Competing in the US: insights for Australian startups from US investors

The US venture capital market has always been important for Australian founders who have had global aspirations from day one or are currently contemplating expansion into the technology-rich, densely populated, and innovative market.

As experienced Australian seed-stage investors, we keep a close eye on the market and make sure to cultivate relationships in the region to support our founders as they grow. I recently visited San Francisco to meet with various US investors to understand their thoughts about Australia in light of current market conditions.

I left the tech mecca with some key takeaways for our Aussie founders back home:

There’s still good interest in Australia, but we’re not front of mind right now

US investors who have previously invested in Australia have positive things about their experiences and remain eager to pursue opportunities in the region.

They highlight the success stories of our homegrown companies, such as Atlassian and Canva, as evidence of the exceptional opportunities that are available here. However, they express some reservations about our competitive advantage in key technology areas compared to what they could access closer to home.

Consequently, the burden falls heavily on our founders to showcase their capabilities and vigorously compete against the abundance of capital and talent available in the US.

Nevertheless, the perception that Aussie companies excel in capital efficiency and early monetisation remains unchanged. A slight advantage is that we’ve created a reputation that we can achieve significantly higher annual recurring revenue (ARR) levels at the Seed and Series A stages than our American counterparts raising at similar stages.

This has become particularly crucial in an environment where capital is expensive and efficiency is paramount.

For founders who aspire to attract US venture capitalists, establishing a presence in the US market from both a team and customer perspective is highly recommended. Demonstrating significant customer growth in the US has become imperative for success.

The ‘art’ of early-stage investing remains a game of extremes rather than averages

The right-sizing of round sizes and valuations still hasn’t fully manifested at the early stage (Seed-A) in Australia or the US. There are many reasons for this, but generally, the ‘art’ of early-stage investing remains a game of extremes rather than averages and is often driven by check size rather than proof points.

The ‘high quality’ bet is still prevalent, meaning that some investors will continue to pay high valuations for opportunities with certain characteristics and move earlier and beyond their standard mandate to get access to the opportunity. The general school of thought is that early-stage valuations are irrelevant to IRR outcomes, and VC is a game of outliers where the apparent options aren’t always the best.

These types of deals are certainly less common in a market like the one we’re currently in, but that hasn’t stopped people talking about them. You’ll find that these stories become a dominant narrative because they get the most attention, not necessarily because they are, in fact, the most common occurrence.

What’s more common (and realistic) is the existence of market-driven fundamentalists focusing on sustainable growth and sound business models. Most investors will stick to their core thesis in this environment, which means not straying far from the thematics and stages they know well.

More so than ever, founders need to do their diligence on which investors are genuinely active in this market at their stage of business maturity.

Founders need to get educated on the different types of VC models and understand the pros and cons of smaller versus larger funding partners so they can choose a funding path that is right for their ambitions.

Formulate a raise strategy for the current market

The most important takeaway is to formulate a raise strategy that considers the state of the market, the relative quality of your business as an investment opportunity and the importance of deploying capital against strategic proof points upfront.

• “Similar to other things that we do” seems to be the most commonly stated reason for taking a ‘hard look’ at a company and the most significant signal for success. This rationale holds immense significance, serving as a strong signal for prospective partners. When a company aligns with familiar patterns, it becomes easier for the partner driving the deal to formulate a thesis. Furthermore, it instils confidence as they rely on solid pattern recognition skills, internal intellectual property, or exclusive insights. To identify compatible investors, seek those who have previously invested in Australian founders, possess a substantial portion of offshore investments, are actively deploying, and have a track record of investing in companies similar to yours.
• Achieving high growth is imperative, even in the face of a market downturn, and the conventional 2-3x growth rate continues to be emphasised. However, investors will now place greater emphasis on the quality of this growth, considering factors such as velocity, consistency, and concentration, as well as risks and dependencies.
• At a minimum, Australian founders should establish a US go-to-market (GTM) presence, either through a sales function that can serve the area or by appointing a US sales leader. It’s crucial for founders to ensure there’s proper product-market fit in the US and showcase their ability to attract and retain top-tier American talent. Investors rarely cite a hard requirement for a founder to move to the US; some more internationally-focused investors dismiss it entirely, but it’s always worth considering if the US region is your focus.
• Relocation is seen as a sign of the confidence and ambition of the business and a genuine de-risking of the initial phases of market entry. The founder needs to prove the company’s attention and resources are focused on the US. I suggest formulating a strategy and committing real capital to the region.

It is undeniable that Australian startups seeking US funding can still capture the attention of US investors, although they may not be at the forefront initially. Australian founders must be great at presenting themselves and demonstrating their capabilities to compete effectively with the vast pool of capital and talent present in the US.

Whether it involves setting up a stateside sales team, relocating founders, or devising strategies to cater to US clients, establishing a robust presence in the US market is imperative for really making a splash in the US.

• Georgina Turner is a partner at Tidal Ventures.