Show host Gene Tunny chats with James Kwan, in-house counsel at VentureCrowd, about venture capital. VentureCrowd describes itself as “Australia’s leading equity crowdfunding investment platform, leveraging the power of crowdfunding for investments that back a better future.” Gene and James discuss how VentureCrowd is bringing venture capital investment opportunities to a wider audience through equity crowdfunding. Tune in to learn about the significance of venture capital in financing and supporting innovative ideas and businesses, particularly in the early stages when traditional sources of capital may be less accessible. Of course, listeners are reminded to do their own research and seek professional advice before making any investment decisions.
Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored.
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What’s covered in EP197
- James’ thoughts on venture capital and what he does at VentureCrowd. (1:31)
- Initial thoughts on government policy towards VC (6:26)
- The valley of death for startups (12:05)
- What’s the range of funding for startups? (13:07)
- Challenges in accessing the private capital markets. (17:29)
- Crowdsourcing VC investment – example of success: Be Fit Food (19:50)
- What is VentureCrowd’s pitch to investors? (21:41)
- ESG investments and societal values. (24:13)
- What are the different ways people can invest through VentureCrowd? Is it based on specific startups? (25:54)
- Tricky legal issues in VC. (27:01)
- What’s the impact of blockchain on venture capital? (32:04)
- Government assistance for entrepreneurs e.g. Breakthrough Victoria Fund (37:51)
Links relevant to the conversation
Venture Crowd website: https://www.venturecrowd.com.au/s/
Transcript:
Democratizing VC Investment Opportunities w/ James Kwan, VentureCrowd – EP197
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. The transcript was then checked over by a human, Tim Hughes from Adept Economics, to pick out any clangers that otters may have missed. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:07
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.
Hello, thanks for tuning in to the show. In this episode, I chat about venture capital with James Kwan. James is in-house counsel at VentureCrowd. VentureCrowd describes itself as Australia’s leading equity crowdfunding investment platform, leveraging the power of crowdfunding for investments that back a better future. In this episode, you’ll learn about venture capital and how VentureCrowd is trying to bring venture capital investment opportunities to as many people as possible. Nothing in this episode should be construed as financial or investment advice. Wherever you’re choosing to invest, do your own research and seek advice from a professional financial advisor if required. Okay, let’s get into the episode. I hope you enjoy my conversation with James Kwan from VentureCrowd.
James Kwan, welcome to the programme.
James Kwan 01:31
Great to be here Gene, longtime listener, first time guess, so
Gene Tunny 01:35
yeah, very good. Well, it’s I should have had you on earlier. I’ve recently discovered you, you’re the in house counsel at VentureCrowd, and you’re involved in venture capital and venture capitals has been an interest of mine for a while or as a as an observer of it, and is keen to get your thoughts on venture capital and what you’re doing at VentureCrowd. So if you’re happy to chat about that, that’d be great.
James Kwan 02:05
I’d love the opportunity. Look, can I just give a disclaimer, Gene? So yes, and I’ve loved you know, I’ve wanted to do this for a while so pilfered this from an American lawyer I listened to. Now what he says is, I’m VentureCrowd’s lawyer, obviously, I’m kind of swapping in a couple of different words, but I’m VentureCrowds’ lawyer, I’m not your lawyer. So anything I do say here, please don’t take it as legal advice. If you do need such advice, please solicit your own lawyer. So with that out of the way, I’d love to actually talk about venture capital.
Gene Tunny 02:34
That’s very good. Is that Jordan Harbinger? He says that on some of his podcast episodes, you know, the did you hear from Jordan Harbinger or from
James Kwan 02:43
He’s a bit of a new name. I think I’ve heard it from a couple of American lawyers speaking in the blockchain space. And we can talk about that as well, because that kind of feeds into the VentureCrowd vision, but it might just be an Americanism right?
Gene Tunny 02:57
No, it’s good advice, though. I mean, yep. I’m not your lawyer. So yeah, exactly. Get your own independent advice, professional advice. So and this is all for general information only. There’s no investment or financial advice in or legal advice in this episode.
James Kwan 03:12
Not even life advice, I think.
