Sex appeal, runways and mature markets: Everything Guy Pearson learnt during his $26 million Series B raise
Wednesday, October 23, 2019/
I’m excited to share the who, where, why and how of our $26 million Series B capital raise which closed a few weeks ago, so you walk away with a few tips on what not to do and lessons from what worked for us.
Looking back on our raise history, I was a non-technical founder who always managed to keep the ship afloat with small rounds as we built momentum, being the only team member who could take a non-market salary.
This made things incredibly difficult as it basically left us with a 12-month runway each time we closed a round — which isn’t enough time to invest the cash and yield any decent results.
Our ‘unsexy’ Series A
In our early-2017 raise, our Series A, we required six ‘major investors’ (two super angels and four VC funds) to fund a $5 million round, which required a higher-than-normal dilution rate. I wanted to get two years of runway under our belt to build a profitable and break-even business and be the masters of our domain.
We clearly lacked the ‘sex appeal’ of other household names, or perhaps people just worry about an accountant as a chief executive in growth mode. So we wanted to make sure we had good partners that were happy to help us build to our goal of being in control of our destiny.
Note: we were too early-stage for large foreign investors at this point.
Prepping for Series B
We prepared for months ahead of our Series B, dating back to September 2018.
At the time, we weren’t sure about raising, so I called on one of my rocks for a chat about what was the right path for the company. Craig Winkler has seen and done it all before, so on a crate outside a Melbourne laneway cafe, I went to town asking myriad questions.
- What he would do?
- How do you scale a company?
- How do you deal with imposter syndrome?
- How do we put our amazing unit economics to work?
After many sage words and stories from experience, he simply suggested I take my chief executive hat off, and look at it like an investment.
He said: “Guy, what does the company need to achieve its original goals of changing the industry?”
And so we commenced our journey towards a B round. Thankfully, this was met with much excitement by our board and existing investors.
We sought out and engaged an advisor from Toronto, SurePath Capital, primarily for their background in SaaS and payments plays in vertical markets to help with the financial model, due diligence process and closing the deal.
We got our pitch deck together and then set a path of meetings with Aussie and US funds over four weeks in late-March and early-April.
Why we chose a global VC
We were after a globally-minded VC who could lead a sizable round. This means we needed someone who could invest more than 50% of the amount of the round. This automatically ruled out the majority of Aussie funds who typically look to make 10-20 investments in a $50 million-plus fund.
Thus, the size of the round, lead us overseas. We were also after a fund that had invested in our space (vertical software and payments) before. We received several term sheets from US-based funds well ahead of receiving offers from Aussie funds.
We were extremely happy we could meet our aim to stay an Australian-headquartered company, and were thankful the partner we chose provided an Australian director to join our board in order to make this possible.
Getting the attention of a global VC fund
Over the years, I’d met (almost) everyone in Australian venture capital. My journeys had also allowed me to meet investors from 50-plus overseas-based funds, predominantly those in the US.
Ultimately, I build this network by regularly adding to and maintaining my own funnel of venture firms around the world. I’d asked our existing investors for introductions, however, these only accounted for a small number of introductions.
I had a pipeline ready, but I looked up ‘venture capital’ in 2nd connections on LinkedIn as we were finalising our funnel, and then researched the funds we didn’t have introductions to and requested an introduction from common connections.
As it happened, we met our Series B lead investor in this way, after I requested an intro via one of our existing investors. Warm introductions are key, but you will have to lead the way.
Lessons from the raise process
First and foremost, build your own pipeline of investors.
Also, take phone calls and reach out to VC funds scouring for deal flow to learn more about the funds looking at your sector and how they invest.
- Fund size?
- Average cheque size?
- Do they lead or co-invest?
- Do they invest outside of the region they are based in?
- How much is left in the current fund?
- How long does each fund run for?
- What thesis do they have in your sector?
Thoughts for other founders
From my experience, Aussie VCs are:
- Interested in enterprise SaaS (large contracts, few customers);
- Interested in tech they can use (or their friends or kids can use) — if they can touch it, they can back it; and
- Not interested in hardware (for the most part).
The Australian VC landscape is still very much in its infancy. Australia has a small number of funds, with small amounts to deploy.
As a result, they say no more often than yes, as they have to be very careful about what they invest in.
In addition, they try to deploy the US fund methodology of a large number of investments. This also means they struggle to help as they’re flat out sitting on many boards, raising their own capital for their next fund and running their own business.
Lastly, in most cases, they can’t follow on in the next round as the lead investor.
So make sure you’re aware of this as you’re raising your next funding.
Global VCs need insanely rapid growth (in users or revenue — hello, Canva) to come in early or need you to have more than 50% of revenue coming from their country (with the plan to relocate or flip-up) to invest in your startup. Although, there are few exceptions. However, they have millions and billions of dollars to deploy at the later stage.
I’d always plan to raise angel, pre-seed and seed locally, with as few investors as possible, and then look for capital overseas as you become mature enough to take it. Australians are still very new to venture capital, so the sooner you can bring on experience, the better.
All in all, an investment relationship lasts longer than the average marriage, so make sure you choose wisely.
Getting operational help
Remember how funds run.
They take a small percentage of capital under management to pay a team, who are mostly ex-investment bankers and incredibly smart folks.
However, if you take 2% of $50 million, that’s $1 million on payroll that needs to be stretched, and simply doesn’t go far in the talent you need for a fund.
So, your VCs are there to help for sure, but you will need to drive that request for help.
Focus on building a transformational company (and allow a decade to do so).
Have a good set of numbers and make sure you’ve got two years of runway. It gives you time, and that’s your most precious asset when trying to crack the startup success secret. Most large companies you know are a 10-year overnight success: Campaign Monitor, Xero, Atlassian, Envato and Canva.
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