I wrote this piece as a newsletter to our investors a few weeks ago. We thought we’d share it to give you some more insights on what’s out there and what we’re looking for.
Where we’ve found our investments so far (yep, that’s Townsville up the top right)
After 8 months since the fund opened, we’ve logged 226 companies in our database and seen another 100 or so that weren’t worth logging. Add to this 260 Startmate applications, and we’ve seen a lot of business ideas. From this deal flow we’ve made 9 investments and have one more in progress. So we’re getting good at saying no! Nevertheless we’re very happy with the deal flow coming out of the Aussie tech ecosystem at the moment.
Here are some observations from the deal flow so far, our filters and what we’re looking for:
As would be expected, by far the majority of deal flow by quantity comes from our email@example.com email address. This is despite us and our website imploring founders to find a warm introduction to us through their networks.
By far the majority of quality deal flow comes from the Blackbird community of investors, founders and Startmate. We’ve been very pleased with the way this is developing and all of our investments to date have originated from these sources. It’s given us a number of opportunities that are outside the general flow of usual sources: accelerators, incubators, angel groups and well-known founders in capital cities.
There is a third category, which is investment advisors – i.e. people who promise to raise money for young companies for a cut of the raising or equity. While there are some good advisors with interesting companies, we’re a little cynical of deal flow that comes from this source as it tends to indicate a founder who is not able to get to us directly, or does not know or care about fund raising. Fund raising is such an important part of the early years of many tech startups, that this is a factor we have to take into account. They also tend to come with 60 page business plans and detailed forecast spreadsheets to justify high valuations! We haven’t yet found a company introduced by an advisor that we’ve really fallen in love with, but this may change of course. [By the way, this is not a dig at the advisor community and we certainly take all companies introduced to us seriously. I'll try to write some more detail on this soon, but please do feel free to comment below if you think differently.]
As you know we have a strong focus on companies that have a product in the hands of a “core group of happy customers”. While revenues are not essential, it’s often the best measure of this. So we’ve quickly filtered out a lot of pre-product, pre-revenue businesses, pointing these founders to the angel communities. We have only made one exception to this rule: Canva, where the founders had built a previous business in a similar area and I (Rick) had been mentoring the founders for some time.
It’s encouraging that we’re seeing more and more series A stage companies, where the business is around 2 years old and starting to generate decent and growing revenues. We love companies with $30-100k in monthly recurring revenue and seem to be finding a steady stream of these! We still see very little Australian capital targeting this space. Our key collaborator is Square Peg Ventures, and we hope to continue investing alongside them.
3. Global vs local:
The second quick filter is businesses that do not meet our passion for global markets. The majority of Australian deal flow is either Aussie focussed, or Aussie first. We are constantly challenging founders to think bigger and smash local boundaries from day one. Each of the businesses we have backed so far is truly global, with founders who have a real passion to be the best in the world, rather than the best in Australia.
4. Scalable business models:
One of the key attributes we’ve become more and more focussed on is finding scalable marketing and sales models. This usually comes in the form of digital and content marketing, with only light touch human sales efforts. We are particularly avoiding business models which require scaling up sales teams in Australia and around the world. We think this is a difficult model to execute from Australia.
5. Founders with an authentic connection to the problem they’re solving:
Finally and most importantly, we’re looking for founders who we think have a real passion and expertise in the area they are tackling. We have to believe that this person has a better chance than 99.999999% of the global population of being able to have insights to crack apart a market. We’re not interested in people who want to be entrepreneurs for it’s own sake, or have chosen random problems while gazing at their navel. We want founders who have become emersed in their niche and have a driving passion to make it better. They are rare, but we love it when we find these founders, and have found them in all the companies we’ve backed so far.
That’s all for this month. Please do keep your antennae tuned to find great businesses to send us!