Gene Tunny 03:14
Okay. So James, to kick off with, could I just make sure I understand what we’re talking about with venture capital, we’re talking about financing for early stage businesses, typically startups they’re not they’ve got an idea. They might have a few employees, they’re looking to get some funding so they can can grow. What’s, how do you think about venture capital?
James Kwan 03:37
Yeah, look, the best way to probably explain it is that crazy uncle you’ve got in the garage, right? Who’s forever tinkering away on and, you know, a harebrained idea, they’re the people which you attract into the venture capital space, it is the idea, are the ideas which are crazy slash revolutionary, but really stand a chance at completely reforming, you know, how we think about doing life, because of the speculative nature of the ideas and the relative lack of business history behind a lot of, you know, these ventures, it’s very difficult for them to get funding from your traditional sources of capital, right? AKA, the bank. So what that leaves, for VC entrepreneurs really is four different options. You can go to your family and friends for a handout. Secondly, you could go to a benefactor with deep pockets, so high net wealth individual or their associated family office and the family office is just their army advisors to, you know, facilitate investments into the venture capital space. And lastly, I would historically have stopped at venture capital funds, so professional funds, who are looking to make an investment in a early stage venture on the prospect of a, you know, just hitting it out of the park in terms of you know, its financial performance five years down the track. VC funds do that on the understanding that, let’s say, the VC fund makes 10 investments, five of them go under, three of them break even and two of them really hit it out of the park. And I said, there are actually four options for VC entrepreneurs to go to for capital. And the fourth entrant into that are the government backed funds right? Now, the one people think about, I think, mostly in this space, just because it’s been so successful, is probably Temasek. Over in Singapore. So Temasek is Singapore’s sovereign wealth fund and they also have a ventures arm. But a little closer to home, there is an organisation a small organisation called Breakthrough Victoria with, I think, circa 2 billion funds under management. And they’re also looking to attract entrepreneurs in the VC space to the great state of Victoria. This probably because I know this is an economics podcast on that fourth source of venture capital, capital, probably a discussion to be had around whether or not that’s crowding out private investment, right. And to what extent you want the government maybe picking winners, but I leave it over to you as the host.
Gene Tunny 06:26
Yeah, exactly. Well, yeah. I mean, I mean, I’m not a great fan of government picking winners. And we might have to chat a bit later about how you think it’s crowding out. I mean, yeah, to the extent that the government gets involved in the deals, or does the financing rather than the private sector, then yeah, sure. I mean, that’s crowding out, I guess they would argue that they’re meeting, there’s a market failure, there’s not enough venture capital funding in Australia. And yeah, there wouldn’t be anyone else who would, who would fund it. Because I know, years ago, it was very difficult for startups in Australia, or people doing something innovative. So someone that Nick Gruen, and I both know, and I know you had a chat with Nick, recently, Anthony Goldbloom, who founded Kaggle years ago, he was at Treasury when I was there. And then he went to the Reserve Bank and he developed this Kaggle, the data science competition website, but he had to go over to the States to get the necessary financing. And you know, he ended up doing really well and selling to Google. So I think there’s been that view, historically, that we just haven’t had the the venture capital here in Australia. And if you want to get venture capital you for something that really innovative, really breakthrough, you need to go to the States to San Francisco to Silicon Valley to get it. What’s your take on that? James, do you think we’ve actually got an emerging private VC sector here?
James Kwan 07:51
I mean, it’s difficult to tell over the last decade, right, just because, I mean, on one interpretation over the last decade, there’s just been so much easy money, which is poured into, you know, people’s pockets, and it’s needed a home investment wise, right. So whether or not we have a working innovation framework in this country is probably something the jury’s still out. Right? There is, I think, good criticism, I think, and it’s, you know, was articulated by Kim Carr, who was the ex Minister for Innovation. And now, the, I think, believe the Chancellor of Victoria University, who says, in a nutshell, the innovation framework within Australia is just fragmented, right? It’s not that it’s nonexistent. But when you, you know, have to go to one arm of government to talk r&d tax incentive than another one to get something known as the early stage venture capital Limited Partnership, the tax incentives associated with that, that’s a particular structure, you can make VC investments through in order to obtain some sort of, you know, tax incentive. And then also litany of incentives. Like I said, you know, at the state level, think, Breakthrough Victoria, it’s very, very difficult for an entrepreneur who simply wants to build a business to tap into the government assistance in an aggregate way, right. So there is, you know, putting to one side, whether or not the existing architecture for innovation in this country is working, I think you could probably say, with a fair degree of certainty that it would substantially benefit from a degree of consolidation.
