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Xero sum game: List early to avoid “blood-sucking” venture capitalists, Takor founder says – StartupSmart

Rob Drury knew he needed a “shit-tonne of cash” to get Xero off the ground, but he also wanted to maintain control.

 

The founder of the cloud-based accounting software company thought bringing on international venture capitalists would only lead to a quick sale.

 

“We probably could have raised money on the US west coast,” Drury said at Innovation Bay’s Melbourne launch on Tuesday night.

 

“But asking for $15 million, we’d maybe look at a valuation of $25 million, and I knew the business would end up getting sold quite quickly.”

 

So, Drury decided to reverse the process.

 

Xero went public and listed on the New Zealand stock exchange in 2007, with a $NZD15 million IPO. Shares grew by 15% after the first day. It listed on the ASX at the end of 2012, and went on to raise money from venture capital including US-based giant Accel Partners.

 

Going public instead of staying private

Last year an increasing number of startups chose to raise money by listing on the ASX, more commonly through the “backdoor” arguing it’s cheaper, quicker and less risky.

 

This week Communications Minister Malcolm Turnbull told the Australian’s Cracking the Code series that the ASX could be on the verge of playing a bigger role in funding emerging tech companies.

 

“I think one thing we don’t do a good enough job at, and I think the ASX can do better here, is promoting the stock exchange as a means of financing startups, or second, third round money for startups,” Turnbull said.

 

“Australians are much more used to investing in listed entities than in unlisted entities. So now that people are used to the tech sector, the ASX should be an opportunity for greater access to capital.”

 

If startups pursue that avenue, they’d be taking a page from Xero’s playbook.

 

“Our first IPO was $15 million, and then we’ve used strategic placements to bring in strategic investors and march up the value,” Drury says.

 

“You don’t have to do a VC round, and then private equity and some hedge funds, and then an IPO. We flipped it around. We did our IPO first and then added a hedge fund, and we just got venture capital. So we did it backwards.”

 

While Drury does believe Xero was unique in some respects, he says going public sooner is a viable option for many Australian startups.

 

“This is what public markets should be: people investing in risk to build businesses and getting capital in to build businesses,” he says.

 

“We have seen other early tech companies following what we’re doing.”

 

Following in Xero’s public footsteps

Perth-based geospatial company Takor Group is one startup that turned to the ASX for funding.

 

CEO Amir Farhand completed a backdoor listing last month after being acquired by biotech company Bone Medical, receiving a $300,000 loan and aiming to raise $3 million with the help of GMP.

 

Now he’s espousing the benefits of this style of public listing, rather than attempting to hunt down venture capital, arguing it adds credibility, creates a wide pool of public investors and grants automatic marketing.

 

The presence of shell companies, especially following the decline of the mining boom, has also presented an avenue for startups to quickly complete a backdoor listing, demonstrated by Takor’s success with this method.

 

Farhand says trying to attract venture capital funding would’ve taken too long, and this method has allowed him to retain control over more of the startup.

 

“The biggest reason is that venture capitalists are, for most intents and purposes, blood-sucking,” Farhand says.

 

“They take most of it. Your first raise is the most expensive raise you’ll ever do; they’ll take most of your percentage quickly.”

 

Becoming a public company inherently grants exposure and reduces the costs of marketing, he says.

 

“Our product is all about democracy and disruption and you really can’t do that in a private setting,” he says.

 

“You want to get people to know more about you. What’s a better way for people to talk about your company than saying, ‘Hey, I just bought shares in Takor’? That in itself is a marketing opportunity.”

 

The virtues of private capital

Not all Australian entrepreneurs are convinced by the trend just yet though.

 

Dominic Bressan, the CEO of emerging mobile ordering startup AirService, says that while he came very close to going down the ASX route, venture capital was still the right way for them.

 

“It made sense to do a private VC round and enjoy the flexibility and privacy rather than having huge compliance costs and full transparency,” Bressan says.

 

“We looked pretty closely at the possibility of a backdoor listing. There’s a lot of that happening and a lot of great companies doing it, but there are also a lot doing it as a last resort after they couldn’t raise private capital.”

 

The main downsides with the ASX method, Bressan says, are the disclosure that comes with it and an early exposure to the whims of the market.

 

“You need full transparency, so then competitors can know what’s going on, and there are a lot of compliance costs,” he says.

“As a public company, if things go against you, you can lose out. If the market turns and you’re not performing, there’s nowhere to go. It’s really hard to go private again after going public.”

 

Bressan admits that raising private funding can take a lot of time and effort, but if you do it with the right people, can ultimately be very rewarding.

 

“It’s more than just money, it’s the skill sets and new clients, and you get to keep a lot of your workflow,” he says.

 

But Farhand says private equity funding can be just as risky, if not more so, than a public listing.

 

“Private equity is very unforgiving – how do you know you’re getting someone that’s going to take you out for lunch?” he says. “It’s not a bad thing necessarily, but what if that person isn’t that great?

 

“With private equity you leave yourself open to that happening if shit hits the fan.

 

“For a publicly listed company if share prices aren’t going well you put out another offer, you dilute.”

 

For Xero’s Drury, whichever method a new startup takes to raise capital, it all comes down to one simple rule.

 

“The best way to raise money is to not need it,” he says.

 

Raising your first round of capital? Starting a crowdfunding campaign? Want to grow your business with Instagram? StartupSmart School can help.

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