Podcast Transcript

[00:00:00] Sean: G’day everyone and welcome to the ScaleUps Podcast where we help first time Founders learn the secrets of scaling so they can fulfill the potential of their businesses, make bigger decisions with greater confidence and maximise the value and impact that they can create in the world. I am your host Sean Steele, and I'm joined today again, actually for a second time by Roby Sharon Zipser - CEO of hipages. Welcome back, Roby.

[00:00:44] Roby: Thanks for having me, Sean.

[00:00:45] Sean: Mate, you may not realise, but actually you are the only person so far that has come back to us, you at the first, second time guest on the podcast.

[00:00:52] Roby: Fantastic. I'm becoming a star. Who would have thought?

[00:00:58] Sean: We are pleased to have you back. For those who haven't heard Roby's first episode, can’t remember the episode number off the top of my head, but I'm sure if you look on the website or in our podcast feed, you'll find it pretty easily. It was very early on. And Roby Co-founded hipages Group in 2004, 17-years ago, largest online trading marketplace and SAS provider, connecting tradies and residential and commercial customers not only helping them generate business and leads, but optimising their business through those SAS products that hipages has developed. So, good summary, Roby?

[00:01:29] Roby: Very good summary. You did a really good job. 

[00:01:30] Sean: So, I should be working for hipages or something. 

[00:01:33] Roby: We've got openings.

[00:01:36] Sean: I’m sure you do. I know that you guys are growing fast and like everybody else and probably struggling with the Wolf and talent. 

[00:01:41] Roby: We absolutely are, yes. It's tough out there. 

[00:01:43] Sean: Super-hot marketplace. That's for sure. Yeah, it's been a while, I reckon since it's been an employee sided a marketplace where people are just… I’m hearing, if people with pretty average skillsets asking for some big dollars that they're getting for jobs. And I just think, oh, you're in just this perfect little moment of time, this little bubble. It's not going to last forever. 

[00:02:03] Roby: Yeah, it's an interesting time. Definitely.

[00:02:06] Sean: Well, today folks, we are going to take a bit of a left-hand turn. There was a couple of things that we talked about with Roby in the first episode, one of the things we spent a fair bit of time on was the links between strategy and execution. And so, I'm going to invite Roby back actually for a third time at some point in the future when the time is right for us to really unpack some of the tools that are used by hipages in really getting that alignment between strategy and execution. But Roby and I have decided to take a bit of a left-hand turn and talk about capital raising.

[00:02:36] And why is that? Because, well, for a few reasons, every Founder has got to think about it, every Founder spends a lot of time usually thinking about, should I, shouldn’t I, can I, can’t, why should I, why shouldn’t I, what are my different options, when is the right one for me, what are the pitfalls? And so, we're going to just freestyle a bit of a conversation today around different types of capital rising. Because Roby, from my understanding, you've done the majority of these at different points in your life cycle and you get the buyers I'm coming from your accounting background, so you probably understand them better than some of the others. So, maybe we could just start. I know you and I talked about some of the different types that we talked about, just very lightly, debt, venture debt, equity, preferred equity, pre-seed, venture capital's strategic investments, IPO's. And you know, for those who haven't done any capital raising, let's assume that, a lot of our audiences, 2 to 20 million revenue range. They're first time Founders, many of them have bootstrapped and just been reinvesting organic cashflow before and taken on none of this whatsoever, have no investors, may not even have any debt depending on the style of business to some support working capital. Maybe if you could just help us by trying to give us some light descriptions of those, so we can understand like what those actually are? So, we'll start with debt and venture debt and then equity. 

[00:04:00] Roby: Yeah, absolutely. I'll give you some colour on the look and I can talk from my experiences. Every time I start talking to different people in this space, there's always new and crafty ways of raising money in different forms of structures. But there are really at the end of the day a few forms. I think, I would say we would have done the majority of the different types of capital rises that are available to businesses in the last 17-18 years that we've been in business. When I go back in time, in terms of the structures that are available, like you obviously won’t fund it yourself.

[00:04:39] So, I remember the time, and this is like a bit of storytelling just for the audience to just empathise with this. You know, no one really wants to give you any money in the beginning. You might get some money from friends and family. I do remember, and I know this is recorded. Those days are done.

[00:04:55] I remember applying for four credit cards or five credit cards at the exact same time before all the credit checks would go out. I think it was a 20 or 40,000 credit. I did the max and I went on credit card and we would just sort of like trying to pay the credit cards one off at the time. So that's a form of debt, right? And a lot of the audience would have probably, you know, if they’ve had the ability to buy a property, they would have probably created some wealth in their property with their offset account. And so, you probably, as a small business would have funded your business through that offset account and probably shelf some money in there and not tell the banks that you're doing that, but you know, like that's like everyone …

[00:05:33] Sean: That’s true motivation. 