Gene Tunny 09:38
Right. Okay. Okay. So back to the, the startup. So you’re talking about what your uncle in the backyard garage or in the backyard shed, you know, as an example, I mean, are there any data or do you have a sense of who’s founding these startups? I know that, like the image of startup founders is that they’re all sort of just out Uni, they’re all sort of in their 20s, and if you don’t make it by 30, you’re a failure. But the reality is different. Is it? I mean, what what are you seeing in the startup space? Do you do have any observations on that, James?
James Kwan 10:13
Yeah. And look, I posed that early illustration of, you know, crazy uncle in the garage merely as an illustration. But really what I wanted to capture, and that was, the ideas which live and inhabit the VC space are just far fetched, right? They, you know, stand a minute chance to completely change the world and along the way to make an outsized financial return. But it is interesting that you touched on this. And I suppose to answer your question directly, I don’t actually have any data. But there is very much this dynamic, arguably perpetuated by Silicon Valley, which worships at the fountain of youth, right. So in order to be a entrepreneur in the VC space, you need to be somewhere between the ages of 18 to 35, you need to wear a black turtleneck. And I think, certainly from the VentureCrowd, side, we really want to expand people’s conception as to where great ideas can come from, because as we see it, VentureCrowd’s mission is simply to fund great ideas, and great ideas can come from anywhere.
Gene Tunny 11:23
Okay. So there are angel investors which are wealthy individuals who might give small amounts, I don’t know, whatever they give nowadays, bu you need a few angel investors, typically, to be able to get the funds, you need to scale up. And so they’re there. And then there are also the venture capital firms, so established ones, they might give you a bit more a larger amounts of funding. What are the different series of funding? Are you across that James, what they talk about?
James Kwan 11:55
Yeah, taking a step back from that, okay, I think some of the policy work, which has been done in this space to inform our innovation framework has identified something called the Valley of Death. And that’s simply a poetic expression policymakers have attached to that very early or infant stage in a company’s life, businesses life, which are very, very difficult to attract capital for the reasons we’ve just gone over, right? They don’t have a track record. And the idea is just far-fetched, it hasn’t been proven. So going to your question about you know, what do Series A, B, C, what does precede mean? These are essentially an effort by the venture capital industry to categorise that very infant stage in a company’s life. And they do that in order to introduce or inject funding in at defined milestones. So company would start a precede, there may be a couple of different stages before that before advancing to Series A, then to B, then to C. And then each stage at each progression, that the checks get bigger. And the prospect of a return gets hopefully more certain.
Gene Tunny 13:07
Right, gotcha. Okay. So so A is the first is that right?
James Kwan 13:12
Yes. So I think they call it following the alphabet in some circles. You would start off at A, well you would start off at precede nowadays and then you would go to A then to B, and then to C,
Gene Tunny 13:24
and is there any accepted understanding of what scale of funding is involved? I mean, so for precede, are we talking in the order of 100k? Or a couple 100k? Or under a million? Or what’s, is there an accepted range of funding term?
James Kwan 13:38
Yeah, look, that’s actually a really good question. It’s one I usually one I kind of leave up to our capital managers who might actually kind of slice that up. But really, they are kind of stages to know, you know, at what level or stage an early stage startup is at. And you know, that’s a way to, again, to kind of size the amount of funding investors would like to put into that company.
Gene Tunny 14:02
Yeah, I might look it up and see if there are any, any guides to that. Just interested. But I mean, one thing I’ve noticed is that, like, it’s so risky, isn’t it? Because one of the reasons banks don’t want to invest is because there’s, there’s not a lot of collateral there. I mean, banks want to lend against, you know, they want to lend you money to buy assets. So they’ve got something they can actually repossess, or foreclose on if, if you can’t meet the repayments. So yeah, startups are a really risky proposition, because you might end up with with hardly anything at the end if if everything goes wrong, if it …
James Kwan 14:39
absolutely. And yet we have this problem with lagging productivity, right. So you kind of you know, take that as a, you know, necessary ingredient to nurturing and expanding Australia’s economy into the future. These are the ideas which need to be funded in order to give that objective a real shot.
