Design marketplace Redbubble has raised $15.5 million to fund its European expansion and further product development. The funding round was led by Melbourne-based Acorn Capital, and London-based specialist marketplace investor Piton Capital. They join existing high net worth investors Simon Baker, Michael Birch, Stan Chudnovsky, Su-Ming Wong and Simon Yencken. The valuation was not disclosed. Greg Lockwood, a partner at Piton Capital, intends to join the company’s board of directors. Redbubble founder and chief executive officer Martin Hosking says in addition to supporting the startup’s geographic and product expansions, it will also be used to continue to develop its relationship with designers. Hosking says Redbubble’s pitch to investors was it’s catering to a fundamental change in the types of products that appeal to consumers. “Consumers are looking for things more relevant, more personal, more creative. That trend is across so many of the things consumers are buying,” he says. “It’s something you see with beer companies. They’re struggling to grow strong brands because they no longer have weight with consumers. It’s a bit of a truism, but millennials are more likely to have a tattoo than they are to drink VB beer. “The trend is towards much more personalised products, and that means the market is simply enormous. When Coca-Cola is releasing cans with people’s names on it, you know people are trying to adapt to that trend. It’s transforming industries.” Redbubble currently hosts 14 million unique images that can be printed on a number of lifestyle products, including apparel, homewares, fashion and technology accessories, and wall art. It’s on track for over $100 million in sales for 2015. Last year more than 1.2 million customers shopped on RedBubble and over 60,000 artists made sales. Since launching in 2007, artists have been paid $30 million through its marketplace. It’s been a big year for Australian design marketplaces. Earlier this month Canva raised $US6 million from Matrix Partners, Shasta Ventures, Blackbird Ventures and AirTree Ventures. In April, 99designs closed a $US10 million Series B round led by Recruit Strategic Partners. In February, DesignCrowd raised $US6 million in Series B funding from AirTree Ventures and Starfish Ventures. Do you know more on this story or have a tip of your own? Raising capital or launching a startup? Let us know. Follow StartupSmart on Facebook, Twitter, and LinkedIn.
Startups and VCs welcome budget measures but concerned about government’s “overall strategy” for startups5:45AM | Wednesday, 13 May
Startups and venture capitalists have welcomed the Abbott government’s push to reform employee share schemes and implement a crowdfunding equity scheme, but are worried the federal budget lumps startups and small businesses under the same banner. John Dyson, founder and investment principal at Starfish Ventures, told StartupSmart it was good to hear Joe Hockey mention startups in his budget speech. However, he is concerned that government has once again assumed startups are similar to small business. “I think there is definitely a disconnect between small business and the types of innovative companies we support – there’s no question about that,” he says. “The government does put them in the same basket in my mind. But they have different needs and hot buttons and priorities. You’re doing an absolute disservice to both sectors if you try to treat them the same, because what will stimulate one sector won’t stimulate the other.” Dyson says the changes to the employee share schemes and introducing a crowdsourced equity funding scheme will support the startup ecosystem, but more detail needs to come to light before startups will know how it will benefit them exactly. “Until you see the details it’s hard to understand what type of impact or benefit it’s going to have on the innovation ecosystem,” he says. “We’ve got a situation at the moment where there’s lots of money for early stage opportunities and there’s also angel-investing incubators and accelerators. The biggest gap in the market at the moment is companies that want to raise two to ten million dollars and I’m not convinced equity crowdfunding is going to fill that gap. Starting the company is the easy part – the hard part is making those companies grow and making them globally relevant.” However, Scott Treatt, a partner at accounting and business advisory firm Pitcher Partners, told StartupSmart in general startups would “not be unhappy” with the budget and points to a range of positive measures the government is introducing. “Startups are predominately cash-strapped at times, so many of the measures that are coming in for small business – such as the reduction in tax rates – don’t always provide immediate benefits,” he says. “But the key benefit I see for startups is the push to get the employee share scheme options. It’s absolutely critical for startups to be able to retain and attract key talent to facilitate the development of new technologies.” The Abbott government’s budget was not all good news for startups, with a $27 million cut to the Entrepreneurs Infrastructure Program over five years. Treatt says while the government is working in a frugal budgetary environment, all governments – no matter which party is in power – need to do more to instil confidence in the greater economy by investing in innovation and education. “I think it will be next year when we start to see more policy and direction coming from both sides of government as we move closer to the election,” he says. “That’s what’s going to give business a whole lot of confidence to facilitate large businesses being able to invest in smaller businesses and invest in other skills to get the economy moving.” StartupAus – the peak body for Australian startups – agrees. While board member Professor Jana Matthews says the government is beginning to recognise tech companies are the future of the Australian economy, she argues that an “overall strategy” is missing. “We need to give people the skills and knowledge they need, both in science, technology, engineering and maths so that they can build tech startups, and also entrepreneurship so they can turn those startups into high-growth businesses that will create jobs,” she says. “Beyond skills, we need government leadership and tangible support for tech entrepreneurs and investors to drive the startup ecosystem.” Do you know more on this story or have a tip of your own? Raising capital or launching a startup? Let us know. Follow StartupSmart on Facebook, Twitter, and LinkedIn.
