It’s safe to assume you are reading this for one of two reasons. You’re a founder with a dream and you are trying to figure out how to make your vision real by raising seed funding in Australia. Or, like me, you’re a student who wants to be a part of something cool and do something a little different to the rest of your course-mates. Interestingly enough, the process is surprisingly similar.
I recently decided to make use of all this newly found time that had appeared in my rather beige looking year. So, I started sending messages to every founder with an interesting-looking idea that I could find on LinkedIn to see if I could make myself useful to them and hopefully learn something in the process. Fast forward three months or so and we have just closed a $500k seed round at RankedRight, the vulnerability management startup that has the security industry shaking in its boots (or slippers, as it’s about all any of us have all been wearing recently).
For Startups Seeking to Raise Capital (Seed Funding) in Australia
Step 1: Make sure you understand the terminology and process so you can make the right decisions for your business.
To help you understand this guide to raising seed funding in Australia, let me quickly run through the basics.
What is seed capital?
Any startup needs money to purchase equipment, pay their staff and in the case of most SaaS start-ups, build their MVP and get it to market. Most importantly, to give a startup a fighting chance of survival, they need cash as a means to facilitate growth in the long-term. In almost all cases, outside capital is required to make these things possible.
This initial capital raise that a startup goes through is typically referred to as ‘seed’ capital. At RankedRight, we successfully raised $500,000 at the start of this year to help us get our revolutionary vulnerability management software onto the market.
Why do startups raise capital?
Without external funding, most startups will be unable to ever get off the ground and certainly have little-to-no chance of flying. Aside from a few exceptional cases, the amount of capital required to take a startup from an idea in the founder’s brain to a profitable company is well beyond the funding capabilities of founders and their inner circle.
We assume that a startup is intending to grow at pace. High-growth companies tend to burn through capital to sustain their growth-rate before they reach profitability. Whilst bootstrapping can often work in the early stages, there comes a point that a startup needs more capital to reach profitability and ensure long term survival.
Seed funding can eliminate some pre-profit uncertainty by boosting reserves and providing a ‘war chest’ of sorts with enough cash to retain key staff and keep the lights on. Thankfully, there are countless investors out there, both small and large, looking to invest money in the right startups. Be it through venture capitalists, angel investors, private investors or crowdfunding, there is no shortage of ways a startup can raise some much-needed seed capital.
Whilst all the above have their own advantages and disadvantages, with RankedRight we chose to work directly with a consortium of private investors.
When to raise capital?
There isn’t a specific answer as to exactly when you should speak to investors about raising seed capital. One startup may need to raise funding before they can even begin product development. Another can build out a fairly substantial product using a founder’s own capital or skillset and bring investors in later to cover marketing / sales expenses. Some may not even need to think about raising capital until much further down the line.
Different investors have a different risk appetite, but to get the ‘average’ investor to part with their cash there is somewhat of a magic formula. Not to say this works in every case – every investment pitch will be different with each investor asking questions depending on their understanding of your industry and their own investment experience / preferences. But before you even consider speaking to investors, you need to make sure that all the below ingredients for this formula are in place.
Step 2: Put yourself in the investors’ shoes to best determine what they’ll need from you.
What are the main things investors want to see in your startup?
1) A viable idea and an investable team.
At the most basic level, the idea must be compelling and the team convincing in their ability to make it happen.
An investor won’t necessarily ask for a hard copy of your CV, but they will want to know what your team have in their ‘toolkit’.
They will also want to know what is actually going to make this idea work. This all comes down to proving that you are going to win.
When a startup is pre-revenue, the team needs to be just as investable as the idea itself. Investors have to believe that you have enough ‘grit’ and enough passion to see the project through. Only then will they trust you with their money.
If your founding team has limited experience, you should consider bringing in advisors or even additional board members who can bridge your knowledge / experience gaps and make your team more convincing. Even if your founders are industry veterans like ours, more experience and more knowledge is never a bad thing; that’s why we brought in Kristan to act as CTO.
2) A quality product
One of the hardest parts of a seed round is successfully getting your proposition across. Even to an industry veteran, this is near-impossible without some form of proof of concept. Ideally, this would be your MVP, and thankfully there are hundreds of developers out there who can help you build one. We worked with SIRION to build our MVP and we recommend them wholeheartedly.
Whilst a product / market overview and a demonstration can sometimes be enough to convince an investor from within your specific industry, most investors will be less specialised. In fact, a consortium of investors from various backgrounds is likely to be your best option.
