As part of the 2019 Spark Festival, William Buck hosted “Beyond Series A and B – What Do Advanced Founders Need to Know?”, a panel discussion with some of Australia’s leading venture capitalists (VCs). Attendees asked panel members for their insights on the VC investment process, from initial introductions through to successful exits. These are the key takeaways.
Do your research
While networking events and pitch nights may be helpful in building your network, there are other methods of helping you connect with the right VCs.
Leverage online tools to strategically target the investors who have interest areas aligned with your business. Then, consider the funding cycle of the VC (as fund managers allocate capital at different times throughout the lifecycle of a fund) and find one that matches your business’s stage of growth.
This will help you engage in more targeted networking and meaningful introductions.
Get straight to the point
VCs receive thousands of leads a year from aspiring founders seeking investment, so standing out from the pack is vital. The first communication with a VC is very important. This is not a time to tell your life story. Instead, find a simple and powerful message, keep it succinct, and leave the VC wanting to know more. If this succeeds, you will always have the chance to tell your life story at the meeting.
High valuations are overrated
For obvious reasons, founders are usually focused on securing a high valuation for their startup. But this can work against you in the next round of funding. If the initial valuation is too high (e.g. often at the angel investment stage), the company runs the risk of a down round when sophisticated institutional investors come on board.
In the early stages of the company’s growth, the focus should be on the quality of the investors and achieving the right balance between avoiding excessive dilution and leaving the company enough breathing space to grow. Ultimately, the valuation that truly matters is the one at exit.
Good corporate governance is underrated
A VC will be less likely to invest in a company that has overlooked the business basics of regular Board meetings and audited accounts. This is more common in companies that received initial funding from high net worth individuals as those investors are usually less stringent about such processes.
Transparent corporate governance should be a prerequisite for companies even while the business is still at its foundational stage.
Practically, a good way to build credibility and confidence is to invest in an audit of your financial statements.
Know your numbers
Another balancing act that founders need to get right is being optimistic with their projections and the size of the opportunity, whilst being able to back them up and remain credible. Expect to be quizzed on the current performance, your financial projections, your business model assumptions, product-market fit and traction. Any indication that projected numbers cannot be backed up is a deterrent for investors as it can be a red flag that the founders may be untrustworthy.
Due diligence works both ways
Once a term sheet is signed, the power shifts dramatically to the VC. This is because, where either party walks away from a signed term sheet, it will reflect badly on your start-up and ring alarm bells for other potential investors.
Do your own due diligence before signing the term sheet. Potential investors need to comprehensively understand your business and its risks and you need to be comfortable working with the investors for the long-term.
Know what the VC is bringing to the table
Each VC has their own strengths – introductions to customers or partner companies, access to technical resources, a network of executives and mentors – each of which adds value to a business.
Founders should have a clear idea about what areas of the business they need the most support with and be open and honest about these during discussions.
Boards make or break the company
An effectively operating Board is a must for each company. A dysfunctional board can paralyse a start-up and soak up valuable executive resources.
Set aside funds for the next funding round
Typically, it takes most companies between three to six months to raise money.
Founders should ensure they have enough traction and runway that they don’t run out of funds prior to or during the next capital raising process – a circumstance that would significantly degrade their bargaining position in the raise.
Don’t worry about exit valuation yet
Exit valuations are difficult to predict in Australia and not worth worrying about too far in advance. Instead, focus on building the business and creating something of value. The rest will take care of itself in due course.