Sam Chandler says the growing Australian ecosystem has made a night and day difference to launching a tech company, nearly a decade after he founded Nitro in May 2005. “It was a very different time back then. There were no accelerators or incubators. There were a couple of VCs, but they were mostly fully-invested and they didn’t have new funds that were actively investing. There were nowhere near the number of seed or angel stage investors. There weren’t any angel investment groups, meetups and things that are happening today,” Chandler says. “So it was a far less rich ecosystem and it was a key part of the reason why we initially just raised a small amount of money and it was at the end of that second year that we raised a million dollars from angels, led by Andy Barlow, who was one of the cofounders of HitWise. It was only through Andy’s network that we raised that first million dollars because we didn’t really have any other options. “It wasn’t as if we could just go into an accelerator or incubator, there weren’t any real seed stage funds in the market. We probably were too early – and probably not credible enough, given we were in our early 20s – to raise from a VC if they had a chequebook at the time.” Chandler says Nitro sold services in its first year or two of operation to pay to get the new business off the ground. “We focused on being profitable from day one – or at least cash flow positive – so not really making a lot of money but being able to pay the bills. We were profitable and were making revenue from day one. So we had our first sale of Nitro Pro happen 45 minutes after we went live, so we knew we were on to something from literally the first hour and from there we had to carefully manage cash flow. “We’ve basically built the business for the past 10 years on cash flow because, up until Q4 of last year, we had not raised more than a total of $7.5 million. “We raised $1 million in seed in January 2007, and then we raised a total of about $6.5 million from Starfish Ventures in 2012-13, and it was only a few months ago that we did our first really big round of $15 million that we raised from Battery Ventures.” According to Chandler, even more important than the emergence of more sophisticated capital markets has been the increase in support available to entrepreneurs. “The other key thing that has changed is that if you need help, with all stages of founding a startup and certainly the early stages, you’ve got resources. You’ve [now] got other entrepreneurs who have experience building businesses, you have meetups, you’ve got this great network, and none of that existed in 2005 when we launched. “Today you could go out and find people who are doing very similar things, and you can get very explicit advice. Whereas, when I was starting out, I was looking for people who were just ‘successful in business’, and while I had a couple of people who I consider to be mentors, neither had any technology experience. “When I think about what I really needed at that time, it was advice about how to hire a good CFO. But what does a good CFO look like? If you haven’t been a CFO, and you’ve never worked with a CFO, how do you know the difference between a good CFO, a great CFO and a terrible CFO?” With the 2014 Startup Muster survey showing just 5% of startup founders were aged 20-24 and just 1% under 20, Chandler says age is no barrier to starting up a company such as Nitro. “I think anyone can do it if they’ve got the right inclination. Startups aren’t for everyone. You need to be fairly comfortable with being your own boss and everything that goes along with that because it can be a poison chalice. But if you want to start a business, you can do it at any age if you’ve got the passion, the determination and the temperament. “And if you’re young and you’ve got the best combination of attributes, the best thing you can do is to find a number of good mentors and listen to them. You don’t always have to do what your mentor says, but you have to think seriously about it. A lot about startups is counter-intuitive, and the only way to learn that what seems to be the right thing is wrong is to do it, see it fail, and then learn from that failure.” Check back for part two of this interview, where Sam Chandler discusses his lessons from moving to Silicon Valley, and where the company is headed next. Follow StartupSmart on Facebook, Twitter, and LinkedIn. Buy tickets to the 2015 StartupSmart Awards.
