Rome2Rio’s angel round: a tale of capital raising in Australia

Eighteen months ago Bernie Tschirren and I returned to Australia from the US, where we had both worked at Microsoft, to found Rome2Rio and develop a travel search engine capable of searching flights, trains, ferry, buses and driving directions all at once.

Last week we closed a $450,000 round of angel financing. The whole fundraising process has been hard work, stressful at times, but also a rewarding and learning experience. Our story is also topical, given the intense discussion surrounding the lack of startup funding currently available in Australia. So, I thought it would be worthwhile talking about this most recent part of our journey.

Focusing on the product

Three months ago, Bernie and I were sitting in a cafe with one of our advisors, Rod Cuthbert. Rod was the founder of Viator, a successful online travel business that started in Sydney but had taken him to San Francisco. About 8 months before, we had formally signed Rod and Sydney Venture Capitalist Bill Bartee on-board as advisors with a small equity stake as payment for their guidance.

I was about to present to a local angel investment group, and we had met to sync up before the presentation. I explained to Rod that this was a good opportunity to practice our pitch, but Bernie and I were not keen to raise funds just now. We had been down that road before: five months prior we had made a serious attempt at raising some capital, obtained commitments from a handful on investors, but fell short of our goal, a $300,000 round. And there was a pretty major disconnect between the valuation on offer from those investors and the number we had in mind, which was modest by US standards but comparable to other deals we knew of in Melbourne.

We received some good feedback during the process, though. A few investors said they were concerned about our business model, which involved making commissions through bookings but hadn’t been implemented yet. Another common concern was that Bernie and I didn’t have the business expertise to build rome2rio into a successful business. We were two hackers, and we needed a hustler. After two months of conversations, we decided to park the whole fundraising effort and go back to focusing on the product.

It was one of the best decisions Bernie and I had made. We overhauled the user interface, improved the messaging on the welcome screen, further refined the search engine’s accuracy and added more transport to the system. Our users loved it and traffic went up. We also added hotels and rental cars to the site; both generate commissions and started to bring in some revenue. It wasn’t a lot, but we could see a path to ramen profitability. If our traffic doubled a couple more times, if we improved our funnel to boost conversations, and if we utilized the Australian government’s R&D tax concessions we could generate a modest income for ourselves. It wouldn’t be glamorous, but we’d have complete control over the company’s direction and wouldn’t need to raise any capital. It was an appealing prospect. 

As it happened, more investors approached us with an interest in the business, but we had now changed our tune. “Sorry, we’re not interested in raising capital right now” … we wanted to fly solo for as long as we possibly could.

Changing course 

Rod, however, was not a fan of this strategy. He had concerns that there would be plenty of money for multi-modal search startups in Europe, and if we waited until later in 2012 we may find a competitor entering the market with a big war chest, some smart people and a solution that looked a lot like ours. And then our advantage would be lost.

So Rod laid out his position: “You can’t stay in your garage forever. Clearly there’s interest from investors, so now’s the time to raise”. I pushed back. We had found the whole process exhausting last time. We had received some useful feedback, but talking to investors was a massive distraction. Bernie sat silently beside me. He hadn’t voiced his opinion, but I knew we were on the same page. However, Rod put forward a convincing argument. “It’s time to grasp the metal”, he said. 

(Actually, he said “grasp the nettle” but I hadn’t heard the expression before and I didn’t catch the subtlety involved in his choice of phrase. He knew we weren’t looking forward to fund-raising, but felt that if we went about it the right way we could have some success and enjoy the process at the same time. Grasping the nettle indeed.)

I found myself processing it all when we left the cafe to head to the presentation, which went well. The investors asked good questions, and a few days later we met with a representative who told us they were interested in investing. The group was reputedly conservative. Surely if we could convince them, the business was in a good position to raise. Perhaps Rod was right, and we should grasp the metal. Or nettle, or whatever it was that needed grasping.

The following week saw a key event that changed everything. Rod, who had been living in San Francisco and visiting Melbourne every couple of months, told us he was going to be living in Melbourne for the next year, to be closer to family here. We immediately discussed a plan for him to be more involved with rome2rio. He could help us raise funds, flesh out our business plan, and establish partnerships to license our technology. Over the next few days we established that he would be the company’s interim CEO.

Bernie and I were excited; given his experience Rod was perfect for the role. With plenty of connections in the travel industry, Rod would be able to help build commercial partnerships licensing the rome2rio API. Plus, raising funds now made plenty of sense. Rod could help guide us through the process, which he had been through a few times before. With Rod and I interfacing with investors, Bernie could focus on the product so that progress there would not stall. And we had addressed the two main concerns voiced by investors last time; we had some revenue coming in, and we had found our business guy.

