Raising funds for funds: Full Circle’s Rowan Grant on how to raise money in venture capital
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Early stage capital is the life-blood of any startup.
And history shows that venture capital funds have played a key role in helping companies scale up.
But before they deploy that money to fund new businesses, VCs need to rustle up some cash themselves. And just like for individual companies, than can be easier said than done.
Rowan Grant has a unique view of some of the challenges involved, having launched the Full Circle fund around three years ago. The fund now counts logistics provider Sendle and corporate training platform Go1 among its successful investments.
Speaking with Stockhead, Grant explained that he and co-founder Dan Gavel began with the thesis that there was a shortage of Series A capital in the Australian market.
“There were a lot of angels at the early end, and a lot of guys doing later-stage writing bigger cheques,” he says.
“But not many people writing a couple million for a company that’s got a product in market and good revenue.”
Before they acted on their idea though, they’d need to raise some money to deploy. And as with a startup founder who hasn’t yet scaled their business, the pair soon realised that asking for VC money when you haven’t yet proved you can pick a winner can be a tough sell.
“I think that’s the perennial capital raising problem for fund managers. People want to see a track record, but you need the money before you can build that track record.”
Grant came from a background of launching startups himself and running the numbers for a high net-worth family office, so he had some understanding of how deals work.
But he explained that the learning curve around raising capital was still a relatively steep one. For starters, the two founders had ambitions to go big. Real big.
“Our initial view was that to construct a portfolio of meaningful Series A investments at around the $2m mark, you’d need around $40m,” Grant said.
“As it turns out, that’s the logical amount for constructing a portfolio — not the logical amount for first time VCs.”
“So we did an international roadshow and we were — I wouldn’t say we got laughed out of the room — but it was like ‘oh yeah, first time VCs from Australia, come back and talk to us when you’re at fund four’. So we learnt really quickly that institutional money wasn’t gonna touch us.”
In talking with industry veterans, Grant said he learnt subsequently that a more realistic starting point for local Series A funds is in the realm of $5-12 million.
“We probably learnt the hard way, but I’m glad to have done those trips and learnt it first hand,” he adds.
“Sure we spent some money and time pitching to people who were an instant ‘no’, but we can also carry on those relationships and foster them for future funds.”
With revised expectations, the Full Circle team instead looked to tap the local network of sophisticated investors and family offices.
The contributions were smaller — in the range of $250k to $500k — but the pair also struck deals for some larger seven-figure contributions.
“Funnily enough, we hit our stride talking to wealthy investors from the farming industry,” Grant says.
“That was by luck at first and then we realised — they understand risk. Because their business by nature has lumpy cash flows and returns that are bunched into seasons and periods.”
The pair also spent a lot of time educating potential investors about the industry, given it’s still a relatively nascent asset class in Australia.
Slowly but surely though, the sector is maturing, and there’s now an increasing number of local players looking to raise capital. Particularly in the wake of funding initiatives such as the federal government’s ESVCLP tax incentive.
So is it a bit easier to raise capital now in the current environment?
“For better or for worse there’s a lot more hype,” Grant says. “So that’s bringing a lot more interest in. And on that global level too, companies that were once startups are now household names.”
“So there’s a lot more excitement but by extension that means there’s a lot more funds raising.”
“For example, my partner and I refer to what we call ‘ESVCLP fatigue’. So we’d go to family offices who’d seen 6 ESCVLPs the month before, and it’s hard to be differentiated when you’re already in a very niche asset class.”
Now that the market is more saturated, it’s essential for VC funds to have a point of differentiation in their skill-set or investment thesis.
On that front, Full Circle has developed a proprietary testing model to help gauge the character attributes of company founders, which Grant says has received great feedback from investors.
“The reason for that was, if you talk to VCs almost all of them will say that at least the top three — but I’m gonna say the top one — most important thing is the founder,” he explained.
“We were noticing with our experience in other deals that founder diligence just wasn’t a priority. So what would be another way of getting to know a founder without meeting them 50 times?
“We never say yes or no based on that data alone, but it’s a really helpful input because it covers a lot of different skills.”
In addition, Grant says that having previous experience in launching companies is an important part of a VC funding pitch.
“I think the three most important attributes in our industry are relationships, deal execution and strategic thinking,” he says.
“So for example, everyone on our team can read and comprehend a standard term sheet and read a shareholders agreement. I suspect there’s VCs out there who’ve started funds who don’t have any deal experience, and I think that’s going to be tough.”
Looking ahead, Grant says institutional money is slowly moving into Australian VC markets, but it’s still typically at far bigger amounts — well beyond the usual Series A round.
However, he notes that potential investors should be aware of one interesting trend — the best performing fund for most VC players is usually their first one.
“Whether that’s because their hungry or they need to prove themselves, it’s hard to say. But the research shows that first-time funds generally outperform,” Grant said.