CeBIT Conferences 2017  

27
Sep

What venture capitalists want to see from your start-up

What venture capitalists want to see from your start-up

The Australian start-up scene is an exciting space to be in, but it’s not without its challenges. One of the biggest difficulties budding start-ups encounter is funding their venture.

Right Click Capital's Benjamin ChongWhether you’re bootstrapping or you’re seeking funding, getting backing for your idea is a real artform. Previously, we’ve spoken with founders who have successfully raised capital for their businesses. Now we wanted to discover exactly what venture capitalists are looking for when investing in a business.

We spoke to one of the founders of Sydney-based firm, Right Click Capital, Benjamin Chong. Mr Chong’s interest in investing in technology businesses has stemmed from growing, buying and selling businesses during his adult life.

Through these experiences he has learned a lot of lessons about what does and doesn’t work to grow a company. In 2003 he started Right Click Capital with his business partner, Ari Klinger, as a mechanism to make investments into technology start-ups.

CeBIT 365: What are the most important qualities in a start-up?

Chong: There are three key factors the Right Click Capital team looks for when any email or paper crosses their desks.

  • Team
    A business needs to be more than just the founder. The team needs to have 2-4 core people who have equity or vested interest in the business. This doesn't have to mean money – it can simply mean the person meaningfully contributes to the business and is passionate to make it a success.

    If the team does not work closely together, have their ideas together or they can’t approach problem-solving creatively together, it will be difficult for the business to be a success.
  • Large markets
    We have a strong interest in businesses that are going to chase large markets with the potential to make a lot of sales.

    An early indicator a start-up isn’t seeking a large enough market for us is if they’re only focusing on Australia. Australia has only a small amount of markets with a huge amount of volume. A better way for founders to look at an intended intended market is to focus on, for example, the English speaking market or the South East Asian Market.
  • Traction
    Traction is considered an early sign of success and there are a number of ways founders can demonstrate this. From performing customer surveys to showing the business’ growth. Even if you think your idea is the most amazing, innovative idea in the world, it means little if you can’t demonstrate results.

    If a business is further along and has a customer base we’d be looking at sales cycles. Specifically whether customers pay on a weekly or monthly cycle. If it’s monthly, when do they drop out? What do their metrics look like? What insights can you show? What do the numbers show?

    The more metrics, the easier we can see how progress is being made in the business. We look for a positive numerical pattern that would resemble what we would call a rocketship.

CeBIT 365: How should start-ups build relationships with VCs?

Chong: A core part of any investment is founder's building trust with investors. In any relationship it’s difficult to give a high level of trust if you’ve just met them. Attending networking events, emails and warm introductions can be a great start. But don’t open with asking to catch up for a coffee. Everyone’s time is valuable. Instead of chatting over an hour coffee, consider letting your numbers speak for you or asking direct questions, instead of floundering and talking about non-critical elements of your business.

CeBIT 365: What qualities do dynamic start-up team have?

Chong: There is one quality that stands out from the crowd for us and that is a willingness to take on feedback. It’s important because if a team wants to continually improve, they need to use that feedback and use it to reach for excellence

If it’s hard for someone to acknowledge feedback, they’re unlikely to be open to change.

CeBIT 365: What is the process for screening start-up founders?

Chong: Each venture capital firm is different, but they will all have some similarities in their processes. Our process consists of three key parts:

  1. Review
    When a start-up submits any kind of proposal we review it. If we feel there's a possible fit with our fund, we will ask for further information.
  2. Meeting and psychometric test
    After we’ve established there’s a likely fit, the founders are invited in for a meeting. Here, the start-up will be asked what challenges they’ve faced, how they overcame them and what opportunities they see. If all goes well, the founders will be asked to take a psychometric test.

    Seeing the numbers is one thing, but seeing people face-to-face is another. We want to see the package. That’s why the whole process is important.

    The test helps us understand what the entrepreneurial potential of the founders is. The investors are looking for:

      • A high level of fluid intelligence (people who will change as the rules of the game change)
      • A level of openness to new ideas, thinking and perspectives
      • A level of agreeableness, meaning they have the ability to get along with others, convince others and work with others

    If a founder can’t meet these prerequisites then the business is possibly doomed.
  3. Due diligence
    If there’s a match, we will start digging deeper into the numbers behind the business to ensure the claims made are accurate. If the business already has customers we will interview a number of customers to get their thoughts, ideas and perspectives.

CeBIT 365: What are some common mistakes startups make when seeking investment?

Chong: There are 3 key mistakes we see frequently.

  1. Underestimating the level of commitment
    People underestimate the amount of effort that is involved in building a business.

    In my spare time I donate some of my time to The Founder Institute, where I mentor and open my network up to budding entrepreneurs.

    At the Founder Institute we run a program one night a week for people holding down a full time job and building their business. At the program, we say this is going to take you 20 hours per week. People don’t believe us; it happens year after year; it's very hard. You have to do everything. Dealing with customers, banks, office space, find and pitch to investors. It’s a very, very time-consuming and full-on process.
  1. Not taking feedback
    Feedback is always hard to swallow - especially if it’s about your pride, job and passion. We provide feedback very quickly to founders. Sometimes people aren’t great at taking feedback, despite us wanting to help them. What some don’t realise is I’ve been in your shoes, I’ve been on your side and I get that perspective because I was a founder too. The feedback is given to be helpful, but it’s not always taken that way.
  1. Targeting the wrong investors
    Just like there’s different restaurants for different tastebuds, there are different types of investors for different founders. Just because one venture capital firm isn’t interested, doesn’t mean there isn’t another out there that’s a better fit.

CeBIT 365: Last words of advice for the start-ups out there?

Chong: Founders should work out what is a reasonable amount of money they need from investors to continue to build their business. The greatest fear of any investor is cash being wasted. Then they need to prove they’ve used the money wisely before going back and asking for more. First time founders want to raise a lot of money, but they don’t necessarily have a track record of spending it wisely.

Founders need to think about what could be done to cut costs or save money in the long run. For example, could testing have shown a certain way wasn’t the best way to approach the market? Could a customer analysis have helped a problem be addressed with less money?

Plus, you need to be passionate. It’s not enough to know the numbers and have the answers. Founders need to have the passion. Are they really driven by what they’re working on?

There’s a visceral part of their being, if they’re passionate about what they’ve really wrestled with, not just lived with, and they’ve thought a lot about it, those founders, in my experience, tend to be more successful.

Final thoughts

Money isn’t the only thing venture capitalists can provide you with. Mentorship, knowledge and connections will give you the power to grow your business. When presenting your business to investors it’s clear you need to show the numbers, the team and the passion to get your idea funded. To present your numbers to investors in the best way, download the CeBIT Start-up Cashflow Template today!

CeBIT Australia: The Start-up Cashflow Template

 

Do you have any tips we should share about securing funding for start-ups? Tell us in the comments below.