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How to snare a US investor

Monday, 23 May 2011 | By Oliver Milman

The business world has been abuzz with talk of a second dotcom bubble, fuelled by the huge public debut by LinkedIn last week.


Whether ‘bubble 2.0’ bursts as spectacularly as its predecessor in the early 2000s or not remains to be seen, but one encouraging sign is already evident – this time, Australian start-ups are part of the tech surge.


A flurry of recent deals demonstrates that US investors are keeping a closer eye on Aussie start-ups than, arguably, ever before. Whether it’s Accel Partner’s investments in Atlassian, OzForex and, most recently, 99Designs, Yahoo!7’s acquisition of Spreets or Tiger Global Management’s minority stake, revealed this week, in Catch of the Day, the days of Australian start-ups being overlooked appear to be well over.


So how do American investors view emerging Aussie businesses and, crucially, how can start-ups boost their chances of following in 99Designs’s and Atlassian’s footsteps?


Scene setters


Haig Kayserian, the Australian founder of web developer Kayweb, has offices in Sydney and New York. He splits his time between Australia and the US and recently launched a new angel fund that exchanges equity for technical skills


He says that the Australian start-up scene has finally “woken up” and that US investors are taking notice.


“There have always been start-ups in Australia, but until recently they didn’t embrace the term ‘start-up’, which is part of the vernacular here in New York,” he says. “The scene has woken up – there are now a few local incubators and there is top-down investment.


“Most US investors haven’t been to Australia but they know the stereotypical questions to ask an Australian and the lack of a language barrier is a big advantage. There is a general synergy between the markets.”


“I’ve noticed that investors here (in the US) believe Australia is a more progressively green place than the US. They feel that Australia is green, literally, and ahead when it comes to green technology. There’s a definite opportunity for Australia to be a leader in a niche tech area such as this.”


Going global


Phil Morle, co-founder of tech seed fund Pollenizer, says that there is growing interest in Australian start-ups from across Europe and Asia, not just the US.


“Everyone is very globally focused, I just think it’s a general trend,” he says. “You can just quickly do something, make something global and valuable.”


“Australian companies and entrepreneurship has always been a very powerful force because it’s always been so hard because of the appalling ecosystem to get a system off the ground.”


“If you’re an entrepreneur, your capacity to successfully do it in the US or southeast Asia is very strong, because there you have investment structures, better incentives on a tax basis and so on.”


“You can now (as a large investor) invest smaller amounts across lots of different amount of opportunities, and a large percentage of those can catch fire.”


Mark Harbottle, co-founder of 99Designs, says that the US venture capital market is streets ahead of its Australian counterpart – a fortunate scenario for a local start-up with global ambitions.


“Australian VCs aren’t very active and I think the US guys see that as an opportunity,” he says. “We didn’t get a call from Australian VCs for three years, while we got calls every week from the US.”


What are US investors looking for?


To get $35 million in funding, as 99Designs did, it obviously helps to have a concept of global appeal, as the crowdsourcing site does. But Harbottle says there are certain strategies that all start-ups looking for US investment can deploy to increase their chances.


“It’s important to have a presence in the US,” he explains. “We have a CEO in the US and without him it would’ve been a lot harder to get the right investment. We, the shareholders, were one step removed from the negotiations, which helped too.”


“One thing we did there was get a communal office space. We met a bunch of dotcom start-ups, which was realty helpful. They made introductions for us that we wouldn’t have got if we rented an office in the middle of nowhere.”


“It’s important to remember, though, that the earlier you look to raise money in the US, or anywhere for that matter, the worse deal you’ll get. You’ll give away a large stake until you can prove you are profitable and fast-growing. If you can do the early stage with your own money, or get an angel investor on board, that is a good idea.”


Face time


Kayserian agrees that it’s imperative to physically get in front of US investors in order to seal the deal.


“It’s key to get in front of them as you can submit ideas, but they will only get you so far,” he explains. “US investors like to see the person as much as they want to see the product or idea,”


One good avenue to investors is pitching events or industry gatherings. Kayserian says that Silicon Valley VCs, such as RRE Ventures, regularly make trips to New York to seek out the best entrepreneurial talent at organised events.


Pitching events are public affairs in the US, with around 20 applicants accepted to take part. One VC firm head even has his diary online so that start-ups can book in time with him.


Sector-specific shindigs, such as this week’s TechCrunch Disrupt, can also be fertile hunting grounds for Australian start-ups.


“For $2,000 you can get in, exhibit your business and mingle with the biggest VCs in the country,” says Kayserian. “Foursquare will be there, Google will be there – this is an audience you want to be in front of. They may hold a side party or event where you can talk further with a potential investor.”


Investor hunting


According to Keyserian, the months of May and June are a good time for Australian tech companies to visit the US and get in front of VCs.


“There’s always a lot happening then – the pre-summer period is very busy,” he says. “A lot of VCs have events each quarter and a lot of them fall around now. It’s a good idea to base yourself here as you’ll achieve far more. You won’t have to pack in meetings and can achieve traction.”


“Remember that VCs need ideas people as much as vice-versa. Come for two or three weeks around a big event, create contacts and leave time to set up meetings for afterwards.”


