When it comes to disruption, the COVID pandemic offered a masterclass for startup founders. It was the best and the worst of times, with the acceleration towards a digital economy backed by the tailwinds of what appeared to be unlimited capital…
Then suddenly, central banks wrought their own brand of disruption on venture capital with rising interest rates that reset investor sentiment.
Looking back over the last few years, Dr Michelle Deaker, founding partner and managing director of leading Australian VC firm OneVentures, believes startup founders must refocus because the easy money is long gone, along with large cheques for small stakes.
“2021 was definitely a bubble, because the investment landscape stopped making economic sense,” Dr Deaker said.
“The valuations were way too high. And even if you looked at them into the future, you couldn’t see how you could deliver a return on it. Now, I think that’s completely readjusted and we’re back at 2015-level valuations – not even the pre-COVID ones of 2019”.
A view from both sides
This is not her first experience with shifting startup fundamentals. Dr Deaker (she has a PhD in Applied Science) has experienced those challenges from both sides of the investment table, having founded an electronic gift voucher startup (running gift card and insurance card programs for clients like Coles Myer and Woolworths) in 1999, just as the dot-com bubble burst, before a successful exit six years later.
She has more than two decades of experience as an entrepreneur and investor in high-growth tech companies here and in the US. She pioneered local VC as a female founder in 2007 and OneVentures is now one of Australia’s largest funds, with more than $700 million in FUM (funds under management).
From an initial focus on early-stage healthcare and technology, Deaker has broadened the remit of OneVentures to invest in later stage companies. All OneVentures companies must adhere to responsible investment and ESG principles and further demonstrate societal benefits at every level that help transform life for the better.
Their upcoming fund, Growth Fund VII, is focused on major global thematics, spanning everything from remote work to pandemic disruption, digitisation of the workplace, clean energy, urbanisation, ageing populations, and access to quality affordable education.
OneVentures also offers venture credit for startups with strong revenue streams in SaaS, fintech, marketplaces and eCommerce as they move to scale-up phase.
As Deaker explains, the OneVentures team are entrepreneurs who understand what it’s like to start and grow companies. They take a hands-on approach with portfolio startups they’ve dubbed ‘Co-Piloting’. As a result, One Ventures invests in fewer companies than some other funds because it prefers to take a more active role in helping build them.
But having lived through the last two major economic upheavals, how does she see this one differ from the tech crash and GFC?
Learning from the GFC and 2021 hangover
“Like the dot-com bubble, there were a lot of ideas that probably never would have been funded otherwise and companies were over-funded,” she said.
“During COVID, the world suddenly woke up to innovation being essential to everyone and those who had adopted technology did so with technology playing a crucial role in maintaining work and life in the pandemic. Investment capital pivoted to back this wave.
“Additionally, a lot of people started investing in this higher risk asset class [startups] who wouldn’t have traditionally done so because interest rates were so low and they couldn’t get returns in other places.
But now this capital has moved away and for startups, there’s an additional squeeze, Deaker explains, as VC investors hold back capital for their own portfolio companies, wary that they might not be able to attract new investors to their funds.
So what’s Michelle’s advice for founders now?
“When we came out of the GFC, companies started to be really capital efficient. Post-GFC companies got really good at bootstrapping, getting to profitability early, and not growing at all costs. I think that mentality has come back in – we need to understand the unit economics of the business and we’ve got to be much more resilient as businesses.
“Founders should be focusing on goals, particularly in, say, R&D, that can deliver revenue in the near term, not long term.
“If they can narrow their focus and generate sales efficiency, then they can grow more rapidly as a business at lower cost often reducing both marketing and implementation costs so they can become more profitable more quickly.”
And don’t forget the little things.
“We’ve seen a lot of companies that would be happy to do proof of concepts all the time. We’re just saying to them once you’ve done a few, don’t do that anymore – just sell,” Deaker said.
It’s not nice to underprice
The other issue Deaker sees in those initial stages is that young companies tend to underprice their products in the hope of attracting more sales and they don’t charge for all their services.
“We’re spending a lot of time looking at pricing and suggesting that they review their pricing schedules or the way that they’re pricing,” the OneVentures MD said.
“Sometimes companies can create revenue by pricing at multiple levels – they might be able to get a transactional price, a management fee and a platform fee, versus just charging one set fee. Even simple things like building in an annual price increase into contracts can support ongoing revenue growth and the cost of implementations should be fully passed on plus a margin not done for free. Ongoing licensing pricing should be tested; I’ve seen companies quadruple what they are charging.”
Where the SaaS appeal is at
As a VC with a strong track record of helping build B2B SaaS startups, OneVentures prefers companies that are “verticalised”, supporting a niche in the market that still has a large global TAM [total addressable market] but where they can have a strong competitive position and build a sticky customer base.
“Then, when you understand your customers, you can build additional products to service their needs,” Deaker explained. “Upselling to existing customers with new products drives down customer acquisition and implementation costs and grows average revenue per user which is a really good way of expanding your business.”
Another way to do that, especially for well-funded companies, is through acquisitions – a trend that’s increased in the last 12 months as sectors consolidate and larger companies (local unicorns Canva, WiseTech and Go1 are recent examples) find product synergies.
“We’re seeing a bit of activity, especially among our portfolio companies, in the opportunity to acquire a customer base or to buy a new product that’s in an adjacent area to sell to your existing customers,” Deaker said.
Some companies are also using venture credit for acquisitions if they don’t have quite as much capital on their balance sheet.
A “sweet spot” for investors
Looking at the VC sector more broadly, Deaker sees a “sweet spot” or “optimal point to get a good valuation” for later-stage scale-ups who can achieve 30 per cent growth and 20 per cent profit.
In the meantime, she advises founders to have a capital runway that lasts until at least 2024, adding that some founders are turning to venture credit as an option to extend it.
But if you are looking to raise, it’s never too soon to begin the conversation, she adds. “Don’t leave it too late to start bringing investors on the journey with your business,” Deaker said.
“Our best founders have been speaking to investors well before they actually start the capital raise and have them excited about the business. So when they come to raise capital, those investors think they’re getting a privileged position at the table. You’ve got to create competition the other way, as a founder as well.”
This article is brought to you by Startup Daily in partnership with OneVentures.