Australian bug tracker startup BugHerd has raised $1 million in Series A funding, part of which will be used to roll out a more robust and powerful version of its task management system called Stack. BugHerd provides web developers and designers a way of managing website development issues quickly and easily. It is a graduate of Australian startup incubator Startmate and Silicon Valley-based 500 Startups. It has over 50,000 users worldwide and 1000 new business customers joining every month. Some of the world’s largest digital agencies are among its users including JWT, DDB, Publicis and BBDO. The bulk of the funding comes from Australia-based Tank Stream Ventures and Starfish Ventures, in conjunction with 500 Startups. BugHerd co-founders Alan Downie and Matt Milosavljevic say the funds allow the company to accelerate its growth plans with a focus on delivering visual, client-focused tools for digital and creative agencies. “There are plenty of bug trackers and project management tools out there, but they tend to put a focus solely on the development team, forgetting that there are other people involved in the project,” Downie says. “This is a dilemma we can solve. “As product development timelines shrink and design becomes mission-critical, regular feedback from stakeholders and clients using tools like BugHerd can make thousands of dollars difference to a project’s budget.” Tank Stream Ventures investment manager Rui Rodrigues says BugHerd’s high growth was one of the attributes that made it an appealing investment. “Software is present more than ever in today’s world and BugHerd has an ambitious vision to transform the way businesses develop online projects in a collaborative way,” he says. “TSV has a strong focus on software-as-a-service businesses and we’re thrilled to be working with BugHerd team, who we believe have managed to build significant traction and are well placed to execute on that vision.” Starfish Ventures investment director Anthony Glenning agreed that BugHerd’s high growth was attractive. “Starfish is delighted with BugHerd’s growth to date,” he says. “The expanded product offering envisioned is set to continue that high growth trajectory. Starfish is excited to participate again in helping BugHerd achieve its goals.” Follow StartupSmart on Facebook, Twitter, and LinkedIn.
DesignCrowd seeks to differentiate itself from traditional graphics design studios as its international growth continues8:29PM | Tuesday, 12 August
Australian crowdsourced marketplace DesignCrowd has set $100 million a year in gross revenues as its next major target, according to chief executive officer Alec Lynch. Lynch told Private Media he sees traditional design studios, rather than online competitors (such as Canva or 99Designs), as his main rivals. “Design is a $4 billion industry that’s highly fragmented, with thousands of traditional studios. So our main focus is differentiating ourselves from traditional studios,” Lynch says. The business began in 2007 when Lynch, then a 23-year-old consultant for Booz & Co, saw an opportunity to disrupt the design industry. “I was working as a strategic consultant and I could see the design industry had problems,” Lynch says. “For people buying designs, it was expensive, slow and risky. And for designers, you needed a portfolio to get a job and a job to get a portfolio. So there were 20,000 designers employed – and 60,000 graduates.” Lynch says there have been three key phases the business has gone through since starting. “We bootstrapped for the first two years, then in 2009 we got a seed investment of $300,000. That angel investment allowed us to grow 13-fold,” he says. “Then, in late 2011, we raised $3 million from Starfish Ventures and we’ve used that funding to scale internationally, increasing our revenue six-fold and go from employing three people to 30,” he says. In November of last year, the business raised a further $3 million from Starfish Ventures, with the aim of launching teams in the United States. The company’s expansion continued in June, when it acquired design and photo site Worth1000, having previously purchased Texas-based company Brandstack in 2011. Over the past year, the company has grown by 83%, and now boasts over 400,000 designers from more than 165 countries. The strong growth led EY to name Lynch its 2014 Emerging Entrepreneur of the Year for the Eastern Region. “Primarily [the most recent funding] helped us scale internationally. Australia used to be our strongest market. Today, 75% of our revenues are from overseas and 40% are from the United States,” Lynch says. “We see huge opportunities to scale further, from $15 million to $100 million or $200 million in gross revenues. That’s total revenues and sales, include what gets redistributed to the designers.” Follow StartupSmart on Facebook, Twitter, and LinkedIn
