How the departure of ‘VC tourists’ has opened the door for committed early-stage investors

How the departure of ‘VC tourists’ has opened the door for committed early-stage investors

Flying Fox Ventures founding partner Rachael Neumann (Provided)

After a boom that saw investors of all stripes throw money at budding Australian companies they believed could become the next Canva or Atlassian, the exit of ‘VC tourists’ from the ecosystem has been a welcomed change of pace for some early-stage backers.

While the market is cooling down, Flying Fox Ventures' founding partner Rachael Neumann believes the quality of startups in Australia remains high - creating the perfect opportunity to deploy capital as valuation prices drop.

Speaking with Business News Australia at the ‘_SOUTHSTART’ conference in Langhorne Creek, South Australia, Neumann seemed optimistic about the opportunities ahead for local VCs as investors typically outside of the ecosystem pull back.  

“Just with a pure investor hat on, this is a great time to be deploying more money. The VC tourists - those who were kicking tyres, [since] everyone could be a good VC in 2021 - have exited,” said Neumann, who founded the VC alongside Kylie Frazer.

“What you're left with is the people who really understand this asset class and who have a long-term commitment to these companies. We're getting founders who have steadily been solving their customer problems, prices that recognise where the market is, and round sizes that are appropriate based on the milestones we need them to see.”

To date, the Melbourne-based firm has deployed roughly $30 million into 55 portfolio companies across 70 early-stage investments, including the likes of legaltech platform JosefAI coaching system The Mintable and insurtech Butter Insurance.  

“We intend to deploy more and more capital…we believe that some of the best opportunities and ideally the best outcomes in the next decade will have been investments that we made this year,” Neumann said.

Archangel Ventures managing partner Ben Armstrong also adds that late-stage investors are moving down the startup funding ladder in a bid to secure better deals. 

“I think later stage investors who might have been a little bit burnt are moving down to try to get earlier and earlier investments where they might be able to get a better valuation,” he told Business News Australia at _SOUTHSTART in Adelaide's National Wine Centre.

“On the other side of the equation, I think there's more angels, angel groups and individuals who are prepared to invest in companies that are coming into the market because there's been all this hype about venture capital returns and how they're much better than the stock market.”

Archangel Ventures founder Ben Armstrong
Archangel Ventures founder Ben Armstrong (Credit: Amila Dedovic)

 

While large VCs usually invest the majority of their capital at Series A or later, Archangel Ventures is purposefully deploying $35 million in funds over the next four years towards pre-seed and seed investment rounds.

The firm has already spent $5 million backing early-stage companies such as healthtech Vively, B2B partnership platform Aerotruth and luxury fashion retailer Azura Fashion Group.

“I think in the Australian market there's still a lot of opportunity. I'd like to see like more founders, more funds, more successful entrepreneurs re-investing into the market. We're fortunate enough to have a few of our investors who are successful founders themselves and that’s what is going to make a great ecosystem in Australia.”

Supporting founders again despite getting burned

But even when investments do backfire, companies like Blackbird – one of Australia’s largest VC firms – don’t hold it against the founder.

One example is Michael Fox, who managed to secure investment from Blackbird for his second venture in 2019 despite online retailer Shoes of Prey – which he co-founded alongside Julia Fox and Mike Knapp - collapsing the same year.  

Over the span of a decade, Shoes of Prey managed to raise $37 million, with Blackbird as a key backer of the platform from 2013 all the way to its demise.

“Blackbird was a lead investor; we probably lost a lot of money on that deal - we really are not holding it against the founder,” Blackbird Ventures associate investor Christie Jenkins said.

Instead of severing ties, the VC doubled down and supported plant-based meat alternative Fable Food Co, led by Fox and his co-founders Jim Fuller and Chris McLoughlin, in a seed funding round and $12 million Series A.

“We like doing everything we can to support founders in growing their businesses. If it doesn't work, we're doing everything we can to support them as a person,” Jenkins said.

“Also, venture capital is not the only path - you can bootstrap it, you can crowdfund it, you can use debt. You can still build a really phenomenal business even if we say no. In fact, we get it wrong all the time as well. We'll regret saying no, [that] happens quite a lot as well.”

Blackbird Ventures associate investor Christie Jenkins

 

In fact, many founders have embraced the idea of securing capital through alternative forms with angel investors, debt financing firms and equity crowdfunding platforms seeing record levels of activity last year.

Founded in 2020, Tractor Ventures offers debt financing for founders who have built technology companies that are generating at least $15,000 in revenue each month. The company applying for a loan must also have at least six months of cash runway available.

Tractor Ventures engagement director Garry Williams said the firm had seen “very significant companies” accessing debt funding at all levels, with some loans going as high as $1.5 million.

“Most companies don't fit the venture capital model. They don't have the capacity to go to the moon with what they're developing, but for companies that can generate revenue and scale their efforts - we're a particularly attractive proposition,” Williams said.

The biggest appeal over using a bank? You don’t have to put your personal assets on the line.

“We're not taking houses as surety, or seizing personal assets. If this doesn't work out, we've got a credit and risk assessment framework and have discussions about what their next steps for growth are.”

The grim reality for female investors

According to a study from Kaisa Snellman and Isabelle Solal published in Organizational Science last year, female founders who are backed by female investors became two times less likely to raise additional financing in later rounds.

“I think we still have way more work to do on this front and part of the solution is having more female investors in the room and at the decision-making table,” Jenkins said.

“We take a business that's female-founded, and they're working on a problem that affects women. People will say: 'Oh, that doesn't seem like a huge problem'. The women around the table might disagree and say that's a huge problem.”

Having worked with thousands of early-stage startups over her career, Neumann has also run into occasions where credentials have been challenged.

“We are about to start a fundraising process; we have only had one or two conversations. But I know there are certain moments where we are asked questions that would not be asked of our male counterparts,” Neumann said.

“Now, I get great joy in knowing that I have the best answers in the world for them, and knowing that we are just as worthy, just as successful and just as strong custodians of capital as our male counterparts.

“But I know that we are being held to a higher standard and that's okay. I'll just rise to that occasion. But it's unnecessary and it exists.”

She noted that 38 per cent of total capital at Flying Fox Ventures had been deployed into companies with a female founder.

According to Folklore Ventures and Cut Through Ventures' State of Australian Startup Funding report, roughly 33 per cent of angel and seed-stage funding went to startups with female founders, while only eight per cent of Series B and later funding was received by women - down from 20 per cent in 2021.

“Founders know that we are consistently checking and trying to remove these cognitive biases that are structural barriers to them getting funding,” Neumann said.

“We’re just tapping into this talent pool that no one else seems to be noticing…we have 450 investors – 50 per cent of those are women. There's plenty of capital held by and in control by women, but they have never been tapped on the shoulder."

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