Laura McKenzie is CEO of Scale Investors which launched the first Australian female-focused investor network in July 2013 based on the successful US group, Golden Seeds. To date, 70 Scale Angels have invested almost $2.5 million in five female led businesses, including Paloma Mobile. In 2015 the $20 million Scale Women's Fund launched, co‑investing with Scale Angels. Laura has a background in corporate finance, microfinance and venture capital with PwC, Opportunity International and most recently at Starfish Ventures. She is a member of the organising committee for the Nexus Australian Youth Summit on innovative philanthropy and social entrepreneurship.
Q. Please tell us about Scale Investors
Scale was set up to solve the problem that female entrepreneurs really struggle to receive funding from the venture community. We thought part of the solution would be to increase the number of women as investors. Scale's purpose is to connect entrepreneurs with the investors who not only invest in those businesses but help with the due diligence process and then sit on the boards of those companies. We also surround the entrepreneurs with mentors and the investors' networks, to help those businesses succeed.
Q. Scale Investors look for disruptive technologies, why is that?
The internet and internet-based tools have meant it's much cheaper to start a business these days; something that might have cost four or five million dollars in the past, you can do for a couple hundred thousand dollars now. That really changes the landscape regarding who can invest in businesses that leverage these tools. Also, disruption can happen in all kinds of industries, and so having an engineer on the team is really important, but you also need a business person or an experienced scientist with knowledge of that field to identify the problem that needs to be solved. We have invested in businesses that are disrupting the property market, the legal market, even the water and sanitation market together with one that's around the future of work, and lastly, communications.
Q. How would you describe the level of innovation in Australia?
The landscape has changed in the last few years but I'd like to see more change. It would be interesting if Australia looked to other countries in a similar position to us a few years ago and [since then] have embraced an innovation policy. For example, the UK has seen tremendous growth and if you spend time around Silicon Roundabout now [a technology and business cluster located in central east London] there's talent and opportunity for both investors and entrepreneurs. I would love to see something like that in Australia.
Some policies in Australia such as the research and development tax rebates are really helpful for disruptive technology businesses. That is great to see and we would love to see more.
Q. What are the hurdles to greater innovation in our country?
Large corporates in Australia tend not to invest in home grown innovation; we wait for our entrepreneurs to prove their wares overseas. If we can change the conversation in the boardroom to give Australian talent a fair go, for example giving new companies an opportunity to pitch for work even though they don't have five years of sales history, that makes all the difference. The hardest thing when you have developed a really cool technology is making your first sale. You have to understand the very long sales cycle of Australian corporates and know who the right person to speak to is. That is a challenge all our portfolio companies face.
Q. What can investors bring apart from cash?
A number of our Scale Angels are really hands-on in the businesses they have invested in. Acting as Chair on the board, connecting them to decision makers or potential customers, accompanying them to meetings, for example. Self-selection happens; you tend to want to lead an investment in an area you have knowledge, expertise and connections so you really can add value. One of our entrepreneurs was in Europe recently and we introduced her to four or five large potential customers. Being able to identify the decision maker straight up will rapidly speed up the sales cycle for her, and obviously that is good for investors. If the business hit its revenue targets sooner, the exit opportunity might come sooner for investors.
Q. How would you characterise your investors?
They are an incredible bunch of mainly woman but also a number of 'Scale Males' who do not want to miss out on the deal flow we are seeing. There tends to be five archetypes of Scale Angels: non-executive directors sitting on listed boards, experienced entrepreneurs now working on their business rather than in their business, experienced investors who have joined Scale for the diversity of opinion around the table, senior executives who are partners at professional services firms – consulting firms, legal firms – and then family office members.
Q. Is part of Scale's remit to provide a network for the investors as well?
Yes, absolutely. We hold investor forums where we all sit around the table, the entrepreneur pitches for 15 minutes and then we have half an hour of questions. The questions investors ask are very different, depending on their own journey. Those who have been entrepreneurs ask questions about people, 'Who will be your first employee? How you are going to create a culture?'. Those with a financial background focus on that aspect of the business, and those who have had operational roles will often ask about the sales cycle. We have a patent attorney who always asks questions around IP protection. It is great way to flush out different facets of the business.
It's also a great way to learn about each other. As much as we do due diligence on the companies we invest in, we should do due diligence on our co-investors. For Scale Angels to get to know each other and see the kind of deals each is interested in helps build that community of trust.
Q. What do you think is the biggest impediment for existing organisations trying to be more innovative?
Existing systems, processes and just the volume of work often means that within an organisation, people do not have time to stand back and think about where innovation could happen. And often innovation changes the mix of jobs within an organisation so there's an element of discomfort that your role might be challenged in some way if you bring innovation on board.
Q. How do you source the start-ups?
There are tremendous groups around Australia focused on mentoring women as entrepreneurs – Heads over Heels, Springboard, the League of Extraordinary Women, Business Chicks, Rare Birds – so they're a source of deal flow. There are also a number of incubators and accelerators in the market – Start Mate, Angel Cube and muru-D. But many entrepreneurs are busy, head down executing on things, and haven't become involved in these incubators, accelerators or mentoring groups. They come to us through word of mouth. We run an 'office hours' each month, which is really an open door policy for people who want to find out more about Scale.
Part of the venture funding industry has been smoke and mirrors, very much about who you know. We want to be disrupters in this market, not only by bringing in more female investors but also by bringing in very transparent, collaborative, quick and open decision-making.
Q. What are the common difficulties start-ups encounter?
The two biggest hurdles are recruiting staff and recruiting customers. I spoke earlier about the challenges of longer sales cycles in risk-averse corporate Australia. But it's also very difficult to recruit staff to a start-up with an unproven track record. We are still waiting for legislation to change so that our start-ups can provide equity as compensation for not being able to pay market-based salaries. Hiring your first employee is such an important decision, it can really make or break your business in the first two years.
Q. Which regions apart from Silicon Valley and Silicon Roundabout do you admire for their start-up energy and activity?
There are so many countries storming onto the innovation scene and being disruptive. There are many businesses using developers in Eastern Europe, Skype as an example has come out of Eastern Europe. Israel of course is really the home of the technology start-up and there are billions of dollars of listed equity for companies spun out of Israel. The Israeli culture of resilience and teamwork has really helped create that. Singapore and Hong Kong have adopted ground-breaking policies to attract more entrepreneurs; in New Zealand as well the government has a very hands-on role. There are many more angel investors per capita in New Zealand than there are in Australia.
Q. What has helped create those differences?
Government co-investment. Both the UK and New Zealand have over a hundred million dollars co-invested with angels. That encourages angels to invest because each company gets two dollars for every one dollar that a private angel invests in their business.
Q. Apart from innovation in products, do you see much innovation in services?
About 45 percent of our deal flow is innovation in services rather than products. I would include for example Cloud Peeps which leverages a vertical around community managers. I've seen lots of disruption in the legal sector and a growing number of businesses disrupting the traditional accounting model. It will be very interesting to see how accounting firms respond to that.
Q. If you had one piece of advice for innovators or businesses seeking to be more innovative, what would it be?
Be curious, keep reading, keep learning, keep testing your ideas and don't be afraid to fail.