Investment in Australia limited but improving: Tips on raising capital

Australian start-up successes need to be celebrated to attract more funding to the sector, a discussion panel at the recent Startup Victoria conference has heard.

The challenges and opportunities facing start-ups seeking funding were addressed in a panel discussion made up of Scale angel investment network founder Laura McKenize, App.io (previously Kickfolio) founder Ed Dowling and LIFX founder Andrew Birt.

Australian investment scene limited but improving

Event coordinator and entrepreneur Scott Handsaker kicked off the discussion by sharing his theory that Australian investors were “a little bit sh*t”, and asked the panel for their thoughts.

Birt, who coordinated the $1.3 million Kickstarter campaign that launched the LIFX light bulb product and capital raising process, says the Australian investment space is evolving as successful entrepreneurs begin to invest in the next wave of start-ups.

“More and more we’re getting a wave of successful entrepreneurs who are coming through,” Birt says, adding that some of his own and his peers’ experiences with institutional investors would lead him to agree with Handsaker.

McKenzie agrees the Australian investment scene is growing and improving, and would continue to as Australian start-ups performed well.

“There have been relatively few success stories that have been celebrated publicly,” McKenzie says. “We need to celebrate success more to attract more money to the sector.”

Dowling, who recently raised just over $1 million in seed capital in Silicon Valley, says Australian investors can “appear to suck” as there were fewer deals because of fewer available investors. He added raising funds is never easy.

“You have to work really hard to raise money everywhere,” Dowling says. “There are so few Australian investors so they see every deal and have a really tough job choosing what to develop.”

Dowling added that companies looking to raise seed funding in Australia need a valuation of around $1 million, compared to companies seeking the same amount in the US which need a valuation of $3 million to $7 million.

McKenzie disagreed. “We hang onto the numbers that are double or triple the average,” McKenzie says, adding the most recent research into American seed capital found the average company valuation was $2.3 million.

Getting the investment relationship right is key

The panel agreed start-ups need to recognise that investment is the beginning of a relationship, and it’s important to get that right.

“Work with someone who has the experience, not just the money. If you take money from someone who hasn’t been there and done that, your expectations will be unaligned,” Birt says. “The last thing you want is dumb money.”

Birt added that investments are negotiations and if the relationship is strong you don’t need to get hung up on reaching a $1 million valuation.

Dowling shared that App.io’s funding process saw them pitch to 100 investors, follow up with 54 and eventually work with 19. He explains the process here:

Dowling agreed the relationships and advice that come with investment funds need to be worth the equity given up receiving it.

“Equity is so valuable. You can’t get it back once you’ve given it away,” Dowling says. “It’s about having investors you can have a beer with when things are going really, really badly.”

Dowling said App.io’s biggest capital raising mistake was to only chase big deals, but the most valuable investment they received was a $5,000 cheque.

“Don’t hang out for the big numbers. Hang out for the right numbers, and hang onto the smart money,” Dowling says. “The fact this guy was interested led instantly to $200,000 in other investments. It was the right person, with the right networks.”

Keep the conversations focused on vision and raise enough capital for 12 months

Dowling says he continually steered their funding negotiations away from discussing their existing revenue directly.

“If you’re making money, it’s less vision focused. The conversations need to be kept as close to the vision as possible,” he says. “Investors will jump on revenue, so we never people a firm figure.”

Birt, who co-founded Melbourne’s first accelerator AngelCube, agrees vision is the make-or-break factor for fundraising, but also pitching to an accelerator or incubator.

“Swing to the fences and you’ll excite the people behind the incubators who’ll think you might just be crazy enough it pull it off,” Birt says, adding you needed to get your ducks in a row too. “You need some kind of product, not just a good idea. You need a team around you as well. If it’s just you it’s hard to justify choosing you.”

McKenzie added that investors assess a start-up’s direct competitors when scoping out a business, and that founders should raise funds for at least 12 months.

“I’d encourage you to raise for a minimum of 12 months because it takes time. Don’t close around and need to head back into the market with no tangible change in your business,” McKenzie says. “It’s really hard to execute on your objectives when you’re raising money.”