Gene Tunny 14:59
Right, Yeah, yeah, exactly, exactly. So it’s across, you know, it’s IT. It’s technology. There’s biotech. There’s I know that there’s a lot of discussion about medtech, biotech, particularly up here in Brisbane where I am medtech is quite popular, we’ve got the Olympics coming up. So everyone’s, sportstech too, I mean, there’s fintech, all sorts of things.
Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 15:31
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Gene Tunny 16:00
Now back to the show.
Could I ask you about Venture Crowd? Where do you fit in this constellation of venture capital, financiers or funders or however you describe it?
James Kwan 16:15
Good question. So go back to what I was saying, what I said a little bit earlier about VentureCrowd’s mission, because it has been around since I think 2013, has always consistently been to fund great ideas. And sorry, we’ll take the detour path to you know, the response to your question about where VentureCrowd kind of sits in the space. What we have seen as the two main hurdles to fund great ideas would be a lack of diversity of thought and imagination from the traditional sources of capital entrepreneurs would normally go to right. So if you can’t persuade a family office or a VC fund to fund you, I mean, you’re pretty much out of pocket in terms of, you know, getting someone to, you know, to back you. My boss loves giving the example of Airbnb, right, who faced rejection letter after rejection letter after rejection letter in Silicon Valley. One of those rejection letters, I think said, and I’m paraphrasing here, we just don’t think travel is a sexy idea. And yet, and yet, we know Airbnb is an eminently profitable commercial idea, because you see it everywhere, right? So entrepreneurs have had to contend with, you know, the biases in the people who they would traditionally go to for funding. On the investor side, investors have had to contend with challenges in accessing private capital markets. That’s happening in a context of companies, good companies staying private for longer, are not even contemplating listing at all. So what VentureCrowd want to do in this space is to really democratise access to founders, access to early stage startups for normal investors. And on the founder side, expand the investor base. So they actually have people with the right alignment of values, to really buy into the founders vision and to make it a reality. So where VentureCrowd sits, you know, in the constellation of VC funds, as you’ve put it is really, that idea of democratising access to private capital markets, both for founders and investors. It doesn’t have a particular mandate, although we have a number of products which align along those segments, which you just mentioned. So there’s a VentureCrowd Health Tech fund. But what we’ve seen is that investors, particularly in an area as speculative as venture capital, want to be able to invest not just in something which will make an outsize financial return, but also align with their values. And we’re actually seeing this in the suppose more conservative end of investments, right with the rise of ESG ETFs. We think the way to do this is by giving communities out there the tools to invest in a broader range of investment opportunities, which hopefully, engages that flywheel dynamic of more investment opportunities available for investors incentivizes more investors to come into this space, which incentivizes more entrepreneurs to come to VentureCrowd to seek capital raising activities through us. So that’s basically it in a nutshell. There’s a couple of nuts and bolts kind of sitting under that. I might just leave it at that.
Gene Tunny 19:43
Yeah, we’ll certainly delve into that. What are some of the successes so far James? Are you able to take us through any of those. I saw that you’ve got a there’s a meal prep business is there health.
James Kwan 19:54
Yeah Be Fit Foods is our one which we’re currently conducting a crowd source funding campaign for. So crowd source funding if you think Kickstarter, but for shares and equities, you’re basically right on the mark. So they’re doing really, really well over an established, you know, relatively new space for an established business. And the great thing about them seeking funding through the CSF, a crowdsource funding regime, is that really opens up the doors again to you know, the Mum and Dad investors I alluded to earlier.
