Every start-up in Australia is seemingly chasing its Hollywood moment but the cold, hard truth is that for most the dream of making it big in Silicon Valley is going to go unfulfilled. So far you can count the number of Aussie winners in Silicon Valley on one hand and for every Atlassian there are another ten that end up as small fish in a big, big sea.
Surprisingly, the grim prospect of being ripped to shreds by Silicon Valley sharks isn’t quite the inhibitor that you would imagine. The healthy venture capital market in the US is happy to back Australian talent but there is a catch. Jumping on the US VC bus is easy but a start-up can soon find itself mired in a lengthy process that leads nowhere. It’s hard to imagine that there are a lot of outfits out there that are equipped to deal with that or have the capacity to put a corporate advisor, on a hefty retainer, to guide them through the process.
So is this focus on North America misdirected and actually counterproductive? Is Silicon Valley the only promised land for our entrepreneur or should they be looking closer to home?
Tech ambitions in the Asia Pacfic
According to Willie Pang, CEO at Asia Pacific sales specialist ViDM Group and a former managing director of Yahoo! Search Marketing, local start-ups should be looking at markets in Asia. Markets, which promise faster growth, bigger valuations and more capital for those willing to put in the effort.
And it is a bit of effort because the investment community in Asia doesn’t necessarily understand the Aussie way of doing things. However, what they do recognise is our tech smarts, and you only need to look at the number of Aussie executives at the helm of the Asian units of major digital and online businesses in the region to see how much that is valued.
The Asia-Pacific market is primed for a once in a lifetime tech boom thanks to the explosive population growth, rapid digital adoption, and increasing levels of disposable income. According to Forrester, Asia will include almost half of the world’s online population and online retail spend in China is tipped to cross the $US356.1 billion by 2016.
“There is a generational opportunity in China right now where the valuation of companies is four, five, and ten times that of Silicon Valley companies. There is enormous money floating around because of the economy is rolling forward,” says Pang.
“What you see is that capital from all around the world is moving into Asia, the likes of Tiger Capital Partners, Accel Partners are looking at the market because they want to make the most of this opportunity.”
This is a capital market opportunity that Australian start-ups need to recognise and it just might be the ticket a lot of outfits need to move higher up the maturity curve.
The interesting thing about the local start-up scene is that there is actually a thriving angel investor community in Australia which is keen to provide seed funding.
“You don’t need to go to the US to get a $200,000 cheque to get your business off the ground, there are plenty of sources here and there is more to come,” Pang says.
Taking the next steps
Things get complicated once they cross the proof of concept. Making the transition from an early-stage business to a medium-sized one is a real challenge.
"The sweet spot for angel investors is the $1 million-$2 million range and guys like Macquarie and Pacific Equity won’t touch anything under $20 million,” Pang says.
For a start-up that has proven its model and needs funding to take the next step can be left pretty lonely in the local capital market space. It’s neither cheap nor a safe bet and it can pretty much forget about a Macquarie taking a punt on it.
So who backs these outfits? Well, Tiger Global does, Accel Partners does, and Pang is confident that Asian money will as well.
“Asians like taking bets and the challenge for a lot of start-ups is to connect with the investment communities in Hong Kong, Mumbai and Singapore,” Pang says.
There is some evidence that Pang’s confidence isn’t misplaced. Singapore has been steadily developing a reputation of a venture capital hub and the city’s main telco operator has its sights set on Australia.
The telco, which is the owner of Optus, has had a venture capital fund in place for a couple of years and a couple of weeks ago launched its latest Australian start up venture, the Optus Innov8 Seed fund.
The fund is designed provide start-ups with $250,000 worth of seed funding and access to mentoring and networking in a bid to give local start-ups a chance to grow their business. It has also forged partnerships with start-up accelerators, Fishburners in Sydney and York Butter Factory in Melbourne to provide collaborative working spaces.
SingTel's imperative is clear. Why spend money acquiring successful start-ups, that have managed to move up the value chain, when you can nurture them from the very beginning and add them to the flock.
Still an aversion to Asia
Tapping the Asian markets can be daunting. Start-ups go to Silicon Valley because they can get a quick visa, jump on a plane and talk to somebody. It’s not quite that simple if a business is hoping to engage with Chinese investors.
The fear of the unknown may drive the pensiveness in the start-up community but there is help out there. For example, Austrade provides an interpreter service for start-ups and help create a schedule to provide access to prospective investors and customers. Countries like Japan, South Korea have government-supported organisations which provide information on trade fairs, procedures, market reports and other business resources to assist start-ups. The governments in Singapore and Malaysia are heavily active with tax incentives to attract start-ups.
Sooner or later Australia will have to recognise that the Asian economic equation has more to offer than just resources. There are inherent limitations in the Australian market, especially when it comes to access to funding, and Pang warns that the Asian window won’t stay open forever.
The allure of Silicon Valley is hard to erase but perhaps it’s time start-ups stopped pining for their Hollywood moment and grab the opportunity that exists in Asia. If we don’t do it now, there is a good chance that Silicon Valley will beat us to the punch on the road to Asian riches.