#20. Raising capital for startups: how, when – & what venture capitalists look for in a product

Darren Moffatt: 00:04

Hi there and welcome to the Nerds of Business podcast. My name is Darren Moffatt. I'm a director at Webbuzz, the Growth Marketing Agency. And I'm your host. It's great to have you with us for Episode 8 of the Product Development Series. If you're new to this podcast, our vision is to make entrepreneurs happier by solving the key challenges that all businesses must overcome. One problem at a time. Regular listeners will know that in the previous episode, we looked at the topic of business models and specifically how to match the right business model to your product or service idea. One of the main reasons why this is so important for start-ups in particular is because it's a key consideration for investors. Raising capital is often a make-or-break stage in the product development cycle. Many promising start-ups need external funding in order to build out or scale. The technology required to realize their product vision. But raising capital is notoriously difficult and not just for precocious millennial or gen zed founders, even seasoned entrepreneurs with a proven track record and established networks can find it a soul-destroying process. As you're about to hear in our opening story, one such founder had to pitch more than a thousand times to different investors before he was able to unlock a flow of capital from the American venture capital community.

Darren Moffatt: 02:01

The year is 2012, a New York man called John Foley launches his new start-up at the age of 42. But John is no ingenue. A qualified engineer, he's already an established name in the tech industry with 15 years of experience in senior leadership roles. In 1997, John helped build city search.com into a household brand. He's also served as president of the famous book, retailer barnesandnoble.com. And he's confident he's new idea of an exercise bike that connects riders by the internet will be a smash hit. He calls it Peloton and quickly raises seed capital from friends, partners, and family. As the company enters the long cycle of product development, John begins to pitch what he genuinely believes to be a 10 out of 10 proposition to venture capital firms. And this is where the trouble begins. It soon becomes apparent that no one is interested. Every investor he speaks to is a sceptic.

Darren Moffatt: 03:10

Some even described the fitness category as dopey. He soon racks up hundreds of unsuccessful pitch meetings. The answer is always no. Although interestingly, the reason given often varies some tell him he's too old, others don't like the idea of investing in hardware and some Silicon Valley VCs even reject him on the basis of his East Coast location. So, John gets creative. In 2013, his team have built several prototypes, which they use in the marketing material or a Kickstarter campaign. It works and the company is able to raise $300,000 from small investors. Meanwhile, John keeps pitching to VCs or institutional money, but continues to be rejected. So, he expands his focus to smaller angel investors. Although his strike rate is low. A trickle of investment capital does start to flow. By the time he's raised the company's first $10 million, he's pitched to 3000 people to win over just several hundred angel investors by contrast, not one of the 400 institutions he's pitched to say yes. Fast forward to 2020, and Peloton is now a publicly listed company with annual revenue of more than $1.7 billion. And what of those 400 VCs who turned John down? Well, they missed out on one of the most extraordinary growth stories of the decade. Thanks in part to COVID and the need for safe alternatives to the local gym, a company is now valued at a whopping $20 Billion

Darren Moffatt: 05:06

Now, I'd like to declare a credit here. I first became aware of the Peloton story through one of my favourites ever podcast, Masters of Scale with Reed Hoffman. If you're not already a fan, please check it out. It's amazing and listened to the interview with John Foley for the full story on Peloton. As you can probably tell by my little preview here, it's a fascinating tale of grit and determination over the long haul. It shows that sometimes founders can be so early with an innovative product or market opportunity that even seasoned investors don't get it. According to John Foley, it was because the category of boutique fitness was a blind spot for Silicon Valley VCs. They weren't seeing the very clear consumer trends happening on the East Coast. And because he was essentially creating an entirely new category with Peloton, no market data was available for his pitch deck. If you're thinking of doing a start-up or creating a new product and you need to raise capital, what can you do to get investors truly excited? How do you convince enough people to put their own money into the business? That it potentially changes your life forever?

Speaker 2 06:31

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Darren Moffatt: 06:51

This is Nerds of Business. We'll start the show in a minute, but first a word from our sponsor.

Ben Carew: 07:00

Hi everyone. It's Ben Carew here. I'm a director at Webbuzz, the Growth Marketing Agency. I work alongside the host of this podcast. Darren Moffatt. If you're a business owner who wants to grow, but you don't have the spare funds to invest in marketing right now, you're not alone. Since COVID hit, we've noticed more clients suspending campaigns or delaying their marketing altogether due to cashflow issues. In response to this, we developed a solution called Buy Now Pay Later Digital Marketing. It provides eligible small businesses with nothing to pay on SEO, digital marketing, and website development. For up to three months, we think it's perfect for entrepreneurs who need a helping hand getting sales flowing again. I'll be back later in the show to explain how it works, but if you can't wait, you can download a free info pack now at webbuzz.com.au/bnpl that stands for Buy Now Pay Later. That's webbuzz.com.au/bnpl

Darren Moffatt: 08:03

So, the title of today's episode and the problem we're trying to solve is Raising Capital for Start-ups. How, when and what venture capitalists look for in a product? It's a massive show today. And we've assembled a truly awesome panel of nerds to help you get some definitive answers. You'll hear from a founder who's successfully raised $13 million for her PropTech start-up, and our two product design experts will share personal insights drawn from their own start-up experiences and observations. If you're a founder or business owner, and you want to raise capital from investors, this might just be the most important podcast we've ever produced because our feature interview today is with the partner of a top venture capital firm. He lifts the lid on the internal processes. VCs use to screen investment pitches and reveals what it takes to get funded by institutional money. Here's a sneak peek.

