thoughts 💭

Why we Invested in Hnry v2

2021-07-22 permalink

When we first invested $1.5m in Hnry in 2019, our investor notes spoke to a concept of “cake-level engagement” as a mental model for the type of customer advocacy that informed and underpinned our investment decision. Wind forward the clock, and we are proud to be investing a further $4m into the business, as a result of both Hnry’s continued almost fanatical customer advocacy, but also as a result of the team’s exceptional execution over the last 18 months.

When you first invest in a company it is difficult to have strong conviction as to the capability of the team. Interpersonal dynamics are unknowable and it is hard to determine if we have strong “investor-founder fit”. All the diligence in the world can often misconstrue relationships and personal motivations. These are arguably the facets that have a greater impact on investment outcomes over the long run. To somewhat mitigate this risk, we have in the past avoided a transactional approach to venture investing, preferring to build long term relationships with potential investee companies and getting to know founders over a period of time. This is not always possible, especially as the competition to get deals done quickly heats up, in line with the ever growing availability of early stage capital. Often investment decisions are made with limited interactions and incomplete conviction around the founding team. Mark Suster coined the canonical phrase “investing in lines, not dots” to describe the predicament.

A major advantage for any venture fund is its ability to invest in follow-on rounds. An effective follow-on strategy allows a fund to reserve capital to allocate disproportionately to its best companies, whilst limiting exposure to those that underperform. At EVP we reserve c. 50% of our funds for follow-on investing and it is often these follow-on rounds that prove to be our best investments.

The same metrics and data set that were used to support an investment decision in the first instance remain available, but now, in addition, there is access to vastly more qualitative information and insight based on months (or even years) of interactions. With our active investment style, we take a hands-on operating approach with our portfolio companies. Our relationships are not limited to the founders. We often work directly on projects with staff from across the team. This experience informs a rich tapestry from which to make investment decisions; an almost opposite setting to when one first invests into a company.

Over the past 2 years we have seen James, Claire and the entire Hnry team:

10x their customer and revenue traction to support over 20k Hnry users across AU/NZ
Enter the Australian market
Build the team to 30 staff (and we’re hiring!)
Maintain growth rates at north of 4x per annum
Maintain Customer NPS > 80
Be a complete delight to work with

In short, the performance has been exceptional and the data before us points squarely to us “doubling down”.

While the traction is certainly impressive, our belief is that Hnry is only just getting started. Long term tailwinds supporting the shift to independent earning are driving key changes to how the population earns. As a result, there is an entirely new infrastructure to be built to support this new working arrangement. All of the services afforded to salaried employees are being reimagined for a new freelance environment. The appropriate hype term is “the creator economy” and the entire tech stack to service this ecosystem is in flux. From Substack and Cameo to Onlyfans and Stripe, the plumbing enabling individuals to make a living outside of the typical 9 to 5 is changing.

Hnry plays directly into this macro-theme. The team is looking to solve and automate the tax and financial admin that sits in the background for participants within this new creator economy. For many of these independent earners, tax particularly, is a veritable fear. And for our users we relieve this burden entirely.

The business still enjoys that raving fandom that excited us back in the day. The team assembled exhibits the operational excellence we’re looking for. And the market is exploding (in a good way) around the business. In our experience it is these ingredients that lead to great outcomes.

And that’s why we invested in Hnry… (again)…

The Covid-19 Story for Aussie Startups

2020-08-27 permalink

We’ve all seen the graphs and images purporting the dramatic trend to digital over the first 8 mths of 2020. The rise of e-commerce, the outperformance of technology public equities and booming second-order effects of our new-normal. But what’s been happening in the early stage startup community? At EVP we see 100’s of companies per mth allowing me to collate a database of AU/NZ early stage startup performance during the period. Here are the facts.

Sample Background:

Mix of 15 to 400 person companies.
Size split by Revenue for the 12 mths to Jun-20:
- Min 900k
- Median $6m
- Max $49m
Typically Series A or Series B funded.
76% of companies loss-making.
Business models typically either B2B SaaS or marketplaces.
Heavy skew towards B2B.
Majority AU based, 18% in NZ.

Throughout the article “Series A” companies are defined as less than 30 staff, raising less than $5m. “Series B” companies are between 30 and 400 staff and raising typically $10m to $30m. Across all charts revenues have been normalised to a $1k per mth starting point.

