As competition heats up in the venture capital space, it’s becoming tougher for VC firms to participate in funding rounds. Meanwhile, deep-tech startups face difficulties attracting ‘smart money’ in the seed stage because investors lack domain expertise and patience. These were some of the takeaway message from a panel discussion held at the Global Mobile Internet Conference in Sydney last week.
[Related: Why the startup ecosystem needs more non-technical entrepreneurs, not stereotypes]
The panel, “Growing complexity and opportunities in the funding landscape”, included Phil Morle (Partner, CSIRO innovation Fund – Main Sequence Ventures & ex-CEO, Pollenizer), Jing Guo (GM, International Department, Galaxy Group), Peter Huynh (Partner & Co-founder, Qualgro VC & ex-director, Optus Innov8) and Petra Andrén (CEO, Cicada Innovations).
Morle, as the panel moderator, kicked off the discussion by asking his fellow panellists if there was any truth to the saying, amongst VCs, that “good companies always get funded”.
First to bite was Huynh. The Ex-Optus Innov8 director said that, in his experience, “great teams do get funded… eventually.” He continued, “It takes teams a lot of time and effort outside of the business to prepare yourself for an effective capital raise. You have to prepare all your materials, including your investor presentation and financial model, as well as your data room and the list of VCs you’ll be targeting. It’s a long and involving process. If you don’t get funded [straight away], it doesn’t mean you don’t have a great team… you may need to persevere longer because YES, it’s hard to raise capital and it takes a lot of time.”
Morle commented that there are more VC firms in Australia today than five years ago; however, Huynh said this hasn’t necessarily made it easier for startups to raise capital because each VC firm still has “a specific thesis upon which they’re investing, whether that’s hardware, or specific applications of SaaS, or so on”. He also indicated that competition between VC firms is heating up. He revealed that Qualgro VC – a Singapore-based VC firm that has four Australian companies in its portfolio – tried, but was unable to, secure a seed deal with an Australian company earlier this year.
“I met with the founding team and put forward an offer to invest within the first week or so,” he said. “But I couldn’t get into the round, they were well over-subscribed – and this was a seed stage business. If I think back to when I started doing see stage work her in Australia, more than five years ago, the pre-money valuation for a late seed stage business was something like $2 million. For this particular deal, it was more like $4 million.”
Noting that Qualgro is ‘relatively under the radar’, Huynh said his VC firm has had to demonstrate to startups undertaking capital raising how they’ve been helpful to their portfolio companies.
“So, we’re actually pitching,” he said. “We help our companies in very specific ways; namely, business development and bringing in new customers, which in many cases is more important to them that the investment itself. We also work very hard with our portfolio companies to help then raise their next round of capital. That said, we know when to get out of the way. We’re not trying to provide day-to-day operator experience, we invest in teams who already know how to do that really well. We’re helping to augment that, addressing other aspects they don’t deal with day to day.”
Morle suggested there had been “an erring of quality” across the accelerator industry as more and more pop up in Australia, including Sydney “where there are now around 20 when three years ago there were just two or three”. According to Huynh, there is a similar phenomenon in Singapore. He explained, “There might be more than double Sydney’s numbers in Singapore, in a market of 5.5 million people. It feels like every large corporate has their own accelerator. In fact, it’s probably the same mentors across half of them.”
Morle asked some of the panellists what investors can do sniff out the value as more and more people try their hand at becoming entrepreneurs. Guo said finding quality projects to invest in was challenging for all VCs, even those in Silicon Valley. Although she didn’t offer a concrete answer to Morle’s question, she suggested that trawling roadshows and competition wasn’t necessarily the best way for VCs to identify talent in because the same entrepreneurs are showing up in different roadshows globally, meaning VCs are often hearing the same type of presentation over and over.
Asked by Morle whether venture capital is about more than just the money, Kopp replied, “It’s about so much more.”
“At Sydney Angels, we’ve had entrepreneurs pitch to us not to raise capital but in order to gain access to expertise, relationships, networks and for forth,” he said. “It goes the other way too in that we as investors look for entrepreneurs who are coachable. All too often we encounter entrepreneurs who think they know it all, who think they don’t need advice, who won’t listen and are arrogant. That puts us of and often it’s the reason why we don’t invest in an entrepreneur or a team.”
Andrén agreed with Kopp that, from the startup’s perspective, investment is about more than just the money. Commenting on the IP-driven deep tech startups she works with in Australia, she said barriers to them attracting seed capital in the early stages include, on the investor’s part, a lack of domain experience and impatience (i.e. deep-tech companies can remain pre-revenue for many years). She noted that there isn’t the same appetite in Australia as there is in Europe for deep technology. For this reason, she said deep-tech startups strike ‘gold’ when they’re able to find an investor who ‘understands their time horizons, can add to their strategy and can provide input not just cash”. She added, “They want smart money and, if the investor is going to sit on their board, they want that investor to understand their business and share in the vision.”
Andrén noted that Cicada Innovations is providing big corporates access to its portfolio companies where it leads to a ‘win-win situation’ – namely, big corporate tap into technologies that address the risk of disruption, while the deep tech startups gain not only investment but also industry contacts, domain expertise, access to global markets and opportunities to validate and field test their technology. Given that Cicada Innovations works with IP-driven businesses, Andrén said the incubator has had to be careful to partner its startups with corporates that are “good citizens”.