The Sydney Seed Fund had big plans to invest in up to 20 startups in three years, millions ready to go and hundreds of applications. But only three startups made the cut in the fund's first year.
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The fund announced their third investment, in customer sentiment software startup RateUs, on Tuesday and is understood to be in the final stages of discussions with two more.
The low number of investments is not due to a shortage of options. Fund partner Garry Visontay told Fairfax Media they have received more than 200 applications in the last 12 months.
"The success rate of investing in two to three per cent of companies seen is pretty standard," Mr Visontay said. "We're actually seeing lots of deal flow. Our fund is one of the few investment vehicles that's investing at a very early stage at the life of a startup."
The fund is run by Mr Visontay, Benjamin Chong and Ari Klinger, who decide which companies to invest $50,000 to $150,000 into for a minority shareholding. It requires each company to have at least two co-founders, global ambitions and a technology prototype developed.
The majority of applications were eliminated within minutes. Mr Visontay says most were marketplaces, social networks or ecommerce sites, and many of these were simply tweaks to existing services.
"Another issue is the ideas are just too niche, such as a social network for opera singers or an online store for cross dressers," Mr Visontay said.
Mr Visontay said the low rate was due to the fact they invested in business pre-revenue, so all he and the other fund founders had to be completely confident in the idea and team.
"Our standards are high, but not unusually so," Mr Visontay said. "We invest with only the team and prototype in place, which most investors won't do as it's just too risky."
Their first investment was Qwilr, a software that generates web pages for quotes and proposals, in August 2013. A second investment, into visual search engine for trademarks CeeQTM, was announced in April this year.
Qwilr chief executive Dylan Baskind said bringing the Sydney Seed Fund on board was a relatively lengthy process compared to signing up for accelerator programs that usually have set term sheets.
"Startups are in the zeitgeist now and there is a lot of noise but most investors are still serious business people and often need new companies to step up and get their acts together before putting any money behind them."
Mr Visontay said they launched the fund to fill a gap in Australia's pitted startup funding landscape.
A report by venture capital peak body AVCAL reveals seed capital grew by 103% to 13 million in 2013.
The surge in early stage capital was part of a boom period for the Australian startup sector; particularly at the early stages that are often dominated by accelerators in the battle for emerging businesses.
The Sydney-based Startmate accelerator program invested $50,000 in eight startups (for 7.5 per cent equity), and Melbourne-based AngelCube invested $20,000 in 10 companies (for 10 per cent equity).
