August is Venture Capital Month ^[1] at Anthill and last week we launched ^[2] a new series written by San Francisco-based Steve Anderson focusing on the capital raising cultures in Australia and the US. Today, Anderson discusses the comparative advantages and disadvantages of pursuing funding from Australian VCs or US VCs.

The decision of whether to pursue funding from Australian VCs or US VCs is not necessarily an either/or proposition. Both VC groups service the interests of Australian entrepreneurs. You just need to appreciate them for their benefits.

From the macro perspective, the US VC as a financial resource sector has been active in its current form a lot longer than anywhere else in the world. The “current form” of venture capitalists in both the US and Australia is a formalisation of what were informal syndicates of investors who pooled their capital and invested it in ventures. Those still exist, but are a variation on what is commonly thought of as venture capitalists.

The benefit to the entrepreneur of this long history is the development of a US VC business culture that has many years of entrepreneurial investment experience. This has resulted in established, but informal, standards of operation.

The culture and standards of Australian VCs is not that much different, but it is different. And that is a good thing.

Preparing an investment strategy

Australian venture capital activity hit a high in late 2008, with 129 transactions. If you are timing your investment strategy, typically there are more investments made in the fourth quarter of the year than in any other quarter. But that is when the checks are delivered, not when the process begins. Think in terms of six months from start to finish.

It’s not surprising that the pace of “new” investments – that is, first time investments in new portfolio companies – slowed in 2009.

Strategy preparation to-do list

• Determine the non-cash contribution your company needs from your investor.
• Determine why the management team will succeed, if not, find who is needed.
• Select VC firms that invest in your industry.
• Compare your company with companies that secured VC investment from the list.
• Make sure the market size is large enough to reach attention-grabbing revenue.
• Isolate your primary (top three) customer targets.
• List three compelling reasons why the company’s customers will continue to buy its products or services (a sustainable, growth business).
• Determine how much capital you need to get to break even or better.
• Determine at what point in the company’s growth it will require a second investment.
• Determine whether the company should do an IPO or be purchased.

Fundamental Benefits of Australian and US VCs

Australian VCs

• Geographically close to Australian investments.
• Willing to undertake early-stage companies.
• Recognise early-stage company management requirements
• Understand early-stage companies
• Primary and secondary investments always part of investment plan.
• Understand Australian businesses.
• Well connected in Australian business network.
• Tight focus on few investment sectors.
• Relatively low hurdles to undertake an IPO exit.
• Relatively small business market for acquisition exit.

An Australian venture capital firm’s greatest contribution to an investee company is being able to pass onto management the knowledge of the business sector the company is in. But as in every partnership, it is important to keep the playing field level between investor and owner/management.

The experience (as distinct from “knowledge”) an Australian venture firm can bring has significant value to the company’s growth and helps reduce or eliminate unnecessary business exercises as it moves from early stage to growth stage. Fundamentals such as how to stimulate channel sales; outsourcing sources that are proven in quality and reliability; instituting quality control in R&D; timeliness, value and objectives of public relations.

US VCs

• Prefer later-stage companies.
• Expect experienced management team.
• Expect large market.
• Expect scalable businesses.
• Primary and secondary investments always part of investment plan.
• Prefer US-based company management.
• Well connected in specific US business networks.
• Focused on preferred investment sectors where knowledge and experience exists.
• Experienced management resource network.
• Deep connections in US investment banking (IPO).
• Experienced and knowledgeable in acquisition transactions.

On the subject of management experience, one leading US venture firm states that what it looks for begins with the “capabilities and charisma of the founding team”. The larger VCs frequently have on staff an executive recruiter to find people with the qualities that are missing in a portfolio company. The adage among US VCs is that they would rather invest in an A management team with a B business, than vice versa. That doesn’t mean that the reverse doesn’t happen.

There are exceptions, and most of the exceptions have been hugely successful (Bill Gates at Microsoft, Michael Dell at Dell Computers and Larry Page and Sergey Brin of Google are well recognised examples of exceptions).

A leading factor for the importance of this one element has been documented in surveys conducted by US magazine Inc. In one of their surveys, only 12 percent of the founders said that the success of their company was due to having a paradigm-shifting product or idea. Eighty-eight percent attributed the success of their company to excellent execution of an ordinary idea.

It’s a risky business betting on emerging companies. So VCs hedge the bet on quality management and strong products that do make a recognisable difference to customers all by themselves.

Steve Anderson started as a journalist, working first at The New York Times and the next 30 years interpreting business to investors. He is now Managing Partner, Marquis Advisory Group ^[3] (San Francisco and Sydney).

Photo: PDR ^[4]

It’s Venture Capital Month at Anthill. Click the image below to attend the event!

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