Bringing New Zealand to parity on the global startup venture capital process
I think that the New Zealand early stage startup market has heaps of current and future potential, however one of the things that we believe needs fixing is it’s mindset and use of terminology when it comes to aligning the appropriate level of funding with the actual stage of the business.
When I was in Los Angeles, I had a number of Kiwi founders come and present their business and say that they are raising “a $1m Series A” now that they have achieved “a revenue run rate of $100k” and booked their “first pilot customer in the US”. The reality of early stage capital markets outside of Aotearoa New Zealand is that their expectations when it comes to milestones accomplished are a LOT higher than this.
I know that these pitches were not purposefully ignorant of the typical boundaries of a typical seed round but instead that they were just a little off in their terminology. Regardless, as a Managing Partner of a US venture firm at the time the lack of awareness certainly was jarring and off-putting.
Anyway, I am not someone who just moans about something and then does nothing to fix it. I have pulled together a matrix of the various factors and metrics that define the characteristics of a certain round of financing, which I hope will go some way in bringing us to parity to other global standards when it comes to raising capital.
The fund raising spectrum
I believe there are nine key areas that help link the stage of a company to its target funding round:
The size of your team is one of the best determinants of your company’s place on the business lifecycle. As the table below demonstrates, if you are a pre-seed stage company the composition of your small team is paramount:
One of the most common challenges I have with pre-seed companies is a preoccupation with building too much product too soon. Our expectations of your first product are far less severe than some might think. Building too many features too soon for a market that you have yet to find product market fit in can be pretty destructive.
Showing that customers who are willing to pay for and renew your product is a significant milestone in your startups legacy. The volume and value of those customers vary considerably as you progress from pre-seed to an A.
Also this category takes in consideration who is actually generating sales. During the earlier rounds it is standard for the founders to be driving the sales efforts, however as the company grows it is normal for this role to migrate to an in-house sales team.
The expectations of revenue vary by investor, however, if you have a SaaS business model we expect signs of recurring revenue to kick in at the seed stage and grow exponentially from there on in. With frontier technology expectations of early revenue generation can be lower depending upon the nature and complexity of the problem you are solving.
A startup that is profitable from the start? Wouldn’t that be nice, albeit unlikely! Typically signs of profitability may not start rearing their head until you are nearing your Series A, however, it is in my experience that Kiwi startups tend to buck this trend and achieve a level of profitability earlier than expected. There are a bunch of reasons for this that we will explore in a later post and I think it is one of the things that makes us unique as a startup ecosystem.
This is a “horses for courses” type of question and depends highly upon the nature and capital requirements of your business. This is also where I see most Kiwi founders are challenged on the stage of their business. Every month we see the goalposts widening for the amount of money raised for various stages, however here are our latest thoughts on the characteristics of each round:
If there was a hard and fast rule that defines the value of a startup life would be so much easier for the funders and founders in the startup market! That being said, based on our experience, there are some trends in the data that we think help align the pre-money valuation of a startup with its life cycle stage:
Understanding how much time and capital you need to execute your short and medium term strategy is key. We believe that typical runway allocations should look like this:
Again, this is topic that needs an article all on its own and is one of the most commonly misaligned features in Kiwi startups that we have seen since launching in market. Preserving appropriate founder equity is absolutely vital to the ongoing success of a company. If there is too little, the risk of the founders attriting from the business increase and exponentially raises risk for all investors. We believe that healthy levels of founder equity should look like this in the early stages of a startup:
We hope you find this matrix useful. We will be hosting a webinar on this in the near future and would welcome your attendance and thoughts on the topic.
Here is also a consolidated version of the nine categories listed above.