Nick McNaughton's View: Innovation & Start-ups Landscape in Australia

Vishal Sharma Monday, April 21, 2008 , , , , , , 0 comments

Today we showcase a story of a man who has been a successful angel investor and now as a VC helping a lot of Australian business to realize their dreams. Nick McNaughton who is based in Canberra, ACT, Australia is running a VC portfolio, under Blue Cove Ventures umbrella.

Let us explore bit further how Nick is helping others and what he thinks about innovation coming out of Australia. This is what Nick has to say in his interview with me.

• Please tell us about yourself, your background and interests?
I am the CEO and Founder of Blue Cove Ventures. Blue Cove was established in 2007. I have a strong heritage in IT Investments and has a long track record of helping to build and grow software and web companies. Prior to founding Blue Cove Ventures he was co-founder of the blog marketing company behind Zookoda. In March 2007 Zookoda was sold to PayPerPost Inc. the leading marketplace for Consumer Generated Advertising.

From 2002-2004 I was Director - Asia/ Pacific for Wily Technology - Wily Technology provided performance monitoring and management solutions for enterprise java applications. I established their presence in the Pacific and helped them to identify, evaluate, mentor and manage their partners in Japan, Korea and Australia. Wily Technology was sold to CA (NYSE: CA) for US$375M in Jan 2006.

In 2001-2002 I was VP Strategy for Soulmates Technology. This company provided multi-lingual, multi-currency private-label ASP dating solution for MSN. I was instrumental in engineering a trade sale for Soulmates to Interactive Corporation (NASDAQ: IACI) the owner of Match.com for US$24M in April 2002.

From 1997-2001 I was Director - Asia / Pacific for Allaire (now owned by ADBE - NASDAQ: ADBE). I was responsible for establishing distribution for Allaire throughout the Pacific. During my tenure Allaire grew globally from US$9M in Revenue (1997) to over US$100M in 2001. In 1998 I participated in Allaire's successful IPO on NASDAQ.

From 1993-1996 I was based in Hong Kong as Director - Asia for Claris Corporation (owned by Apple Computer and now called FileMaker, Inc.). Once again I was responsible for the establishment of Claris' distributor and channel network in the region.
Over the last 10 years I have invested in 7 companies as a private Angel investor. Two have been exited via successful trade sales (Soulmates and Zookoda), two got the bullet, and three are still travelling really well.


• Please tell us about your venture firm /company?
Blue Cove Ventures invests in innovation focusing on early stage opportunities. We love web, mobile and software opportunities and invest in entrepreneurs who have great, commercially viable ideas with significant global potential. We like entrepreneurs with passion and persistence who go that extra mile to get the job done. In return our investees can expect Blue Cove to be a committed partner intimately involved with making their vision a commercial reality. We back companies in Sydney and Canberra – proximity matters!

• Who are the people behind this and how it started?
I am the founder of Blue Cove Ventures – we opened our doors in March 2007. Since 2004 I was a full-time angel investor. I wanted to place bigger bets and sought institutional backing. I have done business in Japan for a decade. My network in Japan introduced me to Hikari Asset Management (part of Hikari Tsushin). I hit it off with the head of Hikari Asset Management and he agreed to back me.

• How long you have you been working in this environment?
Ten years as an Angel investor and one year as a VC.

• What is the main objective/mission behind your venture?
Deliver high returns at reduced risk for early-stage investors in selected IT&C businesses

•Please tell us how does a VC work? Its one of those professions which seems like a black magic to others and sometimes don’t understand what exactly they do?
VC is more of an art than a science. You have to kiss a lot of frogs hoping one of them will turn into a princess! In my first year I looked at 130 companies – we invested in 3 (two of which I have known for many years before I became a VC). Wikipedia has an excellent description of VC - in simple terms a VC invests cash in early stage companies in return for equity to assist that company to grow. The payback comes from when that company is sold (trade sale) or lists (IPO) at a valuation higher than when the VC invested (sounds simple doesn’t it!!!!).

• What ways/models VC's get engaged with a business/startup?
My pipeline comes from a range of sources: network referrals, from incubators, from universities and CSIRO, from business mentors & trainers, from friends, from my website, at industry events.

