Private capital investment in Australia is now seeing a healthy amount of activity in the Series A stage, where a number of venture capital (VC) firms have established traction in the market.
Later stage B and C rounds — where investment amounts rise into the seven or eight figures — are generally still the domain of larger overseas funds.
Before all that though, company founders need to raise seed capital to get their idea off the ground.
And that’s the focus area for Investible, the Sydney-based angel investment fund that has created a scalable model for backing early-stage startups.
Speaking with Stockhead, the fund’s chief investment officer Hugh Bickerstaff neatly encapsulated the startup investment cycle:
“Later stage investing is usually more the science, and early stage is more the art”.
With that concept in mind, Bickerstaff went into more detail on common mistakes investors make when contributing capital at the early-stage level.
For starters, he said many investors in the space lack a coherent strategy when it comes to portfolio construction.
It’s easy to get “seduced” by an idea that you like or a fantastic pitch, and deploy all your funds towards the next big thing. But the reality isn’t so simple.
“On a deal-by-deal basis, you’ve got to understand that it’s still very risky investing. And that’s partly because early-stage startups just don’t have the balance sheet to be able to ride out problems when they occur,” he said.
“There’s a phrase we use which is — if you’ve got less than 30 early-stage investments, you’re still gambling,” Bickerstaff says.
As a case in point, Investible’s website lists a diverse portfolio of 40 companies the fund has invested in.
“You need a portfolio that’s big enough. At that point, the numbers are starting to stack up in your favour that you’ll find a handful of companies which generate super returns to make up for the write-offs,” he said.
“The thing about early-stage investing is that valuations are low, so potential returns can be really high but you’ve got to do it on a portfolio basis.”
When speaking with potential early-stage investors, Bickerstaff instructs them to take their annual investment figure and divide it by three or four.
“You’re going to be investing over a three or four year period, and you don’t want to make all your investments straight away,” he explained.
“Then divide that by 10, because you want around 10 investments each year to build your portfolio towards 30 or 40. So that’s the kind of thinking that should drive your individual cheque size.”
Bickerstaff said Investible, which raised a $20m investment fund last year, reviews “around 1,200 opportunities per quarter”.
That gets screened to 300 after face-to-face meetings, then to 60 following the firm’s due diligence process, before around 30 get put to the fund’s investment committee.
From a starting point of 1,200, the number of companies that make the cut for an actual investment is just six.
Experience Is Key
Bickerstaff said another common problem in the space is a lack of effective networking advice, guidance and support once the initial investments have been made.
“I see it all the time with investors in the space with a corporate background, and a long career history of making good business decisions and managing risk,” he said.
Climbing the ladder at a large company requires skills in areas such as data analysis and project management.
“That’s the nature of corporate life and that’s what good executives do,” Bickerstaff says. The only problem is, they don’t apply for startups.
“Analysis and controlling events to a positive outcome is very difficult in early-stage investing, because there’s no data and there’s nothing to analyse.”
Instead, it’s really about making an assessment of the company founder and backing their judgment.
And to do that, Bickerstaff says there’s nothing like personal experience in building and scaling a business, and getting general exposure to the startup ecosystem.
He also looks for evidence of more qualitative traits such as resilience, passion for the product and the ability to lead and attract talented workers to share their vision.
“There’s a whole different set of criteria that you’re looking for at that early stage,” he concluded.