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B2B and SaaS investors

Video Summary

If you are looking to raise capital for your B2B SaaS business, this panel of investors talks about capital raising for startups and scale-ups. Get a good understanding of what investors look for and how you can better prepare for your next pitch to SaaS investors. You can also get some inside tips from VCs about the good and the bad they have seen when being approached by others looking to raise capital.

Speakers

AirTree Ventures invests in and partners with world-class entrepreneurs to build the exceptional technology companies of tomorrow.

Portfolio companies include Prospa, Hyper Anna, Canva, Spaceship, 90 Seconds, Brighte, PetCircle and Expert360.

After 24 years at the largest accounting firm in the world, PwC, I have just completed one of the best career experiences. Having worked with some of the best companies/clients around the world, dealing with some very complex issues and working with some of the smartest experts in the world, it is time for me to unleash this knowledge gained and put it into practice.

The knowledge and experience gained from performing audits, undertaking acquisition and disposal due diligences, IPOs, raising capital, compiling business plans, advising boards and shareholders, developing growth strategies, business modelling and cross border business transactions between Australia and Asian companies, is what I plan to put into practice in my new roles and business ventures.

The next 3-5 years will be a journey that I am excited about and I hope our networks reconnect along the way.

Artesian Venture Partners (www.artesianinvest.com) is an Australian alternative investment manager focused on early and later stage venture capital with offices in NY, London, Singapore, Shanghai, Sydney and Melbourne. Artesian's VC platform operates co-investment funds with angel groups, incubators, accelerators, universities, government, industry bodies and super funds. Our underlying fund's include the Sydney Angels Sidecar Fund (1&2), BlueChilli Venture Fund, Slingshot Venture Fund, UoW iAccelerate Seed Fund and UoQ iLab Venture Fund, Artesian Clean Energy

[00:05]
John Shim: Hopefully, you’ve had a great day and been quite informative in terms of what you’ve learned. We’ve got the three of the most active investors in the Australian market. What I wanted to do was briefly introduce each of the parties on the panel, so you’ve got a better feel for their background and what they’ve done in the last probably two years in terms of investments and then I’ll ask some questions of the panelists, and then we’ll open up to the audience in terms of any questions you may have.

[00:30]
Okay. So, briefly about myself, as Lea said, I used to work at PWC as a partner there. Saw the opportunity to become an entrepreneur, to see how easy it is to become an entrepreneur in the Australian market, and I was completely wrong. It’s the hardest thing I’ve ever done. I should go back and work at PWC. It was much easier.

[00:50]
Through that journey, I set up Hunter Bay Capital to help startups to growth companies and matured companies in terms of raising capital, help them with business plans, as well as doing mergers and acquisitions for the bigger companies. So, that’s my background. Adam?

[01:05]
Adam Cook: Yeah. So, my personal background is I was from the UK. I started out doing investment banking for some of the larger technology companies in Europe before moving to do some more operational stuff at an image recognition augmented reality company in Europe as well. And then so, I joined Entry about 18 months ago. Over the last 18 months, I’ve been involved with investments like Brighte to do sort of financing, HappyOrNot, who do consumer terminals for NPS and also Thematic which is an NLP company coming out of New Zealand. Entry invests across every single sector from really early stage, 200K all the way up to 20 million, looking to invest in world-class founders building category-leading teams. So, pretty sector agnostic, but a traditional kind of VC model. Luke?

[02:03]
Luke Fay: Yeah. Hi everyone. So, I’m the managing partner at Artesian. Like Adam, I started in investment banking, but I think with the gray hair, I stayed there a little bit longer, about 20 years across ANZ and UBS. My last role was at UBS in New York where I looked after TNT. So, my background has largely been fixed income and for capital arbitrage and distressed assets, which I guess fits quite nicely into VC at times. Our firm is a little bit different to others on the street because we’re actually an alternative asset manager, global alternative asset manager, with a specialization in fixed income and VC. We’ve got offices all over the world: Sydney, Melbourne, Shanghai, Singapore, London, New York. We’re a full stack VC. We invest from seed stage all the way through to later stage.

[03:02]
We have 10 funds at the moment across Australia and China, about 250 million under management. We have 200 portfolio companies spread across just about every vertical business model and geography imaginable, which makes my life interesting at times. We invest in between 30 and 50 or we make between 30 and 50 investments a quarter with ticket sizes ranging from 50K at the seed stage right through to 5 million plus for some of the later stage or the later funding rounds of our portfolio companies. In addition to high net worths and family offices, we’re funded by some of the biggest institutional LPs in the country, like Hostplus, Future Super, Australian Ethical, also industry bodies like the CFC. We source out deal flow from or by partnering with accelerators, incubators, angel groups, and universities. Some of our key partners are Sydney Angels, BlueChilli, Slingshot, University of Wollongong, SproutX, The Actuator, EnergyLab … I know I’m going to forget one. So hopefully, no one’s here that I’ve forgotten.