[00:05:36] Roby: That's kind of the earliest form of debt, but I think the audience not really wanting to hear what the stuff that they've already done, but I just wanted everyone to understand it. Depending on where you're at your lifecycle, we all have had to do those kinds of things. Now, what happens and the funny thing about the capital rises is often you finish your first capital raise and you need to start thinking about your next one because you probably already spent the money in your mind at least.

[00:05:59] So, that's an interesting thing about capital rise. So, I think as a business, as you start to grow, you need to ask yourself some questions like, do you want partners? And if you don't want partners and you're just happy with where you're at, then probably debt is a really good way to go. And you know, you may want partners and you might need to dilute, and it depends why you want to dilute it. And there's a whole range of things that you can go down an equity raising path, and we can talk about that and I'm sure the conversation will get to that. But on the debt side, there's like there's layers of types of debt that you can take on.

[00:06:37] You mentioned venture debt, so I'll explain what we mean by venture debt. And we have had venture debt and then there's also these ideas of convertible notes, which sort of sit between debt and equity, and we can explain that a little bit as well.

[00:06:50] Sean: Yeah, great. And actually, another one of our early guests,  Elyse Dickerson, she did convertible notes. I remember, when she was trying to do her first rise. So, yeah, that'd be great. Maybe we'll start on the debt side and take us through, what are some of the options and how much you think about what might be suitable for you? 

[00:07:12] Roby: So, in terms of debt, obviously you need to be able to service it, you often hear about people being able to get debt without any covenants. In my experience, and I have had vast experience, that's nonsense to get a debt without any covenants. And if anyone starts trying to talk to you about, oh, this company got real money and like they got loans without any covenants.

[00:07:34] So, just for everyone's benefit, a covenant is a certain set of rules or business metrics that you must maintain, an interest serviceable covenant, a minimum cash balance covenant, a revenue covenant, or an EBITDA covenant where your revenue can't go below a certain amounts, and then you breach the covenant, which in a way is almost like a breach of the debt obligations. And you could run into some trouble with the lender and they can call on the loan and that needs to be repaid. And you could be in big trouble if you don't have the cash available to call on the loan. Now, usually in those debt type arrangements that you set up with the provider, you have some sort of like, maybe you can break it once or you have a method to resolve it or a couple of instances, or you might just get a letter to say, you've breached it, it's on file, please don't do it again, kind of thing. So, those are some things that come with debt. And obviously with debt, there's risk. 

[00:08:35] Sean: Do you find that when looking at debt that they’re out of those different kind of covenant types, that there's almost a defaulter or a de-facto one, like, do they usually, is it typically a cash balance model? 

[00:08:49] Roby: It depends on the business. In my experience, usually revenue and EBITDA are, would be the minimum, and revenue EBITDA, interest serviceability, sometimes. I haven't seen that as much lately, but revenue EBITDA, and then a minimum cash balance. Like you can't let your cash balance go below like a like X dollars.

[00:09:10] Like if you've borrowed, if you've got three or 4 million, you can't let your cash in reserves go below a million or something like that. Everyone negotiates that, like it's just a negotiation. There's market standards and it depends on the risk appetite of the lender and competitiveness and all of those things, but you can negotiate those covenants, it just depends on how much in need you are of that capital and… 

[00:09:36] Sean: I guess how much confidence you've got with your ability to turn it into cash or turnaround into revenue generation to earn. 

[00:09:44] Roby: Correct. I mean, at the end of the day, someone that's lending you money really wants to remove the risk and they want to redeploy the capital as fast as possible to someone else, you know, once you've done your service servicing of that debt. So, there's mutual interests in that loan approach, lending approach.

[00:10:01] So yeah, like the things that you be mindful in terms of debt is the covenants and the negotiation on what interest you pay. If you're a small business, you typically will go to one of the main banks to lend you some money. It's hard work. There are business lenders out there that do offer things. Venture debts and interesting one. So, that is actually a relatively new form of debt… 

[00:10:24] Sean: So I kind of asked the question Roby back on the bank debt, is there a typical size that you found that there's not interested in having a discussion until the essentially loan value is of a certain amount, or the revenue of the businesse is of certain value at end of the year.  

[00:10:39] Roby: So the banks lend to all sizes of businesses, whether you're small, medium, or large, and, you know, they'll do big loans to listed companies. And that's common. It's hard to say if there's a minimum per se. But what you would find is that if you're a small business and you're looking at a few hundred thousand dollar loan, maybe up to a million, the bank is typically going to want to security. The main banks definitely do, and the security they'll want is your home, your house, that's typically what happens. There's not a real shortcuts to that. That's what it is. And if you don't own a home, then you've got to look at other forms of capital raising. So, that's the thing.