Subscription vs. Transaction Revenue Streams:

As one might expect, software that monetises by way of a subscription revenue stream faced a less extreme shift to growth rates and revenue. As per the below chart, the B2B SaaS companies were largely unaffected by Covid, while marketplace models, for whom revenue typically is pegged to activity or volumes through a platform were significantly impacted in the first 6 mths of 2020.

I note that the marketplace dataset was slightly skewed to an earlier stage as compared to the B2B SaaS data set. This might account for variance in growth rate. Or maybe marketplaces just perform better…

YoY growth rates show the same trend with B2B SaaS companies slowing marginally, as compared to marketplace models which were severely impacted during the AU lockdowns before rebounding strongly through Jun-20.

Series A vs. Series B Stage Companies:

Comparing the impact of Covid on companies segmented by stage of business provides an interesting, maybe predictable, insight. Clearly the impact of Covid is greater on earlier stage, Series A companies as compared to later stage Series B startups. The earlier stage companies typically had:

less robust revenue streams,
less validation of products or services to position themselves as totally mission critical to their end customer need or workflow,
generally faster growth and acquisition engines which skews towards shorter duration of existing customer lifetimes = newer relationships and a higher propensity to churn,
relatively less developed products

Pleasingly, many of these companies have been nimble enough to spin up entire new product lines and/or revenue streams, or have generally been able to shift towards emerging new opportunities. Pleasingly the average Series A company has already seen revenues rebound strongly in lockstep with the re-opening of the AU economy (sans VIC - sorry).

As expected, Series A companies are growing materially faster on average and equally had a more dramatic slowdown due to the lockdown. Interestingly Series B companies have generally maintained growth although the slowdown has nevertheless impacted this segment with a slight lag. More established growth functions internally have likely setup these businesses to be more resilient as market conditions change. Equally, for B2B or enterprise businesses at the Series B stage, sales cycles commenced in Q1 2020 would still be closing over subsequent quarters, but ultimately seem to still be progressing. Series A enterprise companies are more likely to see sales conversations paused by anxious buyers. They typically lack the product and/or brand validation to diminish concerns within potential buyers.

Average Mthly Burn Rates

As expected, burn rates have reduced as a result of the pandemic. Generally founders have looked to extend runway and tighten expenditure as uncertainty around future growth increases. Across the basket of companies, burn rates materially reduced both in absolute and % terms.

Splitting the dataset between Series A and Series B also provides interesting insights with respect to burn rates. Series A companies were a little quicker to act, but reduced burn by c. 30-40% on average. Comparatively, Series B companies slashed burn by over 50%. This is somewhat of a "narrative violation" in that the conventional wisdom states that startups lack the levers to alter runways or burn as effectively as they have done through 2020.

And finally. With breathless excitement. If you had invested $1 in this random assortment of early stage startups in July 2018, two years later, you would have $2.32 (if you believe revenue growth to be an approximation of growth in value). A cool 52% IRR. Which other asset class would provide such uncorrelated, stable and attractive returns?

2020: The Great Venture Refresh

2020-06-01 permalink

Across every industry the Coronavirus has radically altered the status quo, causing rife dislocation with great expedience. The disease will leave lasting impacts difficult to discern but ever-present for a global generation. Worldwide co-ordination of unprecedented scale will fade to memories of isolation, loneliness, fear and humanity’s fragility.

The venture industry is no exception. Long term in focus and structure, it is somewhat immune from an immediacy of impact, but no doubt, Covid will be the impetus for a refresh. For those able to look beyond our never-ending predilections for news, updates and forecasts, 2021 will be better than 2019. You’ll see.

As Bill Gurley famously remarked in 2000, at the peak of the dot-com crash, “The year 2000 will be remembered as the year that everyone caught a disease known as sanity”. And 20 years later, we will surely look back on history repeating itself and the last few years as out of touch with normalcy.

In recent times an insatiable appetite for growth has emerged. Monikers of triple, triple, triple, double, double are (unhealthily) bandied around as sound strategic advice. Board rooms negate their responsibilities for both prudent business management but also for their communities. For some of the companies I’ve observed directly, growth has become an all encompassing and domineering concept; a goal in of itself. Growth has certainly become a meme. Simply to grow is important. Without thought of an outcome nor direction. Just move!

