Invested: A startup’s guide to raising VC capital in New Zealand

Note: This interview was first published nearly two years ago on a tech blog called NZ Entreprenuers, run by Jose Mathias. I’ve found myself giving the same advice in recent times, both to Kiwi founders & others around the world, so figured i’d re-publish here for continuity!

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We asked David Booth, a Principal at Sparkbox Ventures, to answer a few questions we had about investment. Sparkbox is one of New Zealand’s most active seed stage investors, with exits from companies like Xero, Snakk Media, Greenbutton and more on their books. David also runs his own startup, MeatMail, which delivers fresh meat and produce around the South Island.

If you have an idea, prototype, or running startup that needs some funding, please reach out to Dave on Twitter @daveboothy.

1. You see a lot of new startups and businesses. What stands out to you? Is it the idea? The team?

Every investor has a different set of criteria they favour. Personally, when assessing an investment opportunity for Sparkbox Ventures or our Global From Day One seed-stage investment fund, I ask myself four things:

1. Is the team extraordinary?
2. Where is the market going in the next 5 years?
3. Is the product vision compelling?
4. If I weren’t an investor, would I want to work for them?

The earlier stage the opportunity, the more important the ‘team’ element becomes, because a good team can ‘pivot’ a product and grow into an evolving market but a poorly formed team can mess up even the best opportunities.

Once we get past the high level, we start digging down into validating factors, including:

• User acquisition & market dynamic: how will you cut through the noise & acquire users? Do your customer acquisition economics (i.e. cost to acquire a customer vs. the lifetime value that customer will generate) stack up? How much value do you create for your users and how will you capture some of that value for yourself? How do you defend your position once you create it?
• Technology/ timing: Why is now the right time to build your product? is it coming to market too early (i.e. unproven consumer demand, or high technology risk) or too late (i.e. most social media)? Technology advances in waves, creating immense value at it’s leading edge. You don’t want to paddle your proverbial surfboard too early as you’ll wear yourself out. But if you start too late you better have strong arms! (or be able to afford a jetski).
• Financing requirements: what do you plan on using the money for, and how long will it last? After we invest in this round, how many additional rounds of financing will be required, and where will it come from? How diluted will the everyone’s equity be by the time the company hits profitability or exit?
• Location: where is the startup based? Can it hire the right talent in that location? Where is your target market & are you willing to relocate there if need be? Who else is in the market that could be considered a threat?

Don’t get scared off by all of that though, it is never too early to reach out and chat. We far prefer to get involved earlier rather than later, as it gives us the chance to get to know you as an entrepreneur, and work with you as you develop towards something investable.

2. What documents should I have in hand before I start calling you up? Should I have a business plan?

Business plans are generally overrated. You can spend weeks crafting the perfect document, but it will never fully communicate the passion the founder has for the business. We can get a far better sense for the opportunity over a half hour coffee, and everyone saves a bunch of time. You’ll still need a business plan at some stage, but make sure you have a business first.

Before you meet a prospective investor, just have a very good think about the above factors, and knock together a quick 2-page ‘drop sheet’ for them to take away. Remember investors are busy people, so keep your writing succinct, and don’t be afraid to follow up with a reminder a few days later.

3. Will you sign an NDA?

Very occasionally, but usually no. There is both a logical and a legal reason for this, but ultimately professional integrity and reputation is the binding factor.

• Logical: everyone thinks their idea is unique and valuable. In reality however, an “idea” is nothing but a temporary intellectual bond that draws together the right people. Once you find those people, your idea will evolve and develop, and the real value is found in your ability to execute on the outcome. One of the most advantageous things an entrepreneur can do is talk about their company to anyone who will listen. Being overprotective of your idea will only lead to missed opportunities.
• Legal: Any hot industry or technology is likely to have multiple independent parties working in the same space at the same time. An investor could easily freeze themselves out of a given area by signing an N.D.A. with one person, only to be approached in good faith by another with a similar proposal the next day. Repeat this process 10 times and we find ourselves unable to step out our front doors for fear of breaching a complex web of contractual obligations. We want to work with the best team in any given sector. Show us that is you, and you will be miles ahead.

The time where NDAs are appropriate is where you have patentable IP which has not yet been registered, or are operating in a sensitive industry where your business partners demand discretion, i.e. military or security services.

4. How do you approach investors? Is there a formal process or is it as simple as picking up the phone?

We are generally very approachable, and happy to chat at any time. Drop me a message at davidbooth@sparkboxventures.com

However it is widely acknowledged that the best way to connect with and fully engage an investor is through your network, with a warm introduction from a mutually trusted figure. So before you click above & hit send, have a think about who we know in common, and get out networking at every opportunity!

5. Do you have any tips on how entrepreneurs can stand out?

Traction is king. Even the best idea with the best team will pale in comparison to some good solid market validation. So get out there, start talking to your potential customers, and build a trial product they are willing to part with cash for.

6. Are investors in New Zealand more interested in software or products at the moment?

There is no clear trend as to what New Zealand investors are interested in- investors will consider any compelling opportunity.

The better question is perhaps a combination of what technologies are Kiwis most capable of scaling on the world stage, and what has worked well for investors in the past. For example cloud computing & SaaS (software as a service) products can be developed anywhere with an internet connection, then deployed to customers around the world. NZ has been successful in these industries in the past, so investors will be receptive of further opportunities.

For a contrasting example, consumer hardware products are often better suited to parts of the world with manufacturing expertise and access to economies of scale, including countries such as Taiwan or China. We will still consider such opportunities, but only where we can work with you to build the relevant international partnerships and help you leverage them to full effect.

If you have a good grasp of what & where your market is, where you must be and with whom you must partner to maximise the opportunity, you will be well received by investors.

7. What should aspiring entrepreneurs do now, if they want to be starting their own business in the next few years?

1. Live in the future, and look for what is missing. Talk to any and everyone you meet about what they do and how they do it, then try imagine the tools that will help them do it better. Once you are living in the future, you will start to notice inefficiencies in the present: daily tasks you or others perform that no longer make sense. This is your product opportunity.

2. Read & learn constantly. Some of the world’s leading entrepreneurial thinkers have been kind enough to open up their minds to the internet. To not take advantage of this opportunity is criminal. Some of my favourite bloggers include:

3. Up-skill. I personally find it hard to comprehend a future whereby a basic grasp of the language of the internet is not fundamental to all business, and so recommend any and every aspiring entrepreneur acquire at least that. The Enspiral Dev Academy in Wellington has sprung up to try counter the massive shortage of skilled developers facing our economy, and is doing an incredible job of plugging the gap. If you can’t commit to that sort of investment of time or money just yet, ‘teach yourself to code’ sites like Codecademy and Treehouse are good places to start.

It’s not every day that you get free access to information like this, so please share it with your networks! As stated earlier, if you have a startup that you think is ready for investment, don’t hesitate to reach out to David on Twitter @daveboothy.

Originally published at nzentrepreneurs.org on August 25, 2014.