Emlyn Scott: 09:05

If I was looking at our product, there's sort of two main things. One would be, what is this, the problem that it's solving? So how big is it? How fast is it growing and more important than anything else? How big is the pain point? I wanna be able to talk to a customer and they gotta tell me, this is killing me. I need this product to be able to, you know, give me, give me a solution. And then when I look at the product itself, I'm not generally, and you know, we're a little bit different, but from our perspective, we're looking for a thing called sort of a 10X rule.

Darren Moffatt: 09:31

But first here's just a quick reminder that if you're enjoying Nerds of Business to please hit the subscribe button on your podcast player. It means you'll automatically receive each new episode every fortnight, and it makes it easier for us to stay in touch. So, if you're looking for investment in your company, one of the first things you need to understand is that there are different stages of capital raising, where your business is at in the product development cycle will often dictate what type of investment round, you'll undertake Emlyn Scott is the co-founder of CP ventures. CP ventures are leading venture capital firms for early-stage companies. And in 2018, they were actually recognized as one of the top VCs in the world. In fact, they already have a unicorn or two in their portfolio, Emlyn and his partner, Chris are both experienced entrepreneurs themselves and embrace an entrepreneur first philosophy, which is clearly a major factor in their success. I began by asking Emelyn to explain the different stages of raising capital.

Emlyn Scott: 10:40

Wait, so there's no universal definition that I've been able to come across. So, we have our own kind of version of what we think is pre-seed seed. And then after that is your Series A Series B. So, the way we look at it is, is pre-seed generally as a business that is in development, but it's not live yet. So, it's not generating any revenue, doesn't have any paying customers as such. So, they've gone some way, even before that you might have your, your friends and family around your ideation, that sort of area. So, they're in some level of development that can show us something. Then once they go live, they usually haven't got product market fit. We also define it as sub sort of a hundred thousand dollars a month in turnover. And that'll be a seed stage for us. Series A kicks in at a hundred thousand through to sort of 200,000 to 250,000 a month in turnover. And thereafter you go Series B, Series C. Now there's exceptions to the rule. It always is. And so, some businesses will be a Series A business, even if it hasn't gone live. If you know, they're in R&D for a long time, and they're building something, it takes a lot of money, a lot of skills that might be deep tech or mid tech or something like that. So, there are exceptions, but that's kind of a rule of thumb

Darren Moffatt: 11:44

Later in the show Emlyn will return and he'll reveal exactly what makes us start-up investible. So, stick around for that. But before we get to what VCs are looking for, I think it's really useful to understand how they go about screening and filtering the proposals they received from start-up founders. What Emlyn is about to share is an eye-opening insight into the reality of pitching to investors. And, you know, you mentioned earlier sort of offline before we started recording that you guys see a huge volume of pitch decks, daily, some solicited some unsolicited, firstly, how many of those just get immediately rejected and why might be also an interesting sub question, but the point that I'm super interested in is what's that you must get a bit of a like a little feeling. I would imagine some sort of almost like pattern recognition where you go, Hmm. Yeah. There's something here. Like I liked it. It's like maybe step us through that as well.

Emlyn Scott: 12:50

Yeah. So, what's not normally sort of known as spoken about these for a successful VC there's four key components. And what you're talking about is what I sort of referred to as the second or the first and second component, which is the deal flow coming in and the screening process. So, for the deal flow for us, Chris and I would probably look at five to 10 deals a day each, in terms of volume. And like I mentioned earlier, when, you know, when we go to the US, we'll look at 200 to 250 businesses in each trip, um, that we go over, obviously, you know, we're not traveling right now, but you know, when we do those trips, so you do build up real pattern recognition. You can almost immediately see ones that have got potential. That being said, that's the qualitative aspect of it.

Emlyn Scott: 13:37

We have a quantitative aspect to our process as well. It's very fast, but we break businesses down into sort of 18 key components. We have sub-questions, it's all on a kind of a spreadsheet. And then from that, we have those weighted and scored. We use averages, geometric calculations, and also, weighted averages as well as a way of trying to fair it out. What is naturally a bias kind of thing that humans will do? We'll look at something and we'll go, oh, we really like that founder. Or we really liked this idea. Can we make it work? Are we seeing everything well, that makes us take a step back and bring a little bit of sort of you know, calmer, you know measure to our, to our, you know, to our decision-making process? And we'll do that independently to remove groupthink, think as well. So, and then we'll bring that together on, on kind of like a spider spreadsheet so we can see what each other are thinking and why we're thinking what we're thinking about a deal.

Darren Moffatt: 14:29

Sounds incredibly nerdy. And when, I mean, I'm loving this already, like it's, and, and, and to those founders out there that don't get through the VC gate, it's like in some senses, a death by excel or death by a spreadsheet, there must be times however, where maybe the numbers don't quite stack up, but you still go with it.

Emlyn Scott: 14:52

They're usually the mistakes we make. Ah, that's interesting. So, the ones that, that stack up, they always get through and they, they, they absolutely kill it. So, the screening process that we've done quantitatively has been refined over years to come up with what we've got. It's very simple, but it's very powerful.