• What sort of due diligence process is followed and what factors attracts a VC to be a part of a business?
I do first level screening over the phone or over a coffee. The vast majority of prospects are dropped at that point. If a prospect gets past first base I spend a lot of time on what I call “street” due diligence. I want to meet all the staff, meet customers, go on sales calls, talk to industry commentators, see the CEO present, trial the product. My number one criteria is PEOPLE. If the people behind the idea don’t stack up it gets dropped at that point. I then look for customers. If an organisation is willing to pay money for a product it has validated the idea.

• What is an angel funding, seed money and other common terminologies used in this profession?
Rather than re-invent the wheel visit Wikipedia for:


• What is the investment process?
An entrepreneur registers their interest via email or on our website. If the idea passes the initial screening (reaches first base) the high level due diligence commences. If high level due diligence is ok low level DD begins documentation, technology, IP protection etc. – (reaches second base). A term sheet outlining valuation, $$’s to be invested, how and when the money is to be invested and the mutual obligations and expectations is then negotiated. Additional DD occurs throughout (reaches third base). Once the Term Sheet is signed, legals get written up and signed and the money invested and the share certificates issued (reaches home plate!).

• What stage would you invest in a company? And what do companies have to show before you're interested?
I like to invest in early expansion opportunities. I like to see an early prototype, with initial beachhead customers having bought the product. The companies need the investment to expand their business and enhance product development and accelerate revenues (sales and marketing resources). My investment criteria is as follows:
  • Global potential and appeal
  • Significant market opportunity
  • Proximity to investment manager
  • Credible management with a successful track record
  • Realistic business model
  • Unique and strong intellectual property
  • Clear ownership of any IP
  • Compelling value proposition
  • Sustainable competitive barrier to entry
  • Solid potential for revenue growth
  • Rapid path to positive cash flows
  • Expectation of steadily increasing equity valuation
  • Clear exit strategy
  • Multi-lingual
  • Leverages open standards for application development
• What other services a VC firm provides, for people who are looking for help?
For investees I provide mentoring and strategic guidance

• What market segment verticals are you targeting?
Web or IT&C based

• How many ventures/companies are using your services?
I’ve looked at over 130 companies and invested in 3 (two announced – one in stealth).

• What sort of marketing you are using to spread the word for these portfolio companies?
Industry thought leaders, TechCrunch, ReadWriteWeb,

• How are you measuring the success of your portfolio? Are their any special mechanisms/tools are in place to monitor the progress?
The only success that matters is Internal Rate of Return (IRR).

• Which are the main competitors or major players in this segment, when it comes to Australia?
Other well respected VC’s include:
Allen & Buckeridge
Innovation Capital
Starfish Ventures
Southern Cross
A broader list of Australian VC’s can be found here

• How often do you catch up with others trying similar things and where do you catch up? Do you have dedicated communities in your city?
The main national conference for VC’s is the Australian Venture Capital and Private Equity Conference - other regional VC events are run by Slattery IT - (dates for 2008 not ye published)
I also attend Angel investing events, my local group is called Capital Angels – a national association for Angels has been created.

• What’s your thought on being a VC? How tough it is to be involved in a venture as a VC in Australia?
I love it! Having run territories for three American Software start-ups over the last 2 decades being a VC is a breeze in comparison. Having said that – you are only as good as your investments – you need a strong and consistent track record of picking winners to have longevity in this space.

• What do you think of new ventures and innovation coming out of Australia?
I frequently travel the world. Australia has great ideas, expert entrepreneurs and the ability to have global winners. We can match it with most other markets. What we lack is the management experience to take technologies global successfully – I’d love to see more seasoned international executives return home and take on the challenge of growing early stage companies into world beaters.

• We recently interviewed owners of 35 new/mature tech startups and all of them have said that raising money in general via a VC is very tough in Australia? Why is that so?
The attrition rate for VC’s on average is 99% (1% get to ‘yes’). If you listen to VC’s you will hear – we lack good quality deals! Whose right?

• Do you think VC’s in Australia are more conservative in their approach and don’t take many risks in technology based business?
Yes

• How does Australian VC industry compare to the one in the US?
The US one is older and more established – their networks are deeper, more relevant and conveniently located

• Any new ventures you think are worth keeping an eye on?
I really like Mycosm (from Simmersion – a company we backed in Jan 2008). They are launching a platform for building 3D Virtual Worlds – when they came out of stealth @ Virtual Worlds New York earlier this month they got very positive feedback from industry commentators.