[04:20]
And in China, to name a few: Brinc, Zeroth, SOSV. So, we have the same model that we operate here in Australia or in China. I guess we’re agnostic tech and that we’ll invest in, at a seed stage anyway, tech that we see high-growth potential with real to low capital lifecycle requirement, but we’ve developed and we’ve continued to develop verticals, but we’ve developed verticals across AgTech, Clean Energy, and MedTech to align with our Pan-Asia strategy to address food security, reducing carbon emission, energy efficiency, waste reduction, and health and wellbeing. So, that’s us.

[05:03]
John Shim: Okay. Thanks, Luke. Damian?

[05:06]
Damian Fox: Hi. So, I’m Damian Fox. My background is also to be different from investment banking. Started off in Sydney and then after that moved across to New York. In New York, I was sort of sitting halfway between a sort of private agreement role and a M&A sort of role. Off the back of that, I was looking and going in, setting my own business up in the states at the time and just fortuitously, there was an opportunity to come back to Australia and be a part of setting up a VC fund here, so we did that in late 2013, early 2014. Carthona Capital’s now got about 250 million of funds under management, raised our latest fund toward the end of last year about 100 mil.
[05:50]
Our investments style is highly, highly thematic, so we’ll spend a lot of time as a team going in going, “Okay, cool. What’s a theme that really excites us?” We’ll independently go away and do a lot of research, come to a table and think about, “Okay, cool. This is what’s happening in this space.” And given the check sizes that we like to write, “Okay, this is the most exciting vertical for us.” And so what that means is we’re highly, highly, highly high-conviction investors. In terms of checks sizes, we like to write sort of in the early stage. When we say early stage, we like to sort of go pre-seed, seed, series A, as our initial entry point. In that stage, anywhere from sort of 1 mil to 2 mil initially and then with the intention to write, sort of 2 to 3 thereafter.

[06:29]
In terms of sectors, pretty agnostic. We’ve got a global mandate, so we can invest anywhere in the world. Hopefully, there’s probably predominantly in Australia. Then next biggest area would be in the States and then we did our first investment in Europe late last year. In terms of notable companies in Australia, most known for zero latencies successful virtual reality business based in Melbourne that’s also got centers all throughout Asia and also through the states. Incredible, we were listed on the ASX last year. In the states, probably most known for Peerspace, Google Ventures just recently led their Series V and a business called Ouster, which is a LIDAR-based business.

[07:11]
John Shim: Thanks, Damian. So, look. What I want to do is start from an investor’s perspective, share with you guys what they’re looking for and what are things that they’ve seen so that you get a feel for the type of characteristics in startups that they’re looking for. So, in that regard, I guess you’ve all mentioned you’re sector agnostic and from what you’ve said, if I’m a startup, I’ll go, “You know what? I can approach you because I think I’ve got the best business in the world and you should invest in me.” There must be some characteristics or certain things you’re looking for in startups, that attraction to making that investment. Can you share with us what they are?

[07:47]
Adam Cook: Yeah, for sure. So, let’s say you take everything we say with a bit of pinch of salt because we’re all VCs which is a certain type of funding. We’re all by the nature of venture capital looking for very outsized returns. So, we’re looking at it with a specific lens. I’d say that we also have different LPs in terms of the mandates that we have and the sorts of companies that we look at. This is the same across all types of investors. They have a specific mandate that’s set out by their LPs that says, “We’re going to invest in X, Y and Z.” So, I think it’s good to kind of research when you’re talking to investors what their kind of mandate is and what they like to invest in. So, we’re all going to have different opinions and every investor will.

[08:30]
In terms in what we look for, I think we’re fundamentally looking for product-centric teams building category-leading businesses. We’ve got this really big bias towards fantastic products that users really love. That’s kind of the real core of it. If you can build a product that users are telling everyone about and kind knocking down your door to come and buy from you, that’s the best thing that we can see. So, there’s a couple of examples of that. We’ve got one company, Different, we invested in last year. They do, basically, they try and automate the real estate agent piece when you’re a second homeowner or if you’re renting a home. So, Mina, who’s one of the co-founders, she used to be Head of Product over in Uber, she’s incredibly product-driven, so she’s been spending the last … I don’t know … every single weekend since we invested about seven, eight months ago doing the job of a real estate agent to understand exactly the pain point they go through. Like she is living this day in, day out. She’s going, she’s letting people in the door, she’s doing absolutely everything to truly understand the product. This is going to make every person’s step in that chain a lot easier. So, it’s kind of this obsession with product that we really, really like.

[09:40]
Something else that we really like is domain expertise. I think that, where can we find specific advantages for companies? And it’s like, “Okay, well if the founders have, you know, 10, 20 years specific expertise in this one area, they’re going to be in a much better place than, you know, other people.” So, one of our other companies, for example, is Thematic. So, Alyona spent literally 10 years in the NLP research space before building our product there which relies very, very heavily on NLP. So, we kind of look for product focus and domain expertise for category-leading businesses.

[10:16]
John Shim: Okay. What about yourself, Luke?