Gene Tunny 20:27
So, yes, yeah, sorry, James, I’m just interested in that, because you’re talking about Mum and Dad investors. So normally, these type of opportunities would be for the wealthier individuals who could be angels or sophisticated investors, where you have to meet certain income or net wealth requirements. With Mum and Dad, are you talking about just ordinary people or people with which don’t, who don’t meet the normal, those requirements for sophisticated being a sophisticated investor or an accredited investor? Yeah,
James Kwan 20:58
Absolutely, I mean, there’s probably a kind of parallel conversation to this, right. But when you look at financial services regulation, you have that split between wholesale investors, and that includes sophisticated investors, investors with experience, investors with a certain amount of annual income, on the one hand, and everyone else who gets put in the retail basket. Now that’s fine from a regulatory perspective, if the objective is to have additional protections, which retail investors may avail themselves of, but increasingly what we’ve seen is the categorization of a wholesale investor actually allows you to access a broader range of investments. So go back to what I was saying about companies staying private for longer, and you know what that means in terms of, again, normal people being able to build wealth into the future. That’s really a big part of what’s motivating VentureCrowd to democratise access to these markets. Right. Because why should they be the purview of the already rich?
Gene Tunny 22:05
Yeah, look, I think I generally agree with that, that viewpoint and that philosophy, I mean, the the issue is, of course, that it is it is a risky, sector isn’t it and and I mean, potentially, there are much higher returns, but you don’t get that without taking on a lot of risk. So how do you explain it to investors? What’s your, what’s your promise? Or what’s your, yeah what’s your pitch to investors?
James Kwan 22:31
So the first thing probably to say is, and again, you know, not legal advice, not financial advice. But venture capital, probably, you know, again, because of its, you know, speculative nature, will probably only ever occupy a very, very small part of, you know, someone’s portfolio. But it’s interesting, you mentioned the riskiness of, you know, this area, and, you know, that is a deserved reputation. But when we look at, you know, the volatility in asset classes, which we’ve traditionally treated as less risky, and I’m thinking US Treasuries, right. I mean, as an economist, you’d probably be aware about the volatility that asset class has gone through over the last 24 months. So it’s interesting when we talk about, you know, these asset classes as having a permanent risk profile, and maybe that needs to be revisited. But parking that venture capital investments will, you know, tend to occupy a fairly small portion of an investor’s portfolio. It probably also engages that part of the investor, which, again, what I said earlier, wants to invest not just because of the financial value inherent within that company, but also the values which that company represents.
Gene Tunny 23:47
Yeah, do you find that, that is a, you know, people are really looking for that, that is something that, you know, that will affect materially affect people’s investment decisions.
James Kwan 23:58
I don’t think people can deny the fact that people bring their personal values to investments. I don’t think there’s any other way to describe the, you know, explosive growth in ESG funds over the last 12 to 24 months. I think as a society, we’ve just been, we’re getting less prepared to accept the cost to society, which traditionally had been externalised and separated out from the company’s financial performance.
Gene Tunny 24:25
Yeah, fair enough.
James Kwan 24:28
Yeah. I wouldn’t read into that, though. So the qualification there, Gene would be that I am not an absolute supporter of ESG. I think there are a number of important questions which need to be asked in terms of how you reconcile the values which ESG is intended to stand for on an internal basis. So how do you reconcile the E standing for environment with the S which is for social with the G right when those things come into conflict? And I certainly do think those values aren’t always in alignment. Certainly that broader proposition of people investing, because they see something which, you know, they see a value as in a social or an ethical value they want to advance, in addition to the financial value they hope to realise in the future, I don’t think anyone can really deny that.
Gene Tunny 25:18
Right. So how does this work at VentureCrowd? Do you have a specific investment vehicle or a specific fund that is making ESG investments? Is that what your, is that the case?
James Kwan 25:30
We don’t, and you’d have to ask the people developing products as to why we don’t. But what we do have, and again, getting going back to what I was saying about ESG, having a couple of internal inconsistencies, it’s perfectly fine to invest on the basis of your values, but it probably needs to be a little more specific than something as amorphous as ESG.
Gene Tunny 25:54
Yeah, good point. Yeah. Well, what are the different ways people can invest through VentureCrowd James, just interested in that you have specific funds? Or is it based on specific startups? There’d be a startup, and you, you were mentioning before you went and crowdsourced for Be Fit, was it? Is that right?