• Do you think we can create a new Google in Australia?
No

• Which city in Australia is more vibrant and can be regarded as Silicon Valley of Australia?
I only invest in companies located in Sydney and Canberra. Both have their hidden gems! My peers rave about the quality of companies out of Melbourne

• What do you think of our TAFE/Universities and their curriculum in terms of promoting and encouraging entrepreneurship and innovation?
There are very good programmes in place but I would like to see more focus on entrepreneurship.

• What do you think government (federal and state) should do to improve the culture of innovation and software industry?
AusIndustry has a broad range of programmes and grants to assist early stage companies. Their people are knowledgeable, professional and supportive. I’d really like to see more focus on lowering Capital Gains Tax to really recognise the high risk of early stage investing (for individuals) and to reward that risk.

• What government resources have you used to help your business? And have they made an impact?
All of the AusIndustry progammes

• Have you sought any funding/help from govt or other sources?
Yes – Commercial Ready from AusIndustry

• Would you move your portfolio companies to another country, and if so, for what reasons?
Yes – probably to the US as I invest in technology companies and the US is still the hub of all global technology innovation

• At the 2020 conference, PM Kevin Rudd is meeting with top 1000 people from different background to discuss and collaborate on the issues facing the nation. What issues would you like to raise if you are given a opportunity to attend?
Lowering CGT!

• How a new venture should approach to a VC?
Email me on nick.mcnaughton@bluecoveventures.net – I reply to all emails

• Do you have any advice for people who want to start their venture?
Find an experienced mentor

Thanks Nick for sharing your thoughts. We look forward to hearing from you in future on the progress of Blue Cove Ventures. All the best for future.

For coverage on other Australian startups, innovation, tech trends check this out and our coverage on interviews can be found here

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A VC Perspective: Innovation & Start-ups Landscape in Australia

Vishal Sharma Sunday, April 06, 2008 , , , , 0 comments

Today we showcase a story of a man who is a migrant, an entrepreneur and now a successful VC, helping a lot of Australian business to realize their dreams. Rick Anstey who is based in Gold Coast, Queensland, Australia is running a VC portfolio, under iQFunds umbrella.

Let us explore bit further how Rick is helping others and what he thinks about innovation coming out of Australia. This is what Rick has to say in his interview with me.

• Please tell us about yourself, your background and interests?
Rick Anstey- Started my career in I.T. (data processing at that time) in 1972, with a UK insurance company, doing the normal in house training from operator, programmer and systems analyst.
Got married in 1973 and immigrated to Australia in 1976 – difficult to get in – had to pay our own way and applied 3 times before success. Arrived in Sydney in 1976 with no money one child and my wife. Worked with TNT and then with Comalco before starting my first company in 1983. Naturalised Australian in 1983 and had achieved 4 children by then too !!!

Main focus in technology was user driven software development using the benefits of emerging 4th generation languages. The company was called Tangent Group and in 1994 I was approached by 2 companies to be acquired. The company had given me much freedom to explore joint ventures and associated companies including being a co-founder and silent partner in Strategic Publishing – a group that built a stable of 3 publications around the IT industry – MIS magazine, CFO magazine and Information Age.

In 1994 I sold tangent to Techway – had a 1 year handover and moved the family to Queensland. I commuted from Queensland and had full intentions of developing my role within the Techway group. Reality was somewhat different and when the 12 months was up I left the company.
So August 1994 – sat in Queensland aged 43 and wondering what to do next . I spent the next 4 years with little pressure, building up my knowledge of the early stage technology market and helping entrepreneurs wherever I could and also worked closely with the Local and State Governments to attract International Technology Companies to establish operations Queensland. This involved me in negotiations with global companies such as IBM, Citibank, International Call centre Groups and local partners such as Telstra.

In 1996 I presented to an inaugural meeting of the Queensland Government’s FIG initiative (Financing I.T. Growth). I spoke about venture capital and how to fund an emerging technology company through equity finance rather than debt. This was admittedly very early days in Australia for venture capital and the concepts were unknown to most IT entrepreneurs.

In 1998, my long time friend , Bob Hayward – who was Head of Gartner Research in this area encouraged me to explore Venture Capital as the next career move. We both had discussion with a number of advisory groups and decided to initiate a fund to support the emerging technology industry in Australia. Bob took a sabbatical from Gartner and joined me.

