Investors In Business Want Their Dividends Paid
I enjoy travelling to the United States for many reasons. One of those reasons is that the general mood and sentiment of business, particularly in California, is often a good predictor of where our business mood and sentiment will head in the near future. Whilst on my trip, I was stuck by the realization that the start-up and entrepreneurial eco-system around San Francisco and Silicon Valley has taken a very interesting shift. To use the start-up vernacular; a pivot. Raising capital is becoming much tougher. Venture Capitalist are always shrewd but they are absolutely brutal at the moment. They want to see evidence of a strong, sustainable, scalable business model that is working. If you can’t articulate and prove it, you need not bother signing in at reception.
In the past businesses were able to raise round after round of capital while they figured out exactly how to monetise the value in their business. These businesses were ‘growing’ like crazy. Growing may be measured in revenue, customers or active users and this – if compelling enough – would be sufficient to warrant further investment. Effectively these funding rounds bought time for the businesses to work it out.
Typically a (US) start-up will raise money by pitching to investors by setting out their vision and what specifically they intend to do with the money to reach that vision. They will work like crazy to achieve everything they promised while they burn through the cash raised. As the money gets low they look to raise again. The new pitch explains what they have done with the previous money and why they need more. They again explain the vision and how they will get closer to it. This cycle of capital raising will often be around two years.
The road map is slightly different in Australia – and of course no two journeys are exactly the same – but it follows a similar path. While I was in California (11 days in total) there was a story every single day of a business that had gone to raise additional capital and simply told, “No.” Already three months out-of-date but the story of Beepi made news again while I was over there. In essence, Beepi launched in April 2014, raised $150 million USD and spent it all in the next two and a half years. It couldn’t find a business model that worked and, when no one would invest in it further, it went bust in early 2017.
We should be careful not to suffer from Hubris here in Australia. There is plenty of money available in Australia at present to fund start-ups and growing businesses. It is sensational that innovation and entrepreneurship are very in vogue but, be careful. There is no shortage of money in Silicon Valley, the managers of that money have just become much more discerning – some would say harsh - about how it is invested. The moral of the story is simple; every business, new or old, must be able to show that every dollar invested into it returns more than a dollar on that investment. If it can’t it is on borrowed time.