1. What is angel investing?
Angel investing occurs at the start-up phase of a company usually well before revenues are achieved. The investment is considered to be high risk, and Angels probably have the biggest appetite for risk compared to other sources of capital. Industry statistics indicate that one in every ten businesses that are pitched at this stage are considered investible. Ultimately of the investible companies only approx. 30% will deliver a return to the angel investor. Typically Angels will invest in tech start-ups because if they are successful, they can be globally scaled and provide high returns. An Angel investment is made on the basis the investors will exit within a 5-7 year timeframe. Typically Angel Investors have been successful entrepreneurs themselves or have worked for multinational companies and can assist the company with support and advice.
I am a member of Melbourne Angels, and we invest as a syndicate.
2. How do you know if an idea/concept is a good one or not?
It is always difficult to predict because you never really know until its commercialised and tests the market. That can be several years after the initial investment is made. But usually, the starting point is to understand what problem is the entrepreneur trying to solve and how unique is the solution. Other important factors are the size of the potential market and how easily/quickly the business can be scaled.
3. How important is the people factor when you are considering putting together an investment portfolio? Meaning, how important is it to have the right people developing the idea?
At the stage, Angel Investors invest there is usually very little in the way of assets(either tangible or intangible), and often the company is pre-revenue. So the reality is that you are literally investing in the entrepreneur and his/her ability to make it all happen. It’s the first prerequisite in deciding to invest. Without a capable, determined entrepreneur/founder the chances of the company being successful are minimal.
4. What type of industries typically seek angel investing and why is that?
Typically we invest in the various tech sectors. Right now we see a lot of entrepreneurs pitching to us from BioMedical (a lot of preventative disease solutions), Online Commerce Platforms(e.g., Uber, Airbnb, etc.) and Renewable Energy solutions. Angel Investors have an appetite to invest in these new sectors because the market opportunities and returns are potentially huge and offset the investment risks.
5. How long can it take investors to see a return on the investment and why?
A minimum of five years and more often than not the companies will fail. As mentioned above we are investing at a very early stage, and often the products are still to be developed let alone launched on the market. Angel Investors get their return when the business is either acquired by a strategic investor(e.g., large Multinationals) or in some cases listed on the stock exchange. You need a lot of patience to be an Angel Investor.
6. Why would a business seek angel investing compared to other more traditional financial service providers?
Traditional financial service providers will simply not loan to companies at this early stage. Early stage companies usually have insufficient fixed assets so have little capacity to provide security.
7. What is the future of angel investing?
Wherever there is a vibrant startup ecosystem, there will always be a need for Angel Investors. One of the keys is for a government to provide a stable policy framework that encourages entrepreneurs and investors to take the necessary risks. That can be in the form of tax breaks and/or grants. It hasn’t always been there, but the Federal Government have become more supportive in recent times. Angel investors are becoming more important because other forms of early stage investment such as Venture Capitalists are becoming more and more risk averse.
8. You’ve spent years working between China and Australia, how different are the Chinese to deal with on a professional level?
There are a couple of fundamental differences, but as time goes on and China becomes more and more exposed to the rest of the world, the differences are narrowing. The two things that still distinguish Western and Chinese business habits; (i) in China you normally have to build a relationship first before you can do business and (ii) Chinese will often interpret a written contract as an expression of all that can go wrong and therefore builds distrust between the parties.
9. What’s the best idea/concept that you have seen that has worked?
There are some remarkable solutions being developed at the moment that work on the early detection of insidious diseases and conditions. At Melbourne Angels we have been presented with working solutions to detect the early onset of Osteoporosis, Diabetes and Epileptic fits among them. The various entrepreneurs are working on all the necessary approvals and trials and if successful not only will they become commercial successes but will benefit many many people from avoiding unnecessary suffering.
10. What three words would you use to describe the team at McPhail and Partners?
Reliable, Dependable, Collaborative
Russell Stocker is a valued client at McPhail and Partners, and we would like to thank him for sharing his insights and knowledge with us all. Thank you, Russell.