Audit to Venture Capital Blueprint

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Move Fast and Break Things

TLDR in order of ease & usefulness:

Move into the Financial Due Diligence team
Become a VC scout
Provide portfolio companies with support
Start investing through crowdfunding platforms

Section One: What Is Venture Capital?

Venture Capital is investing in early-stage companies, sometimes as early as an idea, with the hopes of 100x returns.

The overarching idea in venture capital is that it is high-risk, high-reward. Most companies that venture capital funds invest in will perform poorly or completely fail, however every now and then one of their investments blows the roof off and becomes a unicorn (a private company that reaches a $1 billion valuation).

In order to consistently find those outliers, funds need to find a competitive advantage. To do so requires an investment thesis, which states what kind of company they will invest in and at what stage.

In this section you will learn about the different types of venture capital investors, different investment strategies and the current Australian VC landscape.

Different Types Of Investors

First we will discuss the different investor groups, the most commonly known is the venture capital firms. Venture capital firms are typically structured as limited partnerships, with a general partner (GP) managing the fund and limited partners (LPs) providing the capital. They raise capital from a variety of institutional investors, including pension funds, endowments, foundations, and high-net-worth individuals.

Next we have family offices, a family office is a private wealth management advisory firm that serves an individual or a family. These offices have a broad investment mandate that may include venture capital but often includes a diversified portfolio of asset classes such as public equities, private equity and real estate. An example of this in Australia is Grok Ventures, who manage the personal wealth of Mike Cannon-Brookes (co-founder of Atlassian) and his family.

There is also corporate venture capital (“cvc”), where large corporations make investments in startup companies to gain strategic advantages and financial returns. Telstra, for example, has its own cvc, Telstra Ventures (“TV”). TV invests in a range of technology sectors, including enterprise software, network infrastructure, cybersecurity, and digital media. The focus is on companies that can enhance Telstra's service offerings, improve operational efficiency, or open up new market opportunities.

Lastly, there is angel investors, who are high-net-worth individuals who provide capital to early-stage startups. This is different to family offices in that family offices have investment managers who manage the process, whereas angels invest directly. Angels typically step in at the very early stages and can also offer mentorship, industry expertise, and valuable networks.

To summarise, the different investor groups include:

Venture capital funds: funds specifically designed for high-risk, high-reward investments,
Family offices: offices that are responsible for managing high net-worth individuals and their families wealth through a diversified portfolio of asset classes,
Corporate venture capital: where large corporations make investments in startups to gain strategic advantages, and
Angel investors: high-net-worth individuals who provide capital and other support to early-stage startups.

Different Investment Strategies

Now that I’ve covered the different investment vehicles, we can discuss the different investment theses. The investment thesis is used to guide investment decisions and strategy and can be defined by a range of strategies.

The first type of investment theses strategy is a ‘stage-focused’ strategy.

There are distinct stages in venture capital investing because startups have varying needs and risk profiles as they grow and develop. Each stage represents a phase in a company's lifecycle, requiring different types of capital, support, and expertise.

At the pre-seed stage they’re often investing pre-revenue based on the founding team and the market opportunity. They’re looking for a founding team that has domain expertise and an extremely high level of conviction and commitment, along with a significant total addressable market - think $ billions.

The seed stage is similar however, now the product has been launched and investors can consider the business model and the early traction of the product. Both these stages are early and have the highest level of risk but also the highest potential returns.

At series A the concept has been proven and the company requires capital to continue their high growth journey. Whilst the product works and customers clearly want to use it, the risk at this stage is that the company won’t reach profitability or grow to a venture scale business.

As the company moves into series B it starts moving closer and closer to exit opportunities through either M&A or a public listing. Each round of funding moves closer in similarity to private equity funding.

Investors choose to invest at different stages based on their risk tolerance, return expectations, capital availability, and strategic objectives.

Another investment strategy is to focus on a particular industry, such as fintech, agriculture or sustainability. Focusing on a particular sector allows investors to develop deep expertise and knowledge about the industry, including its trends, challenges, and opportunities. It also allows investors to build strong networks and relationships within the industry, including with key players, other investors, and potential acquirers, which improves deal flow and the impact they can have on their investments.

The final key investment strategy is to take a thematic investing approach. Thematic investing is an investment strategy that focuses on trends, themes, or macro-level shifts expected to shape the future of industries and economies. Instead of concentrating on individual sectors or companies, thematic investors target broad themes that cut across multiple industries. Examples of this would be investing in AI companies or focusing on the future of work i.e. remote work technologies, gig economy platforms, and workforce automation.

Australian Landscape

The Australian VC scene has grown significantly in the past decade, as an indicator of this we can look to the number of Australian startup companies that have received a $100m+ valuation.

In the 30 years between 1990 to 2020 there was a total of 95 companies that crossed the $100m+ threshold, in the past 4 years alone there has been another 139. Recently there was a secondaries round (when shareholders in a private company can sell those shares) in Canva, bringing a $2.43 billion windfall to employees and early investors. The expectation is that this will prompt further investment in Australian startups, through new LP’s in venture funds or new angel investors.

