How angel investors give birth to disrupters

Ben Heap is Founding Partner of H2 Ventures, the manager of the H2 Accelerator programme, which helps to launch early-stage fintech start-ups. Each programme runs for six months, with H2 choosing up to 10 start-ups per round. Typically comprising two to three entrepreneurs per team, H2 looks for a combination of technology expertise, such as a coder or engineer, and financial markets expertise. The aim is to have a marketable product within three to six months. H2 takes a 10% equity share in return for $100,000, and is building a portfolio of 100 or more fintechs.

Ben spoke to Graham Hand at the Sydney fintech hub, Stone & Chalk, on 29 July 2016.

“The point of an accelerator programme is taking raw talent, often with a nascent idea that they think is more advanced than it is, and refining the idea until they have a minimum viable product. Our mission is to help them on this journey.

Entrepreneurs are great at convincing themselves that their idea will change the world. It’s completely different making that into a viable business. We are angel investors, we put a structure around the idea and provide mentoring as they turn the idea into a business. Angel money is often family and friends, while an accelerator is more professional and adds discipline. Angel money is usually $50K to $250K, while seed money is $500K to $2 million, often from an outsider who wants to actually make some money. At the seed stage, the business moves from the two- to four-person founder team who are not being paid, to hiring employees, and paying the founders a bit of money.

Angel money does necessarily require that founders can’t be paid from the money. Everything we do is about giving the founders as much flexibility as possible. If the founder wants to pay themselves, we ask them to carefully consider if it is the best use of the money at the early stage. The mistake an accelerator or angel can make is to spoon-feed the founders, then at the end of the programme, they are in a world of pain because they have to work it out for themselves. We might help with the pros and cons but we let them make the important calls. We want to set them up to pitch their business to seed investors.

It’s not all about the idea. It’s 99% perspiration and 1% inspiration. Our focus is on the individuals and the team and whether they are capable of delivering the idea, or the idea they move to as they start to test it. The majority of teams we back, the idea evolves, or ‘pivots’ as we say. As investors, it’s not only the idea, the key is always execution.

The entrepreneurs need to quickly articulate how they think they will monetise the idea, but they do not have to monetise on day one. For example, they might think they can sell directly to the consumer, but if that does not work, then they can sell to an intermediary who has existing clients. We don’t know the answers at the start.

I have described our business as talent identification, similar to a search firm. We look at a lot of applicants, and we have a structured process of screens and interviews. We expect people to read our website and self-select away if they don’t like what we do. It’s not always young people. In fintech, we find an older cohort than other VCs although it’s mainly 25 to 35-years-old, with some older. We want people who have seen a few things, different roles in different places. We look for the ability to cope and apply a skill.

It’s not dissimilar to fund managers. They are often a bit quirky, with an ability to focus 24/7, and a healthy level of self-confidence. It’s important, since most of their smart friends will say, ‘That’s never going to work’ or ‘Nobody will buy that.’ They need enough confidence to push through that when others will stop. But that’s why the opportunity exists. They also need to take onboard the right advice, and they must sift through it, while still owning the problem.

They must work full-time, and a leave of absence from a job is not good enough. We don’t think the project can work without full commitment, they need to forget Plan B.

We have learned the dynamics of teams. When two to four people come into a start-up, it’s akin to a marriage. It’s a long-term commitment. They depend on each other, and foibles will annoy each other. We have made mistakes in not anticipating these problems. We are always improving our legal documents to help founders to protect themselves. Founder shares allow for a claw back of shares if someone leaves early. Of course, you can have advisers and board members who provide advice.

In financial services, regulation is often the biggest hurdle. Despite ASIC’s ‘sandbox’ approach for startups, the time and complexity of the licencing process does not lend itself to the iteration process of a start-up. ASIC needs flexibility to accept new approaches rather than retro-fitting businesses into existing regulations. By the end of the programme, the start-ups should be over regulatory hurdles.

Australian fintech is new so we cannot identify an excellent business we have missed, although there are some terrific founders we have seen who will become incredible success stories at some stage. We meet most of them given our position in the market. Our accelerator may not be right for them, they may be past that stage.

What if the money runs out but the idea is still there? An accelerator model demands they go out and raise seed money. We expect 75% of the ventures in the programme to be successful enough to raise seed money. We don’t put more money in once a start-up is in the programme.

We will move into the early seed money at some stage. We see an opportunity in future for retail investors to invest in a diversified fintech portfolio that is professionally managed.”

Graham Hand is Editor at Cuffelinks. Ben Heap is Founding Partner of H2 Ventures.