Darren Moffatt: 15:12

And this is, this obviously forms some of your IP, some of your competitive advantage as a VC, would that be right? Like, I would imagine other VCs would have some variation on this

Emlyn Scott: 15:22

I would expect so, um, you know, they, don't sort of always lift the hood off to know exactly how they do what they do. And then you need to do it differently depending on what stage you're investing. So, at the pre-seed and seed stage that we look at this, there's not that much to go on. So, you'll have sort of three main areas that you'll go on. You'll, you'll look at the business itself. You'll look at the market environment in terms of how fast is it growing? How big is it that pain point, that sort of stuff that I spoke about earlier, but then you'll also be looking at the competitive landscape? And it's those three together that kind of make up the overall kind of assessment. Later on. It's far more obvious that a business is doing well. I mean, if you're a series, a series B, you've now got revenue coming in, you can go and talk to customers. You can start to see churn rates. There's all sorts of things that you can do that make it far more obvious that this is going to be a really high potential. The converse is that as the price is going to be much higher, so you're not going to get the higher multiples, the higher returns, because you're now paying up to get into a deal.

Darren Moffatt: 16:18

And to that point, you guys have got a pretty amazing portfolio already. I mean, it might be a good opportunity to step us through a key, couple of key highlights of your portfolio the companies that you guys have invested in that have gone on to in some cases become unicorns.

Emlyn Scott: 16:35

Yeah. So, um, well, we're both angel investors as well as VC investors. So, from the VC side, we started in 2018. So, it's still early to, to have them going through to unicorn. We've now got our first and probably another one or two coming through to north of a hundred million coming through, the portfolio now, which is great. One I'd love to talk about, but it's it, hasn't put out a press release to say that it's just raised 20 million Series B, and well over subscribed. Um, but you know, this is going from a seed stage investment through to north of a hundred million in 18 months. So, you know, these are phenomenal growth rates is a 10 to 15% month on month compound growth rates. In terms of the sectors that we look at, you know, where we're at, we're playing in this thing that, you know, if you look at the portfolio, every one of them will be in the sort of fourth industrial revolution kind of thematic. And that's kind of the futuristic of where is the,

Darren Moffatt: 17:35

I think she's going to be very active in our chat today. Maybe, the, the fourth industrial revolution that you just described, give us a bit more context for it.

Emlyn Scott: 17:44

Yeah. So, um, the fourth industrial revolution, just like there's, as you could probably guess three industrial revolutions prior proceeding that each one is a sea change in technology. And it's usually a combining of, of, um, of communication, energy and transport at the same time. So originally there was steam, then you had gasoline, then you move to sort of renewables, which, you know, we've had for a while, but it's now getting better and better. And now we're getting into autonomous vehicles and that sort of generation, in terms of communication, you know, you have the telephone, you have the computer, and you know, now we're getting into AI for communication. So, these are the evolutions. So, you know, we would all be familiar with it. We see it. We just don't think about it that way. So, in terms of our companies, you know, we invested in, you know, micro satellites where it would a bit cost tens or hundreds of millions of dollars.

Emlyn Scott: 18:33

You can now doing it for a few million. You can launch a satellite. Um, and so, you know, in the case of that particular company, they're testing for me thin. And so that 10X rule applies, they can now test for me thing a hundred times better than what exists today. So, we have another one that's for geo-location. So, uh, you know, we use GPS today and GPS, telephone can tell you where you are to a sort of 50 to a hundred-meter radius. Well, this will be able to do it down to a 30-centimetre radius, indoor and outdoor. So, GPS doesn't work indoor. And so that's quantum, so that changes everything for autonomous vehicles because autonomous vehicles can't see around corners. So, this for drones and for warehouses and logistics. So, this is all that sort of evolution of, and then IOT devices to be able to communicate and geolocate so that you can, you know, these things are coming and when you see them, you go, yes, that's a, that's a quantum shift in the way.

Emlyn Scott: 19:26

Things are things are moving. If you were to think about computers for examples, you know, w we've had Moore's law of computers getting more powerful every you know, doubling every two years. So, what does it move now, as we're starting to hit, you know, the sort of the top level of Moore's law, where you get quantum computing coming in. And so that's the next evolution. So, we've invested into a quantum computing company. So, a lot of these things is, you know, they're coming, you can see them, you can see how fast they're moving. It's a matter of them trying to find who do you think is going to be the winners in that particular vertical,

Darren Moffatt: 19:59

Regular listeners will know that Ross Gales from Sydney agency Pollen is one of our two product design experts for this series. Now, while Ross has designed product solutions for some of the biggest brands in Australia, he's also worked with loads of start-ups. So, he's had a front row seat in the capital raising process for many promising ventures. I asked Ross to share the common mistakes to avoid when raising capital and the opportunities that a lot of founders seem to miss.

