What does it take to turn a small startup into a billion-dollar success?
Join Matt Raad on the latest Digital Investor podcast as he dives deep into angel investing with Brian Cooke, a seasoned entrepreneur and mergers & acquisitions expert.
Brian shares his journey from founding an online business to handling billion-dollar deals and reveals how you can achieve staggering returns like 2,600x with companies like Canva.
Don’t miss out on these insider tips and inspiring stories that could change your financial future!
Click below to watch the video or read the article to understand what is angel investing and if it is for you.
Matt Raad: Hello again, and welcome to the Digital Investor podcast.
Today we’ll look at Angel Investing because we know a lot of our readers have questions about this. Mainly:
- What is angel investing?
- Can you make money out of it?
- How passive is it? Who may it suit?
- Who may it suit? And who may it not suit?
- What are the ins and outs?
Also, if you’re an entrepreneur building a business, what does it mean to attract Angel Investors?
So, I’ve brought on a good friend and colleague of Liz and myself, Brian Cooke, non-executive director of Brisbane Angels.
Over the last decade, Brian has been very active in Brisbane Angels. Brian also has a significant background in high level mergers and acquisitions and Venture Capital (VC).
Like a lot of people in our community, Brian is a startup entrepreneur. Many years ago, he started an online business and took it to a public listing on the Australian Stock Exchange, where he was very successful.
Brian didn’t rest on his laurels, he’s been very successful in the corporate space. He was a senior partner with PWC in mergers and acquisitions, doing billion-dollar deals.
These days, he is a mergers and acquisitions advisor for mid-sized companies via his boutique Venture Capital fund Cooke Capital. And mid-size in Brian’s world means companies around the $20-200 million range.
I know you are very passionate about Angel Investing, Brian, as are all of us. So, I want to say a big thank you for talking to us today.
Brian: Of course, Matt, and thank you for having me. I’m happy to be here and hopefully, I can answer your questions clearly and share a bit of knowledge with your readers.
Matt: It’s really cool to have you here because you have so much experience with Angel Investing, venture capital, and private equity.
What is Angel Investing?
Matt: How would you explain Angel Investing to a complete beginner?
Brian: At the very highest level, we’re all very familiar with being able to hop onto CommSec or nabtrade and trade shares on the Australian stock exchange. But there’s a whole raft of companies across Australia that are private, meaning they’re not listed on the stock exchange. And most of those private companies have to start somewhere.
Angel Investing is essentially the first check into a company when it has been founded or is growing or scaling up and requires capital. And so the two core sources of capital for those types of companies are:
- Angel Investors,
- And early-stage venture capital firms.
As an Angel Investor, we back innovation. We back startup companies who have a passion and a vision to grow. That’s essentially what Angel Investing is.
It’s not dissimilar to buying stocks and shares in a public company except in this case you’re investing in a private company. The assets are not liquid in the sense that it’s a longer-term investment. For example, if I bought shares in Macquarie Bank today and I changed my mind, I could sell them tomorrow. If I bought shares in a private startup company today, I really can’t sell them tomorrow.
That’s the first important differentiation. These earlier companies have higher risk, but they also have higher returns and are relatively illiquid.
Example of Angel Investing
Brian: Here’s a recent example over the last two weeks. Blackbird Ventures, one of Australia’s preeminent venture capital firms recently sold part of their shares in Canva in a private secondary sale.
They sold their shares for $800 million and released that capital back into their investors and employees. That return was 2,600 times the company’s initial investment in Canva.
To put that into perspective, if you had invested $10,000 in Canva from 2013 to 2015, it would have realised a $2.6 million profit for you two weeks ago. These are the types of Angel returns that we’re all looking for.
Unfortunately, not every investment delivers that type of return. But that’s essentially what Angel Investing is about. We’re on the lookout for Ubers, Atlassians, and Canva’s. We’re looking for companies that are starting small and ready to grow.
Uber, Amazon, and Google all started small—Google started in the back shed of a house in the middle of California—but each one of these is now a major company. They all started small, and someone backed those companies at some point. That’s what Angel Investing is about.
How should you invest your funds as an Angel Investor?
