SPECIAL REPORT: Diagnosing Australia’s start-up disconnect

We have capital, we have talent, and we have ambition; so why isn't Australia an innovation hub? We put the question to three of the country’s leading start-ups.

It would be folly to try and replicate the success of Silicon Valley, but with an economy in a state of transition Australia should, at the very least, be trying to learn a few lessons from the spiritual home of tech start-ups.

We have capital, we have workers and we have an increasingly competitive dollar; if there was ever a time for Aussie entrepreneurs to shine, it’s now.

But the point is, they’re not.

Despite having everything at out fingertips Australia’s start-up scene continually laments the lack of funding and support in available in the country.

So, to get to the bottom of this disconnect, we put questions to Australia’s leading start-up companies to try and grapple what our start-up scene has, and more importantly, what it actually needs.

99designs: Australia isn’t short of capital, it’s short of big success stories

99designs is one of Australia’s major tech success stories. These days the bulk of their operations are in San Francisco, but their CEO, Patrick Llewellyn, remains infectiously positive about Australia’s potential.

“I’m really optimistic. Every time I come back there’s a new incubator and shared workspaces and new events,” Llewellyn says.

“At the grass roots there’s a lot of momentum, more and more students and engineers are starting to look at start-ups and being an entrepreneur as a career option.”

Llewellyn laments the lack of venture capital funding available in Australia.

 “We have a very shallow VC market in Australia. In Silicon Valley the funds are huge and they can place lots of bets, and this is vital,” Llewellyn says.

“We were doing this in the 90’s in Australia, but the biggest fund was still only $100 million. It makes it tough when you can only make say, 20 investments in a year, if only two or three succeed then it’s hard for everyone.”

Llewellyn thinks this initial lack of cash sabotaged our start-up scene from the get go. As a result of bold investing, and a wad of capital, the Valley produced some stellar success stories that today act as a beacon for drawing investment.

The funny thing is, Australia’s isn’t actually short of capital. Our superannuation funds are some of the biggest in the world, yet according to Llewellyn they are reluctant to commit to our local start-up scene as a result of being “almost too successful”.

“Institutional investors are so large that it’s hard for them to actually deploy money effectively in Australia,” he says.

“It becomes a management issue; they’re always going to look at places where they can put bigger chunks,”

“So these large Aussie institutions end up writing checks for VCs in Silicon Valley because they have the track record and the size and scale. We need to break this nexus; we need to prove there are opportunities in Australia,”

Though Llewellyn adds that this process may already be underway.

“We’re starting to see the next wave of companies really start to deliver on early investments,” he says.

“OzForex is a nice, recent success story; its delivered great returns to early investors but also for the later stage private equity guys,”

“It’s exciting to think about the potential of an Atlassian listing at some point, and Matt Barrie’s Freelancer IPO will be really telling.”

Freelancer: We can’t rely on the US to bridge the capital divide

Freelancer was born from the agglomeration of a number of start-ups and from this genesis Matt Barrie has built a global enterprise that has lofty aspirations.

Barrie’s company boasts revenue growth, profit and a huge customer base, but even the most successful start-ups still require capital for growth.

Last week they released a prospectus laying out their much-discussed IPO, Barrie goes against the grain as a proponent of this method of capital raising.

“If we can harness the ASX as an alternative route to liquidity or fund raising I think it would be fantastic,” he says.

“I think the public has a huge appetite for technology. You can take an early stage mining company to the ASX and the public will be happy to take a punt on a speculative, potentially high growth, resource investment. We should do the same thing for tech.”

Barrie has a steely determination to keep his business in Australia, which is one of the reasons why he is turning to the ASX for fund raising.  He contends that Silicon Valley and the US inadvertently engulf Australian start-ups seeking capital from it.

“You work your ass off and get your first million in revenue and then you go to a US VC for the big bucks,” he explains.

“So they say OK, we need an American CEO; the CEO then moves the office to the US, he sees the business is under capitalised so he raises $10-$20 million, he hires a US management and tops them up which dilutes the shareholder base,”

“So in a short space of time you have a fully US operation. If the CEO likes surfing he might come to Australia once or twice a year, but with the Aussie dollar above one US dollar it’s pretty damn expensive place to do business.”

“This process happens time and time again, it’s a terrible shame.”

Barrie’s analysis of the situation is nuanced and he stresses that the pressures facing start-ups will differ depending on their stage of development. 

“There’s a big gap, in early stage you’ve got your angel investors and your incubators. Everyone’s willing to give you $50 – $100 grand. And then if you’re late stage, with $20 million in revenue, it’s easy enough to get a fund to support you,” Barrie explains.

“But if you’re somewhere in the middle, and that’s where the most exciting ideas are, it’s really desolate."

Though, Barrie adds that things are starting to look up for start-ups.  New venture funds like Square Peg and BlackBird ventures are looking to cater to established start-ups in a funding limbo.

And putting an optimistic spin on the situation, Barrie argues that tough times have only made Aussie firms tougher.

“There’s great discipline, the toughness of the funding market here has built discipline,” he says.

“Aussie outfits are renowned for being lean and mean.”

GoCatch: Government needs to lead the way with reform

The guys behind GoCatch followed a simple formula; they recognised a gap in the market and then set about finding efficiencies using mobile technology.

Their taxi booking app has cut out the middle man in the cab business, and as you expect the push-back from the traditional players has been vehement.

GoCatch has taken this kick-back as encouragement, and is further buoyed by their early wins in courting angel investors.

However, co-founder Andrew Campbell explains, success was never a sure bet. As is so often the case with start-ups, GoCatch bootstrapped (or self-funded) their way through the early days.

It made them stronger, more agile, but that doesn’t mean they would have turned down a little assistance.

“The sector needs continued government support, State and Federal governments have been doing a good job in stimulating jobs in the sector but they could do a lot more,” Campbell says.

“You only need to compare the support they give to the energy and automotive sectors to see all the good work they are doing become insignificant.”

Campbell, and indeed all of the parties we spoke to, lamented the complexities surrounding the taxation of employee share schemes. In the US tax is paid when options payout, while Australian companies must pay tax when the option is issued.

“They have to tidy it up, to make it easier for startups to attract talent,” he says

“It wouldn’t be hard; there are plenty of people at PwC and others, which have been making useful and practical suggestions to the Federal government.”

“I’m sure they’ll so something pretty soon, I hope they do.”

The GoCatch story is being played-out in a whole range of industries from personal banking, to deliveries, to retail sales and health care. The efficiency gains are undeniable and as the legal status-quo and policy settings adapt; we will see markets disrupted at an unprecedented level.

“Australia has a huge and very real opportunity to participate in this wealth creation,” Campbell says.

“We don’t need much to do it, there’s plenty of capital in this country there’s plenty of money in super funds and the only other part that’s missing is government stimulation of the sector,” he says.

“The people are here, the innovation is here, all we need to do is stimulate it and connect it with capital and we’ll have some very exciting businesses emerge.”

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