[00:11:24] Sean: Does that mean that they would usually take on the home loans where like, you'd be transitioning provider? Like, did they just get a hold over that home in some way? Or do you actually end up moving the home loan to that provider as well as the business loan? 

[00:11:36] Roby: You'd probably have to do a combination, bit for the home, bit for the business and you'd have to, or you'd put that as a security. So, the banks have their own methods of working out. I personally like to keep them separate, but, you know, it goes back to that first point I made where; how do you want, do you want to share ownership of your business, then you might want to look at convertible notes and equity type structures. Or if you don't want to put your house as a security, then you're going to have to have more stringent covenants, personal guarantees. You're likely to be asked for personal guarantees regardless, it doesn't make a difference. Everyone's going to want a personal guarantee. So, those are some things that you'll have to consider when you go down the debt route.

[00:12:23] So venture debt is an interesting one. It's been around in the States for a while, definitely in the UK for the last 7-8 years, US maybe 20 years. I think it's relatively new in Australia, like the last 4 years or so it's been in Australia. And then when we looked at venture debt and we did take up some venture debt with some really good providers that they were only three or four providers in Australia, two US ones that set up shop here and two domestic players. But I think there's a lot more of them now, and they've sort of got their cadence and how to operate in Australia. Again, there was some convenance, but the difference between venture debt and normal straight debt is that at the end of the  repayments cycle, the venture debt provider will take usually like 1% equity in your business. You can structure that to actually pay out that equity in a cash value so you can use cash to pay it out. There's definitely mechanisms that you can introduce into venture debt. But the venture debt are generally looking for really big returns, somewhere between 15 and 20% returns. Because when you add up the interest that they charge on the loan and the value that they get from the 1% equity that they're looking at around, you know, that 15 to 20% return, and that's fine, you know, and it was appropriate, sometimes it's not appropriate to raise equity, maybe your valuation isn't where you want it to be, you don't want to be diluted further, so you take on that type of structure. But there's also less security on that, on a venture debt.

[00:13:51] Sean: And if, let's say that you have no other shareholders other than yourself, and you take on a venture debt model and they've got 1%, what's the likely way that they can make that liquid? Do they have to have a milestone where you have to bottom out over a certain period? 

[00:14:08] Roby: You would probably give them the option to get it either they get the option to convert it to cash or equity. And it would depend on where you're at in that point in time when the debt is completely serviced. So, that's how you got to give them some flexibility in that. 

[00:14:24] Sean: Yup. 

[00:14:27] Roby: At least that's how I've seen it being produced.

[00:14:30] Sean: And was venture debt something that you took on earlier or that's something that you did more recently? 

[00:14:35] Roby: We did at about 4years ago. So it was an interesting point in time in our business where our growth had had been sort of plateaued a little bit and the valuations weren’t equal to the previous round. So, we chose to go down a venture debt route, and that worked really well for us because subsequent to that, we brought the business to growth. It subsequently listed and the valuation is exponentially higher than where we were at that point in time. So again, decisions on types of funding depend on where you're at in your business lifecycle. And, as we all know, as people on this podcast will know, it's not always like that. It's a bit like that. It's a little bit of a roller coaster and sometimes you need capital and you need to… you can't be too cheesy on where you get your capital from.

[00:15:24] Sean: Yeah. And then so, do you use convertible notes?

[00:15:29] Roby: Yeah, we have, we've taken up in the history of the business, three convertible notes. 

[00:15:36] Sean: Can you just explain how they work little bit? 

[00:15:39] Roby: Yeah, sure. So, convertible notes have a coupon typically, so you're paying an interest, obviously there's risk associated with money. Convertible notes are a really nice instrument where you may not have alignment with your own shareholders, or you may not be able to get a clear alignment on valuation. And so, a convertible note is like this instrument that is a form of debt or equity and the option to convert to debt or equity at the final repayment or the repayments at the end of it, are at either the discretion of the note holder or like the person that provided you the convertible note or the money, or also on the person that has the note, like who's taking the debt on. And, you know, with convertible notes, you also have a coupon, so you're paying interest on it, and do you know sometimes to preserve cash, you can also structure the convertible note where the interest is accumulative. So, you don't actually have to have an outflow of cash on it. You might need to pay some of the…you just sit on it for a while and that's what's really cool about some convertible notes.

[00:16:52] A lot of the convertible notes that I've seen lately though, seem to be more around, particularly for the businesses that are at the 2 to 20 million range, have more of a debt flavour where they either have at the option of the entity that's given you the note, they get a discount premium to the valuation they have the option to convert to equity at that time so they can get a discount to the share price at that point in time for giving you that note, and all they can select to convert that note and being fully repaid in cash. 