[10:17]
Luke Fay: So, I guess we’re a little bit different as well. We don’t invest outside networks. And when we do, it’s only if the startups completed what we would consider to be an approved accelerator or reincubation program. And I guess we just start with that because it helps us scale out our DD and information analysis. It doesn’t necessarily produce winners, but I think it helps, at that very early stage anyway, get rid of uninvestable companies. They might be uninvestable for a number of reasons and it’s not to say that they won’t come back at some stage. But at that stage, they’re probably just not ready for money.

[10:57]
I think the other thing from our perspective is that our model will capture moonshots and unicorns, or whatever you want to call them. We’ve designed it also with the Australian M&A market in mind which is really a market sub-100 mil. And in fact, I think most of the density, especially around corporate acquisition is probably somewhere between 30 and 60, right, gentlemen? You probably know a bit more than me.

[11:27]
John Shim: Yeah.

[11:27]
Luke Fay: So, for us, we want to invest as early as possible because it gives us a lot of flexibility around our portfolio and allows us turn the investments substantially faster, and also exit with a substantially better return than you do when you’re working at a later stage. So again, for us, at that very early stage, as long as you have the high-growth potential and relatively low capital lifecycle requirement, we’re really interested.

[11:56]
And because we’re only investing a small amount of money, we treat it like an options portfolio, so we can actually spread ourselves quite wide and we use our accelerator partners to help us, I guess, filter that deal flow, so that we probably estimate in a nearly 5-year period, about 10,000 companies are going to be started. We thought the best way to try and capture, it’s only a part of it, but it doesn’t mean that don’t capture everything, but we’re hoping to capture top 20% of the market and then we hope to capture other companies that don’t need to go through that acceleration process through our angel group, Sydney Angels. So, we see a lot of founders that either don’t need to go through an accelerator, they’ve got their funding in place, they’ve had successful legs. They just want to go there for the network and for the ability to attach to the fund.

[12:45]
Other than that, what Adam said, I think it’s fairly similar across most of the VC space. When we’re looking at the later stage investments, we’re looking for that domain expertise, strong product, big market, ability to scale, you’re looking for really strong growth metrics across the business that can help you come up with that point, you’re looking at a strong team. And I guess you’re also looking at companies where you think you can make a difference as well, where we can help them, where we can use our resources to actually help get them to the next level.

[13:19]
We’re a co-investor as well. We like to invest with other firms. I think we’ve done numerous deals with both these firms. I think for us, we like that validation and we like, I guess, the optionality. It gives the founders and the businesses moving forward as well. So, we always like to see co-investors in our deals.

[13:38]
John Shim: All right. Thanks a lot. Damian?

[13:40]
Damian Fox: Yeah. So, I’d agree with everything that’s just been said. If I look back across our portfolio without trying, one constant thing that I seem to see is businesses that have really high IP or business that you can build a moat in. As a VC investor, the worst thing we can do is invest in a business which we’re not going to see moneyback for 10, 15 years, who knows how far down the track. It’s a business that you build up to a massive scale and then a competitor can come in and just sort of encroach on your territory very, very easily. So, I guess that’s one thing.

[14:13]
In terms of any investor, at the beginning, the most important thing is the entrepreneur and the entrepreneur-investor relationship as a subset of that. There’s no point… As an entrepreneur, you need to prove to your investors that you are, globally, the best person to go tackle this massive problem ahead of you. And similarly, you know what? You have to be able to work with your investors. At an early stage, your investors are going to be way more hands-on than they are way later stage in your business. And so as a result, at both the good times and at the bad, you want to make sure you have a good working relationship and you don’t end up in this toxic board circumstance where you’ve got diverging interests and you want people to have this common goal of the business succeeding.

[14:53]
Secondly, the TAM. So, lots of people talk about operating in a big market. I think people get caught up with, “This is the market size”, as opposed to really thinking through what TAM, your Total Addressable Market needs. So, for the type of businesses that I’m doing, the type of service, what actually is addressable and what percentage of that market do we think we can realistically get?
[15:16]
Thirdly, certain businesses are just not open or are not perfect for VC investment. There’s certain things you like to see as a VC investor, that’s scalability, unit economics that make sense, sort of evidence of product market fit, that sort of thing. And then finally, the deal has to make sense. So, if you’ve got a entrepreneur or a business’ expectations around pricing up here and the investors expectations are down here, well, you’re never going to make that work. And similarly, if you’ve got a circumstance where an entrepreneur might have taken some early friends and family capital from less price-sensitive investors at a certain rate, sometimes that means that actually, when a more price-sensitive professional investor comes along and they’re evaluating the business down here, you might end up in a circumstance where the business just can’t take that additional capital because effectively, you’re going to have to crunch those friends and families who’ve supported them at beginning of the lifecycle of the business, so that can just stop the deal.

[16:15]
John Shim: All right. Thanks, Damian. As I’ve said earlier, I left PWC and started a great new startup which I’m sure you all have heard of, it’s called Road Runner Mobile Tyres. So, let’s say, tire business will come and replace car tires at home and it’s a B2C model. And one thing I’ve learnt over 5 years, B2C’s really hard in terms of getting traction and getting scale. Now, we’ve got a lot of B2B and SAS members here. Is B2B and SAS a more attractive sector for you guys to invest in versus a B2C model? Luke?

