Lack of brotherhood harming start-ups

The current model of start-up commercialisation fails entrepreneurs, with the balance of power too heavily weighted in the favour of financiers and advisers, according to the head of a start-up advisory firm.

The comments were made last week by TangibleFuture CEO Dr Richard G. Caro, whose company advises start-ups, large companies and research organisations on how to achieve rapid growth in new markets.

The talk — organised by National ICT Australia — was titled "Entrepreneurship 3.0". Caro spoke about the systemic problems in the current start-up environment, which prevent entrepreneurs from successfully commercialising their product or idea.

One of the key issues is that entrepreneurs don't have a support network or industry body, he said, which stems from the competition for venture capital funds.

"If you're a lawyer or doctor, there's going to be a professional body that you can be a part of where you can go get help and talk to peers and bounce ideas off people," he said.

"In the entrepreneur world historically that hasn't existed. There's very little peer support, it's a dog-eat-dog world. If you give someone help and they get investment, that money could've gone to you."

The lack of support means that entrepreneurs are forced to take advice from financially-motivated professionals, such as advisers and lawyers, who sometimes don't act in their best interests.

While he said that most industry professionals do act in the best interests of the entrepreneur, ultimately their primary concern is to secure the ongoing funding required to stay in business.

"The other area is that because of the size of this ecosystem and all those advisers and helpers that make their career out of helping entrepreneurs, there's a lot out there and some are really good and some are really terrible.

"If I'm a lawyer and my business is helping start-ups, I want to help you, I really do, but when you're gone, there'll be another one, and another, etcetera.

"My bread and butter is making sure I can continue to work with those people and that means I need to be friendly with the source of funds... That's a bit more important than if I'm friendly with you. That's a hidden issue that's problematic."

This dynamic also creates a power imbalance which affects the quality of deals that entrepreneurs can do with the sources of funding, Caro said.

Another problem is that a product or idea won't get picked up unless it fits the very specific requirements of the venture capital firm.

"The venture capital model is about investing in specific types of companies with very clearly explained financial footprints.

"There are lots of companies that are perfectly good and might have large [return on investment], but for reason of size do not fit the profile of what's an investment from the current ecosystem, so they fall through the cracks."

Entrepreneurs don't spread their risk, which means they suffer more if an idea fails.

"Starting a company is a very risky process and some work. The way that investors get around that is they have a fund and invest in a pool of companies and they don't need every one to work, they just need some.

"There's a whole investment model around that and as long as they achieve certain returns, the portfolio does well and is very successful.

"The entrepreneur does not do that, they do one at a time, or maybe two or three at the most."

Stay tuned for Caro's explanation of a new model of entrepreneurship.