Ariane's angels: a look at angel investing

Ariane Barker is the CEO of an investment group called Scale Investors and what they do is invest in female entrepreneurs, start-ups, or at least they organise people such as you if you want to to invest in those start-ups themselves. 

They organise the due diligence, they put everything together and they organise a unit trust to pool people’s investment in a particular business. It’s not a fund, you’ll invest in that individual business and you do it because you either want to invest in female-led start-ups or because you think, which appears to be true, that they do better than male ones. 

Certainly, it is the case that those who have a diversity balance, as they say, outperform those who are male only.  They’ve been going for five years, they’ve got about 13 investments and 100 angels, as they call them, as a part of the club. 

I think it’s worth having a listen to Ariane Barker about what they’re doing and let her give you a little pitch about why you should invest through Scale investors. 

Ariane, perhaps you can start by telling us what Scale does, what is it?

Sure, no problem.  Scale Investors was established a little bit under five years ago by some visionary founders/directors who identified that there was an investment gap for female-led start-ups and female entrepreneurs to access capital.  There’s obviously been quite a large amount of growth in Australian innovation and we have a fantastic number of entrepreneurs, both men and women, coming up through the current disruptive environment where Scale identified that there has been historically and continues to be an investment gap for females on this to access capital, to also invest. 

On the supply side there’s been a gap for getting capital into start-ups with female founders or female leadership.  There’s also been a gap for female investors who are looking to invest in businesses that align with their personal investment profile.  Many female-led start-ups or start-ups with gender balanced teams that would appeal to female and male investors, they’ve also been a challenge from an education and a visibility point of view to get investment in real businesses, real capital into real businesses. 

Scale was really established to help bridge that investment gap that’s been clearly identified through the data available in the marketplace.  This is happening globally.  In Australia it’s particularly acute because we have a relatively conservative investment environment obviously with the disruption happening in the financial services sector, don’t disclose the opportunities that exist.   As well as the risk management mitigation strategies required when one thinks about investing in start-ups. 

There’s a lot happening in the market today whereby scale helps to deliver, a) a solution towards the investment gaps that exist for female founders and start-ups as well as female investors looking to invest in start-ups, as well as helping educate the market more broadly from an angel investing capacity because we are an angel investment group, to support innovation in Australia…

If I can interrupt you, Ariane, our members are obviously investors mostly and might be interested in investing through you.  Tell us why they should, how does it work for an investor wanting to invest through you?  Firstly, is it a fund or does one invest directly in the end business?

We are a group.  We are not a fund yet.  Over the next 2-3 years our goal would be to establish a fund, because we definitely have interest in a fund.  But my background being in investment banking, wealth management and funds management, knows that we need to establish a track record.  At the moment we’re established as an angel investing group whereby sophisticated investors come to Scale because they’d like to get visibility to strong investments to create start-ups that have female representation on the leadership team.  The way one mechanically gets into an investment is that they join Scale. 

As a member of Scale we would create an investment vehicle through a unit trust, where collectively all of the angel investors who are particularly interested in one investment would co-invest into that vehicle and that vehicle becomes the investor on record in the start-up that we’re looking to invest in.  It’s not prescriptive around every single deal we invest in.  We actually have quite a strong pipeline of entrepreneurs and start-ups that apply to us.  Our investors are quite forensic and that’s one of the benefits of having the diversity around our investment base that exists.  We bring a lot of different skills, experiences and backgrounds to looking at investments. 

But mechanically speaking, one would join Scale, be shown different investment opportunities in start-ups.  The founder/entrepreneur would present to investors and the investment that the investors like, we would collate interest, co-invest everything into one vehicle and be the investor on record on the capitalisation table of that start-up.

Is there an expectation that your investor members would invest in at least one or more opportunities each year?  I mean, do you have to do something, do you have to invest some money?

Yeah, you don’t have to do anything, it’s completely voluntary, but the whole premise of Scale is that we educate our investors, we help our sophisticated investors understand how to look at start-up businesses.  We typically would recommend having a portfolio approach towards start-ups.  Start-up investments form part of an asset allocation approach from a wealth management perspective which is well-founded.  Typically, we would recommend depending on the risk profile of the individual that one would invest up to 10-20% of your portfolio into alternative assets and start-ups are very firmly in the bucket of an alternative assets class. 

Depending again on the investment profile of the sophisticated investor, we would typically recommend one looks to invest in a portfolio of start-ups anywhere from three to ten start-ups over a period.  And again, you can choose which investments you like.  We show the investor groups investments on a rolling quarterly basis, so every quarter we would typically show at least eight different start-ups and depending on the levels of interest in those start-ups, the collective will then decide which deals we get away.

Is there any minimum amount that you need to invest?

Yes.  We typically recommend $25,000 per investment and we would only invest in a deal where we’d lead the full due diligence process, where we’ve got at least $200,000-250,000 dollars of interest, just from a resourcing point of view.  We would invest in businesses anywhere from $250,000 dollars, up to $1 million dollars.  Obviously, we’re not prescriptive around if the deal gets bigger, if we have broader interests, if we’re co-investing with another group.  We’re currently in active discussions with a number of other venture capitalist funds.  The space is really interesting in Australia at the moment because everyone’s looking at the level of start-up activity and obviously doing quite a bit of due diligence.

We would collaborate with other groups, we’re also in discussion with other angel groups, but nobody does what Scale does around gender diversity and really backing female founders who would otherwise potentially struggle to get access to investments.

What do you charge?

