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Top five tips for seeking venture capital and how to prepare for it
As the Australian start-up scene takes off, entrepreneurial-friendly capital markets are evolving with realistic, strategic entrepreneurs best positioned to take advantage of the rapidly blossoming opportunities, according to start-up investor and adviser Jon Tanner.
Tanner is the founder of the MitchelLake Group, a recruitment and investment company that has worked with leading start-ups including The Iconic, Yammer, 99designs, Groupon as well as innovation groups such as NICTA.
“I feel there are lots of great ideas right now, and a lot more interest in this sector than there was five years ago. Entrepreneurs are more aware of the opportunities here and overseas, and there are more doors open to Australian founders,” Tanner says.
He shared his top five tips with StartupSmart for successfully seeking investment.
Investment should come with more than just money
While every deal is slightly different, Tanner says the one piece of advice they’d give to every start-up seeking their first round of capital is to seek out more than just money.
“Our view is you would ideally not take money that wouldn’t come with significant leverage around advice and expertise. Your first third party investors should bring expertise and networks in marketing, product and finance that will take you on the journey,” Tanner says.
Red flag: Keep an eye on the caveats and performance expectations
Tanner says while there are no hard and fast red flags for partnering with investors, entrepreneurs should pay particular attention to the caveats
“Pay attention to what rights the initial investors wants to exercise at a later date. Make sure you understand their caveats around performance and hitting objectives. Make sure they’re comfortably within your own capacity and plans,” Tanner says.
Build a skeleton advisory board before you seek investment
Many start-ups falter and freak out in their investment seeking due to a lack of understanding and expert support. Tanner says establishing a network or formalised group of experienced supporters helps start-ups steer through what can be an intimidating period.
“Especially when it’s the first experience working around equity and investment, we would advise founders to seek out an advisory board of people who know how these transactions and valuations work,” Tanner says.
“Find people who get the domain your start-up operates in, grasps the channels to market, and knows the competitive landscape. With this understanding, they should be able to bring advice that will bring the founder comfort.”
Plan your start-up’s whole investment journey
It can be hard to look beyond even one day’s to-do list as a start-up team, but Tanner says the start-ups who plan not just the current round but the overall investment process they’ll require are better equipped to raise.
“Capital raising takes time and effort, and can detract from your potential in the business. This can lead to stress for all concerned,” Tanner says. “It’s smart to get ahead of the requirements that you’ll need to raise for, because it’s much harder to find investment when you’re desperate for it.”
He adds the most compelling investment opportunities are those with founders where this long-term vision extends beyond strategies to include your personal development as your start-up grows.
“Having a picture of what you’ll need when is very appealing to investors, because you’ve planned ahead and you know what you need to do,” Tanner says.
“But as an investor, you really want someone who has a purpose beyond being an entrepreneur and money, someone who wants to impact the market and make a difference.”
Capital requires adjustment: Learn to let go
Even for those who seek out extensive advice and insight from mentors, Tanner says the biggest shift required for start-ups seeking investment has to come from within the start-up team.
“A lot of Australian start-ups get very concerned about letting go of too much equity too soon. That’s understandable, and you should always go into things with your eyes open but if you want investment, you need to be ready to let something go,” Tanner says.
He adds he becomes worried about start-ups that delay their first round of funding, as once the investment has been made it becomes significantly easier to operate as you’re officially worth something and have a valuation.
“In tech, half the battle is having a great proposition and getting the money to get it going. But the other half people can forget is you’re competing against a lot of people whether you know it or not, so timeliness to market really matters,” Tanner says.