[16:49]
Luke Fay: It has its own challenges. I think the biggest challenge that we see with our B2B startups is the coming to grips with the enterprise sale cycle. And it doesn’t matter how good the product is and how much work you’ve done around it. Really getting and cracking that enterprise sale cycle is difficult. And it’s not so much that you don’t crack it, it’s just understanding the time that it can take to get a bigger organization to adapt the product and just the bureaucracy and stuff you’ve got to go through. But even once they sign it up, I also find the next challenge can be adoption within the firm. Like how do you… it’s all well and good to actually get the enterprise to sign up, then you’ve actually got everyone to adapt it. And that can be out of your hands because it’s how the firm actually dictates to you how you can do it. And it’s kind of a trial and error situation for a lot of the funds and if you run out of money while you’re doing that, it can get quite dire. We’ve started to see some really interesting solutions to that, but I think that’s the biggest challenge and it’s almost as hard. I think that the B2C is really a funding issue, it’s just having enough money to do it. Whereas B2B, you’ve really got solve that cycle.

[18:04]
John Shim: Yeah. What are your thoughts, Damian?

[18:06]
Damian Fox: Yeah. So, our portfolios probably 50/50 B2B versus B2C. Having said that though, a comment I’ll make is, all B2C businesses have a B2B element to it, whether that makes them a B2B2C or whether there’s just generally a partnership nature to it. And one of the businesses I mentioned earlier, Peerspace, it’s quintessential consumer-facing marketplace. But having said that though or if you look at how their growth has come, it’s come from partnerships with big, big companies. For example, they’ve got a partnership with Uber or lot of Uber’s sort of out-of-office activities is being pushed through this platform, that’s driven strong growth in the marketplace, which has been driven by a business relationship despite the fact that it’s theoretically a B2C business with them.

[18:49]
I definitely agree with the comments around sales life cycles, sales times, and sales lead times. If you’re given a business 18 months runway and their lead time is two years, especially at the very, very early stage before they’ve had a change to build up a really, really strong pipe of enterprise sales, well, if the business runs out of capital before they can secure that contract, well, what happens? The business pretty much stagnates and then you get to a point where do you reinvest? The founders are unhappy because it’s at a flat evaluation and the investors want to see an upwards as well. So, that’s some of the challenges, but the good thing about VC is you’re investing in hard problems. And so if you can overcome that, it means that your moat, your ability to protect your share of the market is so much stronger than you would be in a traditional B2C space.

[19:40]
John Shim: Adam, anything to add?

[19:41]
Adam Cook: Yeah. I don’t think there are, for us, any major differences. B2C and B2B is fine. I think at the end of the day, it all comes down to product. You’re still selling to somebody, it’s just whether they’re sitting in a business or if they’re sitting in their own home. It’s just a different way of selling to them. We’ve had successes in B2C like Canva, Pet Circle who do online pet shopping, and more recently, we’ve invested in such as Spaceship which is kind of a superannuation place. And then on the B2B side, we’ve had companies like Prosper, do well, Employment Hero who do SME HR stack. So, there are successes everywhere. I think as long as you’re building a product that people want, everything else kind of comes together. It’s just about structuring your business and your sales around which model you’re going after.

[20:28]
John Shim: Yeah. Okay. We might just change the take in, now focus from a entrepreneur’s perspective and giving advice to them.

[20:33]
One of the things I see quite common with entrepreneurs is they go, “Here’s my business plan. Here’s how big the market is. I want to take 1% of the market. Therefore, my business is worth $100 million.” And that 1% of the market is not an easily achievable target, even though it sounds easy when you say 1% or 0.1% of a market.

[20:53]
What advice can you give entrepreneurs around how do you set expectation in terms of the growth rates and what’s realistic that gets presented to you that you can believe in, rather than just simply say, “I’m going to take X percent of the market share that I play in”? Let’s start with Damian.

[21:12]
Damian Fox: Yeah, sure. So, I don’t really… although, from a market sizing point of view, it’s useful to do a percentage of a market that’s interesting. I don’t think predicting how fast your company’s going to grow has got any connection with… Oh, sorry… has connection, but at the early stage, actually predicting growth and be, “Oh, I’m going to be at 0.1% of the market at this point and 0.2% of the market..” is really the right approach. To be honest, it’s a business by business case. If you sell widgets and you sell your widgets for $100 and you’ve got confidence you can sell 10,000 widgets, well, that’s your number. And I would think about it more like that, rather than a percentage of the market. But certainly, from when you’re looking at the value of a potential opportunity, if you can with confidence say that, “Oh. Over time, maybe it takes 10 years, maybe it takes 15 years, maybe it takes a lifetime. I feel that if I can get my product good enough, I can take 10% of this market.” Well, that gives you a good feel of how big this thing really, really can be.

[22:04]
John Shim: Okay. Adam, your thoughts?

