Special Report: Venture Capital fund Seed Space is ready to deploy capital to find the next Australian FinTech unicorn (i.e. valuation above $1 billion). And in doing so, it wants to help local startups safely navigate the dreaded “valley of death”.

Say you’ve come up with a good business idea, pitched in some money and raised some pre-seed capital from friends, family and other local investors.

With a few months — or maybe a few years — of hard work, you and your team have developed a proof of concept and are ready to bring your product to market.

As it turns out, that was the easy part. And to secure funding, scale up and establish a viable business model, you’ll need a strategy to get through the startup “valley of death”.

Dirk Steller is the founder and managing partner at Seed Space Venture Capital, and he’s seen a few businesses walk into the valley of death without a viable strategy on how to get out.

The company is about to launch a new Australian Fund with a focus on early stage fintech companies in the domestic market.

Speaking with Stockhead, Steller says that from a funding perspective, the valley of death represents a leap from ideas to execution — and the fixed costs that come along with that.

“What tends to happen is that people are either still working in their job, so they’re doing it part time, or they’ve got a couple of people together but it’s still in the development stage. You’re not having to pay staff, you’re not having to pay for office space, marketing costs and that sort of thing,” he says.

“From that point, some startups progress into accelerator programs which may give them some money — perhaps $100k. That means they can quit their job, they’re in the program for 3-6 months, they get to the end of that and they might have line of sight to customers, but they still need $1-2m to go from an idea to a functioning business where there’s good revenue.”

“That’s really the valley of death — when you go from tinkering and building something to saying, actually, now we’re going to be burning $30k a month or whatever it might be, just to keep this thing going.”

Market opportunity

The funding requirements for that stage of the business are typically in the range of $500,000 to $2 million.

And although the valley of death has claimed many a startup idea, Steller and Seed Space think it also represents a business opportunity for savvy VC funds.

“This was a capital raising phase where we thought, well there’s not a lot of VCs investing into that, particularly not VC funds doing it strategically right across Australia,” Steller says.

“There’s angels and high net worth investors, but it tends to be Sydney and Melbourne focused, and we saw there was a lack of professional VCs in that seed funding phase, and even fewer focusing on fintech. Our aim is to invest that capital and then follow it, work with the companies and then for the next rounds put more money in where companies have shown real promise.”

To help build its footprint in the Australian market, Seed Space has established partnership arrangements with the local innovation hubs and startup ecosystems.

“We want to see as much as possible of what’s coming into our market segment,” Steller says.

“If there’s a great fintech idea — it could be from Brisbane, Melbourne, Perth or wherever — we want support them through this stage of seed capital raising, to ensure they have the best chance of succeeding.”

Stay out of the valley

So if the scale-up stage represents one of the most difficult phases for startups, what can companies to do avoid it?

On that front, Steller says that while product development is always important, startups also need to establish sound frameworks for the peripheral aspects of the business.

“The first thing is, be as frugal as you can until you’ve got committed capital,” he says. “Then once you’re looking at raising capital from professional investors, it’s important that you have a minimum viable product that’s been tested.”

At that point, the business framework needs to be soundly established in order to deal with the challenges that arise when companies start to grow.

“You need to have a solid corporate governance structure and it helps to bring in advisors that have business as well as technical experience — people who’ve built and managed large businesses and know about financial and legal matters,” he said.

In the end it’s not just the idea – it’s everything that needs to be set up around the idea — and that’s easier said than done if you don’t know what you’re doing.”

This story was developed in collaboration with Seed Space, a Stockhead advertiser at the time of publishing.
This advice has been prepared without taking into account your objectives, financial situation or needs. You should, therefore, consider the appropriateness of the advice, in light of your own objectives, financial situation or needs, before acting on the advice. If this advice relates to the acquisition, or possible acquisition, of a particular financial product, the recipient should obtain a disclosure document, a Product Disclosure Statement or an offer document (PDS) relating to the product and consider the PDS before making any decision about whether to acquire the product.