Other Resources

If you want to dive deeper into understanding venture capital, particularly as it stands in Australia, I would suggest looking at the following resources:

Podcasts:

The Startup Podcast: An Australian podcast that aims to provide a Silicon Valley way of thinking.
20VC: Interviews with the world’s greatest venture capitalists.
How I Built This: Stories behind the biggest, most disruptive companies in the world.

Newsletters:

Letter Of Intent: A daily snapshot of Australian VC activity.
Deal Perspectives: Stories behind Australian businesses that achieve an M&A or IPO activity.

Investment Memos:

Collection of Aussie / Kiwi VC investment memos: Aggregated by Letter of Intent
Emerging views on generative AI: by Square Peg Capital

Section Two: How To Break Into Venture Capital?

Onto the juicy part, how do we make the move into Venture Capital from Audit???

To be very clear, moving into venture capital from audit is not an easy nor straightforward path but by following the steps laid out below you can maximise your chances. The overarching theme here is to build an “unfair advantage” in one of the three key VC areas and I’m going to walk through each of these areas and point out how you can do just that.

Source Deals

A key component of venture capital is being able to get access to startups when they are looking to raise capital. It is better to have seen a company and passed on the opportunity than to have not known about the company at all. For example, many investors passed on the opportunity to invest in Canva in the early stages with fears that they couldn’t compete with Adobe, these investors were wrong but they can now take some learnings from that decision. However, investors that didn’t get a chance to hear the Canva pitch at best didn’t get to learn anything and at worst they missed out on investing in a company that is, as at 2024, valued at over $20 billion.

Even larger, more well known firms, who have a strong deal flow, can miss out on opportunities if they wait for the founder to come to them, deals move fast!

So how can you source deals?

There are three main ways to demonstrate your ability to source deals; angel investing, vc scouting and firm brand building, and all heavily involve networking.

So what really is angel investing and do I have to be a high-net-worth individual? Well standard angel investing is restricted to ‘sophisticated investors’, individuals with at least $2.5m in assets OR $250k salary, so that rules a large portion of people out. That being said, anyone can get involved via crowdfunding platforms and there is set no minimum investment requirement, however it’s important to know that the best companies aren’t using crowdfunding platforms, they’re raising large sums from VC funds. From crowdfunding investments, you will learn how to source deals, you will perform solid due diligence as it’s your own money you’re investing and who knows, maybe you’ll pick the net Facebook and have enough to retire. VentureCrowd is the most well known crowdfunding platform for startups in Australia.

Another option for sourcing is to become a VC scout, A VC scout helps venture capital firms identify and evaluate potential investment opportunities, particularly in the pre-seed and seed stages whilst the company is not well known. The main reward here is that you start thinking like an investor and you will become known in the VC community, some scout programs also offer ‘carry’, a share in the profits the fund makes from any investment where you make the introduction. You can search for the list of scout programs in your city here.

Finally, you can help venture capital firms source deals by helping build their brand. A known venture capital firm has founders knocking at their door for investment, you can help a firm become well known by having a personal brand online or by running startup community events.

Perform Due Diligence

After sourcing a deal, the next step for an investor is to perform due diligence. Now you can get some experience performing due diligence on deals while in Audit by working on the financial statements for acquisitive companies. Through auditing the acquisition you will gain insight into the financials of the acquired company, it is then up to you to consider the investment thesis behind the acquisition and any red flags you would have raised. However the issue with this approach is that the company may not make an acquisition in the period you are auditing and, even if they do, you still aren’t actually performing due diligence.

The single best thing you can do to better position yourself for Venture Capital: move into the Financial Due Diligence team

Now moving into the Financial Due Diligence (FDD) team isn’t easy, it is an extremely well sort after role, however the skillset developed in Audit aligns closely with FDD and FDD not only makes it easier to transition into VC but it also opens up opportunities like Investment Banking, Private Equity and Corporate Development.

The FDD team provides financial advisory services to clients involved in mergers & acquisitions, initial public offerings or capital raises. They’re responsible for understanding the business from a financial perspective to identify any potential ‘red flags’ for a deal. This involves performing an analysis of the company’s financial statements and the underlying data with the help of the company’s finance team.

Prepped Financial Due Diligence Course

If you’re considering moving into a career path of Venture Capital, Investment Banking, Private Equity or Corporate Development then reach out to hear more about our four week Financial Due Diligence course.

Tell me more!

Portfolio Support

The final key area of VC where you can build an “unfair advantage” is in the ability to support companies a venture capital firm has invested in. Now this can mean either moving into the company full time as an employee or it can mean supporting them in your spare time, the idea here is to have the VC notice you value you can bring.

My suggestion is to support in your spare time and free of charge, start providing free technical accounting advice or help put together financial forecasts and models. Startups generally try to operate as lean as possible and in the early stages they won’t have this expertise, so if you can add value here then you are showing the VC what you bring to the table. Of course you can charge for your time but then you are less likely to get the opportunity and you won’t generate as much good-will.

Final Wrap Up

The three key areas where you can stand out from the highly contested field of professionals looking to enter VC are:

Sourcing Deals
Performing Due Diligence
Portfolio Support

Each area has it’s pro’s and con’s so consider your personal situation when deciding where you want to focus your time. If you have any questions on anything detailed above or you want some personalised advice, please reach out to archie@preppedtalent.com.au.

Thanks for reading,

Archie Sampson, Founder of Prepped