Process: How we invest

When considering the fundraising process, we think it should be as close to the ideal dental experience: pain-free, cost-effective, quick and leaves you with a smile.

The recent report from First Round on the State of Startups included some stats which proved that, once again, raising a round is a tough process.

• 47.3% of entrepreneurs spent 4 or more months raising their most recent round.
• Only 45% of entrepreneurs raised the amount they planned to.
• Almost ¼ of all entrepreneurs pitched over 21 VCs.

At Square Peg, we want to do our bit to make it easier. For this reason, we’re sharing our investment process.

Before we get stuck in, let’s recap some of the basics about Square Peg.

A bit about us

• We are a tech-focused, global VC firm operating across Australia, Israel and South East Asia. We have offices in Sydney, Melbourne, Tel Aviv and Boston.
• Our team is made up of 9 partners, 1 associate, 1 analyst, 2 operation specialists, an investor relations lead and a community lead.
• We have invested in Seed, Series A, and growth stage rounds. Our typical first cheque size is around $2m.
• Square Peg’s $180m (USD) fund can be invested across geographies as needed.
• We are comfortable leading and pricing rounds. We will also co-invest.

The Square Peg team during the Monday Partner Meeting

What we look for

As typified by our outstanding portfolio, we have a consistent set of requirements for the teams that we fund.

1. You are building a technology business.
2. Your team is outstanding. We’re inspired by teams that are smart and fiercely inquisitive, self-aware and trust-worthy, ambitious and resilient. Be curious! We back people, first and foremost, so we unashamedly push hard on this point.
3. You solve a painful problem that will impact big, big markets. We’re conscious of global trends and look for the best-positioned team to crack the market.
4. You have a clearly definable competitive advantage. We’re excited by businesses founded on deep domain knowledge, that build advantage over time and are hard to replicate.
5. You know what strong traction looks like for the stage at which your business is at. For B2B, look at customer growth, revenue growth and churn (for enterprise sales, your pipeline is key). For B2C, look at user growth, retention and engagement (however you define that). For all businesses, we love NPS.
6. You understand the growth levers in your business and can identify a path to long-term value creation. This does not mean an exit strategy.
7. Chemistry. It is so often overlooked, but foundational to successful working relationships.

Is this consistent across geographies?

Yes, it sure is. The most variable difference is in the stage at which we invest. In Australia and Israel, we are very comfortable investing from Series A, and have gone earlier, backing exceptional founders such as Christoph from Talon.One in Seed rounds. In South East Asia, we focus on growth-stage businesses such as Chope and Kaodim.

When should you meet us?

We look for potential and are comfortable with imperfection, so our preference is to meet founders as early in their journey as possible. One entrepreneur who did this well was Jack from Airwallex, who introduced himself over a year before their first raise. When it was time to raise, we knew we loved the business, loved the team and could invest with conviction.

How should you meet us?

Your strongest introduction to any VC firm is through a warm introduction. This isn’t hugely difficult as tech ecosystems are pretty well-connected and Square Peg’s networks are deep and generous.

But on a practical level: start with other founders. Not only can founders connect you to VCs, but they are also an incredible source of advice, support and camaraderie — and, if you’ve chosen to pursue a fundraising round, you’ll likely need all three.

Other routes include through our portfolio companies, incubator and accelerator programs, co-working spaces, government initiatives, LPs, angel investors and other VCs.

Be confident — if you’re what we’re looking for, we want to meet you. Don’t forget that if you can’t manage to find a warm intro, you can introduce yourself directly.

How should you pitch?

When you get connected to the team, send us a brief introductory email and your pitch deck. The design of your deck isn’t important, but the content is (Chris’s deck from Vero— one of our favourite decks — had one graph and no pictures). We are likely to read your deck on a phone and may print it out, so keep it concise and functional. We do not sign NDAs before hearing your idea.

We’ve written a whole article on how to do this well (it also includes an example deck).

Our investment process

For our portfolio, the most common investment experience was similar to the one below.

First meeting
You’ll meet with a member of the investment team. We have a flat hierarchy, so whether it’s with a partner or an associate, your meeting is an important one. In this first meeting, the show is yours, so have a plan for how you want it to run. You’ll usually have an hour to walk us through your business, explain your vision, ask questions… and tell us what you did on the weekend. Practising for these meetings seems like a waste of time but will help with the nerves (trust us, we’ve been on your side of the table).

Meet the team
You’ll then meet with other members of the investment team, typically from other geographies, online via Zoom. This will be a similar presentation style.

Heads up
This is an internal step, but useful to know about. The investment partner you’ve met with will spend time getting to know your business and the market you’re disrupting. They will then arrange a “heads up” with the rest of the investment team. This is to share why they are excited about your business and to gather feedback that will help frame their research; we all have biases and blind spots — this helps to correct ours.

Present to the partnership (the big one).
You will then present to the entire investment partnership at our Monday partner’s meeting. You’ll have an hour to pitch, with time built in for the group to talk through your business. At this stage, the firm will be familiar with your business and have read the investment notes that your partner at Square Peg will have prepared. Your partner needs a “strong yes” vote from three partners to complete the investment. In the simplest form, a “strong yes” from a partner means that they really, really love your business and would have been prepared to lead the investment.

Term sheet
A signed term sheet from Square Peg means that, providing legal due diligence doesn’t produce any skeletons, we will complete the investment. We have a preference for industry-standard term sheets with vanilla terms (such as AVCAL’s open sourced docs). It’s at this point that you’ll get familiar with Amanda, our Chief Operating Officer, and her team, Ina and Camille.

How long will this take?

Building relationships and raising a round is time-consuming. It’s common for this to take at least 4 months, particularly if you’re meeting investors for the first time. We’ve completed rounds in a few weeks and waited a few months — it’s largely driven by you.

What it means if we say no

Firstly, you should know that we understand how it feels to get a no in a fundraising round. Many of us have had VCs decide not to invest in our startups. It stings. For this reason, we aim to give constructive feedback, particularly if we’ve had more than one meeting. Take it gracefully (and with a grain of salt), and then build an exceptional business anyway. VC money is like rocket-fuel, but it also comes with a lot of pressure; if you’re asked to reinforce the ship before a fuel injection, don’t take it as a bad sign.

What it means if we say yes

It won’t be just a yes. The bar is high for VC in general, and for Square Peg in particular, so it’ll be an all-in, let’s-do-this-thing hell-YES. We’ll immerse you in powerfully connected networks, make game-changing introductions, join your board, help you to think through problems and gladly answer the phone whenever you call. This kind of a relationship is one hell of a ride.

We’ll move mountains to help you achieve the success you seek.

We’ll also probably take you for a beer.

End

Any comments? Zip me an email: Imogen@squarepegcap.com.