Fishburners CEO Martin Karafilis believes there is no better place in the world than Australia right now when it comes to early-stage investment, which has bucked the trend of declining deal size, but he urges founders to strike the correct balance between not wasting time and being alert to unfavourable terms.
He tells Business News Australia the best time to raise money is when you don't necessarily need it, "because when you do need it, things become pretty tough".
"Timing-wise for startups, you want to have all your deals closed out so that you have money in the bank in November. Everybody’s on holidays December-January," he explains.
"If you think about starting a relationship with a VC (venture capital firm), it takes 12 months to raise - that due diligence process is going to take a couple of months in a lot of circumstances, particularly with how the market is at the moment.
"Don’t wait too late. Otherwise you’ll get into Christmas and the deal will just be gone. It’ll be forgotten."
Whilst there are opportunities to utilise that lull period in the Australian market to engage with overseas investors in countries such as the US, Karafilis notes that North American investors have significantly cut the valuations they are willing to give.
He highlights an abundance of micro-VCs in Australia, as well as the larger ones, that have raised funds for long-term deployment and are looking at seed stage deals. But they are also more thorough in their assessments of prospective portfolio investments, with due diligence checks now "back to where they should be".
"In Australia we’ve probably always had lower valuations in the whole scheme of things - we’ve always undersold ourselves a little bit," says Karafilis, who co-founded AI-driven product recognition technology Tiliter which is used by some of the world's leading retail chains.
"I would say we’re back to normal. As someone who has run a startup prior to the pandemic craze and during the mid-2010s, this is not abnormal what we’re seeing here. It’s just a real normalisation."
Karafilis says VCs are also taking Environmental, Social and Governance (ESG) considerations much more seriously than before as part of their due diligence, and in some cases a startup's policies and practices in this arena could make all the difference in getting funding.
"Investors are looking for earlier stage startups to be more invested in their ESG practices. It may not be that your company or startup is not investable or a great idea; it's when you've got five companies that are down to that last stage and the investors are looking at putting their money somewhere that it becomes competitive," he says.
Against this backdrop, more power is in the hands of investors and startups also need to be wary of unusual or unfavourable terms.
"Under any circumstance you’ll be able to go and access standard terms, standard information that exists. Realistically, if you start to see terms that are outside of those standard documents, I would start to question that almost immediately," says Karafilis.
"This may come from angel investors that are trying to capitalise a little bit more on companies that are on the edge of shutting down or raising money. Traditionally you would always just want to back the founders. Yes, they're going to minimise their risk, but in the end, they're betting that the founders are going to execute.
"We're seeing maybe more investors go to companies that have a higher execution risk, and mitigating that by adding more terms like warranties and different types of payback clauses."
When faced with such proposals, Karafilis says founders need to find ways to demonstrate that they don't require the capital at any cost.
Karafilis says that with the lack of later stage deal flow at the moment, it's interesting to see that early-stage startups are raising more and "basically extending their runway as far as possible".
"We're seeing startups that extend their runway to 18 to 24 months, whereas traditionally they might raise for a 12-month runway.
"It will be a really interesting time to see whether those companies raise faster and still at a 12-month mark, or whether they’ll ride that out, but there’s certainly a push for the profitability model."
Karafilis also forecasts that the cost of living crisis may lead to a decrease in angel investing to a degree over the next six to 12 months.
"A lot of people had their expendable income sitting there and looking at other asset classes, and it was a great time.
"We see this [change] in a reflection of the syndicates that are now raising funds to be able to follow on."
Founders are not often in the spotlight in much of the public discourse about the current challenging economic conditions, but Karafilis adds he is seeing firsthand how many entrepreneurs - many of whom have foregone their own salaries to keep their businesses afloat - are feeling the pinch of inflation.
"From a founder level, it's super hard because you’re working on no money and you're working super long hours. As a reflection of this you’re starting to see founders take some money off the table. There are so many deals out there where founders are selling secondaries."
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