Chasing venture capital partners for expansion

For entrepreneurs trying to turn a great idea into a bankable business, the Australian venture capital markets are a double-edged sword.

Angel investors are lining up to put $100,000 to $1 million into early stage enterprises, with some cashed-up self-managed superannuation funds in particular, seeking to have a punt in the technology sector.

However, money has dried up for mid to late-stage start-ups chasing expansionary capital. That’s because major venture capital institutions – burned by the global financial crisis – are abandoning the asset class.

"It’s been super tough in the past few years because people just don’t have any money," says John Dyson, co-founder of Melbourne-based venture capital manager Starfish Ventures.

With a dearth of Series A financing (the first round of funding after seed capital of about $3 million to $5 million) and Series B financing (a second round of about $15 million to $20 million) many entrepreneurs are looking offshore for support.

In Australia, Starfish has no shortage of enterprises knocking on its doors for financing in its preferred areas: the tech sector and life science innovators targeting medical devices, drug discovery, biotechnology and pharmaceuticals.

"We probably see 500 new opportunities a year that we add to our database," Dyson says.

People skills are valuable

What does he expect from an entrepreneur? Dyson says good people are the key. That rules out those who are arrogant, ignorant and unwilling to listen to advice.

"You back good-quality people and you get good outcomes," he says.

Dyson says the VC funding process typically takes three to six months as he and his team run the rule over prospective investment partners.

He favours entrepreneurs who are willing to seize opportunities and who can build first-class teams around them.

"I’m not going to put $5 million into an entrepreneur’s bank account until I am really comfortable that the person is going to deliver a good return."

A "supercharge" for growth

Online graphic design services company DesignCrowd received Series A financing of $3 million from Starfish in 2011 and a further $3 million last year to help fund its growth plans and international expansion.

"That capital has supercharged our business," says CEO Alec Lynch.

"Since then we’ve grown revenues about six-fold."

He initially set up the business in 2007 with "a few credit cards" and loans from family and friends before getting angel funding.

Lynch says the mentoring and discipline of a VC partner has been just as important as the money for DesignCrowd.

Business processes, board meetings and budgeting all needed to become more sophisticated, he says. "It also means you’re going to be challenged and there’s going to be a level of accountability."

Relationship matters

It makes sense then, that choosing the right VC partner is crucial to make sure your views are compatible with theirs, says Lynch.

VC investors, including Starfish, usually receive preferred stock in return for financing, which gives them return of capital preference at the time of a trade sale over common stockholders. They also prevent the business from making major new decisions without their approval.

At all times, according to Dyson, both the VC firm and the entrepreneur should expect to engage in robust discussion of ideas.

"It’s like a marriage and you need to have a really good understanding of what it’s going to be like because as soon as you raise capital from someone like me, the culture of the organisation will change – 80 per cent of the time it’s a really positive change, but it’s going to change and I want my voice to be heard," says Dyson.

In other words…

  • Mid to late-stage start-ups are struggling to find capital for expansion
  • For those who are successful, venture capital not only funds growth but also can improve the business
  • It’s not just about the money, you need to choose a VC partner wisely

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