Matt: You are a significant Angel Investor and take a portfolio approach. That’s typically how Angel Investing works, isn’t it? We take a portfolio approach. It’s not like one-off deals. Your expertise is in early-stage technology companies.
Can you share with our readers what size portfolio you have?
Brian: At this stage, my portfolio of early-stage investments consists of about 30 companies. One of my partners in Brisbane Angels, Richard Moore, has a portfolio of about 70 or 80.
As I mentioned earlier, there is a high risk. Not all of these companies will succeed, and so we’re hoping for the ones that do. So, we would generally recommend that you build a portfolio of companies to spread the risk.
Instead of thinking you can pick the next candidate, because I don’t think anybody can, it’s far smarter to deploy your investment capital into 10 to 20 companies over a period of time. You’re far more likely to be successful by having diversification rather than concentration. That’s very important.
A lot of people can go too hard, too early trying to pick winners that deploy all their capital across two or three companies. There’s not enough diversification to spread the risk.
Example of diversifying your Angel Investment portfolio
Brian: We would generally say to any Angel Investor, decide the amount of money you’re willing to allocate to this part of your portfolio. We’re not saying you shouldn’t put everything into Angel Investing; you might have property, you might have stocks and shares, you might have superannuation, and you might allocate a certain amount of capital to investing in early-stage companies.
I’ll make a number up. Let’s say you had $100,000 to invest. Then, we would generally say that you need to spread that money across between 10 and 15 companies to broaden out the portfolio risk because if one of those gives you those extraordinary returns, it will cover the losses on the other.
Whereas picking two or three companies, the probability of having success is a little bit lower. We have to leave our egos and our bias that we all have a deep understanding of business at the door. We have experience with technology, and we think we can pick winners, but in all honesty, when you examine it, we really can’t.
So, the best way to ensure success is to try and build out as diversified a group of investments as possible rather than just trying to pick one or two.
Matt: It’s a really smart move because these are high-risk startup businesses, and many startups can fail. As you’re saying, Brian, we can diversify that risk by investing across a wide range of investments, ideally more than 10 to 15.
How much money do I need to become an Angel Investor?
Matt: When it comes to risk, there are specific rules in Australia and America around who Angel Investing might suit. You need to be a sophisticated investor.
Given startups’ higher risk level, can you explain the guidelines for being an Angel Investor?
Brian: Look, anyone can be an Angel Investor, but generally, most Angel groups in Australia only accept money from people who are deemed to be sophisticated investors.
The Corporations Act defines sophisticated (or wholesale) investors as someone who has earned a quarter of a million dollars a year for the last two years or has assets exceeding $2.5 million. This is not designed for people who really can’t afford to lose.
The sophisticated investor criteria are from a government perspective. They are built around wealth rather than expertise and designed around the theory of a government structure. You should only invest in these early-stage, high-risk, illiquid companies if you have the financial resources to do so.
Matt: This is really good advice. Brian and I are not providing financial advice here, but these investments are illiquid. So, if you think you need the money quickly, it’s probably not the right vehicle for you to invest in at this point.
One of the other sides of Angel Investing, though, is the monetary side. You can get extraordinary returns, and we will come back to that in a minute.
The benefits of the Angel Investing community
Matt: John MacTaggert was the original driving force behind Brisbane Angels, and John was always very passionate about helping startups so he started the Brisbane Angels group many years ago. And now, you and Richard have taken the mantle and are building on that passion for everyone.
So, there is another side of Angels that many people don’t realise: the passion side, the feeling of giving back. Can you explain that a bit more?
Why Brian is so passionate about Angel Investing
Brian: Yes, so it’s called Angel Investing. You are investing, and it’s exciting.
Reason 1: Engaging with smart entrepreneurs in Australia
Brian: There are a few key things you get from this type of investing:
- Engagement with some very smart entrepreneurs,
- People who are at the cutting edge of technology,
- People who are doing something novel and different that you wouldn’t normally hear about.
And so, I love engaging with the founders and listening to their ideas.
“There are smart people and innovation in this country, and if we back those people, then Australia will be a stronger country overall.” – Brian Cooke, Brisbane Angels
When I first came to Australia, I deemed myself an economic refugee, having left Ireland in the late eighties purely out of necessity. And I think it’s very important not only for us but also for our kids that we build an economy that’s not purely dependent upon digging stuff out of the ground or farming. That’s smart, it creates high-value jobs, and it creates opportunities for our kids.
