BLOCKCHAIN REACTION: the ups & downs of building a tech startup
Published on 04 February 2021
Civic Ledger provides blockchain solutions for government and industry ecosystems; delivering safe and efficient access to shared public resources.
CEO Katrina Donaghy joins SmartHub Business Manager Elize Hattin to share valuable lessons learned while building a tech startup, and how to see past the slammed doors and temptation to give up, to capitalise on emerging opportunities.
Following a career in state government, local government, utilities and the not-for-profit sector, Katrina Donaghy began ‘dabbling’ in startups in the early 2000’s; at a time when there were no smartphones, coworking spaces or innovation hubs.
A sociologist and political scientist by trade, Katrina returned to Uni in 2003 to complete a Graduate Certificate in Entrepreneur Studies and Venture Development.
“I wanted to get some practical skills around looking at ideas and seeing whether they had the components or the core elements to actually create a startup.
“And obviously, I failed miserably because it wasn't the right time, so I went back into the workforce,” Katrina admits.
Twelve years later, while in her last paid job working in the not-for-profit sector, Katrina was given an opportunity to look at social technologies to better understand information to do better service delivery in the health informatics space.
“I quit my job, joined their startup, and then that led me to blockchain technology around November 2015.
“That was the change for me, because I finally found a technology I could understand, and because I came from government, and understood public sector problems and solved a lot of them, I found this technology a really great fit,” Katrina explains.
Serendipitously, Katrina met her co-founder Lucas at a Meetup event in 2016.
With Lucas as the ‘tech guy’ and Katrina as the ‘frontend person’, the duo secured a contract with Queensland Government.
“We weren't even a company and we delivered the very first proof of concept looking at how to digitise a government issued asset.
“We issued it via the Bitcoin blockchain, using Color Coin, because Ethereum was still emerging…we did a proof of concept with the Queensland government, and because we got market validation of a technology that could solve the problem, it led to us then creating Civic Ledger which was formed on the 21st of September, 2016,” Katrina recounts.
SECURING YOUR FIRST CUSTOMER
From a startup perspective, Katrina says one of the most vital things is getting your first customer.
The challenge, she says, is it is exceedingly difficult to negotiate strongly with Venture Capitalists if you are pre-revenue, because if you have not got your first customer, Venture Capitalists (aka VCs) they can come and take your company away from you.
“It's critical for sustainability, that you look for your first customer because they become your champion.
“They're able to then get you your next customer and your next customer.
For Katrina, looking at operational revenue is a much more sustainable way to think about your startup, rather than going out and raising funds, which can take between 6-8 months of your time as a founder.
“If you are trying to build out your product to get market validation, to secure your customers so you can develop your pitch deck, but you are being distracted by trying to raise capital on something you have not even validated, you'll find that the market has moved.
“You may have actually missed the opportunity to get your product to the market first and become that leader,” she cautions.
Katrina maintains it is about choosing what is the right method for you and for your values and sticking to them.
“When you start the journey, everybody is wanting to be killing it, doing all the wins, get your t-shirt, get your hoodie, get on the stage, pitch your idea, have lots of beers.
“The thing about that is you waste a lot of time. You become extremely distracted by trying to be ‘cool’, by trying to be something that you really do not need to be, because VCs are not interested in the hype.
“They want to know your numbers. They want to know what you are doing, what are you building, how are you building it, why do you think that you're going to beat this race as opposed to somebody else?”
“It is very easy to get caught up with the hype and think that's what an entrepreneur does, and you'll find that you'll be out of business within 12 months because the market's moved,” she advises.
INS AND OUTS OF CAPITAL RAISING
Katrina says when entrepreneurs say they had a really great time for the duration of their startup, they are lying. Big time.
“I'm not a founder that will sit there and tell you, "this is all glamorous," because it's not. You really must have strong conversation with yourself and ask yourself whether this is what you truly, genuinely want to do.
“Are you happy to forego income? Are you happy to forego a lot of things to bring your company to where you believe it can be?” she asks.