[00:17:22] Sean: So, let's just say you got a 10 million business, you're obviously not listed. How does the valuation get determined when you get to the point over there and looking for a discount to the valuation …

[00:17:39] Roby: Yeah, you can do as an independent value, but sometimes you don't actually have to agree on value. What you do, you do is you agree on a discount to the value at that point in time in the future. So, you may not agree on valuation when you strike the note, but what you can say is, okay, well, here's a convertible note, here is a loan, here is you pay interest on it, there might be some covenants in that convertible note, but at the end of that instrument, what you say is; I will get the option to get equity at a 20% discount or whatever the valuation is at that time. Now, the really nice thing for the note holder is if the value has dropped in that time, you have the option to get your money back in cash at some sort of extra, multiple or premium or something like that. And if you've accumulated the interest, you get the interest also paid back. So, obviously there's risk associated with accumulation and maybe people that take convertible notes, the businesses are in different states, so, the interest rates can be higher than what you'd expect from say a business loan where it's secured against your home. You know, you might be paying 4, 5, 6% on a business loan. Maybe it's a bit higher than that may be closer to 7, 8%. But then on a convertible, it's not uncommon to see, where there's less security, but all the covenants in place, they 10-12%, sometimes a bit higher. So, that's not uncommon. I've seen convertible notes like that as well. 

[00:19:01] Sean: Yeah. Right. Okay. That's super interesting. And is there a typical, would these typically be sort of two-to-three year terms on a convertible note? 

[00:19:09] Roby: Yeah, generally it's two-to-three years. I haven't seen four or five, but usually the notes that we took on were around, two to three years. 

[00:19:18] Sean: Yeah. So fundamentally if you're the person providing the loan. So on the note provider… the person who's providing the cash, from their perspective, I've got an opportunity to convert to equity at a discount, if the business is going well. The business isn't going so well, I've got an opportunity to, I will have been accumulating, I would have rather been getting paid interest alone. Or I'm accumulating interest in can be paid in some kind of a balloon. So, I'm protecting my downside, but I've also got this synchronous upside if the business is really streaming a head, I'll convert it.

[00:19:48] Roby: Correct. I mean, that's really… well, those are the convertible notes that I've seen. There's probably a little flavour of different types of things and different types of ways of doing the discounts and all of that. But that's generally the flavour of a convertible note. And if it has more of a debt flavour to it, like more of a loan type structure, then that's going to be recorded on your balance sheet as a loan.

[00:20:12] Sean: Got it. And it's such an interesting, so as a practical example of this, for our audience, when if you listen back to Elyse Dickerson who built the biotech firm Eosera, she had secured a gigantic older for a massive big box retailer in the states. And all of a sudden, she had no production facility, she had no manufacturing lined up, she all of a sudden had to produce something. I think it was like 40,000 units or 90,000 units or something like that. And she just didn't have the cash. So, she raised a convertible notes with private investors, all of whom converted to equity at the end of that period, because the business was going really well, but she just didn't have the cashflow to support that kind of product. 

[00:20:51] Roby: Yeah. I mean, we had a very similar situation because we took some convertible notes a few years ago. We started to see nice, really good green shoots. We were coming out of a, more of a flat cycle and really started to see growth in the business. And to this day, we're still continuing to see that growth and we made some changes in our business model. And we didn't really want to take on or dilute further on equity. We weren't clear on valuation. So, at that point in time, we did take on convertible notes. I actually went to the network that I've accumulated over the years, structured an instrument and did the raising myself with my CFO, we went out, we presented, the terms are acceptable. The board approved that. The money came in. And then from that event, we were able to successfully IPO hipages on the ASX in November of last year. Sorry, November of 2020. So it's been over a year now.

[00:21:56] Sean: Yeah. I actually feel like it's the first point in time where the years had actually just melded together. I keep saying last year and then thinking actually, hang on a second, that is 2020, like they're just sort of all coagulate at the moment. 

[00:22:07] Roby: I keep doing that. So, it's a bit of a COVID cloud. I think, everything's just blended and melded into one, like you're saying. 

[00:22:14] Sean: That's right. So those, any other debt instruments or sort of debt-oriented instruments that you think we should explore? Or should we shift to equity? 

[00:22:21] Roby: I think, like those are the types of debt structures. They're not overly complex. I mean, you can go to investopedia or whatever, and Google ad, and you can read in more detail of all the different flavours, but typically in Australia, the ones that I've described is what's available to the business community. Then there's the whole other conversation on equity and raising money for equity. 

[00:22:42] Sean: Sorry, one question before we do that, Roby. If I'm a small business owner, this the first time I've ever heard of a convertible note, other than my own research, who would you recommend a business go to? Like where would be their starting point for advice around it? Like, is it a lawyer who specialises in this area or there is financiers that specialise in convertible notes? Who would they typically go after? I mean, you've got a CFO and you've always got a really strong background. 

