Angels work better together

New tax incentives are aimed at encouraging angel investors and startups to build strong relationships.

The government’s tax incentives to encourage private investment in startups begin this month.

There has been a marked decline in investment since the incentives were announced in December. Not surprisingly, everyone has been waiting for the incentive to kick in. We expect the floodgates to open and business to resume as normal now.

Of course with the federal election just held, some may wait to see how things settle; but there was a lack of the usual partisan politics around innovation during the campaign. The major political parties seemed to agree that innovation is good, both agree that incentivising innovation is good.

The main points of the new incentives regime are that: 20 per cent of any investment in a startup can be claimed as a tax offset; and capital gains are not taxed on investments in startups.

The usual suspects in the finance industry can assist with more details and advice.

This leads us to the recently rebranded Perth Angels’ latest sessions on angel investing. Formerly known as WA Angel Investors, the group invited Jordan Green, founder of the Melbourne Angels, to come to Perth and talk – to share his experiences of 20-plus years of private investing in startups.

The key point Mr Green wanted to make is that angels must be beneficial partners in the business. To make any money, the business must succeed. Getting a startup to succeed is hard. Making it harder by trying to wring the best terms from the founders is a bad strategy. Early-stage investors need to be helping the founders to succeed as their primary goal.

Mr Green pointed out that the mining boom has actually been a resources construction boom. The mining industry is now entering the operational phase. The mines we’ve been busy building will now operate for the next 20 years or more.

This represents a huge opportunity for mining services companies. Innovation in those services utilising new technology will be key to unlocking value.

Mr Green also foresees the reduction in public investment. The need and opportunity for huge public investment in construction projects will recede. Private investment will become more attractive. Investors will need to create diverse portfolios, including some private investment in innovation tech.

But he was very clear about only investing a small part of the portfolio in angel deals. Early-stage startups are extremely risky.

Mr Green’s advice around choosing investments was to generally pick teams, not ideas. Ideas are unproven at the early stage, and the idea will change as the business grows. Good teams remain good regardless of what happens to the business. There are, of course, exceptions to this rule.

He emphasised that angels need an investor mindset rather than a lender mindset. Investors look at the possible rewards of an investment over the possible risks. Reward is a product of risk, and eliminating all risk also eliminates all rewards. Investors must expect some of their investments to fail, and be okay with that.

The ideal investment is one that doesn’t need lots of capital to scale; this is where tech startups shine. A relatively small investment in development can scale to tens of millions of customers.

Angels should aim for solid trade sales as exits. IPOs are not actually exits for angels. A trade sale gives the angel a clean exit with maximum value.

Mr Green’s firm opinion was that he would prefer five solid trade sales at $20 million each than one unicorn at $200 million. Unicorns are hard to find and unreliable.

The ideal angel investment deal looks like a small tech company with a great team that aims to achieve a trade sale. There are definitely some startups that look like this being forced to go east to find money. The opportunities are real.

To stand the best chance of finding such deals, angels need to group up. The amount of time required to screen startups and do the administrative work involved is huge. Spreading this between a whole group of angels makes the load lighter on everyone.

The group is more likely to find the best deals. And having other people able to spot problems and give a different perspective is gold.

The Perth Angels group is becoming more active in the startup community, taking a more pro-active attitude and actively seeking deals to make.

Hopefully the new incentives will bring more investors into the fold, and fewer Perth startups will be forced to go east to get funding.