Making money as an early-stage investor in technology companies takes a lot more than luck, but knowing what to look for takes an exceptional eye. For every Spreets of RetailMeNot there are hundreds of technology-based ventures that have failed to provide a significant return for their investors.
Early-stage investment was once the exclusive domain of venture capital investors, but this group has been in decline in Australia for some years. Thankfully the shortfall has been made up by the emergence of a wide range of sympathetic and cashed-up angel investors and other private investors.
The organisation of angel investors into coordinated groups, such as Melbourne Angels and Sydney Angels, is boosting the funds that an entrepreneur might hope to raise, while the technological realities of cloud computing and open source software mean that it has never been cheaper to start a company.
Also, many of Australia’s successful technology entrepreneurs have returned to early-stage technology ventures as investors. Some have only dabbled in one or two, such as MYOB founder Craig Winkler, who is a major investor in the New Zealand-based listed online accounting software company Xero, while Computershare founder Chris Morris has put funds into the software-as-a-service company Qdos and the New Zealand car park technology company Meter Eye, as well as becoming a director of Webfirm Group.
Simon Baker has thrown himself into the investment game more wholeheartedly. Baker got heavily into early stage investment after leaving the company REA Group (owner of realestate.com.au) in August 2008. Today he owns both a consulting business, Classified AdVentures, and an investment fund, CAV Investment Holdings, through which he currently manages investments in more than a dozen internet-related companies.
Despite the large number, he describes himself as a very active investor. His investments are spread around the world, but despite their physical separation they are all related to the areas that he knows best – online classifieds and property portals. They include a property portal in Brazil, a global vertical search site in Spain, a classifieds site in the US, and a property portal in Japan, along with investments in six Australian companies.
When it comes to making decisions on where to invest, Baker says the key factor is the time he devotes to analysing and getting to know the business.
“With most of these I have known the management for two or three years, and have got to understand them,” Baker says.
“It comes from lots of conversations and face-to-face meetings. I never invest over the phone, and I don’t want them coming to me – I’ll go to them, because you want to see them in action in their market. You get a feeling, and then it is lots of conversations. You want to get a feeling for how genuine they are.
“It’s a bit like a romance – you’ve got to do a lot of dating before you get engaged.”
Baker says he will only invest when he feels the time is right and he has a good understanding of what the business owners want and what they are planning to do.
“They are either saying or doing the right things, or we have sat down with them and suggested a bunch of things to do based on experience, and they adopt some, if not all of them. That means they are open to suggestion.”
Craig Winkler has not been as active as Baker, but the MYOB founder has made a big impression on the cloud-based accounting software maker Xero. In April 2009 he spent approximately NZ$18 million to buy almost a quarter of the company.
Like Baker, Winkler says he was drawn to Xero in part due to his familiarity with its marketplace.
“Clearly this is one that I have some understanding of, so in some respects it was a little easier – I knew what to look for,” Winkler says.
“The team had done a particularly good job of building their business, and continue to do that.”
The factors that in particular impressed Winkler were the fact that the accounting market was going through a shift from traditional tools to online, which was opening a foothold for new entrants, and the fact that Xero was able to grow swiftly. He says this isn’t always something that is obvious to an untrained eye.
“When I was looking at Xero from a due diligence point of view I was looking to see if they were gliding along and undercooking the back-end,” Winkler says. “In the web space that is a recipe for disaster. So I was keen to see how much care they had taken in building their backend infrastructure.”
One of the advantages of private and angel investors is that they can make quick decisions, without needing to consider the whims of the funds managers.
Although not a typical angel investment group, Pollenizer Ventures has taken this quick fire investment approach to heart. Born from a web incubation firm, Pollenizer has raised a seed fund and now works as a “co-founder” as well as funder of companies, taking early concepts and investing to build the companies.
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