1999 was a year of convergence for me, when a number of projects came together
I was introduced to my current business partner – Dr. Laurie Hammond who had similar aspirations as myself and was passionate about commercialising Australian Innovation that is world class. Also, one of the people I sought advice from was Ross Grant – Founder of prestigious investment bank – Grant Samuel and Associates.
My first initiative in 1999 was to establish Grant Samuel Technology Capital as a partner with Grant Samuel and associates. Secondly, Laurie and I applied for the Federal Governments backing for early stage fund managers through the BITS program.

By April 2000, we were aware that Grant Samuel Technology Capital would not crystallise given the DOT COM crash – but it had given me a fast track apprenticeship in Investment banking and institutional investment. However, in April 2000, the Federal Government announced our success with the application for BITS Funding(initially $9.5 million for us to invest, followed by a further $4.5 mill in 2004).
BITS was an initiative of the Federal Government (Building IT strengths ) which was funded from the Telstra 2 float. Our venture was called inQbator which highlighted the Q from our Queensland Heritage.

• What is the name of your venture firm?
With the passing of time inQbator has become – iQFunds with a management structure called iQ Capital management Pty Ltd

• Please tell us about your venture firm?
iQFunds mainly focuses on the management of the portfolio we have developed through inQbator. We have 15 active companies in the portfolio, 3 of which are now based in the U.S. All of which has a strong international focus for markets and partnerships. The portfolio has attracted well over $70 Million in follow on funding. The portfolio is essentially split into 2 sectors

  • Cleantech and
  • Convergent technologies.
In addition, we have interests in a corporate advisory group – InterFinancial Ventures Pty Ltd and I am an independent Director, on the board of a number of promising companies and organisations.

• Who are the people behind this and how it started?
The partners in iQ Capital management pty Ltd are
  • Rick Anstey
  • Dr. Laurie Hammond
  • And in November off 2007, 3 minority partners joined us
  • Adrian DiMarco – Founder Chairman of Techlogy One Limited – ASX : TNE
  • John Puttick – Founder Chairman of GBST Limited – ASX: GBT
  • David Merson – Founder and ex Chairman of Mincom Limited – Australia’s largest Software House
• How long you haven been working in this environment?
I have been working in Technology and related sectors since 1972 – 36 years. I have been working essentially in the investment side of Technology (VC since 1998).

• What is the main objective/mission behind your venture?
Our objective is to identify and support emerging Australian Innovation and to provide the funding and expertise required to commercialise that innovation and provide a significant return for the stakeholders of which we will be one.
We are a national company with an international focus and mind set and proudly based in Queensland.

• Please tell us how does a VC work? Its one of those professions which seems like a black magic to others and sometimes don’t understand what exactly they do?
There is no one answer to this – personalities, markets and global rends play a major role in defining this. Venture Capital certainly means different things to different people in different markets.
Essentially, Venture Capital should be risk capital that is used to seed and develop emerging entrepreneurial ventures. Once that risk has been minimised, further investment tends to become Private Equity Investment.
The amounts appropriate for a Venture capitalist to invest, range from $100K - $20 Million depending upon what area of the spectrum the firm sits.

• What ways/models VC's get engaged with a business/startup?
Seed funding and early stage expansion capital is hard to provide through a commercially viable business and therefore Government funding has been the most appropriate.
But other forms are:
  • Family and Friends
  • Angel Investors,
  • Early stage investments groups
  • Venture capitalists
  • Government investment programs and R&D funding.
• What sort of due diligence process is followed and what factors attracts a VC to be a part of a business?
VC's are attracted to invest in a company for one reason only – the promise of a large return on their funds. With such high risk and many ventures not succeeding, the return must be significant to balance out and equate to an attractive return across the whole investment fund.
So VC Funds are looking at potential returns of 5-10 times their original investment.

• What business models are common for engaging with a business /company?
Typically, there is an original approach to the firm and that is registered as Deal Flow.
These approaches are qualified over time – which could be weeks, months or even years.
Eventually the VC will decide that they have learnt enough to minimise their risk and are happy to go ahead and inject funds in the company for equity.
Typically, genuine VC companies do not want a majority position as they want the entrepreneur to have every possible incentive to be successful.
However, control, is typically underpinned by a shareholders agreement.

• What is an angel funding, seed money and other common terminologies used in this profession?
  • Angel Funding is typically that investment which comes from wealthy individuals who wish to put a % of their wealth at risk in return for a potentially high reward.
  • The Australian authorities define the term Sophisticated investors as anyone investing over $250K and having written approval from their accountant which support their ability to lose these funds without great exposure.
  • Seed Funding is certainly the early stage funds that prove the product or service. These funds will not guarantee that the company is going to be successful, but they certainly provide whether the business plan works and can be executed successfully.
• What stage would you invest in a company? And what do companies have to show before you're interested?
We invest in a conceptual project which requires the full spectrum of commercialisation through to a viable existing early stage company that wishes to maximise their position through accelerated growth.