Ross Gales: 20:30

Yeah, so we've, we've helped quite a few businesses seek investment in their platforms. And a big part of that is making sure that you're super clear on your product proposition or your USP. What makes you unique in the market? That's critical in terms of understanding and the go-to market strategy behind that is all about how do you communicate your value in your USP? And I've seen so many businesses get that wrong. They go out thinking that they're just another platform like X or the Uber of this, or the Airbnb of that without really thinking, like, what is it that makes me uniquely different in this market, that customers will see me as, as something that really helps them to get that job done or to deliver that type of value. So, it's that if you build it, they will come mantra. I just hear that too much. It really is. I've got a great idea. Let's build it. They will come. I think that's the biggest mistake people can make. I've talked about validation and ensuring that we're always checking with the customers on that, but it's also about, making sure that you've got something unique about your product, and I really advocate for that. And that's sort of find your differentiation and really double down on that and tell that story about why your product is different. The other one I'd say is, is companies that really overestimate their reach and their earning potential. Many times, I say these investor presentations and decks that they come to me with and say, we've got this big idea, and it's going to make us a billion dollars. It's like, no, it won't.

Darren Moffatt: 22:03

I might've been guilty of riding one of those techs, not the ones that you've seen, but I think in the past, I might've written one of those, uh, sort of pie in the sky deck. So, you're quite right. It's a very common pitfall.

Ross Gales: 22:15

Yeah. Look, and, and, and, and investors see straight through it really that's the key thing is, is, is it's, um, it's very easy to try and get excited and overestimate the numbers, but the realistic, the reality is unless you've got the quantitative research to back up your market, potential your reach audience size, understand the value of your customers, and can demonstrate that with some rigor. Then it's just numbers on a page. So, I think that's key. And I think it's, it's something that it cannot be taken too lightly that when, particularly when seeking investment in an idea, understanding the earning potential is a large part of what attracts investment they're ultimately in it for money. And the other thing I would say is that they're that they want an exit. And so, understanding your exit strategy for your product is another critical piece of that.

Ross Gales: 23:02

So, having a clear idea of when those investors will get their money back and how much is the earning potential and tie those things together and demonstrating how you’re differentiating from other solutions. So, demonstrate the value, understand the potential, have a clear exit strategy is the key to a good investor deck? Yeah, I think the ones that I, that I see struggle are the ones who aren't clear on either of those things. They don't have a USP, they don't know what their potential earning value is. And they just fail to understand the ultimately investors want to pay out at some point. So there needs to be clear exit. They're investors, not a bank. That's right.

Darren Moffatt: 23:46

And our other product design nerd for this series, Carrie Peters also had some highly useful insights on this topic. She's now product design principal at Sydney agency, Ustwo. But before she moved to Australia and took up that role, she was a start-up founder herself in the states. So, she's had first firsthand experience of raising capital and pitching to VCs. Listen to Carrie as she shares her own personal story.

Carrie Peters: 24:14

Well, I can tell you a painful story from my own experience being a part of a start-up from early days is that we didn't make good enough or draw clear enough boundaries between what the product was and what it was meant to do. And who's going to solve problems for. We didn't draw a boundary between that and what investors or potential partners wanted. So, we found ourselves being a little bit of you know, we talked earlier about that, that person that wants everyone to like them, we ended up creating this little bit of a Frankenstein of a product because we kept on being like, oh, you really need that investment money. And all they want is a feature that does. And then the next thing, you know, there's another partner that wants something slightly different than that. And, um, I think as much as you can be very, very true and very crystal clear on what your value proposition is, and you can you go in, it is your job to know that and to go in there and tell the investors, this is what this is, and this is what this does.

Carrie Peters: 25:20

And then their job is to decide if it's something they want to invest in, if they really have product, um, opinions, and they want to shift what you're doing, I would, as hard as it is, I would say, walk away from it, cause you'll end up not creating the thing that was, you know, originally intended. It's a really hard thing to do, but it's really painful to end a start-up knowing that you didn't actually make the thing that you had initially or solve the problem for the people that you initially wanted to. So that's a bit of a tale to be warned by,

Darren Moffatt: 25:54

Well, if I had a sad music sample, I'd play it right now, violin. Yes. The low foreboding drone, I think I might be able to dial something up, but I think there's a lot of value in what you just said there, because, you know, we did a tech start-up ourselves about six, seven years ago. And that notionally failed, but we learn a lot and sort of spun off into a different business, which is okay. But the thing is that investors don't know everything. You know, that's a key message. I think entrepreneurs and start-ups need to hear, like, just because you get knocked back or people don't understand your product or the market or the value proposition, it doesn't mean you're wrong. In fact, it could very well mean that the investors are wrong and there've been plenty of cases or stories, you know, in the investment communities where people have just got it wrong, then they've missed out on a great, great opportunity.

Carrie Peters: 26:57

I do think like if you can, if you can find a way to do less rounds of funding, it will be better for your product because you have less moments of needing to kind of stop focusing on the product and quickly trying to impress someone. The more you can kind of do it in a, more of a long play, you know, get just enough investment and just be really smart with what you do with it. Um, don't blow it all and then need to go do another round of investment a year later. Like it's, you need, you need to give yourself long stretches of time where you're really focusing on the product. Um, anecdotally, when I came to Australia, I found it very interesting that the start-ups that I would go and speak with, um, they've all been around a lot longer. And I feel like the model for investing here is slightly better than in San Francisco where it's all about this really quick.