So, that’s a broader social impact that Angel Investors can have.
Reason 2: Exposure to people with a lot of business experience
Brian: Also, the people we talk to who have founded these really smart companies have an energy that just keeps you feeling alive. You learn from them, and they’re just full of energy.
They’re like an electric vehicle charging station. You go in feeling a little bit dull, you’re worried about your own business, and you see all this energy. They just light up the room. So that’s the second thing.
Also, most Angels (not all, but most) have more than 20+ years of experience in their own businesses, including corporate. This can add a lot of value to guiding and mentoring the founders, which most of us do. The founders of these startup companies get a lot of value out of it, as do we.
Reason 3: Social interaction with like-minded people
Brian: Finally, in the case of Brisbane Angels, we’re a network of members. We have about 100 members here, and the interaction with our members is important. So, there’s a social aspect to it as well.
We recently had the Brisbane Angels Conference, where about five or six venture capitalists came along and talked about their investment thesis. So, there’s learning, networking, and social interaction. You get to learn a lot, not only from the founders but also from other members.
Angels regularly meet with each other and network
Matt: I am so excited because Matt and Liz Raad got to MC at the Brisbane Angel Conference this year. I must say that the feedback we got from members was that Liz was a better MC than me. A lot of the readers in our community have seen Liz present on stage, so that’s probably true 🙂
There were all these experienced Angels who had done big sellouts and were very experienced in business. And Liz got them doing “hands on heads” and all sorts of other fun activities, so it was a lot of fun.
So, the social side of Angels is very important. But then, what a lot of people don’t realise is the passion side of it. That’s a big thing we noticed when we first joined Angels.
Why Angel Investing is not a passive form of investing
Matt: At eBusiness Institute, we teach people about creating alternative income and assets.
John started Angels all those years ago, and he taught us one really important thing. If you’re thinking about becoming an Angel Investor, it may look like passive investing on the surface, but it’s not.
Yes, it’s fun and enjoyable. But I think the best value you get out of being an Angel Investor comes from participation. And I know that’s something you are passionate about, Brian. When people are thinking about becoming an Angel, you encourage them to help out these entrepreneurs.
Brian: Yes, and like I said, there’s networking, as well as the social networking side of it.
Some of our members are far more experienced than others. We also get new members, and the best way for them to learn about range investing is to participate.
I’m not saying go in big and hard early. But I would encourage you to come along to an Angels meeting. It could be up here in Brisbane, Melbourne Angels, or Southern Angels down in Adelaide. There are a whole raft of angel groups across the country.
So, come along, talk to the other members, and learn from them. The network of existing Angels will train and share their knowledge with newer Angels. Then, you have the opportunity to participate as heavily or as often as you wish.
How Angel Investing can expose you to worldwide investment opportunities
Matt: You have expertise in venture capital and Angel Investing in the startup space. Is it similar worldwide? There are Angel groups in America, such as the Silicon Valley Angels, which is huge. Does it all work in a similar way in America?
Brian: Yes, it does. There are a lot of Angel groups in America, as well as across Asia, Europe, and New Zealand.
One of the great things about Angels is that we share deals hypothetically. For example, we’re currently working with Sydney Angels on a deal that they’re leading, and they’ve syndicated that deal with Brisbane Angels. So, it’s very collaborative and not competitive.
We share deals with other Angel groups. We’ve done deals with American Angel groups in California, called the Tech Coast Angels and with several Angel groups in New Zealand. So, this all gives you even broader international exposure.
As an Angel group, you want to see the best possible deals and then decide whether to invest in them or not. So, for us at Brisbane Angels, even though we’re a group, you’re not investing in Brisbane Angels. You make your own individual decision to invest in a particular company. We then pool all that capital into a Trust structure and invest as one entity.
Matt: So, then we get a position on their share registry.
Brian: Yes, that’s correct.
How seed stage capital is raised for private investing
Matt: When looking at how Angel Investing works, basically, the entrepreneurs approach an Angel group. Do Angel Investors typically come before venture capitalists?
Brian: Generally, yes.
