AirTree, Blackbird and Folklore partners share what it takes to become a VC

How do you become a venture capitalist?

There is no direct path to becoming a VC. Going to university and studying finance or commerce does not guarantee you can become a startup investor.

One commonality between the country’s VCs – both recently appointed partners and those with decades of experience – is that most of them have operational experience as founders, or work inside startups.

Square Peg Capital’s Paul Bassat is the famous co-founder of Neangan, Blackbird’s Rick Baker started two software companies before moving into investment (Right Party Connect and IDC Global) and AirTree partner Craig Blair founded Travelselect before selling to Lastminute.com in the early 2000s. .

Alister Coleman’s folklore is an outlier among the country’s longest-running VC fund partners, having started his career in investment as a senior analyst for a family office before moving to Fairfax Media and overseeing his M.&A strategy. However, he also had operator experience before moving to VC, founding ShippingEasy in 2011.

A newer member of the local VC scene, Jackie Vullinghs, was promoted to partner at AirTree in mid-2021. She was never a founder, but worked for startups before joining the fund.

“I studied history at university, then sold equity derivatives on the trading floor at Merrill Lynch and Citi in London for six years,” he said.

“Throughout my time in banking, I had an itch to start my own business, but I didn’t have the confidence to go out on my own right away so I joined Lystable, an early stage B2B SaaS start-up in London, as the chief of staff. When I decided to move to Sydney in 2017, I thought I would experiment and mix my interest in investing and my love for startups by trying venture capital.

Vullinghs and Coleman agreed that for anyone looking to enter the industry, your ability to land a job at a VC has more to do with your mindset than your experience.

“You want someone who has independent thinking, is not curious, is good at deductive reasoning and takes information but does not depend on everything, and someone who accepts that there is a lot of uncertainty in the world and is not bothered by it.”, said Coleman.

How do venture capitalists make money?

Partners in venture capital funds are paid a salary and also receive funding. Carry is a form of profit sharing, and they only get this share if they deliver strong returns to the fund’s investors. Carrying hurdles means that if the agreed rate of return is not achieved, the partner does not get to share in any of the profits.

For most VC funds, the total leverage distributed to partners is typically between 15 percent and 30 percent, with 20 percent being the average.

Carry is how VCs make a lot of money, but, with many funds having a 10-year life and returns often not starting to flow until six or seven years into the fund’s life, it takes patience.

What do venture capitalists look for in a startup?

How you rate a startup depends on its maturity. Investors buying a company when it has raised some capital will be able to check metrics such as revenue growth, average revenue per user, customer acquisition cost, cash burn rate and path to profitability – things that are becoming more scrutinized amid this year’s tech market correction.

However, when the company is still in its infancy, there is next to no financial data to investigate and this is where curiosity and intuition have a role to play.

Factors considered by VCs include the experience of the founders and their team (some funds prefer founders who have personal experience with the problem they want to solve), their ambition, the size of the potential market and their personality.

It is also common for startups to get to know their eventual investors for several months, or even a year, before raising capital. This gives the VC an opportunity to get to know the business and witness the founders’ ability to execute their vision.

“The most critical part of the decision happens in your heart – do you love this company? Do you want to go on a 10-year journey with this founder? It’s more art than science,” he said. Blackbird Ventures partner Nick Crocker.

Vullinghs says AirTree does two to four weeks of legal due diligence on its investments, but the fund assesses much more than just the terms of a deal.

“We try to understand in detail the experience and motivation of the founding team, the unique insights that led them to start the company, market opportunities, how the product works and why it involves users, sales and marketing strategies, unit economics and finance, and competitive advantages over time.

The Coleman Folklore Fund specializes in early-stage investing, and he believes he can “get a feel” for the founder in less than 30 minutes.

“The fastest we’ve ever made a new investment is five days. The fastest we’ve ever made a follow-on investment is 17 hours,” he said.

“When that happens, bonding chemicals are on everyone’s mind. [We like founders] are wildly ambitious, have clear thinking, they are honest ​​​​​​and … understand the catalytic power of a team.

“We have also spent six to seven months [assessing an opportunity]. Swoop Aero took seven months because we didn’t understand drones, and we wanted to understand the environment in which they were operating, plus Swoop wasn’t ready to lift at that time.

What red flags are venture capitalists looking for?

Lie. Both Coleman and Vullinghs said there were times when founders lied to them during the pitching process and said that was an immediate red flag.

“We also do legal due diligence and background checks to make sure there are no skeletons we need to know about,” says Vullinghs.

Coleman says if the founder is intimidating or dismissive that’s also a warning sign.

“You try to help these people, but they see the question as something to avoid and avoid,” she says.

How do venture capitalists manage market hype?

Every so often, a sector goes from hot to scorching. If you’re an investor who picks the top of the market, this can mean exciting profits, but if you miss it, the losses will come thick and fast.

There is no better example than the buy now, pay later sector, where companies like Sezzle and Zip are down more than 86 percent in the last year.

Coleman says Folklore always tries to invest in trends before they are discovered.

“You want to invest in the front end, before it crystallizes as something,” he says.

“You don’t want to [the trend] never found, but you have to understand if something is real and durable.

Crocker, however, says Blackbird doesn’t care about the hype.

“We can finance startups at the peak of the hype cycle – like SaaS down (software as a service) in 2021, and we can finance startups when everyone thinks the sector is dead – like crypto in 2013.

“A great company will take more than a decade to build. Wherever the company was in the hype cycle when you met them will not be where they are a year, or 10 years, from now.

How is the start-up this year?

Since interest rates started to rise this year, funding has slowed significantly with venture capitalists experienced the most challenging investment environment in more than a decadeAirTree’s Vullinghs says.

Higher interest rates have gone up, investors are underestimating future earnings, and as a result, valuations and the number of new deals are rising this year.

By 2021, more than $10 billion will be raised by Australian start-ups, while this year to October 31, around $6 billion has been invested, according to Cut Through Venture.

(Despite the decrease in this investment, the amount invested in October of this year – $ 490 million – still exceeds the entirety invested in 2016, which was $465 million.)

Founders are now facing the real consequences of mega rounds raised at high valuations in 2021 when cash flows freely and competition to get deals fierce.

The technology sector has experienced declines and stocks (S&P / ASX All Tech Index) falling 31.7 percent so far this year.

Investors are now asking portfolio companies to make their capital last longer, leading to layoffs in the sector, reduced hiring levels and reduced spending on things like marketing.

“We encourage the company to continue building products and tend to growth, but to focus on efficient growth – constantly evaluating the efficiency of spending and monitoring advanced demand metrics to understand if customer demand slows down, then quickly. the decision to extend the runway if they have to,” Vullinghs said.

However, optimism among investors remains high, with VCs leading out of the long-term nature of start-up investment.

To manage the current uncertainty, Crocker said Blackbird’s approach is to focus on the progress of its portfolio companies, not “economists’ emotions”.

“We’ll never be good at predicting the future, but we can predict which founders will make progress on their vision regardless of what’s thrown in front of them.”

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