By Lachlan Colquhoun
Companies like Google, Facebook, Canva and Atlassian would never have grown without the support of angel investors and venture capital. Here two startup funders share their approach to finding and nurturing the next big business idea.
Todd Forest’s current role is the flip side of his earlier career. Beginning as a fintech entrepreneur, his world used to be one of sweat equity, pitching to investors and planning how to disrupt the big players of the finance industry. Today, as managing director of NAB Ventures, he is on the other side, assessing investment opportunities for the bank’s $200m venture capital fund.
Forest now seeks out complementary startups in the fintech, climate transition and generative AI sectors to help make NAB a more innovative bank. “Part of our mandate is to invest in innovators with an adjacency to what we do, and partner with them to give our customers a better experience,” he explains. While he might be on the other side of the deal these days, Forest continues to live and breathe Australian startup culture, which he has seen develop significantly in the 15 years since arriving from his native US. Amid the highs and not-so-highs of the venture capital industry, however, 2023 can be characterised as the latter. Deal volumes are down around 80 per cent on last financial year, coming off a record 12 months that saw around $9bn invested in Australian businesses across more than 600 deals. “There’s a cyclical
nature to it and 18 months ago prices were really high with a lot—probably too much—money in the market,” Forest says. This had a lot to do with the foreign funds active in the market last year, which he says tended to do minimal due diligence in favour of getting in on the market “as the tide was rising”. Now that the tide has receded, the local industry is more focused on ensuring that established companies are successful in navigating a challenging economy to make it to the other side, to the next funding round, trade sale or IPO. That is not to say that investment should stop; “Valuations are around a half or a third of what they were 18 months ago, so now is actually the time to back good founders,” suggests Forest. “When everyone is piling on it’s easy to be ‘brave’ with venture capital, but it’s actually when things come down that you have more opportunities.”
This optimism is based on the presence of around 120 local venture capital funds in what was a fledgling market a decade ago, and the circular energy whereby ever-bigger capital raises give the next generation of startup founders the confidence to progress their potentially gamechanging ideas. “Each year it is better and better,” he enthuses. “Some of the Australian funds, like Blackbird Ventures or Square Peg, are investing billions of dollars and there’s a bunch of angel investors who are much more robust [than in the past].” Forest is himself an example of how founders who sell their companies often go on to become mentors, investors and board members in other early-stage companies, perpetuating success for homegrown talent. “We see around 1000 companies a year and most of them are in Australia and New Zealand; there are some great ideas coming through,” he says.
THE INSIDE SCOOP
Adding to the momentum are new platforms that use the crowdfunding model to channel and aggregate the funds of private investors. “Historically there were a number of significant hurdles that precluded investors from placing capital into startups and venture funds,” says Dan Bennett of Israeli-founded platform OurCrowd, which partnered with NAB in 2017. “These included regulatory hurdles and high investment minimums, which expose even ultra-high net worth investors to concentration risk; OurCrowd was established to overcome these and give investors a more equitable, ‘democratised’ form of access.” Last year, the decade-old platform surpassed US$2bn in investment commitments across its 14 global offices. A key benefit for those getting started in venture capital, Bennett posits, is OurCrowd’s “ear to the ground”. He says it used to be all too common to see individual investors pursuing interests in early-stage technology companies—“often their neighbour’s daughter’s startup idea”—with little rigour or due diligence.
OurCrowd, by contrast, takes an institutional investment approach, providing access to a vast range of opportunities identified and scrutinised by its VC experts around the world. Bennett says the platform’s 224,000-plus members bring their own skillsets and connections to the companies they invest in too. “It’s a positive virtuous cycle wherein a client might make an investment in a field that they understand,” he explains. “They might become a customer of that particular company through their core business and then help with further connections in their local geography.”
NUMBERS GAME
Venture capital is a numbers game. Of the 18,000 companies on which OurCrowd has exercised due diligence, only 400 have received investment. The platform has staged 63 successful exits so far. Todd Forest says roughly 10 in every 1000 companies researched by his team receive funding from NAB Ventures. Since 2016, NAB Ventures has made 33 investments globally. “When we think about whether a company matches our investment thesis, we quickly eliminate a large number, and then the main criteria is the founder and team around them, followed by market size,” he says. This assessment includes looking at how consumers are responding to the product, as well as whether the bank can add value to the company. “We think about the fit with various parts of the bank, and if we can actually bring the new product or service to our customers to create a win-win both for the startup and NAB customers,” he adds. Once invested, NAB Ventures works closely with the founders to nurture the company’s growth and bring it to maturity.
Sometimes this collaboration leads to a significantly updated product or approach, and ultimately the aim is an exit event such as a sale to private equity, or merger and acquisition. Forest says venture capitalists think seven to nine years ahead, while private equity firms take a shorter three-to-five-year view. He recalls: “We had one exit that took less than a year, but most companies take a while to build and if you look at big tech success stories like Canva or even Facebook, the inflection point was between five and seven years.”
HUMAN CAPITAL
Though NAB Ventures is known for investing in technology companies, Forest says the fund is essentially investing in “people and ideas”. “The most crucial consideration is that you are evaluating, and betting on, a person or a team,” he says. “It’s all about how much you trust these people and if you think they have the motivation and resilience to make it through.” That is why the first question he asks all entrepreneurs is why they started their business; “It’s not necessarily that they have a solution that is unique or completely new, it’s about their passion and if they had a personal experience which really drives them.” He continues: “I ask that because they are inevitably going to hit hurdles and need to be so motivated that they will work late into the night and on weekends and holidays. Meeting people who are superpassionate about what they do is a big factor in identifying startups that are right for us.”
The information contained in this document is gathered from multiple sources believed to be reliable as of the end of June 2023 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this document. ©2023 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.