We’ve recently seen the emergence of the seed stage. I know there are a lot of acronyms in this industry, but seed means the initial seed that starts the growth.
There are a few seed-stage venture capitalists in Australia, and we sometimes work with them. Some examples in Australia are Antler, Skelar Ventures, and Folklore Ventures.
We want to keep the ecosystem as broad and cooperative as possible. For example, say a startup company is raising $1 million to fund its venture. You might have someone like Brisbane Angels lead it, and then other investors will come in.
Or, sometimes, it is led by a venture capitalist. They might contribute, say, $0.5 million, and then high net worth investors and Angels will contribute the other $0.5 million.
The 2 types of startup companies that need funding
Matt: At what level should an entrepreneur approach their local Angels group?
Brian: The first thing I’d recommend is going to the local Angel group’s website and learning what they say. Most Angel groups outline what kind of investments they’re looking for. The great thing about Angel groups is that what they’re looking for is very broad and diverse.
So, generally, we’re not going to invest in what I call a PowerPoint presentation. We’re looking for some degree of product proof. We want to see a minimum viable product, that there’s some product in the market, and it’s gaining some traction with potential users. It doesn’t necessarily mean they’re making money yet, but they are in beta testing, trialling the product, etc.
So, we look for some proof points that what the company is building is actually required by customers.
One reason startups generally fail is that not enough customers are willing to pay the price for the product.
It’s quite simple. And in some instances, the customers are so willing to pay the price for the product that the startup is so successful and doesn’t need to raise capital from us or venture capitalists in the first place.
But, even growth companies that may not need the cash initially might reach a stage where they’re very successful here in Australia. They’re looking for growth capital to take it to the next step, which is to scale it or grow it internationally. So, this is the other use case for the types of companies we support.
Are you an entrepreneur looking for startup capital? Here’s how the process works when asking an Angels group for funding…
Matt: Once an entrepreneur has had an approach to an Angels group, they then need to make a pitch. Can you talk us through what that’s like? It’s a little bit like Shark Tank, and that’s what you, Richard, John and Liz are all really involved in.
Brian: Essentially, we have a very open process. Anyone can apply, which will be screened to ensure it’s suitable as an Angel Investment. For example, we don’t invest in property development. We tend to focus more on high-growth technology companies.
If that passes screening, we will generally invite the entrepreneur to a meeting. Our meetings have 50-60 people in the room and 10-15 people dialling in on Zoom.
The entrepreneur will make a 10-minute pitch in the meeting, providing us with:
- An overview of the business.
- What problem they’re trying to solve.
- What their solution does.
- Why are they different.
- Why it will be successful.
- How they intend to grow into a sizable company.
We then allocate time for Q&A, where we interact with the founder and ask questions that may not have been covered in the pitch.
The founder is then asked to leave the room, and we have a 10-minute discussion. At this point, we are not making an investment but ascertaining whether our members are interested in proceeding with the deal.
All deals are checked with thorough Due Diligence
Brian: If the pitch has gone well, generally, there will be a lot of people saying, “I’m interested.” This isn’t a commitment, but just showing a level of interest.
We’ll then have someone with their main expertise in online business to lead the deal. They’ll interact with the founder, and we’ll do the due diligence.
If it all pans out, we’ll open up the deal for investment. At that point, individuals like you and me will say, “I’m willing to invest $X in this company.”
We will pool all the funds together, and then Richard and I at Brisbane Angels will conduct the deal completion process. We’ll do all the boring legals, paperwork, asset checks, etc. And then we’ll complete the deal.
Matt: The entrepreneur gets the funds, and we have a certain percentage of the company.
Brian: Yes, we will either have equity or a safe note (convertible note). Essentially, we’ve made an investment in the company and hope it can turn into a Canva.
Examples of successful local startup fundraising via Angel Investors
Brian: About a year and a half ago, Brisbane Angels were one of the early investors with Clip Champ. Clip Champ is a local Brisbane business acquired by Microsoft about 18-24 months ago. It delivered a 43x return for early investors at Brisbane Angels.
We also have investors in Vaxxas, a local Brisbane company. They are currently building a factory worth $150 million here in Brisbane. Their proposition is that instead of using a needle to deliver vaccines, they can do it through a patch system. It’s really innovative.