[22:06]
Adam Cook: I’ll just make one comment on some founders doing market sizes. I just don’t want to be specific. Sometimes we’d get companies like take Spaceship, for example. They didn’t do this, but imagine if they came along and said, “Hey, we’re playing in the 2.3 trillion superannuation market.” You’d be like, “That’s not really your market. Your market is specifically a demographic within there who have a certain amount in superannuation.” So, just be far more granular about the actual target market you’re going after, rather than just being like, “I’m going to get the 1% of the Chinese market,” and it’s huge. Yeah. But like, what are you actually doing within that market?

[22:38]
John Shim: What about yourself, Luke?

[22:39]
Luke Fay: I guess, not a different view, but I think it just comes down however you do it, market size or whatever else. As a founder, you’ve got to come up with the balance that convinces investors that this is a blue sky opportunity, but you’ve got to have the financial model behind it to back it up. So, it’s a bit of an art, I think, where you want to have a base case which people can understand and you can kind of justify it, but you need to also build the blue sky around it. So, I think it’s just building that or finding that balance to attract investors, but also not put them off when they start doing the numbers and start making sure that the business plan actually fits with the financial model.

[23:26]
John Shim: Okay. So, from an entrepreneur’s perspective and the ones that you’ve actually invested in, are there any common elements or process they’ve gone through that makes it more likely to be successful in terms of getting investment from you guys? So Adam, what are the things you’ve seen from successful entrepreneurs that you guys have invested in?

[23:47]
Adam Cook: I’d say go out and meet investors early. It’s never too early to start conversations, go and have a relationship, as Damian was saying. This is kind of a marriage. It’s actually harder to get rid of an investor than it is a co-founder, so you are truly in the trenches with probably the key person but also the larger organization. So, you really want to check them out and you should be doing DD both ways. So, kind of trying to develop that relationship over a period of time I think is really useful. If you’re sitting on our side and a company comes along, and you meet them for 45 minutes, and they say, “Hey, can I have $2 million?” And you’re like, “I don’t even know you. Maybe?” Whereas somebody comes along and is like, “Hey, we’ve been chatting for like 6 months, you’ve kind of guided me as to what you think I need to look like for you guys to be interesting,” and you kind of have that kind of working relationship, then it’s a lot easier to have that conversation. So, you can start these conversations early even if you’re a long way off from finding fundraising. And hopefully, it’ll give you a bit off guidance as to what you should be aiming for. So, yeah. I’d say that’s a big one.

[24:49]
John Shim: Luke?

[24:50]
Luke Fay: Sorry. The question was what?

[24:54]
John Shim: So, with all the successful investments that you’ve seen, what are the common traits and process they’ve gone through that [crosstalk 00:25:01]

[25:03]
Luke Fay: Yeah. Look, I think … So obviously, business traction. I think investors, having a good group of investors through a number of rounds. And I think, just what I’ve said before, like just getting the blue sky right with the rest of the model and where you’re at, so that people actually buy into where you’re going and you can actually demonstrate a business and you can demonstrate traction, you can demonstrate that the model that you’ve got in place works, and if X, Y, Z happens, we can get up to here and I think that can be very attractive to investors.

[25:35]
John Shim: Okay. Damian?

[25:37]
Damian Fox: Yeah. I think the core thing is the skills of the entrepreneur, whether that’s technically or whether that’s just ability to sell, and that’s whether selling your business or selling your business to investors. If I look at our really successful businesses, each of those, the leading entrepreneur and the technical entrepreneurs are at a point. Every time you speak to them, you’ll wow and you think you can come up with some DD questions, “Oh, yeah. I’m going to hit them at this next meeting and I’m going to find out,” and they answer them like that and they are just off onto the next level. So, that’s obviously hard to just go and make. It’s not really an answer, doesn’t really help you go, “Okay, cool. I can make myself better,” but I think it’s just becoming a real expert in your field and improving your ability to entice investors and to be a salesman even if you are a CEO.
[26:28]
Adam Cook: I’d like to add to that. A lot of it is practice. The skills that you need is kind of a storytelling ability to get people onboard but a huge amount of it is practice. And as you go through investment meetings and stuff, you’ll start to pick it up. So, it’s just go out and do that a ton of times, practice on whoever you can, practice wherever. Just hone in on those skills. I genuinely believe that pretty much everyone can hone in on those skills, there’s just some people actually go out and make sure they’re better at it than others.

[26:53]
Luke Fay: I was just going to add that I think good founders with good businesses always get funded.

[27:00]
John Shim: Okay. What I might do now is just open up to the audience in terms of any questions you guys may have to the panelist? Anyone got any questions? Do we need a mic?

[27:14]
Audience 1: Good day. Quick one, first mover advantage. Comments? How important is it? How detrimental not to have it, etc?

[27:24]
John Shim: Damian, do you want to?

[27:26]
Damian Fox: Yeah. Look, there’s obviously an advantage. There’s always an advantage in a land grab. But having said that though, I think if you look at it over time, most technology in most areas of technology businesses, the better product wins out of time. I guess I’m just reiterating what Adam said earlier, that if you’ve got a good product, people will buy it, and if you’re solving a customer pain point, that’s more important than necessarily being first out of the gates.