What do we charge?  We don’t charge anything.  We are a not-for-profit.  We are established as a company limited by guarantee.  To cover our costs, we have a membership fee, but in terms of managing the investments, the membership fee covers everything.

That’s what I mean, what is the membership fee?

The membership fee is $3,000 at the moment and that covers everything.  That covers access to our capital markets platform.  We provide a capital markets platform, we provide the administrative support, we provide access to all the entrepreneurs, we provide investment education, we provide connectivity across a range of very talented individuals, we provide marketing and social media around what else is happening in the space.  We collate quite a bit of material information, distil it and deliver it to our members according to their needs.

How often do you communicate with members?  That sort of material you’re talking about, the educational stuff, is that going out like once a month, once a week or what?

It’s all available on our platform.  Once you join Scale you get visibility to our platform.  We speak to our angels every day.  Depending on the deals that are going on at any given time and the level of interest in those deals – we might be speaking to a certain segment of our angel group.  We also provide the information through a bi-weekly newsletter that I write personally and we aim to collate a lot of the articles that are out there as well as the start-up activity that’s happening out there at the moment.  Which is, as I said, quite active.  We put all of that into our materials and communicate that to our network on a bi-weekly basis.

How many angels do you have at the moment? 

We’ve got about 100 angels.  We’ve engaged with more than 200 angel investors.  We’re having a very interesting conversation at the moment with some other angel groups across the country, which I understand are quite male dominated, which is not a criticism, just an acknowledgement that historically venture capital, private equity and seed investment has very much been a male dominated area and that is why we exist.  So we’re talking to groups across the country who are all now recognising the fact that we’ve got a really structured model with some excellent corporate partners who have worked very, very well with us around, a) understanding the mission and vision, b) helping to provide a strong value proposition around what we bring to them and their staff around engagement.

Some of the other groups are coming to us and saying, ‘Look, we want to be part of Scale.’  And at the moment we’re having great conversations about what that could look like.  Potentially, we could go from having a current membership base of around 100 to over several thousand depending on the interest level of individual angel investors across the country and how people want to get visibility to investing in start-ups.

Do female entrepreneurs do better than male ones or worse or the same?

Female…?

Start-up entrepreneurs…

What was the question?

The question is, because you’re investing in mainly female entrepreneurs, right?  That’s the whole point of Scale? 

We are investing in start-ups with female representation, as in, women on the leadership team.  That doesn’t mean 100% female start-ups.  The most successful start-ups have a certain degree of diversity.  The data’s very clear around the fact that start-ups with female founders typically secure less investment and outperform on that investment in the market place.  That is also backed up by the data that shows when you have gender diversity on the leadership team in any organisation you tend to outperform.  Depending on how you look at it, there’s a very, very strong argument to support the fact that having female leadership, female founder in a business, you can get outperformance.

That’s what I was asking, whether female entrepreneurs or start-ups with a skew towards women running them do better than male ones or the same or worse?

The data tells us there’s been an excellent piece of research that came out, I think it was published in the AFR about two weeks ago, done by Boston Consulting Group that start-ups with female leadership outperform 100% male start-ups.  That’s not saying that we have a skew, it’s really just asking that question, is there a female founder in your business?  Many of the businesses we talk to will have a female founder along with one or two male founders or they’ll have a broader team with two women, three men.  It’s really just that core question.

If you’re launching a start-up business and you only have men in the start-up business, have you thought about having women there?  If it’s 100% male driven start-up that does not meet our criteria because we know that there’s some extremely compelling investment opportunities that are being brought to the market led by women.

Do you have any data on what sort of investment performance your angels have been getting?

Our angels or the market more broadly?

Well, both, but let’s talk about your angels for a start.

Sure.  Our angels are very early in the piece.  Again, we were established less than five years ago, we’ve got a portfolio of currently about 12-13 companies, several of which we’ve invested in second or third rounds.  We’ve had two which have had up-rounds which have gone from seed investment, very, very early stage, to upwards over 70% increase on their valuation in the space of two years.  There’s been very compelling data there.  More broadly in the market I refer back to the Boston Consulting Group research piece that just came out recently which is telling us that female founded businesses typically get much less investment from the market, from venture capital, and outperform by about 30% to 100% male-led start-up businesses. 

There’s a range of data out there that does underscore the fact that there’s some excellent investment opportunities particularly in the current environment and it’s worth having a look at.  Interestingly, one of the other areas that people don’t talk about as much is the female investment piece.  Our angel investors are not only women, they’re also men.  Many people join Scale as a couple because typically investment decisions happen in the home as a couple.  It’s not just one person with capital, it’s typically a family’s investment platform.  Some of the best investments that we’ve made have been investments where the female investor has asked some really, really strong forensic questions because women typically – and the data has shown this as well – women make 85% of consumer goods decisions and they also make over 80% of their own and their families healthcare decisions.  So, as consumers in the current economy, we know what we buy, we know what we would like to invest in based on our consumer choices and based on consumer choices that we make for our families, particularly around healthcare.  And our partners typically bring some really, really strong insights to those decisions as well.  Having men and women invest in this way is quite compelling.  But I do want to point to the fact that Scale offers really strong education in this space and we also see that there’s a really strong opportunity in supporting female investors to become more educated, more informed and get better visibility to start-ups. 

Once they see a business which resonates with them, they know what questions to ask, they know how to get their heads around the investment, they know what to go back to their partner and discuss and get his or her insight on, and that’s what facilitates a great investment experience.

Right.  Well, I think that will do us, it’s been great talking to you again, Ariane.  Thank you.

Thank you, Alan, great to talk to you.

That was Ariane Barker who’s the CEO of Scale Investors.