It is important to note here that investors are far more valuable than just the capital they are putting forward. Whether you are a first-time founder or have launched numerous successful startups, there will always be things that fall outside of your wheelhouse. Your investors want you to succeed, and in near-every case will be more than willing to offer support and guidance where necessary.
It is worth noting that raising seed-funding is certainly still doable, albeit more difficult, with a slightly more elementary product build or just a concept. You may find that without an MVP you are more reliant on early-stage VCs or angel investors than private investors. This is no bad thing, but it pays to have a variety of funding sources if possible.
3) Proof of traction
To get non-industry investors on-side, anything that indicates current traction is likely to be a hit. Think pilot customer engagements, blog post interactions, social media discussions and partnership discussions.
We engaged with vFeed early, and recently brought them in as our first partner. This shows a potential investor that the market is interested in what you are offering and that your idea is viable.
Proof of traction is not the be-all-and-end-all. However, for founders without a proven track record, even if you have the greatest idea the world has ever seen, most investors will be reluctant to put up significant capital without quantified traction.
4) A real opportunity
Once a potential investor is convinced that your idea is viable, your team is investable and the market is interested, they will want to get to the bottom of the actual opportunity that you are offering them. This is where a well-rehearsed pitch becomes your lifeline.
An investor will expect to see concrete information on the total available market (TAM), as well as the subset that will make up your serviceable market (SAM) and its landscape. They’ll also want the most persuasive evidence possible to back up your claims that you can achieve your target customer base.
Next comes your business model, which tells a potential investor how you are going to convert this customer base into actual revenue, and in the longer-term, profit. It will also show how you plan on scaling the business.
Finally, they need to see the specific details of your fundraising round; your pre-money valuation, the size of your raise and what purpose the capital will serve as well as any shares allocated via an option pool. This is where your roadmap and budgeted expenditure comes in.
With all this in place, you should be in with a good chance of getting some investors onboard. But anything you can add in to strengthen your case or sweeten the deal is of course preferable. This can include SEIS / EIS allocations, which if you are able to gain advanced assurance, can protect an investor from around 50% of the risk exposure. This means they are significantly more likely to take a risk and invest in your startup.
Step 3: Getting in front of investors
The pitch deck
Once you have all of the above in place, the next step in raising seed funding in Australia is the pitch deck. You need to collate all this information in a way that makes it presentable, digestible and attractive to potential investors.
In practice, this comes in the form of a ‘pitch deck’ that addresses the bulk of what your investors want to know. For a seed round, some of the key metrics that an investor is interested in are customer acquisition / churn predictions, customer engagements, cash flow, profit & scalability as well as of course, the predicted ROI.
It’s a long process, make no mistake. Our team at RankedRight spent more time formatting slides in PowerPoint than any of us want to remember, but the hard work is worth it when you have finally put the finished document together.
The lead investor
To get the process started, you will need a lead investor. Finding at least one is crucial in setting up your seed round. Whilst lead investors do tend to come from institutions, private investors are equally capable of taking on the position if you believe that their network is sufficient to bring in substantial investment for your seed round.
Choose wisely, since the lead investor will help you confirm the specifics of your round so make sure they are the right fit for you. They need to understand both the vision and the value of your startup.
For the seed round at RankedRight, our lead investor came direct from the founder’s existing network, which is often the case.
Other options for finding a lead investor include approaching VCs, asking around in local angel investor groups or reaching out to industry experts.
Getting meetings booked
As mentioned above, your lead investor will help you bring investors into your round.
This doesn’t mean your work is done. The lead investor will give you leads but it is your responsibility to follow up on them and create more.
Reach out to local investment forums, make use of your LinkedIn network, ask previous colleagues or industry contacts you have made over the years. Use your network. It is your best asset for finding investors. Most importantly, don’t exclude anyone. You never know who has a bit of spare cash that they are looking to invest.
At RankedRight, we reached out to a huge number of people who the founders already knew well. And most of them invested. You don’t need to have an address book that looks like a Forbes list, but a handful of friends putting in $10,000 each can quickly fill out your term sheet with a substantial amount of capital.
The actual pitch
The most overlooked yet crucial part of the process is undoubtedly practice. It pays dividends to rehearse your pitch as many times as you possibly can, or even recording yourself if you feel comfortable doing so. Bring in friends or family to listen in from an outside perspective and give you constructive criticism on your technique. Learn your points so that you can address your audience and talk around the subject rather than reading directly of the slides like in a high-school presentation.