And on a global scale we have seen the idiosyncratic emergence of Softbank and their never-ending pools of money. Willing to fund anything that moves up and to the right. Creating investor presentations with literal arrows pointing to the sky as a justification for their endeavours. It strikes me as interesting that venture funds such as indie.vc have been able to rise to prominence with GIFs of burning unicorn heads and a rhetoric of profitability and real revenue. For what else is thy venture brethren been thus striving henceforth for!

The most obvious indication of a startup ecosystem out of kilter would be the endless glorification of capital raising – in this crime both investors and founders are not without blame. As if giving away a portion of your life’s work (equity) is something to be celebrated. Funding rounds should be a last resort! Only to be embarked on if other avenues to build shareholder value are completely exhausted.

2020 will provide a great shakeout towards profit from revenue. In truth this trend had long been billowing with the tailwinds fanned by the spectacular trapeze artistry of WeWork and Grubhub (amongst others) – well before the Coronavirus. For the easiest business model to grow is the one where I give you $2 and you give me $1 back. And this is surely the most common “business” model we have seen through the EVP offices in recent times. Total addiction to paid advertising, unwavering belief in concepts of lifetime value, no understanding of return. But this pandemic will be the impetus to refocus on sustainability over growth.

The Internet-led get rich quick schemes of the 2000s have been replaced with the capital raising bonanza that developed. That founders with no relevant industry experience, no customers, no product and certainly no profit could spend 20 hours building a narrative and a Google Sheets presentation and have a combined paper wealth of $10m (and in some circumstances far more) gives off an uncomfortable odour. These imposters filled the community with a drowning noise of promotion and vanity. Little substance or interrogative inquiry.

So surely 2021 will see a new paradigm where said promoters are driven out by a more cautious and deliberate investor community. Willing to fund earned knowledge or real value creation, but not future promises, this should lead to a bifurcation between those genuinely providing a solution to an important problem and those slaving to the drumbeat of growth. 2021 will be the year of the “true” entrepreneur. Returning to our community’s roots of innovation and improvement for society. Turning away from inflated private companies with unlimited rivers of capital. A great catharsis long overdue.

Why we Invested in Coassemble

2020-02-21 permalink

I remember my first training session as an 18-year-old intern entering the corporate workforce. Our team of around 20 people had to complete mandatory Continuing Professional Education (CPE) hours by 5pm. No one had spent even an hour on training in the prior 364 days. Somewhat resourcefully the team decided to conduct the training on each other’s behalf. Each person would watch a different 45 minute video (one of those videos filmed in the 1970s that has zero relevance in today’s context) and complete a multiple choice, paper-based questionnaire for all 20 people. Within an hour, everyone had finished 20 training sessions. Viola.

In a world where increasingly businesses are reliant on human capital as their core competitive advantage, maintaining qualifications, training, organisation and consistency throughout a company’s talent base has become an ever-pressing challenge. Intangibles now make up 87% of the market value of the S&P 500. There has remained a consistent shift away from physical assets as a store of value towards process, capability, R&D and “smarts”. Yet training and development remains the consistent area of underdevelopment and lack of attention despite it arguably being one of the few levers managers possess to drive performance, culture and efficiency. This is particularly true within 50 to 250 person companies that typically lack the resource to invest in their talent, don’t understand which content to share or what outcomes to drive towards, and have little chance of replicating a highly motivating culture of development. Only a small collection of lighthouse companies (often technology startups) have mastered the use of training to almost simulate a professional sports environment of constant growth, consistent micro-improvements and internal data-drive developmental processes.

Employers that don’t prioritise training and development of their staff typically lag competitors in performance, engagement and staff retention. According to LinkedIn’s 2018 Workforce Learning Report, 93% of employees would stay at a company longer if it invested in their careers. With 2020’s transient workforce, staff retention is no longer a hidden cost, but a major encumbrance to business of all sizes. Development is no longer an optional perk reserved for only certain positions. It’s expected by today’s talent. It serves to illustrate the employer values and how actively invested they are in their employee’s success – not just in the short term, but over their careers. In 2018 the global LMS market was worth USD7.2bn. This is forecast to grow to USD22.4bn by 2021.

