How Airtree invested in Prospa’s $25m round reveals which start-ups get cash
We are often asked why we invest in a particular company. Now that the dust has settled around Prospa’s recent $25 million funding announcement, I thought it would be a good time to share our investment thesis.
Describing how we ended up leading its round is a good way to do that.
We see huge untapped local markets that are ripe for disruption. Prospa’s addressable market is $20 billion in five years and any cursory glance at health, government, wealth or fintech will show up huge opportunities.
Yes, these markets are complex, riddled with regulation and powerful incumbents but the prize for success is huge and we expect to see several billion-dollar tech companies tackling large local markets emerge over the next few years.
While two-thirds of our portfolio are companies attacking global markets we are not afraid to look at local market opportunities.
Why Greg and Beau?
We first met Prospa founders Greg Moshal and Beau Bertoli in 2015 when we invested in their Series A round.
We were impressed by their single-minded focus on solving their customers’ (SMEs) problems and their ability to focus on a clear business model while eschewing popular fintech rhetoric (eg P2P lending).
We also got to better understand the characteristics of SME lending and the inherent market dynamics were appealing.
Over two years we have worked with Greg and Beau mainly focused on product and engineering.
During that time we have observed them evolve as founders and leaders — they embody many of the characteristics that we love in a founding team.
● They are a team. They respect each other’s complementary strengths, are high on communications and long on thinking from first principles while avoiding popular trends
● They have a deep and authentic connection to their customers .
● They know their shit — Beau has spent more than 10 years running a credit book and Greg is a second time entrepreneur with the scars to prove it.
● They are quick to adapt — for example, they have built an internal design team of four and must be one of the few fintech companies that are using double diamond design thinking to evolve financial products.
● They know where to take advice and from whom — they cut down extraneous noise but are quick to act on feedback (positive and negative) that is important.
● They are hell bent on building a world class team — with an incredible culture that goes beyond fluffy mission statements and performance reviews. They recognise that this is the key to delighting their customers.
● They are playing the long game — they are open and transparent, treat people well and are building a cadre of supporters along the way
So why SME lending? Seems a little dull no?
They are solving a real problem in a better, faster and cheaper way — For many SMEs (including a high growth tech SME) it is still very difficult to raise capital.
We are not talking about equity (which bizarrely is easier to raise than debt in Australia), we are talking about $20,000 to fund your next purchase order, which you know will allow you to grow your business by 20 per cent. Or that $50,000 for Capex that will allow you to expand into a new customer segment.
They have a genuine relationship with their customers — built by over-delivering on services using a practical combination of data and humans. This allows customers to re-engage when they next need capital and Prospa to understand its customers better over time.
They manage to deliver on exciting growth and attractive unit economics — this is a tricky balance to find for most businesses. High repeat rates and organic sign ups have allowed them to decouple growth from marketing spend
Leaders in a large, attractive market — Prospa is several times larger than its nearest competitors in a $20 billion market. We believe there will be a few successful players to emerge in the SME space but we expect that the lion’s share of rents will go to the №1 player who can build a brand and defensibility.
Defensibility — this is a highly alluring goal but in practice, very difficult to attain.
Most will have heard about the holy grail of network effects but scale effects (often confused with network effects) are another “moat strategy”.
In Prospa’s case, a deep data set enables it to price credit better over time. Scale also means access to capital markets, which drives down the cost of capital and enables it to offer lower cost finance to its customers.
What does a $25m financing round process look like?
We were fortunate to have built up a solid understanding of the team and business over two years — quite simply, we fell in love.
But make no mistake, stand out companies such as Prospa have a ton of investor interest so a $25 million round is competitive. Greg and Beau were adamant that they wanted a vanilla, simple and quick transaction so when they decided to raise in December we had to mobilise fast.
They had already understood the benefits of working with us so after a competitive process, we were fortunate to be chosen to lead the round.
Five weeks later we had completed due diligence, legal agreements and documentation following the term sheet.
Where to from here?
A $25 million equity investment is a strong proof point for a company, it shows it has scale, team and a level of maturity. It means it knows how to deploy capital to create value.
From a VC perspective, investing at this stage and level into an Australian company is further evidence that the Australian venture capital market continues to evolve.
We are delighted to be doubling down on our investment and looking forward to working closely with the team and our other co-investors over the next chapter.
Craig Blair is co-founder and managing partner at Airtree Ventures