Your slides should contain all the relevant information so that it can be used to show other potential investors or for finding key information, but you should also be able to talk outside of the slides in a natural and clear manner.
Go into meetings with enough confidence to win over investors, but not too much that you seem arrogant. As is often the case, it is all about balance when pitching to investors. Keep your wits about you and be on the ball but give your potential investors the chance to speak and to ask questions.
Just as important, ask them questions. Ask what their understanding is of your industry / market space, and pitch to them rather than at them. For industry professionals you can get right down to the details, whereas for those who don’t know your industry, you may find you need to explain things in layman’s terms.
Step 4: Closing the deal
Getting the signatures
When it comes to closing a deal, timing is everything. At the end of a pitch when an investor says they are in, determine next steps as soon as possible, preferably before the meeting has even finished. Investors are busy. They could easily be in contact with hundreds of startups at any one time. This means they do not have time to chase you for documents.
Create a space, via Dropbox / Google Drive or whichever method you prefer, that you can give access to potential investors so that all documents they need are accessible without a back-and-forth to get the documents in their hand.
Waste no time in getting their signatures and adding them to your cap table.
Knowing your value
A mistake a lot of inexperienced founders make when raising seed funding in Australia is settling. There are more investors looking for suitable startups than there are startups worth investing in. Use that to your advantage.
If a potential investor is looking to devalue your business when others have agreed to your valuation, be prepared to walk away. Not all investors are a good fit for your startup, and not all seed capital is worth the strings attached to it. More often than not, at least one potential investor will treat your raise like an episode of Dragon’s Den and try bargaining for greater equity. If a potential investor starts to request more than you feel comfortable giving, be clear yet professional in taking a deal off the table. Offering different terms to different investors can have a ripple effect and people quickly lose confidence. On the flip side, if potential investors are frequently questioning the validity of your forecasts, don’t let pride get in your way and be willing to review terms.
Equally, be prepared for rejection. You may follow up on a lead for an investor to turn round and say they are not interested before you have even pitched to them. This happens. More than you might expect. It is easy to think they haven’t given you a chance but in reality, they may just have a low-risk investment approach and so they avoid seed investments. In such cases, respond in a friendly manner and thank them for their time regardless. Don’t let disappointment become rudeness in the face of rejection. An investor who says no during your seed round may come back to you at Series A with a great offer so always end discussions on good terms.
If you are looking to raise seed funding in Australia it pays to always be the most prepared person in the room and expect to be scrutinised by potential investors. Be confident in your valuation and know what you are looking for yet be humble and adaptable.
Fundraising is brutal and can often be deflating but keep hustling and follow up quickly on any leads. Most importantly, treat all potential investors with respect and kindness, avoid coming across arrogant or unfriendly and make sure to keep any commitments you make.
Bootstrapping – A bootstrapped startup is one that is being built from the ground up using nothing but personal savings and incoming cash from sales.
Churn – The volume (usually depicted as a percentage) of customers that will leave the business each year, essentially the opposite of customer retention.
Current Traction – Anything that proves you have a measurable volume of interest or a measurable set of customers in the pipeline. Quantifying traction serves to prove a potential investor that there is a market-fit for your startup and that your venture is ‘going places’.
Equity Round – A financing round in which an investor purchases stock / equity in the company.
Lead Investor – the first (and usually, but not always, largest) investor in a round who will bring other investors into the round.
MVP – Minimum Viable Product – The first version of a product that is usable by early / pilot customers who can provide feedback for future development. This is the usually the earliest version of the product that anyone outside of the organisation / development team will see.
Option Pool – The shares pre-allocated and set aside for grants to employees / consultants.
Pitch Deck – A marketing presentation, typically in MS PowerPoint, used during an investor pitch to provide potential investors an overview of the investment opportunity.
ROI – Return on Investment
SaaS – Software as a Service – A software licensing and delivery model in which a business offers their centrally hosted product to the market on a subscription basis. Sometimes referred to as ‘on-demand software’.
SAM – Serviceable Addressable Market – The value of the part of a total addressable market that can be reached by a specific product or service.
TAM – Total Addressable Market – A term typically used to reference the value of the entire market that a product or service sits within.
Venture Capitalist – A professional investor in companies, usually startups, investing limited partners’ funds.