We’re an investor in Arkose Labs, which is again based in Brisbane. We haven’t exited that yet, but it’s going really well and is one of the top cybersecurity companies globally.
We’ve invested in businesses like Hatch Tech, a spin-out from the University of Queensland. They manufactured a drug that was sold to a global pharmaceutical company a few years ago.
So, we’ve had a lot of successes, as well as some failures, but that’s all part of the game.
Brisbane Angel Investors have raised over $86 million dollars for entrepreneurs
Brian: People might not be fully aware because we operate without much publicity. But if Brisbane Angels were a venture capital fund, the value of its investments today would be about $86 million. So, we’re not an insignificant group.
We’ve predominantly invested here in Queensland, but not all our investments are in the Queensland region. We make investments in companies across Australia.
We were founded in 2006 by John MacTaggart and are going from strength to strength.
Matt: Yes, a big thanks to someone like John, who started this. His passion and drive have helped it become what it is today. You and Richard can then take it to the next level as John moves on to his retirement.
They are passionate about supporting local startups in their communities
Matt: Angel groups are driven by passionate ex-business owners who are really successful. It’s a way of giving back because, at the end of the day, we’re giving back to these younger entrepreneurs. We’re mentoring them when we do this.
That was one of the exciting things for Liz and me when we joined all those years ago. We realised, “Oh, this isn’t just a passive investment thing. We’re giving back.”
It really is like a community. You, John and Richard are all really well connected here in Brisbane. But I’m sure all our readers will see it in their local cities too. Local Angel groups are very committed to their local community, especially in the startup scene.
Has that been your observation worldwide, Brian?
Brian: Yes, very much so.
You have to understand what you’re investing in, and it’s easier to understand when you can interact directly with the founders. So, we are Brisbane Angels, but we invest primarily across Australia and New Zealand.
They are a not-for-profit organisation and require active participation
Brian: What you said, Matt, about participation is very important. Brisbane Angels is a not-for-profit member group. So, it’s not designed to make massive profits for a venture capital fund or venture partners. We are a member group, and any of the costs or the fees that members pay are done on a break-even basis to cover the cost of operations.
Whereas, if you invest with a venture capital firm, you’ll pay significant investment fees, usually 2% per annum of your committed funds. If the deal is successful, you’d generally pay a 20% carry.
So, from an economic perspective, because you’re more active and more participative, you’re doing some of the work that you could outsource to a venture capital fund.
If you don’t want to be active, you can always invest your $100,000 or $200,000 with one of the venture capital funds, and they’ll do all this for you. But I think it’s a lot more fun and exciting this way. You learn much more by being more active and participative in this process. And that’s as much part of the fun as the investing part.
Matt: Well, that’s certainly been the case for all of us Angels. It doesn’t matter which Angels group you’re in; participation is a big fun part of it. We are actively involved in the due diligence and discussions around it, actively involved working with the local entrepreneurs, and dealing with people. It’s a lot of fun.
How do Angel Investors value startups?
When you’re buying online businesses, such as buying and selling websites, you can see historical revenue. So, how do you value a company that doesn’t have any profit yet?
Matt: Brian, you have a lot of experience with online businesses making money and taking them to a listing on the Australian Stock Exchange (ASX).
Our world of buying and selling websites predominantly deals with already successful businesses. We’ve got a lot of runs on the board doing this, as it’s all based on cash flow, existing profits, etc.
We have many successful business people in our program. I’m sure they’ll be interested in how you value startups. I remember Liz and I being very shocked when we first started with Angels. We used to keep saying to John, “Explain it to us again!”
We’re so used to 3x the profit of a business that we can get a pretty good idea. And doing due diligence on a profitable online business is pretty straightforward compared with Angel Investing. To this day, that, to me, is the most bizarre thing.
So, how do you value these startups? They don’t have profit, and they’re not profitable. When we watch these types of deals on Shark Tank, they say, “We’ll give you $50,000 for 20% of your business.” How exactly are you valuing these businesses that have no profits? They’re startups.
1. How existing businesses are valued
Brian: Well, let’s go back and start with what you are more familiar with. You’re buying an existing business that has revenue and profits, and so you would normally value that business on a multiple of earnings.
