Venture Building The Start-ups of Tomorrow | Black Nova Group

Posted 2019-08-19 by Harry Laos
a rocket launching into the atmosphere

You may have heard, there’s a new breed of venture capital firms investing in startups known as venture builders. Having said that, few people understand what venture building truly means, or how start-ups can benefit from this new style of investment.

Today we take a look at what it means to be a venture builder. We weigh up the costs, benefits and differences compared with the more traditional venture capital approach.

Finally, we take a unique look behind the scenes of what it’s like to work with one of Australia’s very few venture building studios here at Black Nova Group.

What is a Venture Building Studio?

At Black Nova Group we are a venture building studio, which simply means we provide practical ‘hands on’ venture capital in addition to the traditional style of financial investment.

Our mission is to dream, build and grow Australia’s next generation of iconic start-ups. As a venture builder we do not only invest financial resources, we actually work with our start-up founders side by side, on the ground level and down in the trenches. Effectively we act as their co-founder, giving them as little or as much help as they need on their journey to success.

It’s common knowledge that having a co-founder significantly increases a startup’s odds of success, “You will raise 30% more investment, grow your customers 3 times as fast, and will be less likely to scale too fast” (source: Inc.com).

We believe in a smarter model of investment which gives start-ups the best chance of success. One that gives them the capability and experience to engineer their rockets, team up, fuel up, launch and go interstellar. As a start-ups mission control centre we invest by delivering core business capabilities in the form of advisory, product development, software engineering, legal, accounting, marketing and talent acquisition services in tandem with financial investment.

The Start-up Problem

Venture builders exist to serve start-ups. A start-up is an amazing organism indeed, it's the birth of something great and a diamond in the rough. Needless to say all great companies once began their lives as a start-up.

It usually starts with a person and a groundbreaking idea, then evolves into a living breathing organism, one that acts as a vehicle for change, adding value to the world in increasingly more meaningful ways over its lifespan. However, what separates a start-up from a thriving mature company is more difficult to understand and usually has more to do with the journey the startup takes rather than any other factor, say its product. Hence, strategic considerations that alter the trajectory of the company become crucial, since initial competitive advantages with a product can diminish over time. Like most journeys, there are thousands of paths, all with decisions that compound over years upon years. Choosing the right path at the right time is no simple feat.

The disturbing reality is 90% of startups die within the first 5 years, even those with ample investment. To make matters worse, no one seems to agree upon why (source: Forbes).

“90% of start-ups die within the first 5 years, even those with ample investment” (source:: Yahoo, Forbes)

Why Do So Many Startups Fail?

We decided to ask why so many as 9 out of 10 start-ups fail on their journey within the first 5 years. After extensive research, interviews with failed start-up founders and delving into the experiences of our team, mostly comprised of founders themselves, we discovered two simple points.

1. Many start-ups don’t launch in the first place
Many great ideas and great founders never get off the ground in the first place. Often founders cannot find a co-founder or the technical talent they need when starting out, so they simply don’t start. Finding capital when you are an early stage business with no revenue is near on impossible and unless you are living in your parents’ garage, people need to eat and feed their families.

2. Many start-ups don’t have the right capabilities to grow
Start-ups don't necessarily fail due to a lack of money. Although, this may be a symptom of failure it’s not exactly the cause. Often, they fail due to a lack of anticipation of future events, and the capabilities to act, adapt and move forward in a more sensible direction.

“Many great ideas and great founders never get off the ground in the first place. Furthermore, start-ups don't fail due to a lack of money, they fail due to a lack of anticipation of future events, and the capability to act on those events now”
Matthew Browne - Managing Partner | Black Nova Group


Now, we’re not saying you need to read the future, although we all wish we could. Instead we asked, what’s the next best thing? In reality, there are some issues which cannot be solved by the investment of more money. As the saying goes, it’s pointless trying to fill a leaking bucket, until you’ve found all the holes.

Venture Build vs Venture Capital. What’s the Difference?

The landscape of venture capital is constantly evolving, where traditional models of investment are being reconsidered. Venture capital firms are a traditional investment model that add value by offering investment in the form of money and advisory in exchange for equity. However, with 9 out of 10 startups failing, traditional investment is far from guaranteeing a startup’s success. This has led to emerging styles of ‘smart investment’ aiming to reduce the failure gap, specifically focusing on early stage startup companies.

Venture building firms also offer monetary investment and advisory to start-ups, although venture builders go a few steps further in guaranteeing the success of their investments. A venture builder will take an active role in it’s start-ups by delivering solutions to day-to-day business problems, effectively becoming a startups co-founder. This can be done with as little or as much help as a start-up needs or what is specified in the contractual agreement between both parties.

