How do Australian startups tap into the $140 billion of dry powder sitting in the US?
First published by Smart Company.
According to the latest Crossroads report, Australian startups raised an astounding $3.5 billion in 2017-18. This level of investment was partly driven by the growing demand by US venture capital funds for exposure to leading Australian technology companies.
Australian tech companies that raised from US investors include Canva ($51 million from Sequoia), Safety Culture ($60 million from Tiger Global and Index) and Culture Amp ($54 million from Index). These rounds were all raised from top-tier investors, a testament to the high quality of companies coming out of Australia.
Bailador’s portfolio company SiteMinder raised $33 million from US investor TCV in 2014, and in the second half of 2018, another of our companies, Instaclustr, raised $21 million in a round led by New York-based growth equity fund Level Equity. We work closely with the management teams of our portfolio companies throughout the fundraising process, and I wanted to share a few observations to help others who may be considering raising capital from the US.
What are top-tier US VCs looking for?
1. Revenue of US$5–10 million ($7–14 million) or more
This is very dependent on the stage of the fund. Seed and Series A funds will look at companies with as little as US$2 million in annual recurring revenue, whereas Series B and C funds typically require a minimum of US$10 million. As a rule of thumb, at any stage, Australian companies will likely be subject to a higher investment hurdle than a US-based company.
2. Initial cheque size of $US10 million or more, with $US15–25m deployed over two or three years
There is a lot of capital in the US. As of Q117, US VC dry powder reached $US100 billion according to Pitchbook, and it is not uncommon to hear of a US fund writing a $US10 million or $US20 million seed cheque. The math is easy: a fund has four to five years to deploy the capital raised and limited resources, the time and resources that go into writing a $US5 million cheque are not dissimilar to that involved in writing a $US25 million cheque.
Companies based in Australia warrant additional time and resources (think travel for due diligence and the complexity of dealing with foreign shareholders and documents). In some cases, a US fund will require an Australian company to re-domicile to the US before capital can be deployed — but that’s a topic for another day, as it’s no small feat!
It’s worth the management team going to market with a clear path to deploying $US15–25 million of capital within two to three years. This could be a combination of primary, secondary (buying out early-stage angels, for example) and mergers and acquisitions (M&A) capital. If any component of the funds raised is earmarked for M&A, make sure to have specific targets scoped and rationaliSed.
3. Servicing a massive addressable market …
This is true of VCs in general, but particularly those in the US.
Australian businesses are being compared to US companies and it’s difficult to compare a market with 25 million people to one with over 325 million people. Australian companies need to be addressing multi-billion-dollar markets from day one.
4. … but US-centric
Being global does not necessarily cut it as US domiciled investors typically, though not exclusively, like to see a vast majority of revenue from the States. A big part of the value an investor brings is a network of talent, customer contacts, partnership introductions and local market knowledge — US investors are naturally going to have the strongest value proposition on their home turf.
5. Founder-led companies
Australian investors are typically more open to investing in professional management teams, but US investors have a preference for the founders to be part of the leadership team — particularly in driving the product vision. This view is supported by the success stories of founder-led companies such as Facebook, Amazon and Atlassian.
Tips for Australian founders
1. Target who you reach out to
Compile a list of US VCs whose mandate is a good fit with your company (such as stage, B2C, B2B, sector). Most VCs have their investment criteria or portfolio companies listed on their website.
2. Break through the noise with meaningful contact
Some VCs see thousands of pitches a year. Reach out with a reference to their portfolio companies, investment strategy, and/or insight on the focus and passion of its partner team. This will demonstrate you’ve done your research and you’re aware of their strategy and are reaching out because you fit their criteria. If you can get a warm intro from a contact that is helpful, but not necessary.
3. Get on a plane
Cluster your meetings by city to maximise time efficiency and meet as many suitable VCs as you can cram into a given week. One way to meet a number of VCs in a short period of time is by attending large conferences (such as SaaStr, Startup Grind, South by Southwest).
4. Due diligence preparation
Make sure you have your preliminary data room set up before you start fundraising. US funds will often carry out extensive due diligence that will be time-consuming for the company, so the more work you can do ahead of time, the less stressful the due-diligence process will be and the more time you’ll have to focus on the meaningful commercial discussions.
5. Legal and tax prep
The US market is considerably more mature than the Australian venture capital industry. It’s worth familiarising yourself with key terms unique to the US, as well as potential requirements of different funds (such as the requirement to re-domicile to the US, create new US-compatible shareholder documents). It’s worth understanding any limitations of your existing shareholder base (with regards to different investment structures) and/or associated tax implications.
Existing investors can help
Raising growth capital from the US is a time-consuming process and can become a huge distraction for management.
Good investors can help support their portfolio companies by accumulating a playbook based on experience and tapping into their existing networks. This will help ensure a successful outcome for Australian technology companies that are pursuing rapid global expansion.