Raaj Rayat is an investment manager at AirTree Ventures. There, he focuses on early-stage investments across Australia and New Zealand. He was an early employee of Lendable, a fintech startup that used data science to expand fair access to financial services in emerging markets and has worked as a data scientist and investor in Nairobi and London.
In August, he joins SmartCompany as a guest judge at the Pitch, our early-stage startup competition, this time with a focus on fintechs. Here, he shares his thoughts on current trends, and why being able to explain your startup to your mum is so important.
How are current trends shaping today’s startup and VC world?
We’re in the middle of one of the biggest monetary experiments that’s ever been run, I think. And we’re all figuring out, day to day, how to adjust to that. We’ve seen a year of interest rate hikes, and that has really affected the risk premium that is placed on high-growth tech companies that have cash flows way off into the future. And this has had a couple of effects.
One, it has pulled liquidity out of the system such that capital is a lot more scarce than it was two years ago.
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From an AirTree perspective, we have a seed fund and a growth fund. The seed fund is there to support companies as early as the pre-seed stage when it’s just a team and a dream. All the way through to our growth fund, which is there to support companies, you know, once they have five, ten million dollars in revenue all the way up to $100 plus million.
I suppose if I was to look at it through the lens of the two funds that we run, certainly at the pre-seed and seed stage, the local ecosystem in Australia has been a lot more resilient. I think if you look at 2021, roughly ten billion dollars invested in ventures in Australia, across, I think the number was something like 760 odd deals that were reported.
If you look at that number in 2022, the actual dollars invested have gone down 25 to 30% to about $7, $7.5 billion, but the actual number of deals has only gone down to 730, so a tiny percentage or two contractions in actual deal volume, while the number of dollars has gone down.
What that tells you, and I think it will be the same story extending into 2023, is at the growth stage, the later stage, larger deals are much harder to get done than they used to be. Certainly, for great companies, they are continuing to get done and continuing to get done at very fair valuations.
But, at the seed stage, things have been a lot more resilient. So we’re seeing basically the same amount of deal flow at the early stage, we’re seeing the same amount of innovation, we’re seeing founders come to market at the same rate at the early stage.
That, we have a lot of optimism about, and that’s where we spend probably two-thirds of our time, at the early stage.
What are you looking for in startups?
What we look for hasn’t really changed that much. The way I summarise it is: outlier founders building innovative products in large markets.
We look for founders who are really outliers in one or two things, who can see a little shift on the horizon that others haven’t yet noticed, and are able to react to it quickly with a product that is, in most cases, fundamentally new, or maybe a product that exists elsewhere but applied in a new market. And they’re doing it in a market that’s large enough to build the venture scale business, a business that has the potential to reach a couple of billion dollars’ valuation, a couple of million dollars in revenue.
What about nailing pitches, what do you like to see, and what’s your advice to founders?
There are so many basic things I could say. There are all of the obvious things like you’ve got to have a sufficient grasp on the problem to be able to explain it. A really excellent founder knows their problem intimately enough, such that they can really dial up and down. They can adjust themselves to any kind of stakeholder, they can explain it well to investors, they can explain it well to employees, they can explain it well to their mum, you know? They live and breathe this problem.
That’s one aspect, I think there are many, but another that’s important that often gets overlooked. When I’m reading a pitch deck and it falls a bit flat, it’s often because they perhaps don’t really hit the nail on the head when it comes to explaining why now is the right time for this particular business or product. It’s a bit of a cliché line, but it’s really important.
If you look at the history of technology companies, a lot of stuff has been tried before in different markets, and has worked for different reasons and hasn’t worked for other reasons. One of the things that I certainly look for in founders is a really deep understanding of the graveyard of companies that have come before them, why bits of them worked and why bits of them didn’t, and how that affects their strategy and their focus.
What excites you right now?
From a personal perspective, I spent a number of years involved in startups in other parts of the world, and certainly took my eye off Australia for a number of years.
But, partially due to COVID-19, and partially due to my own interest, I ended up back here and started looking at what’s happening with startups here. I got introduced to AirTree and that’s how I ended up joining. But I think the most exciting thing is this feeling that we’re at the start of something really great in building this ecosystem. It’s hard to really put your finger on what that is, but if I was to contrast it to probably about a decade ago when I was first trying to figure out the startup landscape in Australia, there was not that much going on. I think there was probably a lot going on I just wasn’t able to find it.
Now, you can throw a stick in any direction and you meet people who are involved in startups, working in startups, there are events going on, there are accelerators, there are venture funds, there are angel investors. The startup career path is just at the beginning of being in the mental landscape of young kids and uni graduates.
We’re really kind of at the beginning, and the way I think these ecosystems have unfolded in other parts of the world is they compound very very quickly. I’m paid to be an optimist, so take this with a grain of salt, but I think we have well and truly entered this period of rapid growth.