Venture capital firm OneVentures has invested in just six out of the 700 companies it’s seen in the past two years, through its $40 million Innovation Fund; the successful companies have included Paloma Mobile, a provider of data-efficient cloud applications for mobile and Vaxxas, a biotech startup which has developed a method for delivering vaccinations without a needle.
But what makes the difference? With less than one per cent of the companies that pitch successfully raising money, we thought we’d find out what makes a startup attractive for an Australian VC.
“The world is full of solutions looking for problems to solve,” says Anne-Marie Birkill, a Partner at OneVentures. “We are looking for people with a really good understanding of the market.”
Birkill says OneVentures will look at a range of criteria when assessing a potential deal:
- Market research and analysis. It’s essential that founders have a clear understanding of their market. Too many people present cliches about the market for their business being $’X’ billion, but they don’t have any detail. It’s much better if a founder has done primary research and understands how many potential customers there are, how much they’ll pay and the size of the actual market. Birkill says Seth Godin’s book Purple Cow is a good starting point for how to do a market analysis;
- A clear business model. OneVentures, unlike some other VC firms wants to see a clear business model before it invests. Although other VCs will back a company with traction, even if it hasn’t worked out its revenue model yet. Birkill says she wants to know how much a company can charge a customer, and roughly how many customers there are. It’s even better if the company has been selling something.
- The founders. OneVentures looks for founders with a high emotional intelligence, who understand their own limitations and aren’t afraid to take advice. Birkill needs to understand how a founder plans to build their business, and the potential assistance they require.
- An aspirational exit. It’s useful if you can present a list of potential acquirers for your startup, even if they are ambitious. Birkill says it helps give an investor an idea of where you see the company heading, and also demonstrates the potential return on investment a fund might be looking at.
It helps to understand how VC funds work in order to target to target the right one. A typical VC firm is aiming to return a 30% IRR, or internal rate of return; a tripling of the value of an investment over three years. Most VC funds have a 10 year lifespan and at the end of this time a fund will need to return value to investors.
If a fund invests in a company in year one, it might be a bolder idea that could potentially take time to grow. For example, OneVentures invested in biotech company Vaxxas in the first year of the fund, however Birkill says the fund would be less likely to invest in that same company closer to the fund closing, as the business may take 5-10 years to earn revenue. Because the lag time between developing the technology and shipping is usually much longer with a biotech product, a venture fund would be more likely invest in that sort of company earlier on in the fund’s lifecycle.
The risk of an idea and the potential upside will also determine the deal terms a fund is willing to agree to. How you set the deal terms depends on how you assess the risks. “We’re typically looking at anywhere between 20-40% equity share,” says Birkill. A company like Vaxxas has potential revenues in the hundreds of millions of dollars, whereas another company, although still a good business, won’t have the same potential revenue, and as a result will need to negotiate different equity terms.
A VC will always look favourably upon someone who is referred to them. Most of the promising deal flow for OneVentures has come through the firm’s own network; a referral from another investor or successful entrepreneur. Find someone you know who is connected and see if they can connect you.
“Investors will always look favourably at a deal that has been referred to them. Otherwise try and connect with an investor at an event they are speaking at or attending.”
Birkill’s final piece of advice is don’t get too carried away with your pitch — it shouldn’t be anymore than 10 slides over 20 minutes. Don’t think you need to cover absolutely everything in your pitch, as you’ll have an opportunity to answer questions. Your pitch should tell a story and ‘chemistry’ is really important at this point; listen to the people you’re pitching to, ask questions and don’t get carried away trying to get all the information out in the first meeting. If a VC is interested in your business, they’ll want to delve into the detail over time.
“It’s important to show passion when you pitch. If somone was putting themselves on the line, you’ll forgive the detail.”