Expert opinions – a tech start-up’s primer for raising capital: Part 1

Expert opinions – a tech start-up’s primer for raising capital: Part 1
With a well-stuffed, high-pedigree CV (including Fonterra, GreenButton, Yonix, Voco), plus a position as chair of the Angel Association NZ, Marcel van den Assum might just know a thing or two about investing.

He’s also chair of electricity start-up Flick’s board. At the moment they’re flying a little under the radar, but Flick – the first power company in the country to offer time-of-day spot pricing, rather than a fixed flat rate – is proving itself to be the little electricity provider that just might.

The company recently concluded its first growth capital round (to the not-too-shabby tune of $4.8m), also securing a good amount of brain power in the process (in the shape of several Angel HQ members, the largest group of members ever to invest in a single deal). Sweetening the pot even further is a recent $100k R&D grant from Callaghan Innovation, currently earmarked for secret “stretch” technology projects with export potential.

So it’s fair to say he’s got a bit on. Nevertheless, Assum still found time to sit down with Idealog to discuss the ins and outs, tips and tricks, euphoric highs and the crushing lows of the capital-hungry tech start-up.

Here’s what he had to say.

Idealog: Let’s start at the beginning. When should a tech start-up start raising money? How soon is too soon?

Marcel van den Assum: Start-ups should be thinking about fundraising from the very beginning. Validation of the market, finding out whether you’ve actually got something people want to buy, all that takes time and effort, so if you’ve come up with an innovation or idea, you’ll need to get some sort of seed funding sorted.

It’s a bit easier in the tech space – you can prototype quite quickly – and in New Zealand you’ve got a good amount of accelerators and incubators to support you.

[See Lightning Lab (of which Marcel is a founding investor), The Icehouse and Creative HQ for starters – Ed.]

Image: Marcel van den Assum, chair of the Angel Association NZ

I: Are there any other options for start-ups who don’t feel ready to go the incubator/accelerator route?

MA: Regardless of whether an early stage venture ends up with an accelerator or not, they should still be looking for funding, in which case they’ll typically do best by turning to ‘FFFs’ (friends, family and fools). There’s nothing wrong with that, and the good news is that in NZ there’s a real willingness to engage at that level.

I: Is there ever an instance when gritting your teeth and bootstrapping it is a better idea?

MA: Bootstrapping has its pros and cons – the pros being you can take a conservative approach to things until you really know where you’re at. The con however is that you’re often bound to move at the pace of your financial constraints. Nevertheless, from an investor’s point of view, it certainly shows diligence and that counts for something.

The other risk is at those companies who choose to bootstrap quite often diversify accidentally, and investors don’t really like that. Over time, more and more services keep getting added to the busiess to keep the revenue flowing and, in time, the business turns into a service company and that’s no longer investible. A lot of New Zealand companies end up trapped in that space and they find it hard to either break out or raise money.

I: Where does personal risk fit in all this? Should I be maxing out my credit cards?

MA: If you’re an entrepreneur, then the answer is: yes, just about. Obviously you don’t want to be in pain, but, surprisingly, it can actually have benefits. Some people show exceptional fortitude and capacity for personal risk and investors want to see a start-up’s founders pushing the boundaries, both in terms of aspiration and commitment.

I: Crowdfunding. Yay or nay?

MA: Any sort of funding that’s supporting the innovation ecosystem, I say bring it on. Crowdfunding lends itself to certain kinds of businesses, most noticeably consumer brand-orientated businesses, and that’s fine. It’s a partial marketing exercise anyway and the crowdfunding campaign works to extend its own reach.

But crowdfunding has its risks and some people do get burnt. But then again, of course some businesses fail. They can’t all succeed. But yes, crowdfunding sits nicely alongside other forms of funding.

I: What’s the anatomy of a good business? What are investors looking for?

MA: From an investor’s point of view, there are three dimensions to a start-up.

The first is innovation, or the idea. Is it disruptive? Is there some IP there? Elements of differentiation are important, but innovation is the key element.

The next is the target market. Does the value proposition resonate? Will customers pay for the product? Are you able to articulate that position? And can you accurately identify the pain points in that market?  

Lastly is the business plan and strategy, and the biggest part of that is the team. If I had to identify the most significant success factor for a start-up, it is, without a doubt, the team. And the best team is one that’s able to adapt, has the necessary fortitude, and has the necessary intelligence and insight. That’s what’s most important.

I: Investors. Where do they hide?

MA: There are specific avenues you can follow to find investors, the most obvious ones being incubators and communities. Those are useful because there’s nothing like having a lead investor who can help and give advice.

Also, there are great funds around New Zealand. We’re very well served nationally in that regard.

[See Sparkbox, powerHouse, NZTE and Callaghan Innovation, Ed.]

And the great thing is, once the connection’s made, the conversation often flourishes from there – more investors just seem to come out of the woodwork. Honestly, in this country, if you can’t find your way to money you probably have an issue. New Zealanders have a bit of ‘upstart’ attitude about them, so we do quite well in that regard. We’re good at getting those ideas out there and getting in front of investors.

I: For an investor, what are the tell-tale signs of a good investment opportunity?

MA: It’s a very personal thing and it can be any number of things, but again, at the end of the day, it’s the team that’s the important part.

I: So what makes a good pitch? And what makes a bad one?

MA: I’ve seen somewhere between 750-1000 pitches over the last ten years, and I think it all starts with engagement. Is the pitcher engaging me in his idea? That part of it really comes down to the person.

Then comes being able to articulate the value proposition quickly – to get to the essence of what the business is. You need to give a sense, early on, of how the investor is going to get their money back.

Personally, I look for aspiration and big picture thinking, but with a dose of reality. On the one hand, you’ve got the top down aspirational view, but you also need to reassure me that you understand the reality of making it happen.

I’ve seen some shocking pitches, which I’ve then met the team and been convinced by them. On the other hand, there are pitches I’ve seen that are very slick, but have been nothing more than pure marketing, then, once you look under the covers, they fall apart, so it depends.

I think it’s fair to say that a good pitch is more art than science.