Businesses today have access to virtually unlimited volumes of information and content. But with the rise of this knowledge economy, the means to share and transfer this value has not adapted to a new mobile, always online world.

Further, with the rise of remote and decentralised organisations, training needs to move beyond the “Harbour” meeting room and into employee’s phones, existing software stacks and everyday workflows. Employee’s shouldn’t have to travel to a different city, fill out a form, sign up to a new software or click next through a pre-determined module designed in the 1990s. They should be able to share best practice inside Slack, repurpose process flows into shareable content and build repositories internally to drive performance. Equally managers shouldn’t have to create content from scratch, pay $1000s to professional training gurus and should be able to monitor gaps in the organisation broadly. No more corporate training videos!

Enter Coassemble.

Coassemble is a Newcastle based software company that provides a Learning Management System to small to mid-sized organisations. The Coassemble LMS allows customers to author original educational content and to ensure ongoing training via a range of online assessment tools. The solution integrates with a number of adjacent technology platforms allowing customers to incorporate continuous learning into their existing software environments.

In a competitive market, Coassemble has demonstrated an ability consistently to win customers through superior product capability, improved user experience and an ability to stimulate more effective ongoing employee participation rates. Their team is exceptional, remote-first and totally committed to transforming their very large category.

We first met founders Ryan and Jude almost two years ago and have tracked progress over this period. The founders bring deep industry expertise having been involved in corporate training and software development in the education sector over the past 15 years. Ryan’s professional sports background has imbued an obvious drive throughout the organisation and a demonstrable commitment to success.

Over recent months we’ve seen the business effectively build out its US go-to-market capability and open its US HQ in Denver. Today the business serves some hundreds of customers, with a large and growing proportion of these in the US. Coassemble has an exceptional team, a differentiated product and a vast market opportunity. We look forward to working with the team as they go about building a truly global LMS business of scale.

Why we Invested in Hnry

2019-09-20 permalink

Cake-level Engagement.

Founders consistently ask me the revenue number they need to hit, or engagement metric they need to demonstrate before EVP is inclined to invest. Typically, my answer talks to growing momentum as more important than point in time numbers, the signs of Product Market Fit, or a confidence that the data-set is going "up and to the right". I often watch my colleagues roll their eyes from across the meeting room as I launch into this common refrain.

Well, to all founders, I have finally have an answer:

cake-level engagement. noun a state of customer satisfaction where, unprompted, multiple users of a product or service hand deliver cake to the registered address of the manufacturer or provider of this product or service: Hnry Management has slashed their afternoon tea budget after their product reached cake-level engagement in Q32019.

I am proud to lead EVP's $1.5m investment into Wellington, NZ based Hnry which marks EVP's second investment into a Kiwi-based company and also our first investment into a startup with cake-level engagement. Yup, it's true, our diligence involved multiple interviews with customers that admitted to gifting the Hnry team tasty, sweet treats - even asking family members and friends to deliver on their behalf.

When one sees cake-level engagement, one typically invests.

The Forgotten Workers

Much has been made about the proliferation of the gig or independent earner economy as the continual emergence of various technology platforms has led to new flexible ways to earn income. In EVP's family of businesses alone, we have pet sitters and dog walkers, cleaners, tradies, designers and couriers that now earn multiple income streams as contractors through marketplace platforms. The traditional 9 to 5 office job continues to be unbundled by both technology solutions that allow for remote work and access to talent on a global scale as well as providing veritable livelihoods to individuals as "employees". This fragmented segment of the workforce continues to grow at 50% YoY - a tailwind difficult to ignore.

Despite this, the self-employed segment remains critically under-serviced as compared to full time employees. For a long time, services, products, technologies and society in general has been skewed towards full-time, permanent staff and has overlooked freelance individuals. At EVP we continue to search for solutions focused on this very large market segment as evidenced in our recent investments in Deputy and Foodbomb (amongst others).

My colleague Sanjiv Kalevar at Battery Ventures recently described the blue collar workforce as "the forgotten workers". He writes:

"For people sitting at our desks and working behind laptops on programs like Microsoft Office, it can be easy to overlook the large, sometimes forgotten, workforce out there in construction, manufacturing, transportation, hospitality, retail and many other multi-billion dollar industries. Indeed, more than 60% of U.S. workers and even more globally fall into these “blue collar” industries.

