Editor’s Note: Luke Faccini, Director of Creativity at Sydney-based agency The Sponge, was one of the hundred plus people to attend the Venture Capital by Design seminar co-hosted by Anthill Magazine and MitchelLake in Sydney last week. He thought the insights on offer were sufficiently meaty to warrant this write-up, which was first published over on The Next Web.
Last Tuesday I attended the Venture Capital by Design seminar out of curiosity. Not having any endeavours that require additional capital at the moment made me an exception among the two parties that filled the room: investors and capital seekers.
The board was loaded with an experienced mix of investors and entrepreneurs who could offer great advice: Michael Zimmerman, Rob Fitzpatrick, Chris Hitchen and Ilkka Tales. Their profiles can be found on the event site.
After the general introductions, Anthill founder James Tuckerman, who emceed the event, posed an awesome question to the panel. Given that entrepreneurs are mainly divided into two camps (shown to be fairly even by a show of hands) — those who focus on the strong business technology/idea and those who focus on the strong marketing plan — if only one could be chosen, which is more important?
The panel unanimously agreed on the strong marketing plan, although there is an obvious advantage to having both types within the management of your business.
As the event progressed, it was clear that the focus was on three key areas:
- What you need to get the money
- Where to get the money
- What not to do when trying to get the money
What you need to get the money
- If you are a tech startup looking for capital, you need to be passionate and have some of your own skin in the game. Your business must be scalable — a product, process or system that can be sold again and again to any number of people. It cannot rely on the people or their available time. Remember that investors want a significant return on their cash, so you need to right size your investment capital to the scalability that is possible for your business at exit (when you return the cash).
- For a web-based business, build a community and demonstrate a revenue stream. Keep in mind that there is a massive over-supply of display ad space and it is extremely difficult to sell, even on a website with millions of visits. Do not put it in your business plan as a core revenue raiser.
- Knowing your industry and being realistic about your competitors and understanding their roadmaps is important as well as having runs on the board — personally or within your management team.
- Demonstrate an understanding of the landscape of your industry and possible roadmaps of your competition.
- Have an existing revenue-generating marketing plan that you can implement.
Most investors would like to see some patentable ideas or technologies, but it is not important. It is often about being better at executing rather than the idea itself. Being first to market on the web doesn’t always mean you have the advantage.
IP (Intellectual Property) can be a critical part of establishing value in an entity, particularly if you plan for a trade sale exit. IP can be patents, know-how and trademarks. Know-how — how your company does what it does — is pretty critical. Patents can enable you to block off and monopolise a market sector. If your business has IP, consult an IP lawyer. There are some great IP lawyers in Australia, with even better ones in the US.
Create an advisory panel or board, as they can add a wealth of experience to your business. Members can often become Angel investors once they have been infected with your idea, but they need to have skin in the game along with any expertise or advice that they contribute. With skin in the game, there is an added level of commitment.
With advisory panel members, board members or VCs, listen to their advice, but don’t necessarily take it. You need to show you have a plan, you have the ideas.
Where to get the money
Angel investors can include “Friends, fools and family”, high net worths in your network or the professional angel community (e.g. Sydney Angels). Typically, this funding is for $10K to 100K. For greater amounts, a venture capitalist is needed. For $40 million plus you need to go global. Overall, the VC industry hasn’t been that successful in the last 10 years, so looking forward they will be far less able to raise money.
You can hire someone to do a capital raise. Be prepared to pay 3.5% to 5% of the amount raised as a success fee, but try to avoid any monthly management fees. Do due diligence on who they are going to target and tie them down for a two month period. Like real estate, if your house is on the market for more than two months, it goes stale. The same goes for a revenue raise. Giving them a deadline to work to creates a sense of urgency.
Smart money is when you take on an investor who can add value to your business with their knowledge, experience and networks. You need to quiz your investors as to how they can help you as much as they quiz you about your business. It is important that they fit in your company and culture, because you don’t want someone to come on board that becomes your boss.
It can take a long time to find the right investors for your business and build a relationship, so start talking to potential investors early. It takes a lot of coffees and a lot of talking. Keep in mind that trust is reciprocated and is needed to get a contract signed, so it is advised to give your investors a bit of trust up front.
What not to do when trying to get the money
VCs and angels dislike it when you say you have an idea that is so amazing, but cannot tell them (because you are scared they will steal it), or that you want you to sign an NDA first. The VC industry has a standard NDA, but this will only be signed in the later stages of negotiations.
Saying that you are only aiming at one percent of the market is a common error. And having a fixed value in your head for what your business is worth. The market will determine how much it is actually worth.
So there’s my summary of the event.
Many of you will already know a lot of what’s included above, for some of you it may be new. Either way it’s good to hear from the experts (again…), in a clear fashion, what’s key if you’re seeking funding.
My congratulations also go out to the organisers, Anthill Magazine and Mitchell Lake who, despite the rather bleak funding environment for tech startups in Australia, put together a great event to help those seeking capital to increase their chances of success.
Luke Faccini is Director of Creativity at The Sponge, a Sydney-based company specialising in the development of multimedia branding solutions. The Sponge recently launched the online branding serviceswww.brandpulsecheck.com and www.thinksocial.com.au.