If you’ve read other interviews from our Halo Effect series, you’ll have seen Kylie Frazer and Rachael Neumann’s names come up–a lot. Alan Jones told us how he admired Kylie’s ability to give care and attention to many relationships at once, and Rohit Bhargava said she’d helped him overcome imposter syndrome when he first started writing cheques. Matt Allen spoke about the importance of teaming up with people you trust, which is why he works with them. And Mike Langford shared how they helped him shape an angel education program at Google.
Between them, they’ve worked all angles of the startup experience as a founder, operator, advisor and investor. And after joining forces to start Flying Fox Ventures, they’ve built an impressive portfolio of over 50 companies, including Goterra, Heaps Normal, Zapid Hire, Mr Yum and Safewill.
It’s clear that Kylie and Rachael are mainstays of the startup ecosystem. Now, we get to share their insights and advice that combine deep founder empathy with a no-nonsense approach.
How did you both get started as angel investors?
Rachael [RN]: I started playing in the startup space in 2004 when I worked at a venture fund in San Francisco. From there, I moved into operator and advisor roles and was part of the high-growth journey at Eventbrite.
After I left Eventbrite, I found myself working with a bunch of startups, like Canva and Vend, to help them unlock growth. At first, I asked for equity instead of payment. Then I realised that if I really believed in my ability to help these companies experience growth, I should put my money where my mouth is and invest in them.
Kylie [KF]: I started my career as a corporate lawyer, running large-scale M&A and capital-raising transactions. People are quick to apologise for a career in law, but there was a lot I loved about it. Deals are fun. Selling your time: not as fun.
When I went on maternity leave, I founded a business that failed fast and spectacularly. I started another company, which was more successful, and started investing off the back of that.
Rachael, you founded Working Theory Angels. And Kylie, you started Eleanor Ventures. How did your early angel investing experiences lead you to setting up angel syndicates?
KF: After exiting my company, I was cashed up, looking to invest and had a hard time finding my people. This was back in 2017 when there wasn’t such a thing as a commercial syndicate, and the current platforms didn’t exist. I thought, I know some tricks from my lawyering days; I’m going to build the rigging. So, I built the structure for the commercial syndicate that became Eleanor Venture.
If I’m honest, I had no intention back then of growing it into a venture firm. I just wanted to invest with people I liked who could help me bring more firepower to the table to access the best deals. In return, I would do the deal monkeying because I have good deal monkey skills.
RN: When I started angel investing, a lot of folks from my non-startup life were coming to me and saying, “Hey, I know you’re investing in the startup space; how can I do it as well?”. I realised that we had all these people who weren’t in the startup world who had money and met the sophisticated investor requirement, but they didn’t know how to do it: they lacked confidence and competence and didn’t have access to deal flow.
I realised there was a whole market failure where many people with capital wanted to get access but couldn’t. That was the seed for Kylie and me to start innovating this model, noting there were problems with the syndicate model and problems with being an individual angel.
Kylie, tell us more about your deal monkeying skills.
KF: Ha! There is definitely some art in rightsizing your process for each deal. I’m very good at quickly honing in on potential deal breakers. Good deal monkey skills are more than just mechanics. It involves understanding the capital needs of a business and figuring out where value inflection points are.
When I started investing, I worked with investors who prided themselves on the length and complexity of their due diligence process. I was fresh off leading $10bn mergers for ASX-listed companies and thinking: if I can run a DD process for a $10bn merger in a week, why are they bragging about a due diligence process for a startup with nothing taking 3 months? I was confident I could rightsize those processes in a way that was both founder-friendly but got to the essence of the problem and wrapped a structure around that.
How did you come together to form Flying Fox Ventures?
RN: Working Theory Angels and Eleanor Ventures existed in public as two separate entities for about 12 months. During that time, Kylie and I worked together to ensure we had our co-founder relationship right. As we were building a new model that sat somewhere between a syndicate and a fund, we had to get the product-market fit right, too.
We built a strong value proposition for founders and investors by coming together. We have complementary skills; Kylie has the founder's experience and lawyering chops. I’ve got the product and operational experience from a high-growth startup. We have very different networks that we can bring together, giving us access to some of the best deals in Australia and New Zealand. And we’ve got a deep network to provide the capital to deploy.
What did that period of figuring out your co-founder fit look like?