If you look at any of your investments in superannuation or direct shares, you have a thing called the “Price Earnings Multiple.” For example, I was looking at the price-earnings multiple today for Commonwealth Bank, and it’s about 20. So, essentially, the price of Commonwealth Bank is 20 times its earnings. It’s a very stable, well-run company that is not likely to fail tomorrow (hopefully).
And so if you were to say, I’m going to buy into a bank, you would compare the price, which is the multiple you’d buy relative to, let’s say, Commbank.
2. How startup businesses are valued when they have no existing profit
Brian: So, you rightly point out that a lot of these early-stage companies do not have that. You can’t take what I’d call the “traditional merger acquisition” approach that you and I would be more familiar with.
But here’s the important thing: you are trying to value potential. So, it’s more opaque. It’s not as clear, but there are some benchmarks.
By being part of an Android group, trying to do this on your own is not impossible. But we have benchmarks. We see hundreds of companies a year. As an example, Brisbane Angels invested in 30 companies last year.
When we see that many, we know where those companies are, what stage they are in, and what industry they’re in. We see all the comparable valuations.
So, after a while, it’s quite easy to say, “Okay, this company doesn’t even have a product built yet. It’s got no revenue. They haven’t trialled it with any customers yet.” Yes, it could be quite big, and they value their company at $20 million, but we would probably say goodbye.
But if that same company came back and said, “We’ve got all the same characteristics. We’ve got a lot of potential and a great team of founders, and the valuation was $2-3 million, etc.” We’d probably say the potential of that group of founders to grow the company to where they want to go is more worthwhile.
So, there’s some benchmarking involved. It’s a bit of a dark science, I must admit, but that’s what we do.
Leveraging the experience of other Angel Investors
Brian: That’s the benefit of being a part of an Angel group. There are Angel Investors who might have been involved for 10-plus years and have seen thousands of companies and comparable valuations. So, we keep that data and use it to try to be fair and reasonable.
As you say, Matt, it is hard and a bit of a dark art. It’s completely different to the valuation that you might apply to what I call a normal acquisition of a steady-state business.
But I like to think of these not as investments but almost as options. They’re a note of the money option on the potential of that business.
Matt: That’s probably a really accurate way of looking at it, actually.
They share their extensive experiences with the founders
Matt: One of the things that I’ve observed and talked about in Angel Investing circles is, at the end of the day, we’re investing in the entrepreneur. Do we trust them, and do they have runs on the board? What are they like? What are they going to do with the money? Are they going to stick this out?
Would that be something you would agree with as well, Brian?
Brian: Look, I’ve never seen any investment go through where we were not comfortable with the founder. That doesn’t necessarily guarantee success, but we’re backing a founder or a founding team to deliver on what they promise. Sometimes that works out and sometimes it doesn’t.
It’s just like your own business. When you reach a stage where you’ve grown and are bringing in executives to help you run the company, it’s a major decision of, “Can I give up some control to this individual? I’ll pay them a lot of money to help me run the company.” So, you’re backing individuals.
And so, again, that’s where experience comes in. And that’s generally why a lot of our members have. They’re not 22 and fresh out of business school. They’re probably 40 plus, with 20 years of experience behind them. They’ve either had corporate experience or startup experience.
Many of our members have created their own startups and exited them, so they have innate knowledge of what to look for. They’re aware of the danger signs and pass that knowledge on to the founders.
Ultimately, we want to be aligned with the founders. We want to build a great company with the founders so that both the founders and investors succeed at that early stage.
Is Angel Investing right for you?
Matt: Thank you so much, Brian, for your introduction into what Angel Investing is and what to expect if you’re an entrepreneur. This has been awesome.
For our readers, if you are interested in Angel Investing, either as an Angel Investor or as an entrepreneur, then reach out to your local Angel Investing group and have a chat with them.
Brian, I want to say a big thank you again for coming along and sharing your expertise today.
Brian: Thanks very much for the invitation. If anyone is interested, feel free to reach out either to Matt or myself. We’re always happy to explain things in a bit more detail. But thanks for inviting me along. I hope your readers got something out of it.
Matt: Awesome. Thanks, Brian.
