How “pre-nups” can up the investment in Aussie startups

Startups tend to have a vision far bigger than their bank balances and because of this, external investment is often the only way for an entrepreneur to achieve their dreams. But the startup funding journey is not easy, especially when you are trying to balance product development, customer acquisition, and building your team whilst just managing to get through on a startup diet of ramen noodles.

For most startups, the funding journey commonly starts with using your savings and credit to develop an idea, whilst simultaneously socialising it with anyone who will listen. Then, those families and friends (and sometimes fools) that want you to achieve your startup dream help out. After a few more months you apply to a few accelerator programs and if lucky, get accepted. Hooray! The bank balance is topped up again. But then, the program ends, your bank balance once again approaches nil and the ramen noodles are back on the menu. If you are lucky, your startup is moving fast and customers and perhaps even revenue are on the horizon. But if you want to get there, you need more capital.

So where do you go? The angel investor.

Originally a term for investors in Broadway shows, angel investors play an important part in the investment path for a startup. They provide funds, advice and their networks to help test the business model, get customers and bridge the gap (often termed the valley of death) until the venture capitalists arrive as a continued source of funding. In the heat of the startup environment however, game plans can change – and often angel investors and founders can get caught in the natural tension between one party looking to safeguard their investment returns, and another looking to develop their business. This all too often scenario can lead to frayed relationships, less term sheets signed, disgruntled entrepreneurs looking offshore for investment, more risk adverse angels and ultimately more startup failures. However, things are about to change.

Recently, I attended the launch of a set of voluntary guidelinesto help drive greater success and foster more seed investment in the early-stage startup ecosystem. Developed by KPMG Australia and the Australian Association of Angel Investors (AAAI), the guidelines come at a critical time for the Australian startup ecosystem as the economy shifts away from “holes and homes” to startups and technology enabled businesses.

According to the StartupAus Crossroads report published this year, Australia has one of the lowest rates of angel investment in the world. Therefore, anything that aims to increase the chances of startups raising funds in Australia is good thing in my book. These startup agreements – let’s call them a “pre-nup” look to help both angel investors and entrepreneurs by:

  • Managing the investment – The guidelines provide a clear reporting framework for the business progress, set KPI’s and recommend methods for reporting financial information. This gives an equal footing for both parties to make decisions about the investment and allocation of scare resources.
  • Facilitating open and transparent communication – The guidelines sets out practical steps to ensure frank, fair and full communication between startups and their early-stage investors. The “principles of co-operation” are a code of conduct for both the investor and entrepreneur to promote balanced and effective collaboration to achieve greater success.
  • Managing compliance and risk – Running a startup does come with some legal and regulatory obligations for the entrepreneur and investor and the guidelines highlight some of the obligations that should be met to help manage risks at this early stage in the company’s life cycle, whilst an accountant or lawyer may be outside of the budget.

As a passionate contributor to the Australian startup ecosystem, I hope the guidelines are adopted by angels and entrepreneurs alike to drive more funding, and ultimately greater startup success. These guidelines are however, but one part of the much needed changes to support startups in Australia and drive the new economic growth that we need. If these guidelines and other changes achieve what they set out to do, we will no longer trail the world in angel investment and startup successes, but become a leader and keep more Aussie startups onshore.

And that would be a good thing for us all.

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