RN: I went into it saying, "That's it, we're married." And Kylie was like, "We're going to build up to that." It's a beautiful parable about how we walk different paths, but trust that we'll arrive at the same place.
KF: It’s very uncool in venture to say you’re something of a pessimist. I’m not a pessimist, but I am a hyper-rationalist. Most businesses fail in the early stages because of a dysfunction in the co-founder relationship–I wasn’t going to make that mistake in our business. Just because Rachael and I had instant chemistry and on-paper complementary skills didn’t mean that would translate into a successful co-founder relationship. Thinking about it, I was far less intense when I was dating my husband.
RN: Kylie needed to build her way up to that trust level, so much so that, being the amazing lawyer she is, she tried to lawyer away a very intricate deal with me. And I said, "I'm going to say yes to everything because I know we're life partners. We're lobsters. This is it."
KF: I'm not someone who shies away from conflict, and it turns out, my dear Rachael isn't either. Conflict isn't a bad thing, but figuring out how we'd deal with conflict was a big one for me. We have different ways of moving through conflict, and we've had to develop new tools to do that together and find ways to fight fairly.
Any tips on managing conflict?
RN: One time, we were sparring over the phone and then over text, and it wasn't going well. So we started furiously typing it all out in a Google doc, and crossing out and writing new paragraphs allowed us to see the thought trails. We could pull out a line that was the problem and one that was the solution. It was all there in the doc, and we could see where the disconnect had occurred.
Venture isn’t a consensus sport. Outliers, by definition, can be polarising. If you don’t enjoy robust discussions or have the humility to change your view quickly, venture probably isn’t the right place for you.
What are some of the signs of a good or bad angel investor?
KF: The bad behaviour I often see is that angels aren't upfront about their cheque size. It doesn't matter what your cheque size is–but you don't get to have 3 meetings with a founder if you haven’t been upfront about being a $5k cheque.
We tell people in the first 90 seconds of meeting them what our cheque size is, and we think that should be industry standard.
RN: The really good angels out there open up their network to help the founder. They don't feel like they need to know all the answers. We often hear, "So and so gave me this advice". And I'll know the person–they're excellent. But they shouldn't be giving advice on that topic. Good angels know where their help starts and ends.
What’s your advice for aspiring angels?
RN: Don’t write one cheque unless you know how to write 10 cheques. One reason we ask investors early in their journey to come join our cohort is because we want to make sure they have a portfolio that is statistically likely to help them make money.
We’re always going to be playing in a high-risk, high-reward asset class, but only 1,2 or 3 investments means it’s statistically unlikely that you’ll make money–it would require lightning to strike at a pretty high rate.
We always say: take the zero off the size of that one cheque you were going to write and instead add it to the number of cheques you're going to write. The only problem with that is it's tough to write 10, 20 or 30 cheques, which is why when you get started as an angel investor, you might want to do it with Flying Fox in a cohort. Don’t be afraid to go at it alone–there is power in coming together!
What’s your due diligence process?
RN: One of our advantages at Flying Fox is that we have over 450 investors, over 100 founders and a network that extends beyond that. They form a beautiful community that can help with due diligence when we need it. At the stage we invest, we tend to focus more on understanding customer pain points and the founder’s “customer mindset”.
What are you looking for in a founding team? And how do you test for it when you’re meeting them?
KF: We’re always looking at their fit for each other and not just their fit for the problem they’re solving. How do they work together? How do they handle pressure?
We had a call with a founding team, and one of the founders was taking up too much air time, so I shushed him. He looked at me like I was crazy and said, "I don't think I've ever been shushed before!". His co-founders just laughed. Disrupting someone's flow can tell you a lot about them and the team dynamic.
RN: I hide under the label of being a straight-shooting New Yorker. I'm not afraid to ask direct questions. I'll say, "Hey, I hope I don't offend you with this question, but are you the right person to build this?".
The best founders are the ones that come back and say, that was a different and difficult first founder call, and that is why I want someone like you on my team because I want you to keep asking me those questions. When people get excited by our pressure point pressing, I can tell it will be a good fit.
KF: It's a matching process between founders and investors. But sometimes the default is to match to likeability. And you don't want to optimise for likeability.
One of the things I loved about the pandemic was all our meetings became Zoom meetings…and I saved a hundred bucks a week on coffee. It's hard not to focus on likeability and human factors in a face-to-face meeting. But when you're on a Zoom call, you don't spend as much time on that. I find it evens the playing field and takes out a lot of those biases.
