Why VC firms now take start-ups seriously

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Low-risk, high-return

 

Glenning says companies need to demonstrate certain qualities to justify their expense.

 

“Have you finished your product? Is it in the market? Have you proven out the business model?,” he says.

 

“What’s the cost of customer acquisition versus lifetime revenue of customer versus overheads to deliver on your promise?”

 

“Basically we need to have some comfort that even if the business isn’t profitable now, it will be after these metrics are proven. That’s the stage where we most prefer to invest – when the founder can answer these question.”

 

The $40million firm OneVentures has invested in six start-ups – including the University of New South Wales spin-off SmartSparrow. The fund’s founder Michelle Deaker says that accelerators and angels develop a company’s business prospects.

 

“It is synergistic,” says Deaker, whose firm was assembled with the help of the government’s IIF funds matching program.

 

“We often invest with angels or post an angel round.”

 

“We see it as a positive that an angel or an accelerator may get in and work with a young company to begin to take out risk elements in the business whether technology, team makeup or business validation with customers prior to our investment.”

 

The entrepreneur and the egg

 

Last year Startmate, Pushstart, and Melbourne’s AngelCube mentored 20 businesses, approximately 50 entrepreneurs – almost four times the previous year.

 

This growth will be boosted next year by the Singtel Optus Innov8 seed program and others. The investors have taken notice.

 

Melbourne’s Adventure Capital has invested over $1 million since it was founded early last year. Startmate founder Niki Scevak and former MLC advisor Richard Baker reached into the deep pockets of Atlassian co-founder Mike Cannon-Brookes and Southern Cross Ventures, among others, to establish Blackbird ventures and capitalise on this opportunity.

 

ScriptRock’s Baukes believes that the new players will provoke the more established players into action.

 

“With Blackbird coming out of nowhere a lot of other funds have noticed a potential competitor going for really early stage and they’re going to want a slice of the action,” he says.

 

Scevak adds: “Venture capital is a service industry, servicing entrepreneurs who are starting these types of companies. The main constraint is the number of founders starting these particular types of companies.”

 

“It’s not the case that if there is more venture capital then there will be more start-ups I think it’s the other way around: as people start more start-ups, there will be more venture capital. So as the number of companies that have started increases so too will be the amount of venture capital available.”

 

However, it might be some time before the established venture capital firms catch-up to the likes of Starfish, and OneVentures, who closed their ten-year funds before the global financial crisis – around the same time many investors shut their wallets.

 

“It’s been a tremendous advantage over the last two years,” Starfish’s Glenning says.

 

“In the last 12 months Australian companies raising money couldn’t go to that many people. Therefore Starfish is in a fabulous position because we get to see pretty much all the deals.”

 

Five VC questions that Tony Glenning says every start-up should answer:

  • What are you selling?
  • Who is your customer?
  • How do you acquire the customer?
  • What’s the value of the customer?
  • What are your overheads?
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