One of the first lessons Katrina says she learned in the early days was realising she did not quite understand the ins and outs of capital raising, because her other co-founders had expertise in that area.
“I didn't actually ask questions I should have done way back at that time, because I really believed they had my interests at heart, and they did, but what happened was when I became the CEO of the company, I inherited a lot of things that I didn't quite understand,” she admits.
Katrina says it took her a long time and a lot of lessons to realise when it comes to critical decisions around your capital table, shareholdings, and the legal side of the business, you must be present.
“If you do not understand the language in the shareholder's agreement, or in your constitution, or how capital table works, or how an information memorandum works, you need to get advice.
“It's not appropriate to go, "It'll be okay, somebody else will look after it for me” … because five years down the track when you've got toxic co-founders, your capital table is a mess, VCs will not touch you.
“You really have to be thinking even though it's really boring, "Okay, what about" ... "I've got to have shareholder's agreement; I've got to know my capital table." Do not put friends and family on your capital table. Do not give away your equity for $5,000. Do not do that.
“It's really critical that you hold out as long as you can before you start thinking about a raise. And when you do a raise, it must be smart money,” Katrina advises.
Katrina warns against taking your first buck that comes along.
“You could find that you're not compatible with your investor, and then they will actually ‘stack’ you. They will stack the board with their friends or friends of friends, and then they will get rid of you.
“It's critical that even though these are really uncool, uninteresting things…you've really got to do your foundational stuff.
“Get your shareholder's agreement in order, your constitution, get a good lawyer, get a good accountant, start thinking about your numbers, and I know it doesn't sound really interesting from an entrepreneur's perspective, but those are my lessons,” Katrina says.
One of the hardest lessons Katrina learned was not taking control of the company books, rather leaving it to their accountant who held her at arm’s length.
When she finally found the courage to sack the accountant and open the books herself, it was not a pretty sight. Their first raise of $700,000 had been squandered.
“We squandered it because I didn't know the numbers and I didn't know how to best apply the capital in an Research & Development (R&D) perspective, rather than thinking from an operational perspective.
“If I were to give you one piece of advice when you think about this journey, you have got to grab your co-founders and have that conversation.
“Get your shareholder's agreement, get your constitution, get a lawyer, and when you think about being an investor, you are interviewing them, because this is your company. It's their privilege to be on your capital table, not the other way around,” she urges.
WHAT I WISH I KNEW BEFORE I STARTED
The first thing Katrina recommends to StartUps is to make sure they use the resources from the SmartHub.
“Be honest, don't sit there and think you have to know everything because you're not going to know everything.
“When you do not know something, go to the SmartHub, and ask.
"Is there any pro bono legal advice I can get around my shareholder's agreement?" If you take half an hour out of your day, it will save you three years of pain and expense when you have to unravel that,” Katrina advises.
Her second piece of advice is around hiring. Katrina says one of the things startups like to do is create everyone as a chief.
“Everybody's got to be a chief. All the founders have to be chiefs. Chief this, chief that… and then you have nobody doing anything.
“Suddenly all your money's gone because you are paying yourselves a stupid salary when you should be foregoing a salary and paying good people to do really good work, which you do not want to do,” she says.
According to Katrina, one of the most important hires startups can appoint in the first instance is someone to help with branding and marketing, and website development.
“If they help you get your branding, your messaging and your website in synchronisation with your messages, your product, and your values, it makes it a lot more easier when you go to pitch because everybody will know what business you're in, and everybody will understand your messaging,” she explains.
For tech startups, Katrina recommends using open-source software as much as possible, making sure you are putting your code in open source such as Git.
“Atlassian is probably some of the best tools that you can use, Jira, Trello, and you can get them as a low cost, you can get them free until they step up a bit. Don't go and invest in software you're just not going to use,” Katrina implores.
Working on the company wiki would be something Katrina would have prioritised earlier if she had her time over.