So, once you’re in front of a US investor, how do you impress him or her? Kayserian says that the rules are much the same as Australia, with some key differences.


“Any start-up has to state what the problem is and how they solve it – that’s a basic elevator pitch,” he says. “You also need to show you understand the competitive landscape, mention how you will monetise your idea and whether you have an exit strategy.”


“You need to show a skillset and passion. If the investor isn’t impressed with the founder, he won’t invest in the start-up.”


“Coming from Australia, you need to have a vision broader than just Australia – you need a global outlook. VCs will want to know how you will get to a broad market rather than just start something in Australia and have it copied in the US – like Groupon but in reverse.”


It’s vital that you do your research before you approach a VC. Does he or she have a track record in your area? Are you sure that they haven’t invested in your idea already?

“VCs in the US know the market inside out,” says Kayserian. “I’ve been in a pitch where the start-up pitched an idea and the VC said the idea had been done and asked ‘Why are you re-pitching this business’ idea to me?’


“The start-up said ‘No, we are different because of this’ and the VC said ‘No, I know you’re not because I invested in them myself.’ The guy just sunk back in his seat.”


“You need to do your homework. Also, there’s a bit of stigma here about social media as a lot of VCs have been burnt by it. They know what they are looking for.”


What's your market?


99Designs’ Harbottle says the best VCs will go out of their way to help you even if you’re in the lucky enough position to be able to turn them down in favour of better offers. But he adds it’s vital that you focus on what your market is.


“In Australia, we tend to focus on the product and getting that right,” he says. “In the US, it’s very much customer and marketing driven. In Australia, we rarely ask who our customer is. If you can’t work out who your customer and your market is, you shouldn’t be in business.”


Ditching the boardroom


Keyserian adds that the culture of doing business in the US is something that Australians have to adapt to.


“In Australia, you meet in a boardroom, but they work all hours in New York so you have to be prepared to meet anywhere,” he says. “They mix fun with work, so I’ve met a VC for a pitch while walking in Central Park. I’ve had meetings at restaurants and rooftop parties. You have to be prepared to get out of your comfort zone.”


He has a final word of warning for those keen to jump on the first LA or New York-bound flight.


“You should dream big, but go lean,” he advises. “As much as it sounds romantic to get $5 million in seed funding, the implications are losing control of your business. Look to friends and family first.”


“Avoid going for the romantic dollar or you could end up working for someone else who sets you lots of KPIs – which is what you started up a business to avoid in the first place.”


Top tips

Sidney Minassian, founder and CEO of GrowthQ, a US-based start-up and venture advisory firm, has five top tips to getting a US investor on board:


1. Create a US parent company to take in the investment


“The company in which you want to take investment most likely needs to be a US Inc and needs to be the parent.”


“While the IP does not have to move (immediately), the US Inc must be the parent and ultimate holder of the IP. Creating your corporate structure can be simple or complicated depending on your circumstances.”


“In my personal case I had already created value in my Australian company (I had IP and revenue) and had taken angel investment in Australia.”


“So there are legal, tax and IP consequences that need to be addressed. I suggest companies do their homework, understand what needs to happen, how long it will take and what it will cost. Then be ready to address this head on with your prospective investors.”


2. Be prepared to relocate to the US


The founders and management team most likely need to be based in the US. Having the software development teams outside of the US or additional sales offices outside of the US is okay.


“However it makes it easier for board meetings, business development, follow-on funding and ultimate exit if the investors and company management are in the same location.”


“I suggest founders need to be prepared to make this transition and don't forget if you have a spouse or children you need to think about how to on-board/transition them.


3. Get warm introductions to investors


“While many investors say they accept 'cold' calls or emails, the reality is that venture investment is very much a 'people' investment business. Getting a warm introduction will always get a better response.”


“In fact, I know some VCs who believe that if an entrepreneur can't even find a way to get a warm introduction into to them, then they're probably not a good bet anyway.”

“There are a bunch of networking events, industry groups and government support initiatives for helping Australians get connected.”


“One other strategy (that's also good for your business in general) is to appoint a US based board of advisors who are connected and experienced in the venture space.”


4. Create a story they can relate to.


“It's all about creating credibility early on. It’s highly unlikely that you have a degree from a top US university or that you have a US brand-name paying customer.”


“So you need to make sure your story is one that investors can quickly relate to and your achievements are not lost or undervalued in the translation.”


“For example, Commonwealth Bank and Macquarie Bank were both paying customers of one of my previous Australian tech start-ups and while recognised by any Australian, the average US investor has not heard of these guys. So coming to the US, I was coached by my mentors to position CBA as the Wells Fargo equivalent and Macquarie Bank as the Goldman Sacs equivalent.


5. Prepare to pitch to US investors - it’s different from pitching to Australians


“The average US investor hears a lot more pitches and has more deal-flow than Australian investors. So their bar is higher, their patience is shorter and they have many other investment options – so you need to make sure your communication does not fall short.”


“Take the time to practice and constantly refine your pitch. Be prepared to be interrupted during your pitch and have the confidence to steer the meeting back to you agenda.”