[00:23:08] Roby: Yeah. So like, in terms of the convertible note, like obviously we did that ourselves. So, we didn't like, there's like VC funds and things like that that do convertible notes, so you probably just have to do a bit of research, ask around in terms of the financial community. I mean, if anyone wants to shoot me an email, see if I can introduce them to one or two people that can help them. I certainly have people that I can connect people to on that. So, I'm happy to, connect with me on LinkedIn and send me a question, I'm pretty responsive there. So, I'll be happy to help out and make some intros in definitely in the Sydney market. I know quite a few people, but it's not too hard to find and set these things up. Just need a little bit of help or advice. There's lots of bankers and things that can do that for you. 

[00:23:55] Sean: Yeah. Okay. That's awesome. Thanks Roby. And so, if we shift to equity and maybe if we think about this almost from a journey perspective, you know when you are in super early stage and you're just struggling for capital and you can see the vision of your business. And you've got a few customers, maybe a little bit of revenue coming in, but you'll open to the fact that actually, I don't know what I don't know. And maybe I see some real value in bringing somebody with some additional expertise in additional to capital and I'm open to offering out some equity to do so. How might they think about that sort of super early stage when we start there? 

[00:24:27] Roby: Yeah. So, that’s is an interesting one because like we've taken all the flavours of different capital raises along the way, but we did actually start with an equity race, so that our first form. Well, besides the credit card story that I opened with and the loans from my personal account, like we really quickly moved into equity raises, and now our preference has been to be just ordinary equity. So, for the audience, just to clarify, there's different types of ways of raising equity and ordinary shares just standard, everyone treated equally, all shareholders shares are the same, but there's this thing called Preferred Equity. And there are different funds from VC and private equity, particularly from the US that will come to Australia with different preferences on the equity. So, the shares are not equal to ordinary equity. So, they get their first money out. They get some extra preferences on their shares, extra multiples, extra multiples, you know, that's the concept of preferred equity and you can get some really nice valuations, but it's hard to work out your true valuation when you start getting ordinary and preferred equity mix. We were fortunate enough that we didn't actually take on preferred preference shares or provide equity through preference shares. We did all, all of our raises through ordinary equity raises.  Yeah. So, when you go and raise equity, who do you raise money from, I think is the next question. And there's different ways to do it. So sort of pre-empting your questions there, Sean. 

[00:25:59] Sean: No, thank you. You are doing the job for me. 

[00:26:02] Roby: Yeah. So like, I mean, what's interesting that wasn't available to us though, and it might be worth looking into, I'm not a massive expert on it, but so worth taking a look at is some of the crowd, crowdfunding, particularly for the smaller stage businesses where I think between 2 and 10 million, the regulations have really changed. It's easier to get crowdfunding nowadays. And there's like platforms that do crowdfunding really well domestically and internationally, and the rules, like I said, have changed. So, some of the issues with wholesale and going to high net wealth and all that sort of all those rules and signatures that made them a little bit easier to make that happen.

[00:26:40] Sean: If there's anyone in the audience listening, and you have raised money through crowdfunding, and you're still in that sort of 2 to 20 million scale journey, we'd love to hear from you. It might be a good opportunity for us to have a conversation, so that's something that we can unpack in the future. Okay. So, we've got crowd funding as one option. 

[00:26:59] Roby: And then the other, so the straight ordinary equity is you effectively, you probably appoint an advisor, usually a banker. There's plenty of them out there, and just do checks and make sure that they’ve checked their credentials that they know what they're talking about. They do quite a lot of the negotiations, the heavy lifting, the intros, they have the right network. There's plenty of really good ones out there. We've worked with a number of very strong, I guess I call them advisors or advisors for banking. So these guys do really good job. They help you with your pitch deck. So, you obviously need a pitch deck. This is the whole other conversation on how to put a pitch deck together, not for today. It's a 10-12 page document. You create an information memorandum and I think you also need to be ready for due diligence, right? So, there's a whole other conversation on due diligence and talk through that, probably maybe if we want to later, but we can explain that. So, you've got to be ready because you've got to stand up and present and tell your story to people that will ask you hard questions. They're not stupid, they're smart people. They've seen pitches and many pitches before, they know what to ask. They know how to get to the fundamentals of your business, you need to have financial literacy, and your advisors will help you with that, and you need to be ready for the questions. 

[00:28:23] Sean: Actually, just as a resource for people in the audience, if you're in the process of thinking about raising and you're looking for some assistance on building a pitch deck Y Combinator. So, if you just Google Y Combinator pitch decks, they have some really excellent resources, good templates. 

