It was a trip to South America that sowed the seeds, or should that be seed funding, for online disruptor Grana.
Launched two and a half years ago by Luke Grana and his business partner, Pieter-Paul Wittgen, the eCommerce platform specialises in affordable quality basics.
During a visit to his brother in Peru, Grana stumbled across Peruvian Pima cotton, from where the idea to create essentials from the world's finest fabrics was born.
In 2014, Grana touched down in Hong Kong with reasonable savings in his pocket and got to work setting the wheels in motion from his small warehouse in Kennedy Town.
“At that time I had $US200,000 ($A260,000) in savings and I brought a one-way ticket to Hong Kong, set up a small little warehouse in Kennedy Town, which had 500 square feet, then I ordered the first batch of 2000 t-shirts.”
Searching for investors online through LinkedIn and government start-up initiative Invest HK, Grana and Wittgen decided a beta launch would be the best strategy to prove the businesses profitability.
“Before we launched, I was reaching out to different investors saying, 'if I start this business will you invest money into it?' A lot of them said they wanted to see a proof point. So I said to them that if I could go through a beta launch and sell out of 2000 t-shirts will you provide some funding?
“At that point they said yes and that's when I managed to go through a beta launch and sell out of 2000 t-shirts within three weeks, which were shipped to eight countries all directly from Hong Kong,” Grana says.
What may have sounded like a short process was anything but. For Grana, the pitching process took close to six months with cold calling and constant conversations a key in developing the perfect formula.
“We all start off from somewhere, I was committed and persistent in cold calling potential investors and following up to arrange a time to meet, pitch my business plan for Grana or receive feedback on how to improve my positioning.
“Often we began with a high level introduction, along with a call or meeting to get to know each other.
“If we both felt comfortable, then we moved into the due diligence stage to allow both parties to become more aligned on the long term goals of the business.
“Of course, not every meeting will necessarily lead to an investment due to multiple reasons, and so of course the process is always a continuous conversation.”
Eventually, Grana hit the mark in the form of an initial $US1 million investment from the Bluebell Group. This provided the brand with stable ground and a direction for further funding injections.
“In April/May 2014 we did our first $US1 million ($A1.3 million) in convertible notes and the lead investor in that round was Bluebell Group.
“Then we did another round of funding of $US1.5 million ($A1.95 million) in 2015 and then a $US3.5 million ($A4.5 million) equity round to convert both the note one and note two into equity and that's what we called our $US6 million ($A7.8 million) seed funding round.
“Then last year, mid-year, we did our A Capital round with Alibaba based in Hong Kong, who were the lead investor.”
The funding journey for Akagu, an online reverse auction site, is slightly less traditional. Founder Jimmy Zhong wasn't even scouting for partners when he met current investors Capital Alliance at a friend's wedding.
“I never actually sought any investors. It was very organically done in the end so I never actually planned to get investment. We were going to bootstrap at that stage. I actually met my investor at a mutual friend’s wedding.
“You're inevitably asked 'what do you do?' and you just have to do a bit of an elevator pitch and that sort of lead to interest from the investor,” Zhong says.
As a result of this, Zhong's approach to the pitch was far more casual than most other start-ups; he likens the process more toward dating than searching for investment.
“The first few meetings were really just to get to know each other better and the type of details that we went through in regards to Akagu were very high level.
“It was almost sort of like dating, the investor had to suss out whether I was someone who was passionate about what I am doing and knows the general direction I wanted to take Akagu.”
As an already established business, achieving 200% increase in subscribers month-on-month since its first live sale in December 2015, Akagu was in good stead to prove its worth from the start.
However, Zhong explains it wasn't that simple, with Capital Alliance requiring further proof the business could hold its own in a competitive online environment.
“We did have to provide a pretty comprehensive financial model. Also our early traction was very critical too, just to provide some social proof that it was just a little more than an idea.
“At the time we had about 500 users and 20 designers, our website was not that great but we had people interested and using it and early adopters as customers as well.
“So I think that was really important and then we just used that existing data to create a model.”
In February this year, Zhong and Akagu managed to secure $400,000 in seed funding from Capital Alliance which saw their CEO Mohan Du join the board as a non-executive director, also taking approximately 10% of the business in equity.
Even though the deal is only recent, Zhong has already seen benefits from having Du as an investor, with the current user rate now at 2500. Zhong is also appreciative of the freedom to continue running his business in the manner he sees most successful.
“His official role with the company is a non-executive director and that was his preference. I've been fortunate in finding someone who was happy to allow me to freely run the company still.
“The core business model hasn't changed but our investor [Du] has given us more options in terms of moving into other industries.”
While it may seem casual and easy for Zhong, the process is not without its challenges.
He freely admits legal technicalities can be daunting and encourages other start-ups to do their research.
“Build that network, whether you've got lawyer friends or other business owners that have gone through the same. Even just a quick Google of angel investments or term sheets.
“Once the conversation matures and progresses that's when you have to get really serious about how the investment should be structured and then you really need to do as much investment research as you can.”
For Fame & Partners founder Nyree Corby, her approach required very little research.
“The reality for me is I spent five years in venture capital prior to founding Fame & Partners, so I already had a lot of connectivity in the Australian investment community.
“Because of that existing network, I had a large number of people that I could go to for both the angel round and then obviously for later to form the back bone of our seed round,” Corby says.
Corby's approach to her seed round was, as she will admit, much quicker than most with the necessary amount of funding generated in roughly six weeks.
While most seed funding rounds take an average of three to four months, Corby's foresight to establish relationships during her angel funding round allowed her to generate her seed funding internally.
“Different people have different theories on whether or not it's good to build relationships with future investors early.
“In the earlier stages of a company it suits to build relationships early because I think that people see what you can do and then, especially if you then deliver on that operationally, they get very excited to participate in a future round.” With
Fame & Partners achieving 400% year-on-year growth and a recent round of series A funding totalling $10.2 million completed, to Corby seed funding seems so long ago.
But with her experience in both venture capital and launching her own business, Corby believes there are key points for any start-up to note. As a founder and CEO she is aware that one of the major issues many in the same position face is the impacts time and distraction.
“I think the greatest challenge with every financing round is founder distraction. In reality fund-raising is a full-time job and so you spend 75% of your day doing your financing, pitching, working with investors and so forth.
“You've got to think, unless you have a right hand man or someone that you're working alongside in the organisation who actually drives day-to-day operations, often things will come to a standstill.
“I very much experienced this when I was running our process, even though we did our seed round internally.”
Secondly, even though the venture market is growing here in Australia, it still has a narrow set of investors when compared to countries such as the US. For this reason, Corby believes each start-up, particularly in fashion, should be aware of the differing categories and expectations that come with investors.
“If you look at a fashion brand or a retail business model, there are lots of different categories that may be seeking funding but typically wouldn't get a very large multiple on their business in a trade sale situation.
“Some don’t event want a trade sale in the medium term, so therefore venture isn't going to be the right investment partner.”
Finally for Corby, simple and sensible documentation is key to ensuring a smooth investment process. While she concedes it may sound like a basic concept, it plays a vital role in ensuring that further investment rounds are not met with unnecessary difficulties.
“The last thing you want to do in early stage rounds is give investors a lot of rights. Something Fame & Partners did was we maintained one class of stock or shares right through to series A.
“We didn't have any preferences and that was highly beneficial and actually made the process of doing our series A much easier.
“At that kind of level, keep it as simple as possible because the more complexity or special rights investors have, the more complex future deals become and more expensive they will be to get done in the future.”