What key questions do you want answered by founders pitching you for investment?
RN: There are 4 questions we want answered in our conversations with founders:
- What is the customer problem, and why does it matter? A founder's ability to clearly and succinctly articulate the customer problem helps us understand how deeply the founder knows the problem, not just their solution.
- Where does this problem sit in the overall total addressable market? We want to know if this is a large and growing problem that is so painful people are willing to pay for a solution.
- Why is this founder uniquely qualified to solve this large problem? And what is the solution they're thinking about right now? I say right now because we invest so early that the solution and product they come to us with at that point in time isn't the one that will make us money and save the world. We see it as a proxy for their product sensibilities, and they need to be really good at the iterative process of creating solutions.
- What is the special sauce or crazy differentiator that will make this highly likely to be successful? Is it because they have proprietary technology that didn't exist before? Or do they have a business model innovation they have just developed? Have consumer expectations or the regulatory environment shifted to give them tailwinds?
KF: It's also a bit uncool to talk about exits upfront, but we do. We’re thinking about potential exit pathways from the first meeting. While we are always looking for GP-generated liquidity (such as selling to a downstream investor), we also want to know that the founders are building the relationships needed for company-level liquidity events.
Would you say your investments sway toward a certain vertical or are you more agnostic?
KF: We are stage specialists, which we believe is necessary early on. It can be hard for funds to stay at seed; cheque sizes need to increase as fund size grows, which can push investors downstream. We’ve built Flying Fox in such a way so that our incentives and economics are optimised for early-stage.
One thing that our portfolio companies do have in common is a trend towards capital efficiency. Where a company has high capital needs, we tend to do those rounds with deep-pocketed co-investors or someone with deep sector experience.
An example would be our investment in Contactile, which makes robotic fingertip sensors. We were a small cheque in the round, led by True Ventures, one of the best specialist robotics investors in Silicon Valley. We knew that would be a good way to get our investors some exposure to the sector.
We're always thinking about how we can get exposure to segments of an industry that we like without having to buy all the humans, all the hardware and all the things.
RN: Portfolio theory is always important to us. Our cohort investors come to us with a set amount of money, and in exchange, they get at least a 10 deal portfolio handed back to them. So we're also looking at how this deal fits within the portfolio we're building. Is it de-risking the portfolio and getting the right distribution that we're looking for, for our investors?
What do you want to see from founders reaching out to you?
KF: That's easy–there's a spot on our website where they can upload their deck. Otherwise, they can email either of us [firstname.lastname@example.org or email@example.com].
We like to see a deck and an ask. Some say, "it's never too soon to talk to us. Come as soon as you've got your idea." It's never too early to reach out to us, but we want founders to come with an ask, not just for a chat. We're here to fund, not just have coffee.
What should founders expect of you post-investment?
KF: There's no one-size-fits-all. We're very good at staying in our swim lane and not over-promising and under-delivering.
We don't take board seats by design; a lot of startups at the early stages are over-governed. It's our role as early-stage investors to build trust. That means when something goes wrong, we'll be the first person they call to help them fix it. We don't need a board seat to do that.
We expect our founders to help each other. We are the only firm in Australia to have a carry share initiative for all our founders; 5% of mine and Rachael’s carry is reserved for our founders. We like the way this aligns incentives both to assist in the portfolio and also from a deal flow perspective. Founders will refer the best founders to the firm that gives them a slice of the economics.
What’s next for Flying Fox Ventures?
RN: We’re heading towards the first close of our ESVCLP fund. The fund is designed to invest alongside our cohorts and double down on the brightest spots within our portfolio.
Xailient’s platform for smart camera management is poised to turn their customer’s smart camera hardware into recurring revenue machines. Zapid Hire went from zero to $1m ARR in less than a year and have just landed in the US, where they are replicating this insane growth rate. Goterra is (not so quietly) saving the world one truckload of food waste at a time - securing new enterprise contracts each week. They plan to own 10% of the domestic market before too long. We’ve got a lot of heavy hitters already and we’re just getting started.
KF: That’s the thing about getting in early. We’ve known these companies for years. We have asymmetric information. We know how markets have evolved and how teams execute. And we’ve earned the right to double down on our early cheques. Staying power goes a long way in venture.