Doubling down on portfolio winners: Why Flying Fox Ventures is growing its early-stage remit

Melbourne-based venture capital (VC) firm Flying Fox Ventures is seeking $20 million to launch a new fund to bolster its support of early-stage Australian startups, and its founding partner Rachael Neumann is confident it will hit that target before the raise closes in three months’ time.  

Founded in 2021 by Neumann and Kylie Frazer, Flying Fox Ventures has deployed roughly $30 million in capital into 55 portfolio companies under a rolling fund model that has allowed 450 investors-plus to chip into companies such as Butter Insurance, Josef and Mr Yum.

The VC is staying true to its roots, with the new fixed fund to be deployed alongside its rolling fund over the next three to four years, with plans to collectively back between 30 to 40 early-stage startups.

Speaking with Business News Australia, Neumann claims the VC will be the first in Australia to have both models working together side-by-side.

“We are going to continue to have rolling funds on an annual basis, but when we listened to our customers - who are investors - and our founders, we realised that it was time to add another product to the Flying Fox ecosystem and that is a fund that has a bigger chunk of capital that folks can invest in over a longer period of time,” she says.

“One of the benefits of this fund is that 40 per cent of the capital will be reserved for follow on [investments]. It not only can double down on the portfolio winners that come out of these recent cohorts, but also it can write follow-on cheques into any company in our portfolio.”

“This gives us the opportunity to write up to three cheques per company, probably up to the Series B stage. We are always going to look to have our point of entry in the pre-seed or seed. We will grow with them up to a certain point, but we are early-stage specialists and that's where we're going to stay.”

Neumann notes the new fund will be backed by a mix of newcomers, who are some of the leading investors and family offices in Australia, and investors the VC has worked with over the last two years.

“We feel really confident that we will be hitting our first close before June 30,” Neumann says.

According to the firm, 45 per cent of its portfolio companies have gone on to raise a subsequent round at market valuation, while almost half have generated more than $1 million in annual recurring revenue (ARR) – a milestone that indicates a startup has escaped the ‘valley of death’.

To try and avoid seeing its portfolio companies collapse, Neumann notes the VC assesses whether the business is spending cash wisely from the get-go.

“We look for capital efficiency upfront. It means that we believe that they'll be able to achieve some of these big inflection points in terms of growth with as little capital as possible,” she says.

“In macro-economic conditions where downstream funding is less readily available, or where expectations and milestones are much higher, it means that it can do more with less and it's more likely that they're going to hit those milestones before they run out of money.

“Because that's really what it comes down to - Can I get to the next milestone that unlocks a tranche of capital before I run out of money and die? When you're capital efficient, it's more likely that you'll be able to buy yourself the time and space to be able to get there.”

While there has been news of redundancies, particularly in the tech sector as giants like Atlassian cut its workforce, Neumann is optimistic about the opportunities for startups focused on human resources, recruitment or upskilling.

She notes companies such as managerial skills accelerator program The Mintable, which the VC backed in a $6.9 million raise nine months ago, are able to provide value to clients whether the market is on a hiring blitz or scaling down operations.

Other startups in the space supported by Flying Fox include video hiring platform Zapid Hire and most recently Mercu, a communication operating system that onboards the deskless workforce.

“The pandemic fundamentally changed the way we work and we think that was just an accelerant to what was inevitable - whether that's around distributed workforces, investing into culture and diversity, management skills [or] identifying that there's a huge community of talent that sits beyond the desk,” Neumann says.

“We have to think about what is the use case when the supply of talent is abundant and when the supply of talent is scarce. Those three [companies] operate really well in both scenarios. We're seeing it play out in real life…their product and service is providing a ton of value,” she says.

She notes the VC carefully considered how the new fund would be structured, as the bigger it becomes, the more challenging it can be to deploy capital effectively.

“VC incentives pull people out of the early-stage because the way firms usually operate is they need fees in order to provide an operating budget, fees are based on funds under management and so they're incentivised to raise larger and larger funds,” Neumann explains.

“Once they have that capital, they need to get it out the door and that comes in the form of writing bigger cheques. That either means they need to go later stage, or if they do want to go early, they're at really big valuations.

“Sometimes we see that from some of the larger firms who still want to remain early - they're writing real big cheques at really big valuations. We'll see if those end up playing out.”

As the VC looks to secure fresh capital, it has also promoted Bree Kirkham to general partner.

“Bree came to us with deep experience having grown and scaled companies internationally, including Airbnb, Uber and ClassPass and we just knew we wanted that operational experience on our team,” Neumann says.

“She assesses companies and can look through the lens of what it takes for those companies to be able to successfully scale overseas, and [can] service our portfolio companies who are looking to do that, providing her expertise and guidance on helping them enter those new markets.

“You'll see as we add to the Flying Fox team, which will be few and far between, that they will tend to be senior seasoned leaders who can have an impact from day dot and really lean in with our founders.”