[27:52]
Adam Cook: A good example, a recent example of this is actually HipChat and Slack. I don’t know if you followed the story where HipChat … Atlassian bought HipChat, which is very similar to Slack, many years before Slack kind of came out the gates. And they didn’t probably invest in HipChat as much as they should’ve done and Slack came from behind and because it was a superior product that had better growth built into it, it massively took market share over HipChat, and the announcement the other week was that HipChat has now been shut down. It is no more. So, it’s important that a product usually wins out.
[28:29]
John Shim: Another question. There you go.

[28:31]
Audience 2: What are your top 3 sort of turnoffs when looking for companies to invest?

[28:37]
Damian Fox: One each? One each?

[28:40]
Adam Cook: We’ll do one each.

[28:41]
Damian Fox: Someone who reeks of being full of it. You speak to them straight away, I love a salesman when I say this, but someone who you question them and they tell you this and, “Hmm, does that seem right?” And you toy a little bit more and then finally get to a topic that you actually know a whole lot about and you ask and you realize, “Hmm, they’re saying this, but actually, you know … hmm.”

[29:05]
Luke Fay: Really high, unsustainable burn rates.

[29:10]
Adam Cook: Just not knowing your shit. Like if I’m in a meeting and I say, “What’s your cash burn?” And they go, “I don’t know”. Like, What do you mean you don’t know? Like the lifeblood of your company is cash and you don’t know how much you’re burning, like last month? Like, how are you running this business?” So, just like making sure across those numbers and just across how you build your business.

[29:30]
John Shim: A question there?

[29:34]
Audience 3: Just a quick question, Damian. You mentioned previously that you, at least your company has sort of themes that you tend to focus on. I’m just wondering maybe we can just quickly cross. Are there any particular themes for each of you that you’re particularly excited about right now?

[29:45]
Damian Fox: One thing I’d say is that sort of thing, we regard as our IP. But one area that I’m highly, highly, highly disappointed that we haven’t made an investment in, and I was just talking to Adam about this, is AgTech. I think there’s a real opportunity in Australia to really dominate the world on that space and unfortunately, on our portfolio, we don’t have a single AgTech investor. So, if there’s anyone out there that has got a great AgTech business, love to hear about it.

[30:15]
John Shim: Luke?

[30:18]
Luke Fay: I was just going to say that yeah, our vertical specializations, for the reasons that I stated at the start, AgTech, Clean Energy, and MedTech, we’re addressing food security, carbon emission reduction, energy efficiency, waste reduction, and health and wellbeing.

[30:41]
Adam Cook: For me personally, I look specifically into FinTech energy IoT and then I’ve started to do a bit of digging around space and quantum just in my spare time because I think it sounds cool and I want to see what’s going on. We’ve done a fair bit of research into those two sectors, keeping our eyes out.

[31:00]
John Shim: Any other questions? There’s one here.

[31:03]
Audience 4: I’ve got the microphone. I’m sorry. Luke, just touching on what you said you’ve basically finished off saying, “If the company’s really good, it’s going to get funded.” Not so long ago, I heard of a really successful entrepreneur from the Silicon Valley also say that. So, I asked a few people in VC what they thought about that because I thought that was an interesting comment for him to make. And one of the people I spoke to said that’s not true and they are an investor heavily in the Sydney space. And they said it’s a lot actually to do with luck, timing, being early to markets, what’s already out there, this kind of stuff. So, whether you’re right or wrong, cool. I’m just would love to hear some more thoughts on that. Maybe to do with the Australian ecosystem.

[31:48]
Luke Fay: I mean there’s a lot to be said for being in the right place at the right time, no doubt. I guess I’d address it like this. We work in an industry that has relatively low barriers to entry. And if you think about the success rates, they’re relatively low compared to the failure rate. So, the noise that you hear around failures is usually overwhelming and it’s a big voice. So, I guess that’s the voice that a lot of people tend to hear and tend to extrapolate.
[32:20]
Damian Fox: A point I’d make would be that sometimes, this is more of a Silicon Valley phenomenon, but sometimes you get into this circumstance where these big funds have raised billions of dollars and so they’re chasing these big, massive, massive outcomes and so I’ve seen businesses before that are great businesses that are maybe worth $50 million, $100 million and actually just can’t get capital just because what they’re going to be worth is only 800 million because actually, the fund is looking for a $2 billion opportunity that could return the fund and they could just sort of coast for the rest of the lifecycle of the fund. So, definitely, there are circumstances out there, but I would reiterate that if you’re in a hot area that’s got this massive market size and you’re a really good entrepreneur, I would hope that you get funded and fortunately, there’s a bit more venture capital available in Australia now. So, please come pitch us if you’ve got that great idea.