James Kwan 26:12
Yeah Be Fit Foods, so probably the best way to think about and I think this kind of applies broadly, is you can either invest into a single asset, or you can invest into a portfolio, right? A number of our investments right now would fall into the former basket. So investments directed into single company. But we do have and the example which I gave earlier being the VentureCrowd Health Tech fund, that would be one which grants people exposure to you know, a number of companies playing in a particular sub sector of the economy, namely Health Tech.
Gene Tunny 26:44
Yeah. Yeah, gotcha. Okay. Okay. Very good. And James, you’re a lawyer, aren’t you? You’re the in-house counsel.
James Kwan 26:53
For my sins, they never take me out of the dungeon.
Gene Tunny 26:55
Right. Yeah. So, I mean, what sort of, are there tricky legal issues involved in VC? I mean, what what are the, can you give a flavour of the types of issues that people in your sector or, you know, in venture capital have to think about please?
James Kwan 27:11
On any given day, you will have, I think this is the way I would describe it, you would have work which is driven by the broader economic climate. So when, yeah, when times are good, no one ever looks at the contract, but when interest rates are rising, and people are finding it difficult to put food on the table, you know, that’s when people actually, you know, start taking, you know, a magnifying glass to the investment contracts and seeing whether or not they can withdraw their money at a particular time noting that venture capitals, you know, tends to be a mid to long term investment. You have companies who you may have, you know, I’m not singling anyone out, in particular, I’m just kind of painting this sector in a broad brush. But you may have companies who, who you got along famously when you’re raising capital for them, but as soon as that capital is raised and transferred into their account, you no longer hear from them. So you having to chase them up. So there’s a lot of things of a transactional nature, which are driven by again, the broader economic climate. The other parts of my job, what really the other half of my job really would be dedicated to standing up the technology platform, which VentureCrowd wishes to move its financial services and financial products onto and that’s a way of engaging online communities to make investments. We think, within that the, so I again alluded to blockchain has been a bit of a part of the VentureCrowd strategy. And we think, so putting aside cryptocurrency, which is a particular, you know, use case of blockchain, we think that there is something within that technology, which neatly aligns with this idea of democratising investment, because what blockchain allows you to do is to represent ownership in a virtual context. And it allows you to do that as potentially as seamlessly as sending an email, you know, between you and I. So, we have, you know in the works, a development of a blockchain platform, which we hope to leverage to facilitate investments in a virtual slash digital context. And there’s a long list of items of a regulatory nature which we’ll need to tick off before we can do that in a compliant and safe way. So that’s probably the other part of my job, which is probably a little less applicable to other VC funds and more specific to the job I currently occupy right now at VentureCrowd.
Gene Tunny 29:54
Right, and so is this why you’re in, you’re based in Canberra aren’t you James and is this why because you have to talk to Treasury I guess and maybe APRA, the Australian Prudential Regulation Authority.
James Kwan 30:04
So APRA does actually have I think it’s a little known secret. But APRA does actually have a Canberra office. But you know, the headquarters are still very much ensconced in Sydney CBD.
Gene Tunny 30:15
Right, gotcha yeah,
James Kwan 30:16
I’m actually in Canberra, because I’m a born and bred local, so this is kind of in the personals. And, you know, it’s probably safe to say that, but for, you know, the broad based acceptance for remote work, which has happened over the last 12 to 24 months, because of COVID, I probably wouldn’t be where I am right now that, you know, we now live in a world where you can work in a, you know, industry where, you know, you are very much separate, except for a virtual connection with your employer, and pros and cons, but it’s working out pretty well, for me.
Gene Tunny 30:48
Ah very good. This blockchain platform sounds terrific. Would this be a first to the world? Do you know if anyone else is looking at this worldwide? Are there any examples of this sort of thing?
