Taking a start-up through to a trade sale likely to return the founders and other investors well over $2 million in three-and-a-half years is the sort of performance internet entrepreneurs dream about. But that is exactly what Phillip Druce, 36, and Kelvin Yip, 28, of online auction site OZtion have achieved, all on a shoestring budget provided by themselves, family and friends.

Behind the scenes, however, the Melbourne IT developers received some useful guidance from corporate advisers BSI. That advice, according to Mr Druce, kept them on the right track in building the company and ensured they were able to quickly negotiate a financial exit. The acquisition of OZtion was announced by Jumbuck Entertainment Ltd (ASX: JMB) on 3 June.

The deal involves an upfront payment of $1 million in cash and Jumbuck shares worth $1 million (to be held in escrow for 12 months) plus an earn-out on revenue achieved in financial year 2009-10 which is expected to be earnings per share accretive, assuming performance hurdles are met. Mr Druce and Mr Yip had retained a majority holding in the company. They have now committed to two year management contracts with Jumbuck to further develop the business.

Jumbuck is a mobile phone technology business. Chief executive Adrian Risch said he saw OZtion as an opportunity to develop an online presence for his company and also to add a new revenue base that could be marketed to existing customers. OZtion was, he said, poised to rapidly expand as a result of Australian users of online auctions becoming disenchanted with world market leader eBay. According to Mr Risch “OZtion is the clear challenger to become the biggest online auction website in Australia”.

A recent decision by eBay to make its PayPal subsidiary the sole means of electronic payment for its services was widely criticised before it was rejected by the Australian Competition and Consumer Commission. The OZtion story started in 2004 when Mr Druce was developing computer software for use by commercial users of eBay. In those days, when most users had only dial-up access, one of the advantages of Mr Druce’s software was that it provided a checklist of information needed before users went online. The software also provided after sale transaction record keeping offline on the user’s own computer, an important feature as eBay’s online records are deleted after three months. Mr Druce discovered that many eBay customers were not satisfied with the fees and charges and this started him thinking about an alternative service. That was when he learned recent university graduate Kelvin Yip was working on software for categorising items for garage sales. Did it include an online auction function?, he asked. It did, so soon development was focused on this feature. Once they decided they had superior technology they decided to set up their own online auction site. This was a bold move. In addition to eBay, at the time there were also about 15 other online auction sites operating in Australia.

According to Melbourne BSI director Mat McDonald the most important factors in the success of OZtion were Mr Yip and Mr Druce’s IT skills and their identification of a market opportunity. But Mr Druce said Mr McDonald’s advice was a key factor in developing that opportunity. He said he and Mr Yip had founded the business in late 2004 with only their own money but a couple of months later, after the site had gone live in early 2005, they had realised they needed seed funding. They put together an information memorandum and circulated it to friends and family. That was successful but about a year later they needed more capital. Their public relations agent suggested they should approach BSI and as a result they were introduced to Mr McDonald. Mr McDonald’s research produced a realistic fiveyear business model including discounted cashflow figures that could be used to provide a valuation of the business. He also produced an executive summary and PowerPoint presentation to show to potential investors.

Mr Druce said he had intended to approach new potential investors identified with the help of IT colleagues. But first he went back to the original investors. They agreed to increase their investments to complete the second funding round. Since then, he said, the business had developed amazingly closely to Mr McDonald’s projections, with some slight outperformance. When the possibility of selling the business arose, Mr Druce and Mr Yip had asked Mr McDonald to revise the business plan again and this had helped the sale go through quickly and smoothly. Mr McDonald said OZtion illustrated the importance of start-ups seeking the help of business advisors at an early stage. He said an important part of his work with OZtion had been to document ownership of key intellectual property.

Mr McDonald said BSI worked on a basis of consulting fees plus success fees structured to be payable over long periods to make them affordable to cash strapped start-ups. At an early stage, BSI focused on identifying the full range of government grant funding which might be available to a start-up. The consultancy had the highest success rate in attracting federal COMET (Commercialising Emerging Technologies) grants for its clients and this covered 80 per cent of its fees for many clients. In some cases, successful applications for government grants resulted in clients attracting much more in grant funding than they spent in consultancy fees.

published in the Australian Venture Capital Journal on p15 June 2008