[33:14]
Adam Cook: I also picked up one that come up and said, “You know, wrong time or wrong place.” I’d say, even if you have, in theory, a good business, if you’re in the wrong time, then that’s unfortunately a bad business. That’s not going to go anywhere. I probably generally agree with that comment, but it might take a lot of noes. It is a numbers game. There is some element of luck, but if you’ve gone and talked to 100 people and got 100 noes, then it probably isn’t a great business. But I think some people expect a yes after maybe like 10 conversations, but even good businesses will still have to have sometime 50 plus conversations with investors just to get one yes.

[33:55]
John Shim: Any other questions?

[33:59]
Audience 5: I’m kind of flipping this on its head a little bit. Say there are businesses that you’re quite interested in investing, would you ever make the argument you shouldn’t take investment from you guys? What reason would you have to argue against your own existence, basically?

[34:14]
Damian Fox: I would not.

[34:17]
Adam Cook: I think it comes down to what type of business a founder wants to build and what kind of ambition they have. If a founder wants to 100% own their company and build a nice business that might be worth 10 million one day, it’s pretty great, right? I’d take 100% of a $10 million business. If you just gave that to me, that’d be awesome. But other people just have far greater ambitions. They want to build a billion dollar business. So, I think the mindsets have to match up. So, sometimes I meet a ton of great companies that VC just isn’t suited for. So, in those situations, I say, “I don’t think you should be talking to VCs, I think you should be finding different ways to fund your business. Because this is a great business, but it’s not appropriate for what we look for”.

[35:00]
John Shim: Questions?

[35:12]
Audience 6: For all three, how many pre-revenue companies have you invested in?

[35:19]
Damian Fox: Over 20 for us.

[35:20]
Luke Fay: Probably about 190. 190, I don’t know. Something like that.

[34:25]
Adam Cook: I’d probably say out of … I think our portfolio is 41? I’d say probably, I think it’s eight or nine.

[34:33]
Damian Fox: I would add that it’s probably how we see our specialty. We like to go pre-revenue and that’s why when I say pre-seed, seed, sometimes series A is pre-revenue these days, so.

[35:46]
Luke Fay: Okay. So, we source some ideal flows. We have five seed stage funds which basically takes seed, pre-seed investments and you have to go through the accelerator. So, often, we’re dealing with a couple of founders with just an idea. So, we do it a lot and that’s how we build our model around that.

[36:10]
Audience 6: It’s positive to hear it because most VCs in this country say they’re pre-seed but then they expect revenues of a million plus before they even talk to you. So, it’s really great that you guys are doing that.

[36:20]
John Shim: I think that’s why we’ve got the right VCs here for startups. Any other questions?
[36:28]
Audience 7: Do you have any views on companies that are wanting to be designed to be multinational versus prove your worth in Australia before you kind of stretch yourself too thin?

[36:42]
Damian Fox: So, the only comment I’d make is that… it’s a thing that everyone’s heard before, it’s “Australia’s a good proving ground.” I think it depends on the type of business. I think it’s actually quite hard to take businesses offshore. You have to have a very specific type of probably consumer-facing business. Most B2B type businesses, there’s always a different sales channel. It’s actually quite complicated to go offshore even to seemingly similar markets. So, I would much rather invest in an Australian-only business that has a massive, massive, massive TAM here than I would want that, “Look, I can prove it out here and then maybe I can go offshore and roll the dice again and see if it can get some traction there”.

[37:26]
Luke Fay: Yeah. Horses for courses, but I mean, depending on what your fund’s mandate is, you’re always looking for businesses. If you’re investing in Australia, that can expand globally and scale globally. So, yeah. You like to get as many of those as you possibly can. But it doesn’t preclude you from actually investing in companies that are going to be successful in Australia and I think I explained it before with our model. Because we invest so early, we have a bit more optionality around that because we don’t have to get as big exits out of investments because of the IRLs that we can get.

[38:03]
Adam Cook: I think we look at it both. We’ve invested in companies that even their first customers were US customers, they did global from day one versus others. I think in investments we’ve made in companies that are kind of doing the journey where they prove it out here, our investment has to stack up if they were just going to do Australia. Like we can’t be investing on the basis that maybe they’ll go out afterwards. So, I think that’s kind of just the difference in how I think.

[38:26]
Luke Fay: The only I’d add … Sorry. We’ve got a big China fund and I think it’s entirely different there because you’re just looking at it to scale in China. But, anyway.

[38:37]
John Shim: All right. Might just have one more question from the floor.

[38:40]
Audience 7: Hey guys. Just a question for the panel here. Historically, there’ve been a number of policy measures from government to stimulate the investment activity in Australia [INAUDIBLE 00:38:50] partnerships and [INAUDIBLE 00:38:52] themselves. What sort of things does the government do well to try and stimulate a response [INAUDIBLE 00:38:59]?

[39:09]
John Shim: Luke, do you want to take that one? About the [INAUDIBLE 00:39:11]

Luke Fay: Yeah. I mean, yes, [INAUDIBLE 39:13] are great. Look. Just broadly speaking, I think you want a government that supports an ecosystem without getting too involved. So, I think we’re kind of in a situation in Australia where there some great initiatives around that. I think sometimes we see some of the grand process that’s going on. It can get bit distortive, albeit that I think it can be useful. So, I think you just want a government situation where they’re supporting an ecosystem such that founders can actually get out there and create businesses and be connected with funding from VCs and other sources.