Carrie Peters: 27:43

Like it's almost a badge for doing your next round of funding, but I feel like it shouldn't be like, I feel like that longer play that you should be able to be a start-up still six years later, as opposed to San Francisco where it's like, oh yeah, I made it all the way through all the rounds of funding. And I sold it in year two. That to me means you've made not a product for people, but a product for investors. And I think that's scary. And I think it's, you know, for all the Australian, I guess entrepreneurs out there good on ya. Do the long play, it'll be better for people

Darren Moffatt: 28:17

Yeah. So, um, what I'm taking, I'm taking a lot out of that. Um, just before we move on to the next question, but, you know, it seems to me that purity, the purity of the idea, the purity of the value proposition, purity of the design thinking, you obviously placed a premium on that. You'd rather have that purity maintain for as long as possible, then get corrupted essentially to some extent by the very nasty, necessary capital-raising process.

Carrie Peters: 28:49

Yes, but with an asterisk and this is why, so you need to know what your objective is. If you go into being an entrepreneur with this idea that you're gonna, be a successful entrepreneur, and that is your objective, then you can totally do the other model. You can totally be like; I'm going to literally just find out what investors will invest in. And I'm cause they're literally my user. They're, market. They're my audience. And you just pivot your product your way up to selling it to someone. And that's your objective then? That's good. But if your objective is to actually solve a problem or like create a thing for people, then you need to keep that objective ever, ever present ever sort of in mind. So, it depends on the objective, I guess.

Darren Moffatt: 29:34

So, if you're a start-up founder or you're launching a new business that will need to raise capital in future, then the biggest you might be asking yourself right now is what will make my company investible. That is what our external investors really looking for when they get pitched by founders. Well, it's actually a bit of a mystery when I started research for this episode, I noticed that, although there's a lot of general content online about raising capital, there are actually very few interviews with venture capitalists and fewer still where the principal of a firm refills, exactly what they're looking for. Well, I'm pleased to say that's about to change in this feature interview with Emelyn Scott, from CP ventures, he lifts the hood on the key metrics and times VCs are looking for in early-stage companies. What follows is I think, essential listening for any start-up founder.

Emlyn Scott: 30:33

It's such an easy question. So, I would caveat it to start with that we look at far more than a product. So, we'll often tell businesses, especially ones that have got some hardware component. Cause they love their products. It's like, look at my product. This is awesome. And you go, yeah. Yeah, but we're investing in a business, not a product. So that's the first thing. So, there's a lot more. So, if you were to take a standard sort of pitch deck, that'd be 18 slides product would be one of those 18 things that we look at to sort of put it in context. If I was looking at a product it's sort of two main things that one would be, what is the problem that it's solving? So how big is it? How fast is it growing and more important than anything else? How big is the pain point? I wanna be able to talk to a customer and they've got to tell me, this is killing me. I need this product to be able to, you know, give me, give me a solution. And then when I look at the product itself, I'm not generally, and you know, we're a little bit different, but from our perspective, we're looking for a thing called a sort of a 10 X rule. And so, this is something as, as I mentioned, right at the beginning,

Darren Moffatt: 31:30

That's very nerdy, the 10 X rule that you've, you've awakened the, you got the attention of the nerd bot there what's the 10 X rule Emlyn?

Emlyn Scott: 31:39

The 10 X rule is, is literally, is it 10 times better than the proceeding product before it, or what people are using currently? So that sort of relates back to what I said, you know, sort of rather be a breakthrough technology, something that is just a quantum improvement. So, a case in point might be something like the iPhone versus the phone before it was just a quantum improvement over the product before that just decimates the competition. Right. So, we're looking for something like that, you know, it's a real IP or USP component to it. That is just so frigging hard that someone's now cracked it and that's what we'll be looking for.

Darren Moffatt: 32:14

Yeah fantastic. And, um, you know, just to expand on that point a little bit, are you looking for products and businesses? Of course, not just products, but are you looking for products that are global in application or are you happy to look at a great idea that, you know, might just dominate sort of Asia Pacific?

Emlyn Scott: 32:38

Yeah. For, for us? Usually, it's global. So, I mean, that's one of the beauties of VCs in particular like software, because software can be, you know, global from day one to an extent. So, there's, there's usually sort of three types of models there's is the one where it can be instantly global. Think of Twitter, say for example, or even Facebook, even though they didn't do it that way, but it's global. Then you've got ones where it's sort of semi global, so they need to put people in each of the jurisdictions, just to sort of local hubs, but they can expand it really fast. I think of something like Uber. So that's sort of the case in point, and then you've got local ones they're often in the tech space, something like FinTech, where you've got to get licenses and you need to have a real expertise.

Emlyn Scott: 33:18

Every country is slightly different. We generally don't look for things like that because they're too limited and they're too hard. We're looking for something that is in those sort of the first two categories. Asia is okay because Asia is massively growing. And you know, it's, it's from a psychology perspective is very different to sort of the U S market. So that's okay. And even India, cause that's again a, you know, massive market. Um, so we'll look at something. It can be, um, limited to those, but in time could go outside of jurisdiction as well, if needed. Okay.

Darren Moffatt: 33:51

When it comes to actually, you're developing products and designing products, like when, when do you, where is that line that this might be difficult for you to answer, but where is that line where it's no longer just a dream it's moving into reality is moving into something that is investible.