By and large, these workers have not benefitted much from recent technology improvements available to office-based workers. Hourly and field workers are dealing with much more basic on-the-job challenges, like finding work, getting their jobs done on time and getting paid. These more basic needs can be solved with seemingly simple technologies—software for billing, scheduling, navigation and many other business workflows. These kinds of technologies, unlike AI, don’t automate away workers. Instead, they empower them to be more efficient and productive."

In the same way that office workers of the last decade used Microsoft Office (or more recently Superhuman, Notion, Airtable, Canva - but that's another story), blue collar workers are rapidly adopting a similarly ubiquitous mobile based technology stack. For freelancers, the best in class toolkit or industry-standard has yet to develop and the race to win this market is on.

In the wake of better known cloud accounting software catering to small businesses, an often overlooked function for these independent earner folks remains the financial, tax and admin obligations that are typically intimidating, stressful and confusing. Those already taking advantage of self-employment often struggle to cope, with no single solution providing the comfort and reliability to allow them to simply focus on doing good work for their clients. Tax time evokes a real, visceral fear and a sort of all-encompassing dread! Existing e-tax services have penetration rates of sub 30% and all the freelancers we spoke to almost hung up the phone once we mentioned the dreaded T-word.

Enter Hnry.

Hnry is a pay-as-you-go service that handles all the financial admin of being self-employed. With smart use of technology, Hnry simplifies the world of self-employment for its users, their customers, bookkeepers, the tax office and everyone in between. Hnry customers have their income paid into their own unique Hnry Bank Account. Hnry then automatically calculates, deducts and pays all required taxes in real-time, before instantly passing the remainder to the customer, along with a payslip. Hnry files tax returns, manages business expenses, invoicing, credit control and online payments – essentially providing a single solution to eliminate the administrative pain from independent earning.

The business essentially helps designers, gym instructors, tutors, programmers, tradies, artists and many more shades of independent earners to set, forget and leave the hassle to Hnry. The tool is focused on levelling the playing field in a market that is rapidly growing. No wonder their clients are sending baked goods…

Having got to know James, Claire, Richard and the team over the past few months, we are extremely proud to partner with Hnry and help to accelerate their early momentum, launch into the AU market (and beyond) and most importantly, ensure careful monitoring of the company's extraordinary cake-level engagement.

If you're a freelancer who pays an accountant $000s to complete their taxes, check out Hnry or be in touch directly.

Yet Another 2017 Prediction Post

2017-01-18 permalink

The Australian venture capital landscape has matured rapidly over 2016 as the category continues to grow into a popular alternative asset class integral to a diverse portfolio. Compared to the preceding year, Australian VC will enter the new year with more than double the number of funds and more than 5x the amount of capital within the sector as a steady flow of global technology success stories provided the impetus for investors and managers alike to enter the space. Undoubtedly, 2017 will be another year of rapid change for the asset class, below are a few of the key trends to be expected:

1 The next wave of technology emerges

Recent years have been dominated by the emergence of on-demand and sharing economies within traditional sectors — Uber and AirBnb being two of the more successful examples. As per the below image produced by Gartner, virtual reality remains the most notable next technology horizon and is threatening to break through to mainstrean adoption in 2017. While at current VR is the domain of gamers, Snapchatters and hardcore technologists, many predict that the technology will be a fundamentally social medium that will redefine our approach to interpersonal communications. VR technology stemming from Facebook, Microsoft, Google and Magic Leap is expected to reshape traditional activities and services from architecture and design to therapy, travel and media consumption in general. Any area of life where “presence” is a part of the use case is set to be transformed by VR. While the key VR players are already heavily capitalised, many with venture backing, VR’s emergence will create an array of complementary products and services for which venture capital will play an important role in 2017. The applications and underlying software relating to the mobile and desktop operating systems of today will have to be reimagined and reconfigured for the interactive world of virtual reality.

2 Fledgling Australian VC grows up

With the proliferation of capital in the Australian startup ecosystem, fund managers will be under pressure to deploy larger cheques to later stage companies. Historically Australian startups have been forced to look overseas for larger funding rounds. However, in 2017, Australian founders will be able to raise bigger rounds locally with investors having to prove their value-adding credentials on a global scale.