[00:28:38] Roby: Absolutely. Yeah. So, the audience is actually really lucky because we've really matured in Australia over the last, I'd say five years on how to do these things. Whereas, you know, when we did our raises 12-14 years ago, there's absolutely nothing out there. It was like, we were just sort of winging it and trying to work it out. But today it's really polished, it's really like people know how to tell the stories, how to get the pitch decks right. I think the thing that people though do underestimate is the due diligence process. So, you know, we've made some investments just recently ourselves, for one of our businesses, we invested in a musical Brixton agent. We also have made an acquisition in New Zealand recently. And I think the thing that Founders are genuinely shocked. And I know that there's been a lot of phone conversations, couch sessions, just explaining the process of the due diligence. And that is a comprehensive process. And you need to be ready for that. You are pretty much going to be asked to provide nearly every document that you've captured over the years. And really, if you are not really that good on your paperwork, your leases, your principal contracts, your contracts with your customers, or employment contracts, your certificate of incorporation, your tax returns, your accounts, management accounts, you name it, IP, trademarks, domain names. Your list is extensive, legal due diligence. Your business model, all of that needs to be loaded into a data room and that will be interrogated. So, the people that invest in businesses, they're really clever. They'll give you maybe 10 questions and a list of things that they need, and you put it all together and you do it like, you know, a week or two, like, it takes a bit of time to put it together and you're probably working till midnight, getting it together. And then they'll send you another equally large list. The next week to add more too. And then a week later, an equally large list with more questions and eventually it does slow down. So, I think that's probably the thing that the audience may not be aware of is how much work is involved in that due diligence process, that's something that was a shock to me the first time, but after the 8th or 10th time, it becomes business as usual.

[00:31:03] Sean: And as the CEO in the last five years, I probably looked at over 200 deals and we went in to deep due diligence on probably 9-10-11, like full processes. And we had six or seven people working on this, all from different angles. Like you guys have got sales and marketing and you guys are building the fight, you’re rebuilding the financial model, and you guys are doing all the tax and legal and data, and it is a huge process and it becomes a big part of your life and the challenge of course when you’re small on one hand, you don't have a lot of information, but two, there's going to be an expectation to find it and to come up with it because people are essentially putting their money at risk, right. So, they want to know where their risks are. 

[00:31:47] Roby: And it's even harder because usually at that scale, you've got a job to do. You've got to show up every day. You probably have a team, you've got to be smiley, you got to motivate, you've got to continue delivering and you know, you're probably doing stuff when you come into work every day. And then when you wrap up your day, you've got to do the due diligence work. So, that's what I think, I think founders in my experience and in my own found a very, very challenging, and it was a lot of work. Yeah.

[00:32:17] Sean: I agree, it's a big and you know, sometimes depending on how well it's done, there's a real risk of taking your eye off the ball in the main game of the business. If you're not resourced for actually doing it. 

[00:32:29] Roby: Absolutely, happens and it's the worst time for it to happen because what the last-last thing that anyone's going to give you money when they do an equity raises. So, tell me how was the last month results and if the numbers aren't where they're supposed to be based on the forecast, the deal could just fall over and all of that at work and go away. Now, that's a bit doomsday and Mr. Negative, right. But like, you've got to be mindful of all of those things. 

[00:32:51] Sean: That is actually such a great point. And yes, if I think about some of the day-to-day processes that I've run, that might've actually gone over the course of say four months. So, you know, the team on the other side, they work super hard. They're getting all this together. The numbers are starting to wobble and every month, whilst we're doing that day-to-day, we're getting updates on the numbers every month, as you said, and actually month to start with tail off, month three, you started to look a bit worse. And so, all of a sudden, we're in the process of assessing our risk on our side, right? And so, we're going, actually, maybe it's not as stable as we thought it was, they like I'm spending all my time doing your due diligence. 

[00:33:23] Roby: Yeah. So, there's three things that could pan out, right? The deal goes ahead because they take the risk, they walk away, which is terrible. And then all that effort is wasted and you might run into a cash issue, which is not good, and the third thing is they come back and renegotiate terms.

[00:33:41] Sean: Yeah. So, price goes down. Yeah. 

[00:33:44] Roby: Yep. And that happens. It's happened. And I'm smiling because like we went through it. I think the comfort, maybe that just so it doesn't sound so doomsy and not a bad option is that you can only do what you can do. You're a human being. You do the best you can. You come in every day, you work through, you put the material in the data room, you stay focused, be happy, be motivated, be energised. Think about my own motivational technique has been, how will I feel in a week's time? How will I feel at the end of the month? How will I feel in a year's time? And probably in years’ time you wouldn't have even thought about what you're experiencing now, you would have gotten through it. So, it's just getting up, getting into the routine, delivering what you said you're going to do and it's, do the best you can. That's all you can do. 

[00:34:36] Sean: And don't forget that, as you're building that documentation, if it's the first time around for the next, if that deal doesn't come off, when you end up with a different investor, you've actually got the, now you've got 85% of what you need and you're just updating 15%, which is awesome. So, it does. The first time around is a bit harder for sure. 