She recommends Confluence in Atlassian which offers a method for you to capture your wiki.
“When we think about a wiki, it's your DNA. It is about your policies, your values, your missions, it is about how you are building your tech, choosing your tech tools.
“When you onboard new staff, which is critical, they're actually going to know exactly what to expect when they work with you.
“That's important, because one of the things you want to do is not be the company. You want the company to have its own identity, so eventually you want it to work without you,” she explains.
Having strong foundations in place will also assist when startups reach the point of doing a capital raise, as VCs will want to look at your data room and your due diligence.
Katrina says your due diligence is critical and urges all founders set up their due diligence room to hold your certificates, ABNs, shareholder's agreements, all the things investors want to see.
Another tip Katrina offers is do not avoid doing your meetings.
“If you do not have a board yet, which is fine, you really need to show you're meeting together.
“Make sure you document it and throw it into the data room. Keep that as a good pattern, because what happens is the VCs will come back and they will want to look at how you have grown.
“What sort of agenda items you had in your meetings? how you were thinking? how you were managing risk and making decisions and all that sort of stuff. Because investors don't invest in product, they invest in the founders.
“They're looking for those founders that are actually thinking about this stuff. Because when investors come looking at you, they are bringing other people's money with them, and they want to invest in you because they want to believe that you are the ones that is going to deliver 10 or 15 times in four years’ time,” Katrina explains.
Katrina urges startups to think lean before spending money on things they think they need to get legitimacy.
She admits wasting money on renting a city office space could have been better spent employing people.
“What Covid was able to show was that you could still be a legitimate startup and not have an office. Think seriously lean,” she encourages.
Four years into her journey, Katrina enrolled herself in CEO School, delivered by mid-tier accounting firm BDO.
The brainchild of Fishburners Business Manager Marc Orchard, CEO School is now the biggest program in Australia that gives startups and founders an opportunity to get away from the noise and focus on what it takes to be a CEO.
“One of the most important things it taught me is financial literacy.
“We have to know our numbers. We must know what a profit and loss is, what goes into the P&L, what goes into the balance sheet, what your cash position is, what your burn rate is.
“As a startup, you kind of go, "but I've got no money." I know you may not have any money, but you have got to start thinking about your chart of accounts.
“You've got to think about your accountant, and you think, "but I'm still too early." If you put these things in place right from the get-go and get help, you will find that when you are two years into your startup and you really are ready to scale, you do not have to go back and fix up things.
“You'll have a good handle on your numbers, because at the end of the day VCs only want to know numbers.
“They can look at your product, but they are smart, but they want to know how have you grown? Where are your customers? Do you know your customer? These are the really important things about being a startup,” Katrina explains.
DON’T BUILD CANNONBALLS
Katrina says it generally takes six years to become a company that is likely to scale internationally.
She says founders must have a lot of patience with yourself and need to constantly innovate.
“Your R&D is critical. So, if you are using novel technology, if you are a technology startup and you are playing with novel tech, like blockchain or IoT, or AI, make sure that you understand your R&D and what you can claim when it comes to your tax time, because your R&D is going to be your lifeline for your next financial year.” Katrina recommends.
Katrina explains too often she has seen startups and founders hide themselves away for a year or two as they try to build what she calls a ‘cannonball’.
“They sink time and money into building a big cannonball, only to launch to a market that says, ‘we don’t want that.”
“You've got to build little things and test it, and then iterate and pivot. You have really got to test a lot of things before you land on what is the product, what is the platform, now we can go hard. And you do not have a lot of money. So, don’t go building cannonballs,” she urges.
UPS AND DOWNS OF STARTUPS
Katrina works with a tech called blockchain, which she calls an emerging technology (formerly known as nascent technology).
“Blockchain is the underlying digital infrastructure that enables us to securely share data with one another.
“Using things such as cryptography, decentralisation, immutability, it's really good for solving problems whereby you have a shared interest in a transaction, but you can't get access to each other's databases,” she explains.
