Tuesday, June 12, 2012

How we raised a $3m round of funding in Australia

There has been a lot of press lately discussing the state of tech entrepreneurship in Australia and where it's headed. My view is that we're in a pretty good place. The government is very supportive of startups and just in the 3 years we've been running Shoes of Prey we've seen a huge number of new startups begin their journey, some existing startups receive huge funding rounds (Atlassian, 99designs, OzForex, Catch of the Day, StyleTread), a number of startup incubators launch (StartMate, PushStart, AngelCube, Blue Chilli) and startup working spaces launch (FishBurners, 66 Oxford St).

All of that said, it's still difficult to do a Series A round of funding here in Australia.

There's money to be found at the angel investment end of the market, and US VCs are willing to invest large amounts in larger Australian startups (see Atlassian and co. mentioned above) but there aren't many investors in Australia willing to make investments at the $1.5m-$3m Series A level.

So how did we do it? We put together a group of 9 different investors who all contributed to our $3m round, with the largest investing $900k. That was no easy task.

We first started contemplating the idea of raising capital in December 2010. We did our first pitch about 16 months ago in early 2011. I estimate I pitched ~80 different investors. We signed one term sheet then decided not to go ahead with that investor. We came very close - to the point of draft term sheet stage with another 3 investors at various points throughout the process, then signed a term sheet with our final investor group in February. It took another 4 months to put the legal documentation together and close the round.

A turning point in the process was getting Mike Cannon-Brookes on board. We'd had a huge amount of support from Richard Baker as well as Bill Bartee and Tristen Langley from Southern Cross but we couldn't quite cobble together enough people to do the full round. Mike Cannon-Brookes has a huge amount of respect in the tech community from what he and his co-founder Scott Farquher have achieved at Atlassian, and once Mike came on board the investors that were close but not quite over the line came on board too. Mike also introduced us to Michael Arrington and CrunchFund who didn't need much of a pitch beyond the fact Mike Cannon-Brookes was investing.

I spent ~30% of my time over the last 18 months pitching investors and managing this process. That's a huge amount of work and the second largest project of my career behind launching Shoes of Prey. That time has a significant opportunity cost, it could have been spent working on the business. That said, pitching our business to a lot of smart people and hearing their feedback helped us clarify what our strategy should be to grow the business going forward. And we now have $3m to invest in the growth of the business and a fantastic group of investors who will be able to offer advice and support as we go forward.

One interesting learning that came out of the process was pitching US and European firms. We pitched about 30 US and European firms and without fail, every one of them (except CrunchFund!) concluded,

"We love the mass customised fashion space, we love the success you're having there, but a $2m-$3m round is just too small for us to do when you're based in Sydney. Time zones and geography mean it's not worth our time. Either move to the US/Europe so you're nearby or come back to us when you're raising $10m+ in your Series B."
Fortunately we were able to get a mostly Australian group of investors over the line.

While raising a $3m Series A round in Australia was challenging, it's not impossible. Based on our experience there's a massive gap in the market for investors to invest in Australian startups doing Series A rounds. With the number of incubators that have recently launched, and the media coverage the tech startup is getting we're going to see some great startups coming out of Sydney over the coming years.

I'd encourage Australian investors to look at moving into the tech startup Series A investment space. And I'd encourage US and European firms that are already in the space to think about spending some time in Sydney and perhaps even setting up an office here. Based on our experience you'll have very little competition!

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  1. Awesome stuff. I keep an eye on you from NYC and love hearing the great news. Congratulations.

  2. nice work guys! Awesome to see how its grown from when you first started to where it is now

  3. This is a fantastic story, thanks for sharing it. I run an annual start-up competition at the University of Melbourne. The talent is definitely here in Australia, and like you I am so glad more incubators have sprung up.
    Good luck going forward :)

  4. Congrats! Michael, I'd love to hear about your decision to do a round of financing at this stage - are you primarily going to invest in marketing, client acquisition?

  5. Congratulations to you all, and lots of food for thought there. Best wishes going forward now that you've got the funding; I can't wait to hear more about what you do with it. Cheering you on from the sidelines :)

  6. Congratulations guys - thanks for sharing some of the details; and looking forward more exciting stuff from the SOP team.

  7. Congratulations Mike and team! Looking forward to seeing how SOP develops with the new funding. $3m buys a lot of shoe leather...

  8. Thanks so much for your kind words everyone. :) Bmiloev - marketing and customer acquisition is exactly what we have planned and why we raised the round. Lots of exciting blog posts to come as we roll that out!

    1. Thanks Michael! It would be extremely interesting if you ever have time to share how you (and your investors, now) evaluate the (lifetime) value of a customer and the client acquisition costs.

  9. Hi Michael, Thanks so much for sharing your journey. So interesting to hear. Even with your traction and great growth you still had to have social proof in Mike as a lead investor (maybe not in money but in taking charge) that got you over the line. Well done on all your success and look forward to the Series B (If you need it) at an even greater valuation! :) Cheers, Humphrey @HumpheryPL

  10. Congratulations Michael on securing the fund. I can certainly echo your sentiments. In the short space of time that we have turned our attention to looking for investors to help us expand our business we have realised that there is a gap in the Australian market. Syndications is the opportunity - if only the media and investment market would see that in Australia. And yes, the US investment market has also told us to go away and come back when we are ready to look at $10M+.