The venture building approach goes beyond ‘smart money’ and towards ‘smart money with practical tools’. This usually takes the form of boots on the ground where the venture builder delivers critical business functions like software development (product), marketing (growth), talent (team building), legal and much more.

“Venture Builders go a few steps further in guaranteeing the success of their investments... delivering solutions to day-to-day business problems, effectively becoming a startups co-founder”
Matthew Browne - Managing Partner | Black Nova Group

The Venture Build Solution

As a solution venture building is a new breed of practical level investment, where traditional funding and expertise are provided in conjunction with a working partnership over time. This hands on approach differentiates them from traditional venture capital. As an example, everything we do is underpinned by the belief that:

“Start-ups need real world solutions to their ship’s capability gaps. They need a crew who can help fix the tears in their sails as a result of their journey along the way. Often this is more than just money, or advice on how to spend that money.”
Kevin Calitz - Chief Operations Officer | Black Nova Group


"As a venture builder we’re a founder friendly investment fund, created by start-up founders to serve start-up founders."
David Theodorou - Chief Executive Officer | Black Nova Group

We’re like a start-up’s rocket engineer, launchpad and mission control room on their journey to success. Our approach is to provide ‘smart practical investments’ in the form of:

  • Traditional Financial investment - cash investments in combination with a mix of the following practical level investments.

  • Advisory - expert advisory from fellow start-up founders, investors, technicians and domain experts matched to a startups specific needs.

  • Digital - we build your product, starting from conception, to software design, development, deployment and maintenance.

  • Team building - team mapping, talent acquisition, training and management to get the right people in the right seats on your journey.

  • Growth - we help grow your business with strategic marketing, facilitating partnerships, sales planning and training.

  • Accounting - we organise your business so you can get on with the job. End to end accounting support, setup, tracking. All the fundamentals and ongoing compliance.

  • Legal - we ensure your interests are protected, through advisory, contracts, terms and conditions.


  • With far more resources available, our mission is to action your success by giving you as much or as little of what you need, when you need it, being there for you every step of the way.

    “We’re all serial start-up founders here, we walk in your shoes every day. We’re so ingrained in start-ups, yet we’re small enough that you matter.”
    David Theodorou - Chief Executive Officer | Black Nova Group

    The Venture Capital Solution

    Traditionally venture capital started in the banking industry, where bankers would loan out large sums of money to new idealistic ventures during their early stages of expansion.

    Almost all great companies have been built with the help of venture capital at some point in their journey. The venture capital space is evolving into specialist firms that loan out capital to specific industry sectors such as health, software or say logistics. Capital itself now takes many forms beyond money such as - advisory, talent recruitment, marketing, legal and just about every function you can imagine in a business.

    As a solution venture capital firms tend to focus on startups in their later stages, with proof of concept, a product, clear signs of traction in the market and often prior rounds of investment are a prerequisite before VCs get involved. They tend to invest only cash and advisory, primarily taking a numerical approach to their investments. However many are starting to recognise the benefits of taking a more active role in their start-ups’ journeys.

    How Much Capital Do I Need. What Are Your Terms?

    The benefits of venture capital really come down to what terms are being offered in exchange for a VC’s cash investment. The terms usually involve the amount of investment, timing and pay back clauses which guarantee a nominal return to the investor when the start-up hits its milestones - such as the next round of investment or a successful exit.

    It’s quite important to consider what terms are being offered because those terms ultimately determine how much success (in the form of money) that you, the founder, walks away with at the end of the day after an exit.

    How Does The Venture Capital Model Work?

    Usually the terms are individually agreed with each deal and they reflect the VCs analysis of your business model in its ability to return a profit on their investment. Typically the risk of failure and losing the investment is of prime concern, however your risk is also affected by the risk of that VCs total portfolio value, reflecting the risks it has taken with other start-ups within the portfolio.

    If the VC has made some poor investment decisions in the past, then it's possible they’ll pass on a higher price to new start-ups joining the portfolio. This higher price can come in the form of less favourable terms such as higher equity stakes and more stringent requirements for a return on their investment.

    In this instance, when you require a large sum of monetary investment, the terms are favourable or perhaps you really need the specific expertise of a VC, it’s advisors and it’s portfolio, then going down the VC route may make sense.