Emlyn Scott: 34:13

There's literally just so many components that go into making that. But if I would try and pull out one sort of key one, it would be the vision of the founder or the founders. So, they've got to have not only the vision of where they think this thing could go, but also the capacity to be able to deliver it. And it's quite common within VC, not so much in Australia, but overseas that founders get replaced on the journey. And I get why it's very hard to be a CEO it's even harder to be a start-up CEO and still capable of running a big business and doing that journey through, and often not only different people at different stages for the businesses, but it comes back to, again, what does the founder really want to build? Um, cause we see ones that are there. They just want to get the capital, but the capital might be because they need the capital as opposed to it's for accelerating the business. And so, there's different drivers for why businesses seek capital. It might be more survival as opposed to actually, they just need it for fuel for growth, which is the area that we're much more interested in of course.

Darren Moffatt: 35:19

Yes, of course. And on the topic of raising capital for a new business or a start-up with a killer product idea, you're in sort of maybe seed or pre-seed stage, what do you think is the absolute, most important part of the process for a start-up? So, capital raising process, what is the most important component of that?

Emlyn Scott: 35:42

So, I would say it's, it's preparation probably. We see too many businesses that go, okay, we're ready to raise capital now, what do we do? Okay, let's go and raise some money and you go, well, you should have been thinking about that 12 months ago and preparing for it. It takes a long time to build up the relationships with your future funders are potentially, or at least it's a lot easier if you've built up those relationships. It takes a while to get your pitch deck, right, to get the messaging right. To know what hits home. And so, we'll often see decks that have been written too much from the sales perspective. So, they're trying to sell to a customer as opposed to they're now selling to a VC does now looking at it from the lens of, are you an investible company? And it's a very different lens that we'll be putting on the business. So, to just go out there and just go away, just going to raise and you know, and scatter gun, it just doesn't work very effectively. Those that are prepared for it have a much smoother journey through that, that capital raising cycle.

Darren Moffatt: 36:40

And what do you think? I mean, obviously the pitch deck is super important, right? So, for those listeners that might not be familiar with that terminology. The pitch deck is essentially a slide deck, a PowerPoint that's been very refined and the messaging and the numbers are very compressed. It's very high-level stuff. And you alluded to really, it's about 18 slides. What people do you think that it's valid for instance, I mean there are consultants and companies that you can hire to polish your pitch deck, so to speak. Is that worthwhile? Bringing in outside consultants to sort of grease the wheels with the VC community, what are your thoughts on all of that.

Emlyn Scott: 37:26

Consultants? I'm usually not a fan of it, certainly at our stage. There's a place for them. It's usually later stage when it starts becoming more institutional or professional. So that's probably your Series B and above. Okay. Um, prior to us, prior to that stage, we're far more, concerned with can the founder hustle? And so, if they bring in a consultant, they're not showing that skillset. I want to know that they can go out and they can sell because it's usually a founder led business at that point in time. So that will be a massive red flag for us. If we see a consultant bringing in a business early in the cycle, in terms of other sort of skillsets around it, absolutely bring those in you. You want your deck to look amazing. I want to open it up and just go, wow, these guys are on top of them.

Darren Moffatt: 38:14

You obviously want to see an investment in great design.

Emlyn Scott: 38:17

Yes, exactly. I know it's superficial, but it says something about the way that founders think that everything's gotta be done. Right. That they don't just go, oh, sort of she'll be right. And, you know, we'll get to that in sometime in the future or even the raising capital and looking after investors is an important, because in partner, it's, it's a type of marriage, you know where, you know, and, and often lasts a lot longer than marriage would, um, you know, we're there for the next five to possibly up to 10 years, and it's never as good as right at the beginning. And we want to know that they're going to take that relationship seriously. They're just not going to just see us as money coming in, but actually as a partner of that business.

Darren Moffatt: 38:54

Yep. And again, we touched on this before, but a slight digression. So, at that point, when you're getting approached by a start-up. The product, I'm assuming you want to say some sort of prototype. You want to see that some, certainly some validation for the product idea. Maybe give us a little bit more detail on taught all levels of product development that you want to see at that investible stage.

Emlyn Scott: 39:23

Yeah. So, at the pre-seed where, you know, often you won't see very much, so it's much more reliant on the capacity or the capabilities of the founder. So, we'll be looking at their background and their ability to be able to deliver it. But very few businesses fail because a product isn't delivered. So, more businesses fail because they'd never sold a thing afterwards. So, we're not usually that concerned about the product where, you know, if these people are incredible people, then we're pretty confident that they're going to deliver it. It might take a little bit longer. It might cost a little bit more. That's the nature of development. Yes. But we're pretty confident that it's going to get done. Um, so, but there's no excuse for not having some level of tractional validation and that we see as a big problem, because businesses will come to us and they'll go, yeah, but we haven't got a product yet. So, we haven't spoken to any of our customers. And we're like, what's he building a product without knowing what your customer wants? Why haven't you got, so that's, again, it's a red flag. You need to get off your and go out there and talk to you to your customer or your potential. Because they're the ones using your product at the end of the day, they're the ones who are going to pay for this.

Darren Moffatt: 40:27

So that's a really important point. Again, I've seen this, you know, in my experience around the traps as well, people golfing, sometimes invest huge amounts of money in building a machine or some sort of solution, but they didn't validate the idea properly or they didn't. Some of their assumptions were completely erroneous and they've got something that is essentially a massive white elephant for start-ups that require a reasonable sort of investment in actual the product building phase. What are some ways that they can do this, this validation piece? So, you talked about tractional validation a minute ago. What does that look like?

