Demystifying startup investment and securing your next raise

In a world where unicorns exist, and hockey sticks are used by investors to describe growth curves, it is no surprise that founders entering the start-up space can feel out of their depth learning buzzwords alone, in this week’s episode of Platform Diaries. While some of the perplexing terminology used can be understood through a quick Google search, the waters become murkier when attempting to understand investment round language. In order for you to best approach funding for your start-up, it is important to have a clear idea of investment rounds, and the appropriate actions to take at each stage.

To set the record straight on start-up lingo, I sat down and spoke with Cam Walshe, entrepreneur turned investor with Pitch VC. Cam, who has been on both sides of the start-up process, knows that in Australia it can be particularly confusing.

“In Australia, we’re a much more immature start-up ecosystem. We’re kind of finding our feet and learning,” Cam admits.

In comparison to our Silicon Valley counterparts, Australia’s start-up and innovation industry has growing to do. Consequently, lingo does not always exactly mirror that of the US. Despite the confusion, Cam says there are some easy ways to tell what the different investment stages mean.

“There are a couple of ways you can look at it,” Cam tells me. “Some general guidelines to look for is where are you getting your money from. If you're pre-seed, it is founders, friends, supporters, and family putting in money, and maybe a little bit of Angel. Then, looking at the seed funding stage, once again it's friends, families, but you then start looking at incubators and Angel investors. Then Series A, you start to look at more institutional investments. While some Angels and friends might come along that journey, your primary capital is coming from venture capital or corporate ventures.”

Cam also suggests that looking at what you are using your money for can help you figure out where you fit in the messy word of seed, pre-seed series A and so on.

“Pre-seed is all about getting the idea started,” Cam says. “Seed is about market research, further product development and building out a team. Then series A, you're looking into building out that strong track record, business strategy, etc.”

While ultimately pre-seed, seed and series A are merely labels to describe your start-up, determining where you are on the journey can help investors decide whether or not they are a suitable match for you. It also sends out a clear message to the market about what you are using the capital for.

Armed with the knowledge of your place in the investment phase of start-ups, you can now start going out into the world to raise funds. Using the example of the wildly successful Melbourne-based start-up Mr Yum - a mobile ordering platform that Pitch VC invested in – Cam shared some of the best ways to go about raising funds.

“There are a lot of different reasons why people invest, but there are a couple of main ones for Mr Yum. One is the team. They had a really great founding team with Kim Teo, Andrei Miulescu, Kerry Osborn and Adrian Osman. Especially in those early days leading up to pre-seed and seed rounds, the investors were looking favourably at the team. Another reason is the market… there's no doubt timing, Covid and all that kind of stuff played into their momentum, which were big market factors.”

Cam points out that Mr Yum’s pre-seed round investors were people in the hospitality industry. These investors were able to clearly look at the market, and understand its size and future.

“I think the big one, which allowed them to raise the type of money that they did, is momentum. A simple sum might be team x market = momentum. Being able to take advantage of what’s happening in the market doesn’t automatically happen. They worked really hard and were super smart to take advantage of the conditions at the time.”

Founder Kim Teo has revealed that the pandemic could have easily ended Mr Yum. The product (being menus inside physical stores) was not clearly a beneficiary of Covid conditions, where shops were closed. They could have easily given up, but they considered the situation an opportunity and capitalised on the post-lockdown world that required physical distancing.

While you may now feel inspired and ready to go out there and start raising funds, Cam warns of some of the mistakes he has made and observed in the past.

“Targeting the wrong investors, for the wrong stage, at the wrong time, and having unreasonable expectations of investors are a couple of common mistakes I have seen,” Cam shares.

Echoing the lessons from earlier on in the conversation, Cam provides that knowing your stage and therefore what you are asking for from investors can be integral in securing funds.

“Another mistake I see is in the early days, as you go and speak to two or three or maybe 10 investors, you get some interest and think ‘cool, I'm going to close these investors and get them in’. Then one month goes by, two months goes by, three months goes by, and you think you're closing in, and then the investor for whatever reason decides not to invest, and you have wasted three months… the times that I've had success, it's been talking to lots of people and talking to the right people.”

Cam stresses that raising capital is as much of a transactional process as it is one of building trust. In order to secure funds, you must forge connections with potential investors as ultimately, they are signing up to go on the start-up journey with you.

“We had a founder reach out to us at Pitch Venture Capital, and the first part of our process is connecting with us is filling out an online form. We do this because even though we would love to speak to every founder, it's just not possible to have a conversation with the 70 to 100 applications per week. This one founder sent us a really nasty message about us not being personal enough, and Rosie who looks after our deal flow, messaged the founder and said ‘sorry, we would like to talk to everyone, this is just the start of our process.’ The founder sent a one sentence email back saying, ‘go f*ck yourselves’.”

Cam admits that he can understand the founder’s frustration, but now any chance of them investing in the future has now been dashed due to the lack of trust they would feel working with this person and their team.

It is through trust that Cam’s emerging Pitch VC has invested in exciting companies such as Mr Yum, NetworksX, Auto Repairs Direct and Polypedia.

If you’re looking to raise funds for your start-up and are not sure what part of the cycle you are in, Cam advises you to evaluate where your funds are coming from and what you are using them for. Then, once you are out there searching for an investor, avoiding telling them where to go will help you build trust and positive relationships.

If you’re an investor and think the Pitch VC is a match for you, you can find out more about them here. .

The information contained in this email is confidential, and it may not be intended for your use. If you are not the intended recipient, any use, disclosure, copying or retention of this document is unauthorised. You are asked to please delete the document immediately or contact the sender if you are not the intended recipient.