James Kwan 30:58
Yeah. So there’s a couple of people who, you know, have also twigged to the idea of blockchain being, you know, a potential, you know, next generational platform to make investments. So, you know, the effort to tokenize, they call it, you know, real world assets. But, you know, you could also include shares traditional financial instruments into that definition, definition of real world assets. And there’s definitely a couple of people doing that, again, over in Singapore, which, by the way, I should probably mention VentureCrowd’s also recently announced that it’s established a branch office over in Singapore, which is why I know about this. There’s a couple of companies, the one which comes to mind is ADDX, which is an exchange, which is hoping to tokenize a bunch of financial instruments and put them onto the blockchain. And it’s just, you know, again, there are certain efficiencies which you know, businesses see, which make developing, you know, a market exchange on that technology on the blockchain and attract a prospect.
Gene Tunny 32:04
Yeah, I’ll have to look more into that. I know, that wasn’t ASX looking at this. And then they had an issue that just didn’t work out for them. They blew a lot of, 200 million or something on investigating a blockchain exchange for the Australian share market. But you know, they had a go at it. I mean, you know, you may you’ve got your own tech guys and your own ideas. So yeah, I think it’s worthwhile looking at for sure.
James Kwan 32:28
The ASX post-mortem Gene is actually really interesting to read because blockchain at its heart is the idea that you can scale up peer to peer transactions, right, whereas the current model of financial services and financial transactions very much and the realm with which ASX sits in is very much based on intermediaries. So you know, how you reconcile a technology which promises peer to peer transactions with also the presence of intermediaries is somewhat difficult to reconcile. And I think that’s, you know, something which comes out in the post-mortem on a ASX chess replacement project,
Gene Tunny 33:09
I’ll have to have a look. So you were saying what they were trying to do if they, the way they were coming at it was never going to work? Is that what you’re suggesting? Because it was incompatible. There’s this incompatibility with their model and why would you use blockchain for that? Because they just, they didn’t want to surrender their role as the as the intermediary? Is that what you’re arguing?
James Kwan 33:31
I think that’s something which definitely kind of comes through quite clearly in the report, or at least if not quite clearly, and then reading between the lines, right, because ASX is, you know, an existing financial service has a number of stakeholders, which, you know, it needs to accommodate. And those, you know, stakeholders make money. You know, they have business in the existing financial system, which is predicated on money passing through different entities before it hits, you know, kind of, you know, the end investor.
Gene Tunny 34:03
Yeah you’re talking about the brokers as their stakeholders and the banks. Okay, gotcha. That makes sense. I’ll have a close look at that. I just thought of that then when you mentioned this, and just remembered ASX blew a, a whole bunch of bunch of money on that. But look, you know, there are going to be failures, in any when we’re innovating and before you get to the successes. I want to ask you about one thing you said before where there are concerns, sometimes the founders, they’ll get the money deposited, and then you don’t hear from them. But one of the things with venture capital, I mean, the way I understood it is that, I mean one of the benefits of this approach is that the the founders can get the benefit of these people who’ve been in venture capital like the or the angel investors have been successful business people, and they’ve got a lot of experience and the, and the venture capitalists have seen it before. And so they can provide them with the founders with the benefit of that experience. So will they sit on a board, they could be advisors, I mean, I know that someone like Tim Ferriss, you know, he would be an advisor to Uber or Shopify, and then they’d have an IPO and then, you know, make ridiculous amounts of money. Like, how does it work with VentureCrowd? Do you have a role in how the company runs day to day or the strategic direction?
James Kwan 35:19
Again, good question Gene. So, ideally, the investment is tied also to some sort of ongoing engagement with the company. Right. And while that is the perhaps the ideal let’s say, it doesn’t always happen. And it really is kind of horses for courses right. Some founders, you know, may be reluctant to relinquish the control, which is represented by having, you know, an external person sit on their board. And it really is, I suppose, on investors VC funds, the onus is on them to actually persuade founders of the value of having a fresh set of eyes, an experienced set of eyes stewarding the company as it kind of goes through, you know, its various stages of maturity. And I suppose, where that doesn’t happen, right, where the company just, you know, takes the money and run that is, you know, a risk, which, you know, needs to be considered.
