Importance of investors for your startup

Finding investors for your startup is important for three reasons - growth, exposure and leverage. We sat down with Tan Huynh and Andy Budiman, co-founders of Detexian, and Gary Brown, managing partner of HnB Accountants, to chat about the importance of investors for start-ups and how to attract the right investors for your business.

Growth for a startup relates to all things financial support, cash flow and going to market quickly. Exposure is all about network distribution and strategy partnerships, while leverage comes from tapping into your investors’ network for advice and strategic direction.

Turning an Idea into a Business

Ideas can come from anywhere but how do you turn it into a business? The idea for Detexian was born in 2018 from Tan’s desire to found a start-up specialising in cyber security for the mid-market. Average businesses are often on a limited budget and cyber security is an afterthought, so one of the key objectives for Detexian was to enable these businesses with the capabilities to safeguard their data and their people.

Unfortunately, for the first part of the journey, they were targeting the wrong product. It was a server protection product for companies, however servers are being phased out in favour of software. So, they quickly pivoted. They scrapped the whole idea, even after raising money to fund it, and started from scratch. To turn an idea into a business, you need to be able to pivot, being willing to pivot at the right time and the right place.

“Over the last three years, Detexian has spent an enormous amount of time getting validation from investors, people in the security industry and, most importantly, our clients. We have done extensive user testing, gotten lots of feedback and adopted many intuitive processes to get to where we are now.”  Tan Huynh, Co-founder and CEO at Detexian

Validation

Early validation from investors is also important for startups. In the startup industry, your first investors are often early adopters of your product or idea. In Detexian’s case, early validation was sometimes the only thing getting them through. Their idea was born in 2018, however, cyber security management wasn’t even a market category until October 2020.

Detexian spent almost three years as one of only 5 companies in the world trying to break into this market, the only one in Australia and the only one in the world focusing on the mid-market. The data points from customers told them that it was something that was needed, but nobody was sure exactly how to tackle the problem.

Having conviction and early investors that fully believe in and back your idea is important to keeping startups going and boosting them up through the tough times of doubt and uncertainty.

“If you want to truly be the first in the market, be prepared in the long haul to validate that.” Andy Budiman, Co-founder and CPO at Detexian

Raising Capital

As a startup, you never stop raising capital. Doing this at the beginning of your startup journey gives you the opportunity to then recycle that capital through incentives and continue to build and expand on your original concept.

The idea is not to go to market too early, you need to collect a few points along the way and get investors excited about what you’re offering.

Since the beginning, Andy and Tan have been talking to a number of investors and they will keep doing so until they’re ready to go out into the market again. Detexian is currently in an ideation sort of period where they can get capital and accelerate growth.

“As a start-up, you need to know where you are. For us it’s about accelerating growth, so it’s very much about who we are going to be attracting as growth investors.” Tan Huynh, Co-founder and CEO of Detexian

Understanding Different Types of Investors

Just like there are a range of different types of startups, there are a range of investors. Not every startup is going to be a unicorn or scalable in Silicon Valley terms. Sometimes it’s better to build a business and be acquired. Other times, you can build a very good revenue-generated business and then drive it.

There are a number of investor options available to you  such as angels, high-worth individuals and various types of venture capitalists.There is another option available for startups which is known as bootstrapping, there can be some advantages to bootstrapping over seeking investment.

Advantages of Bootstrapping

Bootstrapping refers to building your company with personal finances or some other internal form of income. In this age of startups and Silicon Valley success stories, many startup founders forget that sometimes you have to be working three jobs to make ends meet while you get your idea off the ground. You need to be scrappy and manually get things done.

“There’s a lot of start-ups that bootstrap for five years, that’s how they have to do it.” Andy Budiman, Co-founder and CPO at Detexian

Sometimes, you have an idea that the industry or the world is not ready for yet, so you’ve got to

bootstrap yourself.

When you bring in an investor, you’re effectively selling a piece of the business. For example, if your business is valued at $3 million and you bring in $300,000 worth of new capital, you would effectively be selling 20-30% of the business. If you bootstrap for as long as possible, when you finally do bring in that investor, you’re giving away less of your business.

“Be mindful of lasting for as long as possible, because that way you get the highest valuation that you’re going to get and then you’ll leverage off that.” Gary Brown, Managing Partner at HnB Accountants

Investment Options for Small and Medium Businesses

There is a lot of conjecture at the moment about how much money you should put into a small business in the current environment. Depending on what industry you’re in, it may require different amounts of capital. Depending on how fast you can get revenue would depend on how much capital you need as well. Some industries can hit the ground running with revenue, whereas other industries need months, if not years, before seeing revenue.

Investing with Friends and Family

If it’s a good idea, getting the money is easy. If it’s a bad idea then nobody wants to put money into that because it’s highly likely that it won’t work. When friends and family say that it’s a good idea, that’s not necessarily true because they’re obviously biassed. When people want to put money into the idea, money means trust, then you know that the idea is a goldmine.

In Melbourne CBD, 1 in 5 shops are now shut, but, real estate agents are saying that they’re getting masses of enquiries about people wanting to move into those shops before there’s even foot traffic back there.

With people not being able to travel, they’ve built up a record amount of cash and they’ve got to do something with it. Some will go into business, some will do investments, some will stick to the ASX or invest in property. Whatever it is, there’s definitely hoards of cash out there for the right type of investment.

You always know if it’s the right type of investment. If it’s a good idea then getting the money is easy. If it’s a bad idea then nobody wants to put money into that because it’s highly likely that it won’t work

Gary Brown – Managing Partner at HnB Accountants

When friends and family say that it’s a good idea, that’s not necessarily true because they’re obviously biased. When people want to put money into the idea, money means trust, and they know that the idea is a goldmine.

Why are investors important for small businesses?

When you’re looking at raising capital, the idea is important, but so are the people and board or committee members that the business owner is surrounded by. Investors usually bring more than just financial resources, they can also have experience and skills that are valuable for your growing business.

“If I am the smartest person in the room, then I’m in the wrong room. I like to surround myself with experts in areas that I’m not an expert in.” Gary Brown, Managing Partner at HnB Accountants

By surrounding yourself with experts in fields that you aren’t an expert in, you’re giving yourself the best chance. Find your marketing expert, your lawyer who’s going to help you through all the challenging legal documentation, your financial advisor, your strategic person and your business mentor.

Have all of these different areas covered, because without them you can’t learn. There are many people out there who have already done what you want to do and they can help you dodge that minefield.

The insights and feedback that you get from people who have done this before are priceless. They can simply take one look at it and give you advice and guidance that is coming from experience.

Very often, you may get some advisors that are well-versed in the theory but don’t have experience. You need to be mindful of that because in the world of start-ups you can’t beat the experience.

“There’s a difference between bringing in money that has experience behind it and just dumb money. Whenever you’re looking at investors, you need to look at what else they’re bringing to the table. Are they bringing experience in the right field? A contact list or a network? Or are they just bringing in money without any other benefits?” Gary Brown, Managing Partner at HnB Accountants

What happens after investment?

Investment can have a profound impact on the future growth of your business. For a small or medium sized business, investment can be an exciting moment of growth.

With the influx of new capital, the possibilities are endless. Imagine being able to upgrade your tech, expand your reach and bring on new team members to help drive your business forward. Not only will you be able to work more efficiently, but you'll also have the opportunity to tap into new markets and show the world what your business is made of. With a solid plan in place and a keen focus on utilising the investment effectively, the sky's the limit for your business.

If you want to learn more about how your business can be supported through a growth phase, reach out to our consultants at Exo Digital and we can help guide you through this process.