[00:34:50] Roby: Absolutely. It's, you get to recycle that. And if you have a process of just maintaining that, like, you know, just put it down as a task to update, our material contracts, like let's just update it into this specific folder. Actually, like maybe a good little tip is maybe you're a bit away from doing these rises, but maybe you want to go and get what is the typical data structure of a due diligence folder and have your folders, whether you use Google drive or whatever it is, you know, Microsoft products that just start setting up your folders so that when you start filing and doing those contracts, you just pop them in there. It actually, when you do have to get the due diligence folder ready, it's literally just grab and paste it into the data room, really makes it easier. And I think I wish someone had told me that earlier. I mean, I was pretty organised to be fair, being an accountant, but like, if you're don't have that natural skillset, that’s a good way to start thinking about.

[00:35:42] Sean: Well, actually in the audience, if you'd like to send us an email at questionsatscaleupspodcast.com, just send me an email and I'll shoot you an example DD list, because I do a lot of these kinds of work and I support other clients buying other businesses. So, I'm in DD quite regularly. And I can send you an example list of the kind of stuff that we might ask as a typical list to start with. So, it'll just tell you as exactly what Roby said, what's the structure, what's the folders, what am I going to expect over time, this allows you to start building it now even if you don't get you might raise capital for another year. Well, get your skates on. So, conscious how much time we've got left, we'll move on from that. But then, we're talking about kind of equity options. You said, most of the time you raised pretty straight, ordinary equity. And so, this is typically equity holders that you expect to hold that percentage of shares forever. 

[00:36:35] Roby: No, you wouldn't necessarily hold it forever. So, everyone wants to return, I think depending on your life cycle, I think people looking at five years probably is a reasonable time. They want to know what their exit strategy is. So, if the company is going to be held private forever, then you're not going to really want to invest like that. It's like, how do I get my money out? It's like, you're sort of stuck when you go in. And so typically in the I am material and the narrative that the Founder has to follow it and you will get pressure. And typically, when the equity is raised, you will get a director appointed like a shareholder representative director, if not one, maybe two, and they will be an exit plan needed. And the exit plan is typically whether it's going to be a trade style or an IPO. So, a trade sale is when, you actually have another business buy you out. That's typically a trade sale. And then an IPO is obviously list on a relevant exchange, whether it's the ASX, if this is an Australian podcast or the NASDAQ, it just depends. But, you know, in our case, we always had that as a potential option. We decided to go down the listing route and the shareholders that came in have done extremely well. Most of them have done 10 to 20x of their money when they, some of the original, original shareholders that came in at a really low valuation are at 30-40x of their money. So, the definitely it's worthwhile, it's definitely the risk, but there is also a high failure rate with these type of businesses. So, you know, but the people that usually come in are people that are sophisticated investors. You can look up what a sophisticated investor is. You either own a certain amount of income or you have a certain amount of net assets, so that can wear the risk, but yeah so that's generally stuff to think about.

[00:38:28] Sean: And so, we think about that, actually one of the things you mentioned was a strategic investor. How would you separate sort of typical investor from a strategic one?

[00:38:39] Roby: Yeah. So, we also have had a strategic investor come into hipages. So, in our space, it was just hard to get awareness levels to where we wanted them to be. So, at the time news corp, so everyone will know who they are. One of the largest or the largest media company in Australia. And they invested in hipages back in 2015, there was a strategic reason behind it. Obviously, there was some decline in their trade classified advertising, we offered a very differentiated products to the Googles and the Facebooks of the world. And it was the evolution of where classifieds are going, which was a request to quote service. So, they invested heavily in us and we wanted to lift our awareness level up. And so, we worked very closely with news and we moved from low single digit awareness to mid-twenties, and then subsequently supported us through other marketing to get our awareness levels up to closer to the 60% range now. So, you know, 6 out of 10 people in Australia would have heard of the hipages brand. Certainly, if you're a homeowner, you would've come across us. So yeah, that's what a strategic can do for you, right. Make you from an unknown, not really aware of what you do to becoming known. and so news served that well and still to this day, maintain their position and they own 25% of the business and work well with each other. And the connections that we have through news and the way we are as maybe a cousin in that empire has been really good for us. It might not be good for everyone, but for us that worked out really well.

[00:40:21] Sean: Yeah. And typically, I think one of the things that might be common as a characteristics of a strategic investor is that they have an asset that they willing to leverage, that I can see through partners through an investment in your business, they can bring something to the table that's valuable for you, but it's also going to be valuable for them because the value of their investment is going to go up. So everybody wins in that scenario. You get to grow, leveraging their assets. Their investment grows and you and everybody wins in that scenario and I think strategics can be really, yeah, we do that a lot in educations. I mean, it might be trying to shift from B2C model to a B2B model and then take on a strategic partner actually has a significant number of employers that they can immediately introduce your education business to. And all of a sudden, you know, your business can double or triple pretty fast. 

