Domenic Carosa on dumb money vs. smart money

Dominic_CarosaDomenic Carosa was the youngest CEO of a listed company in Australian history. In this Q&A with Alex Pirouz, he discusses capital raising and the difference between dumb and smart money.

Domenic Carosa grew the digital marketing company Destra to an annual turnover of $100m. He floated Destra on the ASX when he was 25, becoming the youngest publicly-listed CEO in Australian history. He now heads up Dominet Digital, a boutique investment and consulting group with a focus on digital innovation and investments.

Dominic_Carosa
Domenic Carosa

 

In this Q&A interview with Alex Pirouz, Dominic talks about all the various elements required by an entrepreneur to raise capital, what entrepreneurs need to do in order to be investor-ready and the difference between smart money and dumb money. 

How does an entrepreneur know when they should raise capital?

Once they have developed a proof of concept, which is a working model of their business operation, which is when they are looking to grow the business. This in my view is the right time for entrepreneurs to be raising capital.

How do you know how much capital you need to raise?

This depends on several things: what the business owner’s business plan is indicating, how much working capital is required in the business in order to grow it and what the particular opportunities are within the business and the industry

What do entrepreneurs need to do to be investor-ready?

They need to ensure that their corporate structure is right, making sure they have a clean balance sheet, an understanding of how much capital they are looking for, the kind of valuation they are comfortable with that is fairly reasonable for the key stakeholders, and one of the other recommendations I make is to make sure they have a board in place, whether it is an advisory board or an actual board of directors.

I have heard you mention smart money and dumb money in other interviews; what is the difference?

Dumb money is funds that are invested with no added value whatsoever, whereas with smart money the investor not only invests funds into the company but also rolls up their sleeves and helps facilitate the growth of the company. Smart money usually comes with networks, expertise, the ability to open doors and work with the entrepreneurs to support them in fast-tracking their company growth and success.

For someone who has never raised capital for their company, where do they go to look for investors?

There are many different platforms but one which I recommend is Wholesale Investor Pty Ltd. This is a platform with a network of thousands of investors in the market looking for opportunities and deals.

What is the best way to approach investors?

In my view everyone, either directly or through one or two degrees of separation, is connected to a high net worth individual. And my advice for raising capital from high net worth individuals is that when you first meet them, do not ask them for money.

Because by doing this it automatically differentiate you from the other 99% of people, who are out there and who as soon as they meet an investor basically try to pitch them a deal to ask them for money.

Dominic, are there different types of investors?

Yes, there are different types of investors. There are Angel investors, who typically will invest anything up to a couple of hundred thousand dollars. Venture capitalists really won’t touch anything that is less than $2 million, but prefer $5 million dollars and upwards, and then there is a Venture Solo Rider, which is the bracket in-between angel investors and venture capitalists.

If I was raising capital, how would I know that I have a good proposition?

I think having a concise business plan and understanding the gap in the market you intend to fill is important. Another element which I think is important for entrepreneurs to understand is valuation. One of the frustrations that I have as an investor is the unrealistic expectations that entrepreneurs seem to place on their business.

For someone who has no clue about raising capital but needed to for their company, what is the first thing they should do?

They should find a corporate advisor that can help them through the process. As Carey Packer used to say: always hire people that are smarter then you. My first capital raising was back in September 1991, when I raised $1.3 million in venture capital, and I used a corporate advisor to help me through that process because I had never raised a single cent before.

What factors do you consider before investing into a company?

The very first thing I look for is whether or not I can work with the entrepreneur. To this day, if I look at the investments that performed exceptionally well versus those investments that have been less than satisfactory, there is a direct correlation with the founder/entrepreneur being open to feedback and implementing recommendation provided by the council/advisory board.

As an investor, do you have standard questions? If so, what are they?

My standard question is ‘Tell me about the gap in the market’. I want to know what the gap in the marketplace is and how you are filling it. I also try to get a sense of who the entrepreneur is and want to know about their successes, but I also would like to know about their failures because I think a lot of learning actually comes from failure as opposed to success.

What is the best method and approach to present an investor your proposition?

Well, when I go to raise capital, I take a detailed information memorandum (IM) because investors love detail. I put together a PowerPoint presentation with maybe about a dozen slides for investors who like things that are visual and like to have the business properly explained and finally I put together a 1-page executive summary.

Different investors like to consume information in different ways, some are more visual and some are more auditory, so by effectively providing the complete range from full detail, numbers, graphs to a high-level one-page executive summary with a whole bunch of discussions and presentations you are able to cater to each of those investors.

Are there certain things entrepreneurs do that raise concern for investors?

If entrepreneurs have too many fingers in too many pies, that strikes alarm bells, because we like entrepreneurs to be deep and dominant in a specific market.

What is one piece of advice you have for an entrepreneur who is looking to raise capital?

Under-promise and over-deliver.

Alex Pirouz is the founder of RIDC Advisory Pty Ltd. A Business and Sales Advisory firm partnering with Australia’s largest and fastest growing companies to further increase their revenue. Visitwww.ridcadvisory.com.au for more details.

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