• What other services a VC firm provides, for people who are looking for help? What market segment verticals are you targeting?
Information technology, telecommunications, and anything within the convergence of Entertainment, I.T. And Telecommunications. Life Sciences and renewable energy

• How many ventures/companies are using your services?
18 of our own + ++ a number receiving advisory services

• What sort of marketing you are using to spread the word for these portfolio companies?
Very little – marketing is a function of each company directly.

• How are you measuring the success of your portfolio? Are any special mechanisms/tools are in place to monitor the progress?
We monitor our performance regularly for our shareholders. Portfolio valuation is carried out regularly using the Valuation Guidelines set down by the Australian Venture Capital association – AVCAL.

• What is the monetizing/revenue model used in various companies? Is their any new model, which is being tried?
This is certainly a major focus of each company and I cannot go into each model, but happy to discuss offline.

• Which are the main competitors or major players in this segment, when it comes to Australia?
A wide pool of investors from High Net Worth individuals to Private Equity Funds.

• How often do you catch up with others trying similar things and where do you catch up? Do you have dedicated communities in your city?
There are a lot of networking groups that have been running many years but essentially a group of synergistic peers are developed by working with one another.

• What’s your thought on being a VC? How tough it is to be involved in a venture as a VC in Australia?
VERY Tough and not commercially viable if you do help seed and encourage early stage companies. Needs Government support if we are ever to capitalise upon the huge investment Australia makes in R&D.

• What do you think of new ventures and innovation coming out of Australia?
World class – and very competitive if given the chance

• We recently interviewed owners of 35 new/mature tech startups and all of them have said that raising money in general via a VC is very tough in Australia? Why is that so?
Australian investors are typically risk averse – property and Mining have offered greater returns without the risk. Only a small handful of people have bee en successful with investment in early stage investment. These successes are not highlighted and therefore others do not know about the opportunity to be successful.

• Do you think VC’s in Australia are more conservative in their approach and don’t take many risks in technology based business?
ABSOLUTELY !

• How does Australian VC industry compare to the one in the US?
Depends upon timing and markets – currently less aggressive that previously, but that has meant that eyes are now focused outside of the U.S.

• Any new ventures you think are worth keeping an eye on?
YEP – and that’s what we are doing ..

• Do you think we can create a new Google in Australia?
It will be very very hard – and almost impossible ,,....but times are changing.

• Which city in Australia is more vibrant and can be regarded as Silicon Valley of Australia?
Victoria and South east QLD

• What do you think of our TAFE/Universities and their curriculum in terms of promoting and encouraging entrepreneurship and innovation?
Positive but not he total answer – they contribute to achieving our goals.

• What do you think government (federal and state) should do to improve the culture of innovation and software industry?
A long long discussion which is currently being worked up. The new Government has initiated a formal review of Australian Innovation and Dr. Hammond, my business partner is actively involved in this review.

• What government resources have you used to help your business? And have they made an impact?
Government grant funding has been very helpful. We have had great success with Federal and State Government grant funding.
  • Commercial Ready in particular – Federal
  • And TeQstart – QLD Government.
• Have you sought any funding/help from govt or other sources?
yep – see above

• Would you move your portfolio companies to another country, and if so, for what reasons?
Yes - to have access to larger markets and by association, access to larger pools of investment funding. Typically valuation tend to be stronger in larger markets.

• At the 2020 conference, PM Kevin Rudd is meeting with top 1000 people from different background to discuss and collaborate on the issues facing the nation. What issues would you like to raise if you are given a opportunity to attend?
No comment

• How a new venture should approach to a VC?
Be prepared – not many have patience to see you continually until you get your story right
Its all about whether the people can execute, have the tenacity , have the product and proof that there is market demand

• Do you have any advice for people who want to start their venture?
Lots – but see above and best done face to face

• Do you have any business advisor/mentor?
Yes – older Banking/Finance industry experts


Thanks Rick for sharing your thoughts. We look forward to hearing from you in future on the progress of iQFunds. All the best for future.

For coverage on other Australian startups, innovation, tech trends check this out and our coverage on interviews can be found here

Continue Reading >>