[00:41:02] Roby: Exactly. And then in our case, we announced to the market late last year, we invested in a business called Brixton agent, which is an area that we just didn't have presence in, we as hipages has worked really well with homeowners, but we don't really work in the property management side of things nor commercial property management. So, the maintenance and repairs of rental properties and commercial property. And so, Brixton agent has really nailed the technology. And so, we took a strategic position in that business and took a 25% stake in their company and appointed a director, our CFO is a director on that business. And that helps us get presence in a area we really felt we needed a presence in, and working with the best in the market. So, strategics can be helpful and we have like a joint venture agreement with each other where we are helping each other's businesses out, and our customers out. So, there's definitely a win wins to be made in having a strategic investor. 

[00:41:57] Sean: I think one question that often gets asked, someone's thinking, well I can’t have to set up a partnership with someone or a relationship, maybe I can refer to them and they'll refer to me. That's all fine. And those of course can work. but my question is always, how much longevity has it got? How sustainable is it got when you buy, when you got money invested in each other, people want to work together because actually everyone's going to reason. 

[00:42:21] Roby: That's absolutely my philosophy. If it's too risky and you're not sure, the partnerships are fine, like when people do partnerships all the time and you know, a lot of partnerships don't pan out. In this instance, like when you've done your due diligence, you've looked at the market, there aren't really any other players. This is the best fit. Money on the line, really makes people come to the party and deliver. But then the other thing that I think about as well is that, you know, if you have a partnership, you're helping someone else build up their business, but you don't have any of the upside of some of the IP that you may have given them. And that's something that I think a lot about, and we're kind of really like those strategic investments, or at least have a piece of the prize at the end of the day, that you've helped build.

[00:43:08] Sean: Roby. I know we are almost at time and I want to respect to that clock today, respect your time. Anything else that you think when you take a step back, anything else that you wish somebody had told you about capital raising on your way up that might have made your life a little bit easier, whether it was a resource or somebody to speak to or someone you had to get in your corner or… what would you leave people with? 

[00:43:31] Roby: Probably a couple things. So, I think, just be careful with who you take your money from. I've heard some pretty shocking stories where some of the people that you've brought money in have been like really hard to work with, and just told hold outs to the last minute and try and get benefits for them. And you really need to do your due diligence on who's bringing the money into your business because it's your business at the end of the day. So, that's really, really important. I think that's probably the most strategic thing I could give at the end of this meeting is be careful with. You take your money from and make sure that they are people that you want to work with, they will let you run the business and not get hands on. So, I've heard some really horror stories in that side of things. And I think probably the little tactical thing, maybe an operational thing that, like we were good with our models, but it was too complex. I think for Founders, your business model, your forecasting, I'm talking about your actual forecasting and your projections and your assumptions really should all be in one workbook, one spreadsheet. At the end of the day, that's what people are going to really, really look at. They're going to analyse your assumptions. And if it's too complicated, you can't even transfer the files or you don't really know how those numbers work, you're not going to have a successful capital rise, whether it's debt or equity, no one's going to believe your business. Everyone looks at the numbers at the end of the day. So that's probably more of a tactical thing compared to the first point on being more strategic on who you bring into your business. 

[00:45:04] Sean: Fantastic. And actually, you know, just think about, an interview we did recently with John Katzman, that's just been recently published to build three companies, 200 million rev, or beyond that, one of the things he also said is not withstanding, you got to be careful who you get into bed with and I couldn't agree with. The upside, when sometimes people are a bit scared about that is actually, if you get the right people that can really help you improve your business because they ask you hard questions, because they really challenged your thinking, because they're asking you stuff that no one else is going to ask you and it actually improves the way that you think about your business and the category and who the business is going to be. And so that could also be super valuable if you go right.

[00:45:39] Roby: And that's great. That's strategic. That's fine. It's just, sometimes you don't want the partners that get in and start telling you how to hire and fire people and how to do all the little bits and pieces. You just really want them out of that. What exactly what you said, Sean is what you'd want from a business partner that is investing.

[00:45:57] Sean: Yeah. Beautiful. Well, Roby, thank you so much. People, as Rob has already mentioned, you can find him on LinkedIn. Feel free to shoot him a note and say, thanks if you enjoy what he's had to say, of course, we always value if you leave reviews on the podcast, you can follow us on LinkedIn. You can join us on YouTube and you can watch the full video version, but I hope you enjoyed the show and just remember, the only thing that you can guarantee is going to stop you from scaling up is actually giving up. So, you got to stay in the guy and you got to keep tacking and changing and you got to stay flexible, but you got to stay committed to that vision that you'd go for your business. So good luck everyone, and we'll speak to you again next week. Thanks so much, Roby.

[00:46:33] Roby: Thanks, Sean. 

[00:46:34] Sean: Thank you. Mate.