[39:54]
Damian Fox: I think our R&D incentives game is amazing. So, whoever came up with that one is a genius.

[40:00]
Adam Cook: Yeah, R&D tax is fantastic. They’re also looking at reducing that, so that’s not ideal. I think also just one thing to mention is the whole visa issue in Australia, it’s just terrible for tech talent. The fact that if you look at any kind of standard jobs in technology, like a PM or a UX Designer, it’s just not in the visa categories which is ridiculous. At the time when Trump and the US is shutting down, all of these phenomenally talented people within the tech world, surely it’s the time when Australia should be more open to that. So, I think visas in Australia, especially coming from the UK and how hard it was for me to even get a visa and it’s so difficult for some of our portfolio companies to get really good talent, I think it’s pretty shocking right now.

[40:50]
Damian Fox: So, there is one visa which is the 188E which is pretty much you got to be an entrepreneur and you can .. if you’ve raised more than I think it’s $200,000, you can apply for this visa. The unfortunate side is that I think it’s an 18 plus month process, so you have to have a visa first, be here, and then you can sort of roll onto this bridging visa. That’s very hard to invest into a business which the founder may not be able to work in at some part of the time in the future.

[41:17]
Adam Cook: I think there’s only been one of those and that was actually Roman, from one of our companies.

[41:21]
Damian Fox: Is that right?

[41:22]
Adam Cook: Yeah. He’s the only one who’s done this. So, that’s how difficult it is to get this entrepreneurs visa.

[41:25]
John Shim: All right. One last question from me. Apart from money that you guys provide, what additional things can entrepreneurs can expect from you once the money’s been invested? So, Damian?

[41:35]
Damian Fox: Yeah. So, because for our initial investment, we like to go in so early. We’re highly, highly handson. So, as a minimum, we’d be speaking to our entrepreneurs, especially in the early stage, once a week. With some of them, it’s more like daily. There’d be certain few entrepreneurs especially at the moment that if I went through my missed calls while I’ve been at this conference or just be entrepreneurs that you’re working with. For us, the reason we do that is at the beginning, it can be a lonely job, being an entrepreneur, and having someone to sort of a sounding board that you can say, “Oh, look. I’m thinking about doing this.” and just sort of think through the logic is really helpful. Similarly, when things aren’t going that bad, it’s really good to be across them and not fighting about it at the next board meeting, but instead fighting about it in realtime and being able to sort of lend a helping hand and make sure if there’s a way to solve the problem or at least get ahead of it, that we can be there and assist.

[42:29]
John Shim: Luke?

[42:30]
Luke Fay: Our companies that come through the early stage through the seed stage funnel with accelerators get full-on funding, guaranteed full-on funding provided that they do certain things which I think solves a really big issue for founders out there. Secondly, our global network and all our firm’s resources moving forward.

[42:58]
John Shim: Adam?

[42:59]
Adam Cook: So, the way we’d like to think about it is we want to be that first call, not only when things are going really well, but also if a founder’s going to ring and be like, “I think I may have fucked up”. Like, we want be on the other side and for the founder to be that comfortable. I think that’s really earned through trust, so it’s about working with the founder, it’s about communicating regularly, whether that’s once a day, once a week, however our founders want to do it. We also do a whole ton of what we like to call platform which is … we’ve got about 40 portfolio companies from companies that are looking into IPO all the way down to pre-revenue. So, we’ve got a ton of experience in matching our portfolio companies up with those a little bit further on or having the same kind of issues.

[43:41]
We also run a ton of breakfast sessions. So, we’ve done them with Anil Sabharwal who’s the VP of Google Photos, runs Google over here with our portfolio, mainly our sort of key portfolio people who are doing product and we had Hugh Williams who is VP of Engineering at Tinder and eBay coming to do a CTO session. We’re constantly looking at plugging in these world-class people into our portfolio companies for sessions or for help, or in wherever we can. We also have Andrew who’s our in house recruiter, who does a ton of recruitment for all our portfolio companies. On one side, it’s great for the portfolio companies, but very selfishly, if we can place the best people in our portfolio companies, then surely they should be better companies. So, it’s kind of a win-win on that side.

[44:27]
John Shim: All right. So, our time is up. As I’ve said, you’ve got the three most active investors here. Hopefully, you guys will get a chance to approach them and talk quick pitch, and get their cards and get to know them. But their insightful message, it’s basically, they’re straight shooters. You’re not going to get sugar-coated messages from these guys. They’re not going to waste your time. They’re going to give you quite honest and frank feedback. And as they said, it may not be the first pitch that you will get investors, it might take you three or four, or five, it could take a year before you got your business into a state where they can invest. You’ve just got to persevere. And I’ve gone through the same journey raising capital for my startup. And it will happen as long as it ticks all the boxes.

[45:10]
So, can you all join me in thanking Luke, Damian and Adam. Thanks, guys.

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