    Venture Build (VB) vs Venture Capital (VC)

    Stage of Engagement angel
    VB
    seed
    VB/VC
    A
    VB/VC
    B
    VC
    C
    VC
    Requirements for start-ups Ideation stage
    VB
    Prior investment rounds
    VC
    Proof of concept (revenue)
    VC
    Prior investment rounds
    VC
    Expansion
    VC
    Level of Investable cash $10K - $100K
    VB
    $100K - $500K
    VB
    $500K - $1M
    VB / VC
    $1M - $5M
    VB / VC
    $10M+
    VC
    Level of Investable capability Advisory
    VB / VC
    Product
    VB
    Team
    VB
    Marketing
    VB
    Mentor
    VB
    Terms Very Favourable
    VB
    Favourable
    VB
    Moderate
    VC
    Stringent
    VC
    Average investment success rate 5-10%
    VC
    10-15%
    VB / VC
    15-25%
    VB / VC
    25-50%
    VB
    ROI expectation 3X
    VB
    5X
    VB
    10X
    VC
    20X
    VC

    As a Start-up, How Do I Make The Right Decision?

    Unfortunately, many start-ups get locked into deals with investment firms that don’t meet their needs into the future, for example when the money has dried up and the business begins to face deeper experiential level challenges that money alone cannot solve.

    Here’s what we discovered, all forms of capital aren't equal. When it comes to setting yourself up with the best chances of success, it’s important to consider:

    1. Which forms of investment will you need in your journey - money, capability or a mix?

    2. What is the fair market price for how much equity you are prepared to ‘pay’ in exchange for those investments?

    An example

    Let’s say you have a start-up which has a competitive advantage selling online pet food, where your core business is your website and mobile application. You wish to expand internationally into the USA, with the belief that your superior quality pet food and low cost logistics model are sure to break the market.

    You know you’ll need more resources to achieve this, so you consider what’s on offer. You meet several venture capital firms who offer you approximately 1 million in exchange for 25% equity, along with advisory services to help you break into the US market. Do you take the $1 million?

    As a venture builder, we have a slightly different approach where we say okay $1 million is fine, however, let’s look at what that money represents and the outcome you wish to achieve by spending that money. We break down your runway and roadmap into key resource stages e.g. software development, product, legal, accounting, marketing and talent. We then offer you a deal with flexible options on the continuum between purely money and those key outcomes which you need, where we guarantee the delivery of those outcomes.

    Simply put, the very point that we’re offering investable resources beyond money means we will be there working with you side by side every step of the way. Not only is that a long term commitment but that is a shared risk and shared incentive to achieve a mutual outcome. You may even choose to take an additional round of investment in the form of venture capital later down the line.

    VCs tend to give you money without the same level of ground level commitment to see the execution stages through, whereas a venture builder provides as much or as little executional level help as you need.

    We tend to commit to our investments heavily upfront then earn back over time. We do this by taking a loss on the work we give a start-up now and earn back across the portfolio every time we increase your chances of a successful exit and return on our investment. We are incentivised to succeed just as much as you are.

    “When we invest, we’re not betting or playing a game of chance. The money we are investing in is you (the people), more so it’s our money, our time, our energy and our resources. When we invest we care about the outcome.”
    David Theodorou - Chief Executive Officer | Black Nova Group

    Behind the Scenes With Our Team

    The Black Nova Group executive team is made up of experts in their field and like minded start-up founders. Meet the team here.

    Executive Team
    Matthew Browne | Managing Partner
    David Theodorou | Chief Executive Officer
    Kevin Calitz | Chief Operations Officer

    Management Team
    Adam Bosnjakovic | Head of Software Engineering
    Alex Lennon | Head of Talent
    Harrison Laos | Chief Brand Strategist

    Conclusion

    Weighing up the traditional approach of venture capital with a more modern venture building approach, or a mix of the two, is an important consideration that almost all start-ups will go through at some point during their life cycle.

    Venture capital tends to favour later stage start-ups who are market ready and looking for larger monetary investment and advisory to expand. Whereas venture building offers a more complete end to end solution to help earlier stage startups get off the ground and scale.

    As a venture builder we dream, grow and build start-ups. We provide practical venture capital tailored to the needs of our start-ups, in a way that makes us effectively their co-founder, companion and deck hand.

    We take a practical level approach, one that reflects our belief that start-ups often need more than simply money to succeed. On their journey to discover success we become their ships crew, working in the background.

    Since we all live on the same ship, we all sink or swim together. We help fix the tears in their sails so they can sail safely through the storms.

    Written by Harry Alexander Laos

    Astronaut looking at phone while sitting on a ringed planet.

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