Back door closes as another opens

13/07/2016 - 12:11

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The political and regulatory climates appear to have synergised, making increased private investment in the startup sector more likely.

Back door closes as another opens
NEW VIEW: The federal innovation incentive is good news for startups. Photo: Stockphoto

The political and regulatory climates appear to have synergised, making increased private investment in the startup sector more likely.

Six months ago I wrote an article about backdoor listings in the tech startup scene, suggesting that it wasn’t a great fit for the normal model of startup investment. Six months of data seem to have validated this view.

The ASX is now officially concerned about the boom in tech startup reverse takeovers, or back door listings. It’s making changes to the regulations around listings in an attempt to close the back door.

As always, the regulator is playing catch-up to the real world. The word in the community is that the boom was over a couple of months ago. Tech startups are ‘so last year’ in the fashionable world of finance. Getting a reverse takeover deal involving a tech startup across the line is already difficult.

This is good news, despite the finance industry protesting the ASX changes. A more cynical man than I would see this as a gravy train rolling to a stop – the passengers are bound to complain; regulation is almost never welcomed by those it regulates.

The good news is the effect on startup funding. Investors are not able to punt some spare change into public stocks, knowing they can pull it out later. Investment needs to go private. But private investment takes some thought and investigation. The term is longer, and getting out is harder. It needs knowledge and experience to do it properly.

Perth Angels

The WA Angel Investors’ rebirth as the Perth Angels could not come at a better time. The WAAI had a reputation for a lot of talk but not much walk. The Perth Angels is already proving to be a more dynamic and active organisation.

Angel groups help provide knowledge and experience; not only to the businesses they fund, but also to the other investors in the group. Each investment needs a lead angel, but the others in the group can be ‘silent’.

As time goes by, the silent investors will learn the ropes by experience and be able to take a more active role. The group expands, and more investments will happen.

Innovation incentive

The timing of the federal government’s innovation incentive to encourage private investment in startups is also perfect. Getting a 20 per cent tax break up front and no capital gains tax on the exit encourages private investment. There are investments waiting to happen because of the delay between announcement and implementation.

Hopefully the incentive will survive whatever the new parliament throws up. Both major parties’ support of ‘innovation’ means it should make it through the mayhem, though Malcolm Turnbull’s #IdeasBoom may die along with his political ambitions.

Synchronicity

The synchronicity of the political and business environments is always a great signal. Entrepreneurs learn to look for unrelated events lining up to create new opportunities, and the current conjunction of events signals a great opportunity for tech startups.

The opportunity is that private investment, especially angel investment, is ideal for tech startups. An increase in private investment will lead to an increase in startups getting funded. Startups will be more likely to succeed with the funding (and less likely to go east). We may even some startups from other states coming west to get funded.

Community success

Creating a working startup community relies on a virtuous cycle. Each startup that successfully exits scatters experienced employees as founders for the next generation. Successful founders also act as angels for the next generation.

Getting this cycle started is tricky, and we’ve been pulling the starter cord for a while now. One of the main limitations has been the lack of investment. Another is the lack of technical talent.

But solving the investment problem would likely lead to solving the talent problem, especially during a mining downturn – all those tech-minded geoscientists can retrain fairly quickly as developers. A sudden rush of new startup jobs for developers would create enough of an incentive. Perth is full of smart, creative, people; we have a reputation for it. Get the money sorted and the talent will follow.

There’s a narrative that uncertainty inhibits investment. But uncertainty is what startups thrive on. A common definition of startup is ‘a business that is uncertain about its model’. In uncertain times, changing the model becomes the sensible thing to do. As one door closes, so another opens.


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