Emlyn Scott: 41:08

So, it can be a one end of the extreme, as simple as it's just obvious that if you can deliver this product, there's a demand for it. And we have a few in our portfolio like that. So, we have you know, one in Healthtech, for example, and you know, that, you know, that they're trying to solve some huge gargantuan problems that nobody's been able to solve before. So, you know that if they get it in, there is a salute, you know, you, it's a winner, it's a winner. Absolutely. Yeah. It's just a matter of now getting pricing, distribution, all the rest of the stuff. Right. Other times it's not so obvious in which case, you know, going out there and talking to your customers, will be impressive. Companies or founders have gone out there and they've surveyed a lot of companies, or a lot of, you know, potential customers, whatever they, you know, whether it's a company or a customer that they they've got, uh, or thereafter. So, the, that sort of stuff that we'll be looking for, but we know that it's going to take a while. Usually, the first 12 months before they get that product market fit.

Darren Moffatt: 42:08

And now for the entrepreneur perspective, Mina Radhakrishnan is the founder and CEO of PropTech :Different. Mina herself has a design background and was a product designer for Google. And also, for Uber when they had just 20 employees, Mina has bought design thinking to make property management, less painful for investors by creating a platform that manages properties for just $100 per month. And :Different has raised $13 million in capital so far, including from the likes of leading VC firm Square Peg Capital. I asked Mina how she did this and what impact it had on her business. And you've successfully raised a fair bit of capital for :Different. I mean, are you able to share roughly how much the capital raise has been today?

Mina Radhakrishnan: 43:02

Yeah, we, we it's, um, yeah, it's probably raised, we raised a little just over $13 million now. We completed our Series A fundraising in April, I mean recently anyway. And I strongly recommend if you can avoid raising during a global pandemic, it's not fun, but I think it speaks to the strength of our business that we weren't able to pull that off and, and make it come together. And I think it's been a, it's been a really good, um, the equity year for us.

Darren Moffatt: 43:27

Yeah. Well, look, I think that's an incredible achievement, obviously speaking with another entrepreneur who, just managed to complete the race before the pandemic and I kind of breath massive sigh of relief. So, if you were still kind of trying to bed that down, you know, hats off to you. Yeah.

Mina Radhakrishnan: 43:44

And I think like one thing that's really important for people who are thinking about building venture backed start-ups, is to make sure that they really understand the economics of how venture capital works. And that VC is not a good fit for all businesses. And it, it just, it's not, it doesn't define whether or not your business is a good one. Now that's not to say that we shouldn't have venture capital. I absolutely think that we should it. I think that like it will improve the Australian ecosystem have more venture capital, more of these investing in early-stage start-ups. Um, but you have to recognize it, like, you know, venture capital is like a hits business, right? It's like the music industry it's like as a fund, you're expecting to make like outsize returns on a few of your companies. Um, and we were on a lot of them and the rest of them kind of in the middle and like, that's what I really like.

Mina Radhakrishnan: 44:26

You really have to 10X yourself in order to be valuable. And you have to remember that's the lens, I, which an investor's looking at that from, [inaudible] as you think about, as you think about kind of what your, what your pitch to investors is. A lot of it needs to be really clear about your narrative, what you think you can accomplish, what you think you can do. And I think like most investors know, especially like real estate start-ups. Like what do you think you're going to build the, of the year to build it in? And you're like, you know, projected success, metrics and stuff are just like made up. They're all imaginary, nobody knows, right. The key is like, are you learning? Are you growing? Do you have the right vision for where it's going to go? And are you the right person?

Mina Radhakrishnan: 45:00

You have the skills necessary to execute on that and make it happen. I think that's the thing that most people are looking for, um, in early start-ups. It is Important to be honest about kind of where it is. And but at the same time, like, you know, tell a big picture story, but be realistic, right. And I think you have to find it there. And I think the narrative I think is really important. It's like, do you understand what you're trying to do and why you're trying to do it? And from the beginning, we've always talked about what :Different is. And the fact that property management is this incredible base. It's a really critical way to be able to build relationships with people, to earn the trust as a property manager. But for us, we've always thought about :Different as the assistant for the home.

Mina Radhakrishnan: 45:35

And that's where we want to go. We know we can do that, but we have to, we have to, we have to get this foundation right first. And that's where we spend all our time and energy knowing that where our North star is and, you know, it’s over here and being the home assistant. Um, I think the other thing I would say is, um, like one thing for [inaudible] as like I'm, I'm not the model and numbers person and my husband is, and he's great at that. He's very thoughtful in his approach to actually sort of like, taking the approach around, like, what does it mean for this business and really answering these key questions around metrics? Like, what are you, what's your projected? What's your projected customer acquisition costs? You know, what do you think the LTB is?

Mina Radhakrishnan: 46:14

Why do you think that's the LTV pushing, making those assumptions clear around how that's all gonna come together so that when we talk about our business, like we're talking about it both from the perspective of like, here's the product, here's the vision? Here's how it's going to turn into, we use here's what matters when we look at, but also from a perspective of strong business, all right, well, is this a good business? Like, what are you, what, what are you going to economics? And what's your payback period look like, what's your path? And I think you have to be able to speak to both sides of that. So, for me, I think that's one of the great things about having a co-founder is that, you know, like we have very different things that we're good at. And it's the combination of those things. I think ultimately creates a better business.

