’s show, it came across as patronizing and got the panel offside. Cheeky is fine, and can build rapport (example: the Bottlepops duo who offered us a beer) but if it distracts from your presentation or jars an investor into thinking you would be disrespectful in a business relationship, your chance at a deal is off to a rocky start. Demonstrating a willingness to listen bodes well for a long-term relationship with an investor. Talking over the top of an investor when they are trying to give you constructive feedback/criticism, signals someone who would be difficult to work with.

This article first appeared on Business Review Weekly. View the original here.

Why you must park your ego to drive your idea global: Shark Tank’s Steve Baxter

There’s an iconic business book called The E-Myth, which addresses some early stage challenges faced by entrepreneurs as they seek to create a business that is highly manageable, scalable and profitable.

Principally, it argues entrepreneurs must surrender their identity as a successful “masterful professional” who controls every aspect of the business and start hiring people who are able to fill that role so they can focus on taking the business to the next level.

Many things have changed since The E-Myth was written more than 25 years ago. One of the major shifts is the scale of the opportunities in front of today’s entrepreneurs. Thanks to the digital economy, today’s SMEs are much more inclined to think in global terms, which in turn means they are likely to think in bigger terms about the possibility for their business.

What remains true is the need for entrepreneurs to move beyond their “flying solo” mindset. This means moving beyond my ‘give up your day job’ advice, and going one step further by surrounding themselves with appropriate experts or expertise across all areas of a venture.

Simply put, the do-it-yourself mentality just won’t cut it when it comes to scaling your business.

In Australia we have a huge opportunity to create global business – to build more Atlassians, 99designs and Campaign Monitors – tech startups that have created 540,000 new jobs and by 2033 could be contributing $109bn annually to our economy.

We have the ideas. One of the most exciting elements of Shark Tank is uncovering incredible business ideas from across the country. This is world-leading innovation, fitted with a typical Aussie ‘keep it real’ mentality. For me, there is nothing better.

Necessity has truly been the mother of invention for many of the entrepreneurs pitching on Shark Tank. From the frustrated mum who invented the illuminated ThroatScope to help her son cope with oral medical examinations, to the enterprising outback adventurer who created ‘Rescue Swag’ as a more comprehensive emergency first aid kit to help with medical emergencies in remote locations.

Add to this equation the HEGS Peg – a peg with hooks – invented by a husband who wanted a way to hang his wife’s delicates without damaging them and the Dyskin Guitar, which makes learning to play the guitar really simple, you have an eclectic bunch of sheer genius inventions.

Take a bow Aussies.

Then take a deep breath and think about how successful you truly want your ventures to be.

There are accolades aplenty for those who invent clever things. It’s great party conversation and the PR halo can be huge. But accolades and acknowledgement don’t equal revenue and businesses don’t become global by themselves.

Necessity is the mother of invention on a national scale as we stare down our economic future. Do we want to remain a nation of middle-sized SME’s alongside multinationals and an internationally-controlled mining industry?

I sense we want to think bigger. We need to. The digital economy means we can no longer keep global competition at bay. Our businesses must become globally competitive, if we do not grow our businesses internationally others will come here for us.

That journey is a long and arduous one, and it’s not for the faint-hearted.

To ‘scale’ a business beyond an idea (and even an idea with some good local revenue attached) requires a team of experts and a lot of resourcing. That means asking for help.

It means parking your ego outside so you can allow experienced specialists to guide you in key areas; Areas such as patents and trademarks, manufacturing offshore, entering key international markets, partnering and sales and marketing.

I have yet to meet an entrepreneur who could do all or even most of that on their own. I have met plenty that try.

The good news is help is at hand for our entrepreneurs, and on a broader scale for our national economy, as the government turns its attention to supporting Australia’s business growth. We are also lucky to have support outside of government, with co-working communities, such as River City Labs in Brisbane, providing an environment for entrepreneurs and mentors to mix and share advice.

This next decade is a critical one and requires some bold thinking. We need brave and highly motivated entrepreneurs to step forward with their business opportunities. Our governments and community need to also rise to the challenge and be willing to commit resources and moral support to help these talented individuals create something that is much bigger than them – a business that can hold its own offshore and deliver tangible benefits to our Australian economy and national morale.

If Shark Tank demonstrates anything, it’s that Australians are awash with brilliant ideas. We truly are a clever country. Now let’s be a truly successful country and generate the rewards of all that clever thinking. That starts with thinking big and most importantly asking for the right kind of help.

This article first appeared on Business Review Weekly. View the original here.