VC fund Tidal has $30 million to invest in seed-stage startups. Here’s what its investors are looking for

Tidal Ventures

The Tidal Ventures investment team: Andrea Kowalski, Wendell Keuneman, Georgie Turner, Grant McCarthy. Source: supplied.

Aussie VC Tidal Ventures has raised $30 million for a fund dedicated to investing in Aussie seed-stage startups, and while COVID-19 has caused headaches for some early-stage ventures, the current environment means opportunities abound, say Tidal partners Andrea Kowalski and Wendell Keuneman.

The fund is intended to plug a gap in the market for seed funding in Australia, Kowalski explains.

“There’s no real dedicated investor at this level,” she says.

“It’s such a critical point in terms of the company and setting them up for success,” she adds.

During the economic downturn caused by COVID-19, there’s been something of a shift from the ‘growth-at-all-costs’ mindset, towards demonstrating a scalable go-to-market strategy, and spending funds wisely.

“I don’t think we’re going to see the $20 million seed rounds that we saw a few years ago, where the remit is ‘go and grow’,” Kowalski suggests.

“The round sizes will come off and the bar will be higher for these seed companies … these founders need to be really considered with how they deploy funds.”

Part of Tidal’s goal is to help boost Australian businesses onto the global stage. Aussie companies are famously capital-efficient, Keuneman says, and that’s going to help them here.

“There’s a generally a risk aversion in Australia for investment anyway,” he explains.

“That has bought less capital into the mix, and then obviously founders have to do more with less,” he adds.

That inbuilt capital efficiency means startups tend to have “a pretty good run rate” before they enter the global market, or they have customers there already.

“They’re global from day one,” Keuneman says.

COVID-19 is emphasising the need for capital efficiency. So, it’s a time when only hardened investors are likely to stick around, and hardened founders too.

“Both sides of the table you have people really putting skin in the game,” he says.

“It’s a true test of your long-term sustainability.”

Who’s cashing in?

The Tidal fund is sector-agnostic, but there are a few areas that the partners are keeping their eyes on.

“We’re thematic-led investors,” Keuneman says.

For example, there are opportunities in workflow automation and enterprise productivity. That is, tools that enable collaboration either for businesses or at a user level — anything that helps people do their job more efficiently and cost-effectively.

That’s obviously become a more prominent theme as COVID-19 has driven whole businesses to move to remote working, fast.

“You’ve got a real merge between work and life,” Kowalski says.

The Tidal partners are also looking into the cyber and logistics spaces, and — something else that’s been particularly resilient throughout the COVID-19 crisis — e-commerce.

“It’s not that we’re looking to back e-commerce retailers,” Kowalski says.

“We’ve got this market tailwind — there’s now a massive shift to online at a much faster rate than we ever thought would happen,” she explains.

“What are the components of the plumbing or the infrastructure to enable e-commerce to happen more seamlessly?”

Just this week, Tidal announced it had made its first investment from the new fund, into online search startup Sajari. According to Kowalski, it’s a behind-the-scenes application that simply enables e-commerce to be done more efficiently.

It’s an example of the layers of trends, themes and opportunities caused by COVID-19. There’s been a spike in e-commerce activity, which means there are underlying opportunities for other businesses that support e-commerce infrastructure, and make life easier for those retailers.

And, when you start to dig deeper, “there’s so much that doesn’t exist,” Kowalski says.

“That’s what’s really fascinating about seed investing at the moment,” she adds.

“Compared to any other prior economic downturn, the pandemic has put tech firmly on the forefront to be what powers the recovery.”

Future of funding

When it comes to what funding in Australia will look like in both the near and distant future, there’s a strange double narrative going on.

On the one hand, early on in the pandemic there was concern that seed stage and early investment would dry up, as venture capitlists backed their existing portfolio companies and ventures with less risk. At the same time, angel investors were expected to be more cautious with their cheques.

Right Click Capital’s Internet DealBook data seems to confirm this, showing a significant increase in average investment deal size for the first half of the year.

But, at SmartCompany, we’ve had startups reaching out to share their seed funding news, while equity crowdfunding has remained strong too.

According to Kowalski, the numbers coming out of the US show startup investment is down at the seed level.

“But I think that’s to be expected in the current environment.”

There’s a “flight to quality”, she says, with investors focusing on product-market fit as a crucial metric, not just a nice-to-have.

“There’s probably a higher bar and more scrutiny, at a global level,” she adds.

At the same time, “not being as focused on growth means you don’t have to write these massive seed checks — you can basically do more with less”.

Keuneman agrees that private angel and family office investment is likely to remain depressed, at least for the time being.

“What we’re seeing on the wealth side is there’s also a flight to safety in terms of asset classes,” Keuneman says.

When it comes to private investment, VCs sit in the ‘alternatives’ category, he notes.

“You’ll probably see some of those folks reducing their exposure to this asset class,” he says.

“That’s why a fund like ours really matters,” he adds.

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