Fund raising in earnest

On March 1st we sent an email out to 23 local and overseas investors we had met during the course of the previous 18 months. Some we knew well, others we hadn’t spoken to for a while and were, in my mind, long shots. Rod helped craft the email, which updated the investors with recent business and partnership developments, told them we were bringing Rod on-board as interim-CEO, and announced that we were doing a $300,000 angel round. We told them the pre-money valuation we were offeri
ng, and that we expected to utilize government grants and tax concessions to essentially boost the investment to over $500,000 in funding (I’m planning a separate blog post on government grants available to Aussie start-ups).

The responses started to come in the same day, and were still coming two weeks later. In total, 17 of the investors were interested, most asking specific questions about some aspect of the business or the raising itself. We compiled an FAQ in which we collated everyone’s questions, answered them, then distributed this to all the interested parties. The approach worked well; the investors could see that other parties were engaged, the questions they were asking, and get a detailed picture of the business as we saw it. Importantly, it sent everyone the clear message that this was a competitive deal.

The process was definitely a learning experience. Rather than engaging separately with each investor, doing telephone and Skype calls or meeting in person, Rod was driving a more managed, arms-length approach. It did not come naturally to me, but it worked.

The next step was to agree on terms with an investor or group of investors. Amongst the interested parties were traditional VC funds; Angel Investment groups; online travel companies looking to make a strategic investment; savvy and experienced high-net-worth individuals, and a few not so experienced individuals who figured they knew a good thing when they saw it. Choosing the right mix was going to be tough.

We soon got a term sheet from one of the VC funds. By then we had engaged a local lawyer, Darren Sommers, who had plenty of experience with this type of fundraising. Darren’s advice was simple: “If you have strong interest, and it looks like the round will be oversubscribed, you should ignore this term sheet and present your own to investors”. It was an attractive idea. It meant we wouldn’t be relying upon the market to set the terms; instead we would propose terms that were fair and reasonable for the founders and investors alike. We ran the idea past our other advisor, Bill, who told us we had nothing to lose and to go for it. 

A different approach

Darren produced a simple term sheet, with a single class of ordinary shares, that would make a follow-on Series A investment easier. Many of the things that VC funds regularly ask for were not included. But we needed to be careful not to be perceived as too arrogant, and end up with nothing, so this was a nervous time. On March 20th we sent the terms out to investors, asking them to indicate their “desire to participate (subject to due diligence), and at exactly what amount”. Twelve of our 17 investors responded positively, and before long we had around $1,000,000 penciled in. We were majorly oversubscribed, and forced to admit that Rod was right: now was the right time.

We were now in a tricky position, but it was a good problem to have. Bernie and I had done the maths and decided we could increase the round to $450,000 and still be happy with the amount of equity we would retain for future rounds. That still meant leaving many potential investors behind. We liked them all, and it was a tough decision. 

One party was a major Online Travel Agent, based in a key Asian market and keen to integrate our technology into their site. We couldn’t go past this opportunity. They were prepared to do the whole round themselves, but we were very keen to have local entrepreneurs Guy King & Bevan Clark — founders and former owners of RetailMeNot — as part of the round. They had built and sold their Melbourne-based web technology business; that was our goal as well, and we were excited at the prospect of having them as part of the rome2rio team. Ultimately we decided to do the entire round with these two groups.

I found the next few weeks personally challenging. While we negotiated the details of the shareholder agreement with our chosen investors, we were still not in a position to give a final “no” to the other potential investors. After all, until the deal was signed, there was technically no deal. Rod kept reminding me that “there’s many a slip ‘tween the cup and the lip”. And of course the agreement took longer to finalize than hoped, so things seemed to drag on forever. In the end, the key terms that we had crafted were left untouched, with the only negotiation around issues related to specifics on shareholder rights in future rounds of funding. To much relief, we successfully closed the deal last week.

Raising funds for your start-up is rarely enjoyable. But with Rod, Bill and Darren’s help I found it less stressful, more rewarding and ultimately successful. I also found that despite reports to the contrary, there is plenty of seed money available in Australia for web-based startups. It may be harder to come by, and may take longer to find, but with the right approach and an exciting investment opportunity you might just find more than you need. 

We’re now in a position to build a great company. In addition to bringing Rod on board, we will bolster our engineering team. We’ll have funds to travel to conferences and meet partners, as well as for outsourcing data entry to expand rome2rio’s repository of train, bus and ferry routes. Bernie and I have come a long way on our $21,000 in investment to date, and we are now set to take the business to the next level.