Katrina says blockchain technology is a complex tech; likening it to governance that requires a complete change in the way we think about data, systems, and how we work together as industries.
As early adopters of the technology, Katrina recounts her startup journey.
“We were lucky in 2017, as a couple of governments in Australia were exploring this technology.
“We just delivered our first proof of concept with the Queensland government, and that gave us confidence because we kind of knew that you could look at a license, you could digitise it, it goes into a registry, becomes immutable, and then it could be shared securely and safely, and issued.
“One of the problems the Queensland Government wanted to solve was the problem of water trading, or water markets in this country, because in this country we have a problem where we can't agree on who's got what.
“We see a lot of commission of inquiries, we see a lot of court cases, we see a lot of it in the news, because we can't get agreement on who has what. How much has been traded? For what price?
“The Australian government recognised this a long time ago, and thought the problem was because there was a lack of information in the market.
“We applied to this program, and we were only six weeks old, and we were incredibly lucky we got selected.
“We're the only tech company in the group. There was four of us working on the problem, and we tested the problem and found that the problem was wrong.
“We were selected, and we got to work with the customer for three months to deliver a feasibility study, but we didn't lean in with blockchain in the first instance.
“We wanted to make sure that we understood the problem, and we found that their problem was incorrect. We found that why we had problems with the water markets in this country was not because of lack of information. It was because the trade itself was too hard,” Katrina explains.
Her team delivered the feasibility study, identifying blockchain technology could be a suitable technology to solve the problem with transparency in the water markets because of its opacity, lack of data interoperability, and not knowing the actual price of water.
“We were judged, we were assessed by the Australian Entrepreneurs Committee in July 2017, and we were rejected.
“Despite giving us raving reviews for being innovative, the panel was not convinced the regulatory environment would be suitable for our technology,” she admits.
After a year of starting, Katrina team crashed; considering whether they should forget and quit.
As her co-founders leaned towards winding up the business, Katrina was not ready to call it a day, yet.
“You do get pushback and you will get rejected. You ask yourself, ‘why am I doing this?’. You will go through this all the time and you can either quit, or explore what else you can do, or find out what else is happening in the market.
“That's when our next opportunity happened, and we got selected with IP Australia on solving a really great challenge around intellectual property.
“Our water ledger is now being delivered up in Mareeba-Dimbulah, we've done our very first trial for water ledger and trading.
“It took us four years and a lot of door slamming…you can't just say, "okay, get the door slammed and it's all over." You have got to really dig deep.
“You've really got to have the support like the stuff that the SmartHub does, you've got to keep yourself engaged to ensure you get that support back,” Katrina advises.
Katrina cautions it can be a very lonely place being a founder, especially when you get rejected.
“It's a long game here. It is not like you are just going to turn up and next minute you have got people throwing bucks at you and suddenly you are ‘Afterpay’. It is just not going to happen,” she counsels.
Katrina’s final advice is to beware of the three killers that will kill you.
“Your cash, your co-founders, or your customers will kill you.
“Do not just bank on one customer. They will kill you; she cautions.
Katrina also reminds startups that by choosing to become an entrepreneur, a co-founder, or a tech StartUp, gives you an enormous amount of freedom.
“It gives you the freedom to think and create, and innovate, and meet amazing people.
“You become the person you really wanted to be all these years. Your journey is determined by you.
“One of the most important people in your entire StartUp and in your entire journey is you. If you are not healthy, you are not present, and you are not in the moment, it has a massive effect.
“Take it easy on the alcohol, go to the gym, make sure you get good hours of sleep, drink lots of water, eat healthy, be present. These are critically important,” Katrina recommends.
Katrina Donaghy is the CEO of Civic Ledger. Using innovative blockchain technology, Civic Ledger builds open and secure digital platforms that streamline how you as a citizen interact with government.
Civic Ledger empowers citizens and industry to self-manage their transactions with government through digital platforms that foster transparency and build trust between citizens, industry and governments.