3 Human capital flows towards venture capital and startups

An emerging trend of 2016 will come to the fore in 2017 with Australia’s best human capital shifting away from large, established corporates towards disruptive technology-led startups. While the most in demand graduate positions were formally with Goldman Sachs or Mckinsey, look for the best university candidates to join the likes of Deliveroo, Canva and Siteminder. Nimble startups are able to compete in areas other than cash compensation and the opportunity to make a real impact achieve work-life balance and have responsibility is alluring for many. Venture capital will simlarly piggy-back off this trend with thought-leaders trending towards the investing space looking to pick and back the next wave of winners. In the past Australian venture funds have been manned by a small number of experienced operators with either a finance or entrepreneurial background. As the industry matures expect deal teams to mimic the US and increase in size with analysts, associates, directors and operational post-investment teams.

4 Startup valuations face a reality check

Valuations across the US startup ecosystem have been in decline throughout 2016 but the trend has not yet reached Australian shores. Venture capital continues to operate in a price insensitive environment with fund managers preferring to back best in class founding teams solving pain points for substantial market opportunies rather than haggle over valuation. Convertible note structures are becoming more common as investors prefer to avoid valuation conversations with early stage companies. At some point investors will be forced to price funding rounds and expect valuations to be benchmarked to the more mature global markets in which prices have decreased. In 2017 the more sophisticated and experienced investors will become more price sensitive, leaving over-hyped expensive investment opportunities to corporate venture capital arms or angel investors who are typically less price conscious and often investing for strategic reasons.

5 Venture Capitalists deliver on their promises

More startups in Australia raised capital in 2016 than ever before. Many of these deals were competitive with venture capitalists differentiating terms as much on services and help, “smart capital”, than multiples or financials. In 2017 investors will have to live up to those promises with only the experienced operators able to add real value. Expect investors to be under the microscope in 2017 as much as the founders they back.

Valuation, Valuation, Valuation

2016-08-18 permalink

On Monday night I was fortunate to attend an excellent Innovation Bay dinner. Unexpectedly, the most common topic of conversation: valuation. Angels wanted to talk valuations I was seeing in the market, bankers and corporate types wanted to explore my valuation background with EY and how it is translating in startup land, and founders were obsessed with “multi’s”, “pres” and “x on x’s”.

Valuation is certainly an important topic. It is frustratingly opaque. Not only because there is scant comparable public market information. It is opaque because fundamentally, most startups are game-changers and unlike any other business in the market. Why should I peg my valuation for a revolutionary business that is defining alternate use cases and building new markets to an existing player with the only similarity being they share a sector? More frequently, however, valuation is opaque because it protects investor’s blushes. Transparency is not the friend of an under-performing fund manager.
Why does valuation matter? Valuations for pre-revenue companies serve as signalling tools more than anything. Does it matter if EVP invests at $3M or $5M. Kind of, but not really — we can make money either way. What is more important: are they a maniacal product girl/guy with an unfair sector advantage? Can they talk to the blue-sky, game-changing vision and treat this capital raise as a nuisance just getting in the way? At such an early stage, valuation is a signal, nothing more, nothing less. It speaks to the focus, judgement and vision of the founding team. Whether we bet on a founder with all of these qualities in spades is an extremely good predictor of our fund’s overall success. Whether we invested at 3 or 5 is not.

If you’re raising your first external capital, you should be pricing the round at a valuation where the best investors in Australia want in and are willing to contribute, not at the maximum price where you can find investors to participate. The best investors are the ones with deal flow on tap. They aren’t going to pay 2x a fair number for a deal when there are 7 more outside the meeting room offering superior risk/return trade offs.
This is becoming particularly important in an Australian VC market that has added over $1 billion in capital already this calendar year. Even from when I joined EVP, average pre-revenue business valuations have gone from $2M to $3M. I appreciate that our new fund may have helped change the quality of our dealflow, but the trend even before announcing in August was clear.

Founders need to ask what the VC did for their startups lately. When was the last time they spent the day in their portfolio company’s office? Do they carry business cards with “commercial director” on behalf of their startup companies? What was the last connection they gave to a founder that actually resulted in a new hire, a new commercial sales channel or dev talent? Is the fund they represent their primary business or is it just something they do amongst a range of business interests?

