Adeo Ressi is the founder of the world’s premier start-up incubator, Founder Institute.
The Institute has spawned over 1,500 ‘graduate companies’, and created over 15,000 jobs across the globe. 87.5% of them are still operating today. They’ve got a combined value of over USD$12 billion.
So Ressi knows what he’s talking about when it comes to startups.
That’s why Australia should listen when he has something to say about our startup scene.
Unfortunately, it’s not good.
‘In Australia you’re getting it wrong, and it will not only hurt your long-term returns but also the prospects of the country. […]With a lot of the Australian deals I’m familiar with, the terms used are unfair to the entrepreneurs and that hurts the trust between them and their investors, creating a more hostile and less productive environment. […]There are a lot of investment accelerators that have essentially unfair models.’
In other words, it’s not a lack of smarts that’s the problem. Or a lack of entrepreneurial spirit. It’s the way they get funded that’s the issue.
What’s with the attitude problem?
You can kind of understand why traditional lenders would treat startups with suspicion. They’re not really into taking risks. For example, to get a loan from a bank, you have to have a proven business model and a strong plan. You have to have a track record of success already. You can’t just rock up to a bank and say, ‘Me and my mates have got this great idea, and here’s how we think it will go. No we don’t have a finished product, but we have a plan and the talent… So can we please have $200,000 to work on it for a bit? By the way, we won’t be able to pay you back for a while…’
But startup incubators aren’t meant to be like that. They’re meant to encourage innovation, and give entrepreneurs breathing room to grow without some of the pressures other businesses face. Unfortunately, some do this better than others.
When Ressi mentions terms being unfair, he’s talking about a few things. First, there’s the set money for equity rates. Many incubators offer a certain amount of money for a certain percentage of the fledgling company’s equity. For some of them, the cash offered is relatively low compared to the equity demanded.
Then, there’s the benchmarks. Some programs are very formally structured, and require participants to provide ‘deliverables’ (tangible results) at certain intervals. If they’re not developing at the required pace, they get kicked out. This doesn’t suit some startups, where they might be more than capable of reaching six month or 12 month goals, but a lot of research and testing is required before development can begin.
What’s the solution?
Ressi believes that entrepreneurs should feel like the pressure they’re under is meaningful. That they’ll get a fair reward for meeting the high standards they’re being put under. He says that unfair terms and intense pressure are unproductive, and destroy trust.
He wants to bring the ‘founder friendly revolution’ to Australia.
This means shifting the value of the deal a little more to the founder’s side. Giving them a little better value for their ideas, through things like valuing the startup company at a fair market price (not a set price). Or actively promoting communication between the company and their investors, to boost mutual confidence.
In other words, making sure they don’t feel like they’re being ripped off.
The ideal program would remain highly selective. And participants would ‘have to run really hard and fast to get there […] if they fail, they die. And that’s not good’. So from the investor’s side, they’re still getting the cream of the startup investment crop. But startup founders feel much better about what they’re doing.
If you’re interested in investing in startups, you can hear more first hand. Mr. Ressi is speaking next Thursday in Sydney.
Eva Mellors,
Contributor, Money Morning
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