Gene Tunny 36:15
Yeah, I mean, just thinking about it, what I’ve seen with these, a lot of these startups is that it’s so long until they’ve actually got any significant amount of revenue, right. So for their first few years, they’re just burning cash. And they have a burn rate, don’t they? So they figure out oh, this is how much money we’re burning every month. And this means we can, you know, we’ve got to basically have the product up and running, earning revenue by this date. And, yeah, it’s, it can be tough that that sort of business. And if you’re investing in it, yeah, you’d have to, you really have to have nerves of steel, I suppose. Because a lot of it…
James Kwan 36:45
It’s not for the faint-hearted Gene
Gene Tunny 36:48
Yeah, that’s, that’s a good way to put it. Okay. Right. James, I should ask you about policy, you, you were talking about policy before. And Kim Carr, he was Industry Minister when I was in Treasury I remember. And he had an innovation review. And I think his idea was to try and connect everything up and have a more integrated system. And so he was Minister for Industry and Innovation for a while. So I guess he was probably trying to make, to improve the interconnectedness or whatever you want to call it when he was there, but you’re saying that there’s fragmentation? Is that, is that the case? You think that there are, that we could have better policy settings for venture capital here in Australia? Is that your view?
James Kwan 37:37
Yeah I don’t think I really have too much more to say, apart from you know, what I said earlier about fragmentation. But again, as I put it before, as an entrepreneur, right, your focus, the reason why you get up every day is to build a business. It’s not there to fill in a form. And so it is a little puzzling, that in order for people to access government assistance in this space, but it’s not just one form, it’s multiple forms. And those forms are Byzantine in nature. And you’ve got to deal with a host of government bureaucrats in order to access those those incentives, you know, those assistance packages, it may simply be, you know, a symptom of government being a complex creature, right. I mean, you would know that perhaps better than most people right Gene, but if that is the case, that the assistance is out there, it’s just not readily accessible. It’s not easily accessible, then perhaps one way of nurturing, you know, the venture capital industry in Australia, is to simply make it easier for entrepreneurs to do that on a personal basis with, you know, the least amount of friction possible in the least amount of time and attention taken away from building their own business.
Gene Tunny 38:55
Yeah, it sounds like what, is it about information, getting the information out there? Just trying to think how they can do that. Improve that accessibility? Maybe I’ll look into it and just see what the, yeah, I mean, I might have to try and connect with some founders and see what issues they’re, they’re facing moving. It’s, it’s a good point to, to make. I’ll also have to look at the break through fund and break through funding through Victoria, right BreakThrough Victoria. I’ll have to see how it’s gone. It’s, Ill have a look at its financial disclosures, and, gee, it’s risky for governments to do that sort of thing. And one thing that, it’s interesting it’s being done in Victoria, because Victoria, historically, I guess everyone’s forgotten it now but back in the late 80s and early 90s, there was the Tricontinental which was the merchant banking arm of the State Bank of Victoria. And it lost a lot of money on commercial real estate, if I remember correctly, and that basically led to the downfall of the State Bank of Victoria. And you know, huge issue at the time. So in, you know, venture capital’s arguably more risky than commercial property. So it’s it’s interesting that they’re doing that I guess they, if you’re upfront if you’re clear that you could lose money and it’s highly risky then, and they’ll argue that there’s a public benefit to it. Maybe you can, maybe you can get away with it if you limit your losses I suppose, limit yeah…
James Kwan 40:23
Yeah, what is it people say, Gene, don’t put money in to an investment which, you know, you’re not happy losing right, and I think that applies on the individual level. It probably also applies at the level of state governments.
Gene Tunny 40:34
Yeah, I think that’s a very good point James. Absolutely. Okay, James, anything. Any final points before we wrap up? This has been great. I’ve learned a lot about your business. And yeah, really appreciate your perspective, is there anything more you’d like to add before we wrap up?
James Kwan 40:48
No, I think you’ve done a pretty good job of covering everything. I’ve really appreciated the opportunity just to come here and have a bit of a chinwag. And you know, if there’s an opportunity to do it in the future. You know, who knows?
Gene Tunny 40:58
Absolutely. Okay, well, next time I’m in, in Canberra, and yeah, not during the winter, though. And it’s winter there at the moment. And I remember those Canberra winters, so stay strong, stay warm. Very good.
James Kwan 41:12
Thanks again for that Gene.
Gene Tunny 41:16
Pleasure. Thanks, James.
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42:04
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Credits
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