As John Henderson of AirTree says:

“I think it’s critical that you do reverse due diligence on your investors to ensure that they have a good reputation, that they’ve delivered on their promises in the past and added value to other companies. Sadly, a really bad investor can poison your company.”

Another important point: this is not the US. We have different market dynamics, challenges and opportunities and we have differing valuations. Don’t expect your series A to be valued at US rates.

In the last couple of months I have spent time with a number of pre-product/market fit businesses that have valuation expectations that are an order of magnitude above a fair and reasonable range. Below I’ve tried to present my own view on early stage valuations. These aren’t absolute. As you can see the market changes rapidly. It’s a cliche we used to roll out in my former corporate life when our valuations didn’t stack up or if they were poking and prodding holes in our methodologies, but still, it’s true: valuation is more art than science.

Pre-product

You are a consultant at McKinsey with the best deck in Sydney. Your idea is rock solid and you have 350 sign ups on your live launchpad you mocked up last weekend. Maybe you’ve wireframed the lot, or maybe you work for Credit Suisse and you have the world’s best financial model showing EBITDA of $56 million in 2021.
Valuation: $0M (you’re a consultant and this is your first startup) — $2M (you were the founder of Pocketbook and this is your next big thing)

Size of Round: $200k to $500k

You should only be raising if this is your second or third startup. If this is your first, then don’t worry about raising, spend your banking bonus on derisking the deal and proving your ability to execute.

Pre-revenue

Congrats you have a product. This is no small feat. It probably took 2 or 3 of you 6 months to build out version 1.0. Maybe you gave the product away for nothing. You have 1,500 free users and 20% of them are logging on daily. You have 100% mom growth (but your first user was two months ago). This is cool. But it’s not a business… yet.

Valuation: $2M — $4M

Size of Round: $500k to $1M

Early revenue generating

It’s amazing to compare the product today to 6 months ago. Your 2 dev guns have covered the walls mapping out their future sprints. Customers are paying and they’re actually sticking around. You worked out it’s easier to sell to a business and you have your first commercial partnership accounting for 20% of leads. Your Angel investor got you a meeting with the founder of Deputy who taught you about LTV:CAC and the magic number. Product/market fit is looming on the horizon.

Valuation: Ask someone smarter! Or read: Fred Wilson, Mark Suster, Roger Ehrenberg

Size of Round: $1M to $5M

The Warm Intro: Closing Networks and Limiting Opportunities

2016-06-28 permalink

Too many founders, VCs and corporates have become obsessed with the warm intro. Founders are hiding their direct emails from pitch decks and websites, charging to meet for coffees and closing networks rather than broadening them. The implication: “Nobody outside my current direct network can help”.

It is with trepidation that a founder must approach the ivory towers of VC land. VCs with closed submission processes are arrogant, not efficient. In general, the warm intros I receive are most likely coming via the 10% most random segment of my LinkedIn network — people I’ve never met in person and certainly those I wouldn’t trust as a source of dealflow.

The reality is that there is a small (I mean less than 10) handful of people that receiving a warm intro from would put you at any particular advantage. The actual problem is that if the opportunity doesn’t work for EVP, then replying to decline the advance makes me look arrogant and the intermediary embarrassingly incapable.

Additionally, for investors to close their deal pipeline to only those that a) have direct connections or b) are resourceful enough to build some artificial relationship with a distant member of their network, they are creating a whole series of cognitive selection biases. Two of the more distinct ones include:

Similarity Bias — The bent towards those with similar life experience, most relevant in this context in relation to work and educational backgrounds.

Anchoring — Past experiences inform the way in which investors interpret particular pieces of information, most specifically how they may skew the importance of particular factors in relation to others. I.e. If an investor backed a startup that failed due to technical incompetence in the founding team, they may inappropriately consider or place greater emphasis on this as a deal criterion for the future.

The message is: email investors directly. They will always reply. VCs boast about the number of deals they see and turn away. The same way startups present user numbers as the first vanity metric in every slide deck, VC’s wear their low-conversion screening process as a badge of honour. Equally, they likely possess an ego-driven obsession with building reputation and network in the startup community. You’re more likely to get a generic, template reply via a warm intro than from a direct message.

So, don’t ask my mates for a connection. If you need $500k to $3m and are based in Sydney; email me