Don’t make a kangaroo’s dinner out of a business investment

 
Richard Farleigh
I WAS shocked when a good friend in Australia mentioned he’d invested $100,000 into a new business, planning to export kangaroo meat. It was a lot of money for him, and he came to me a little concerned that things weren’t right. He only shrugged when I asked “mate, you know I’ve been doing a lot of this type of investing. Why didn’t you ask my opinion?” Anyway, I agreed to meet one of the managers, the one who had persuaded my friend to invest.

The company was a complete start-up. There were just a handful of people involved, no one full-time. They had no sales team, and were putting efforts into trying to open up the US market.

Apparently, kangaroo meat is the only meat that can actually lower, not increase, cholesterol levels. The plan was to catch the interest of health-conscious Americans. The company believed they had a unique selling point because they had technology to make the meat easier to prepare. Kangaroo meat can be notoriously tough, but by selling it precooked, the consumer only needed to boil it in a special wrapping, and it would be nice and tender. I had a few concerns. Why was a tiny business trying to open a completely new market on the other side of the world? Why not Australia where cholesterol is a problem too? And the funding – it just seemed to be running on my mate’s hundred grand, which had run out. As I raised this issue, the meeting turned a bit frosty. My mate naively had no idea what percentage of the company he had received for his investment. So I asked the manager. “He’s getting ten percent,” he said, as the meeting suddenly felt arctic.

If you put $100,000 into to a business and receive ten per cent of the shares, this puts a valuation of the funded business at $1m. There is no way you could value this business anywhere near that. The manager didn’t agree. “This business could be worth zillions”, he said.

It got worse. The manager had given himself thirty per cent of the shares. His justification was that the business was his concept, and that he received no salary. I pointed out that $300,000 was a lot for an unproven idea and a part-time commitment.

“I haven’t made three hundred grand on this. But my mate has paid one hundred grand in cash for a third of the shares you have. So yours must be worth three hundred. That’s if he hasn’t paid too much.”

“That’s if you want to believe that ‘text book’ stuff. We operate in the real world here.”

The business went nowhere. It proved too difficult to open a new and remote market. Either way, it would have taken a miracle for my mate to make any money at that valuation. Happily, kangaroos are still safe from millions of hungry Americans.

Richard Farleigh has operated as a business angel for many years, backing more early-stage companies than anyone else in the UK. www.farleigh.com