Darren Moffatt: 46:50

And now another word from our sponsor.

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Darren Moffatt: 48:04

So, the problem we set out to solve in this episode was Raising Capital for Start-ups: How, When and What Venture Capitalists Look for in a Product. Our product design experts, Carrie Peters from Ustwo and Ross Gales from Pollen revealed the common mistakes and pitfalls that founders make drawn from their personal observations and experience. We also heard a great real life case study from our entrepreneur guest Mina at :Different. And of course, our feature interview with venture capitalists Emlyn Scott was an amazing insight into the capital raising process. From the VC perspective, I hope their collective wisdom has given your ideas to crack the code to growth in your own venture. Now, there's really so much value in this episode that when it comes to summarizing, it's kind of hard to know where to start, for once I'd actually recommend you download the written transcription of this episode and take your own notes.

Darren Moffatt: 49:04

You can find that on our website at webbuzz.com.au/nerds but if I had to nominate some key takeout, here are five conclusions that we can all draw from this episode. Number one, investors want a business, not just a product. It doesn't matter how brilliant your product is. If the founding team is not seen to be up to the task of running a business, VCs will not invest. Number two, be clear on the problem you're solving. The heart of the problem is to solve and the bigger the market for a solution. Generally, the easier it will be for you to get investor interest. Number three, vision is important. As Emlyn said, investors want to see that the founders have a clear vision of how their product solves the problem and effects positive change in the world. As Mina said, also, you need to build your narrative.

Darren Moffatt: 50:03

Guess what? Storytelling works. Number four, create an amazing pitch deck. Don't skim on time or money, invest in good design and iterate until it's perfect. And number five show you can hustle. If you're asking people who are essentially strangers to invest in your company, they will want confidence in you to grow their investment. A passive founder with no drive or ability to sell will not get the deal. So, learn how to hustle. As we heard in the Peloton story at the top of the episode, perseverance is key. They wouldn't have succeeded without it, but they also had a vision, a clear problem to solve a huge untapped market, a great product and a viable business model. Even with all that 400 VCs still said, no, the truth is raising capital can be a brutal process. It can take up vast amounts of the founder's time, and it's not uncommon for entrepreneurs to burn out during the process. Raising capital is not for everyone. So, if you're about to embark on that journey, be honest with yourself, get independent feedback on your business idea or product before you go too far down a dead end. But if you can create a product or service that is genuinely 10 times better than anything else out there, investors will be interested. You just need to find the right one who loves your vision enough to go on the crazy journey with you.

Darren Moffatt: 51:40

We're coming to the end. But before we go, it's time for our regular segment Nerd Under pressure where a guest has to share one killer hack or tip, they recommend for you. Our listeners let's find out who our nerd under pressure is today. So Emelyn, we now come to a recurring segment here at Nerds of Business called Nerd Under Pressure.

Emlyn Scott: 52:02

I'm sweating now.

Darren Moffatt: 52:09

And, you are the VC, venture capital, nerd here today. Emlyn has CP Ventures, and I think our listeners will be very interested to learn from you one killer hack that you can recommend to entrepreneurs and start-ups for raising capital. I'm going to give you five seconds.

Emlyn Scott: 52:36

Okay. I would hate to say this, but there just isn't there isn't a hack that I know of. There's no substitute for hard work and preparation. It's just that pays off. If you don't do it, it's just not going to happen for you probably. I'm sorry.

Darren Moffatt: 52:53

Everybody's got a bit of an anticlimax. Everybody's looking for the easy way out.

Emlyn Scott: 52:57

He isn't, you have to do the work and if you're not prepared for it, then that's just not the journey you and that, and that's how you get the good, the good from the bad. Because I mean, a lot of it is about perseverance. You know, it's a brutal journey. It's not something that anybody that I wish on people, it is really lonely and hard. And both Chris and I have I've found as, you know, as I said, found us first, we know what it's like to have the sleepless and be, you know, that the person at the head of the helm having to do salaries, wondering, you know, how you're gonna fix this problem. Cause it, it just doesn't go upwards to the right, like the, you know, the diagrams. It's not like that. It's, you know, it's all over the shop and it's a stressful, stressful journey.

Darren Moffatt: 53:40

So, no single killer hack, but it's just about doing the work.

Emlyn Scott: 53:45

Yes. And there's a lot of things you can do wrong. I mean, there's a heap of things you can do wrong, but there's no killer hack to raising capital that I know of. Okay. Sadly,

Darren Moffatt: 53:54

We'll take your word for it. I'm sure. You're right. So, thanks for listening to Episode 20 of the Nerds of Business podcast. If you've enjoyed it, please leave a review on Apple, Spotify, Google, or wherever you listen to your podcasts. It helps us climb up the ranks and become more visible to other people. Just like you. Remember, we want to help as many entrepreneurs and business owners as possible. If you've got a question or some feedback, we'd love to hear from you, you can engage with us at webbuzz.com.au/nerds that's webbuzz.com.au/nerds . I want to thank all of our guests and the team at Webbuzz for helping me put this show together. We'll be back in two weeks with our next episode, which is Seller Beware: Navigating the Pros and Cons of e-Commerce and Online Advertising Platforms. Until then I'm your host, Darren Moffatt. And I look forward to nerding out with you next time. Bye for now.