Today we showcase the story of a man who has been a successful angel investor and is now as a VC helping a lot of Australian businesses to realize their dreams. Nick McNaughton who is based in Canberra, ACT, Australia is running a VC portfolio, under the Blue Cove Ventures umbrella.Let us explore a 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 have a long track record of helping to build and grow software and web companies. Before 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 a 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 the 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 have been 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 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? It's one of those professions that seems like 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 had 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 listed (IPO) at a valuation higher than when the VC invested (sounds simple doesn’t it!!!!).
• What ways/models VCs get engaged with a business/startup?
My pipeline comes from a range of sources: network referrals, incubators, 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 attract a VC to be a part of a business?
I do a 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, and trial the product. My number one criterion 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 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 okay 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 enhance product development and accelerate revenues (sales and marketing resources). My investment criteria are 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
- The 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
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 about these portfolio companies?
Industry thought leaders, TechCrunch, ReadWriteWeb,
• How are you measuring the success of your portfolio? Are there any special mechanisms/tools in place to monitor the progress?
The only success that matters is the 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 VCs is the Australian Venture Capital and Private Equity Conference - other regional VC events are run by Slattery IT - (dates for 2008 not yet 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 VCs on average is 99% (1% get to ‘yes’). If you listen to VCs you will hear – we lack good quality deals! Whose right?
• Do you think VCs in Australia are more conservative in their approach and don’t take many risks in technology-based business?
Yes
• How does the 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 the 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 the government (federal and state) should do to improve the culture of innovation and the 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 the 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 programs
• 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 the top 1000 people from different backgrounds to discuss and collaborate on the issues facing the nation. What issues would you like to raise if you are given an opportunity to attend?
Lowering CGT!
• How a new venture should approach a VC?
Email me at 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 the future.
For coverage on other Australian startups, innovation, and tech trends check this out our coverage on interviews can be found here
Comments
All the best
Justin