Investing in Australia’s creative tech future
For tech founders starting up their company there is an incredible journey ahead of them. There’s the ignition of an idea and the determined drive to follow through. To get that idea into serious traction some startups surge forward, while for others going forwards may be slow and steady. Whatever the pace, investment is one of the imperative intersections founders cannot avoid when reaching that horizon goal.
Finding a smart investor is going to give the startup that extra fuel to keep going and reach that goal. Anthony Musumeci, Investment Manager at Uniseed, gives his advice about the importance of timing when looking for funding and what founders should look for in an investor.
Uniseed has an equal first look “right at emerging technology based companies coming out of its partner research organisations which includes four of the top universities across Australia and the CSIRO”. Anthony says, “we see some exciting, very early stage, opportunities.
We get to work with some incredibly smart people. It’s really enjoyable to help them along in their journey. They’ve got the vision, the smarts and the technology. We help them get their product or idea from that concept stage and help create an impact.
The warm introduction
In order to help startups Uniseed often provides a warm introduction to potential co-investors for a start-up that is seeking a large amount of capital. Uniseed typically look for basic financial documentation from a startup company seeking investment, which includes at a minimum a month-by-month cashflow forecast.
Anthony says, “This shows us the expected revenue (if there is any) and expenses over at least two years. We also look to understand what the future capital needs of the company might be to understand any potential follow-on funding risk? For capital intensive companies we look at who we know in the Australian ecosystem or internationally who might like to come and invest in these later stages.”
Successful startups addressing market problems
Anthony says the most successful startups are the ones with a “unique and defensible product or service which solves a pain-point or addresses a problem in the market,” that customers are willing to pay for.
“At the university we see a lot of “solutions looking for a problem”. They are technologies that are built on the back of great research and have some unique or interesting properties in the form of a widget or a new process. However, they don’t know where these technologies will fit it into the market. In contrast, a lot of the better opportunities we see have identified a pain-point in the market and are building a solution to solve that. Consequently, it’s more of a market pull rather than a product push.”
Research, approach and build rapport
Anthony says founders should try and look for investors in advance of needing to raise capital. “Startups should approach, or begin to form relationships with, potential investors through networking early on. “Some of the most successful and efficient capital raising’s I’ve seen are where the startup founders have had relationships with, or are known to, a series of investors.”
“It’s often a good strategy for founders looking to raise money to seek a warm introduction from a portfolio company of the investor. Generally, the portfolio companies have developed a rapport with the investor and know what the investor likes to see. That way when the founders pitch their plan, they’re already saying the right things. That’s one of the smarter ways I’ve seen it done.
Usually in the early stages of a startup emphasis is placed on the team. Anthony says, “if you can establish a good relationship with investors before even needing to raise capital you are often a few steps ahead of founders seeking investment from a cold call/email”
Anthony advises to look for investors which bring more than capital to the table. “Startups which grow quickly team up with investors whose skills sets and expertise relate to their company and can open doors or add complimentary knowledge and expertise.”
Being diligent with investors
The Investment Manager also suggests that startup founders do their due diligence on investors. “Unfortunately, not all investors will be a good fit for your start-up. You want to make sure that you and a prospective investor has the same shared vision and you are aligned in terms of future direction.
I’ve seen a number of horror stories where a founder accepts money from an investor, but later discovers that their time horizons to exit are not alligned. It causes all sorts of nasty situations.
When approaching investors, Anthony says, “many sophisticated investors are open to take meetings with startups before they’re actually ready to raise capital.” The founder might have an idea of their plan and their strategy, “you can go to an investor seeking feedback around that.”
“However, it’s important for founders not to waste an investors time. “You don’t want to go in with an idea and nothing else. You need to have given some thought to your strategy, financial model and business model”.
The time to ask for money
Knowing when the startup needs funding is also incredibly important. “Ideally if the company can grow and develop their concept with non-dilutive funding, or funding by family and friends, that’s often cheaper funding (in the long run) and it can be easier to find”.
If timing is not restrictive to commercial success, then grant programs are also possible. It often takes many months to apply for and be awarded a grant so it may not suit everyone. “If you need capital now to execute an idea, and get it into the market before competitors do, then a slow grant process is probably not the right one for you.” It’s at that point founders are better off trying to secure investment from Angels or other early stage investors who can potentially help faster.
The further a startup can take an opportunity in terms of de-risking it from both a technical and commercial perspective, the greater the valuation will likely be. “The important thing is that founders don’t run on a shoe-string budget for too long and risk jeopardizing the value of that opportunity”.
There’s often a delicate balance for founders between taking enough money to create significant value and minimize dilution and taking on too much money too early and getting unnecessarily diluted.
Anthony suggests founders should focus on a financial runway for at least 12-18 months. “The capital raising process always takes longer than most startups anticipate. “What founders need to do is raise enough money to have the cash runway to achieve some meaningful milestones”. If a founder only raises six-months of funding “then two months later you’re back out there canvassing more investors for more money”.
It’s advisable to set some meaningful commercial or technical milestones. Make sure it’s a conservative budget in terms of time to-hit milestones and estimated costs so you leave a little room for unexpected events and can still hit those key milestones.
Why teamwork is important to an investor
It’s no secret that startups need a passionate founding team which has perseverance. “Many founders underestimate how difficult it will be when they first jump in”. It’s great when founders surround themselves with other experienced and passionate individuals who want to share that journey.”
Ideally a founder should surround themselves with people who have diverse skills sets and backgrounds. Anthony advises founders to have a team ranging in skills from commercial elements to marketing and communications, and maybe through to legal and financial background.
He says from an investment point of view, “it’s often difficult to back a team which have four software engineers who claim they can do absolutely everything. I’m more inclined to back a team who is more diverse with complementary skills set. I have more confidence they will be able to address future challenges.”