Reform of Australia’s employee share scheme laws could potentially boost the economy by $1.4 billion in the long run, according to a report by Employee Ownership Australia and New Zealand (EOA). The EOA chair and Link Market Services global head of EPS, Angela Perry, says the Employee Share Schemes – Their Importance to the Economy report presents a strong case for a reversal of the 2009 Employee Share Scheme laws. Currently employees are taxed when they receive share options from their company, rather than when they are sold or become full shares. The report’s key findings are as follows: The amount of money subject to income tax under the employee share plans has halved since the 2009 changes. Reversal of those changes could increase tax revenue by over $215 million per year. If option plan taxing returns to the pre 2009 position then there is potential to increase plan usage by over 200% and increase annual taxable income by over $131 million. With reform, salary sacrifice plans are likely to increase immediately by 10%, impacting 40,000 employees and increasing the amount of savings per employee to $5000. The findings add to an already considerable pile of evidence of the benefits of reform, supporting what could now be considered a near universal view of those in the startup industry. “We weren’t surprised by the findings, but we felt it was important to get the facts and figures out there,” Perry says. “While most people in the startup industry would anecdotally agree with the evidence, with thought it was necessary to provide evidence in support, with distinct and reliable information.” The study examined anonymous client data from Australia’s two key share plan administrators, who together combine for between roughly 80% and 90% of the market. Among those who have spoken out in favour of employee share option scheme reform are Australian Private Equity and Venture Capital Association chief executive Yasser El-Ansary, RetailMeNot founder Guy King, Blue Chilli’s Alan Jones, Shoes of Prey co-founder Michael Fox, Starfish Ventures’ John Dyson, Deloitte, the Institute of Public Accountants, and federal Minister for Communications Malcolm Turnbull. However, even with the support of a prominent cabinet minister the government has been slow to act on the issue. A review into employee share scheme laws, which was started under the former Labor government late last year, was due to report to the Department of Treasury in December. However, it appears to have stalled during the change of government, before consultation was reopened by the Coalition government in January. That consultation period closed on February 7 and in late May the department said issues raised regarding share option scheme laws were now being considered as part of the Prime Minister’s Taskforce which was established to develop a National Industry Investment and Competitiveness Agenda, which was due to make its recommendations to government by “mid 2014”. StartupSmart asked the government when it expects to release its findings from the review and had not received a response at time of publication. Perry was optimistic reform would eventually occur. “We will be sending this to our contacts within the government,” she says. “(Liberal MP) Tony Smith has always been a supporter, and we’ll be putting forward a case based on reversing those 2009 changes.”
It took 10 years of running his email startup as a lifestyle business before Ben Duncan decided he was ready take his business to the next level, raising millions in external capital and replacing himself as CEO. Duncan had launched AtMail in 1998, when he was 17 and working in a mate’s web-hosting business. He’d been tasked with creating an email system, built one and liked it so much he chucked it up on a few Linux software forums and watched it take off. As people began to download and use the email system software, Duncan’s hunch it could be a business took hold. They signed on their first major client, Xerox, in 1999. Bootstrapped and profitable since the first year, the team grew to 15 and was bringing in revenue of over $2 million each year. “We knew we were onto something, and we realised running it as a lifestyle business wouldn’t take us to the next level. But we felt that we were just scratching the service,” Duncan told StartupSmart. “A lot of our competitors had raised a lot of money and had a lot of success, and we decided we were ready for that too.” After raising $2 million from Melbourne-based venture capital fund Starfish Ventures, Duncan had some hard decisions to make. The team grew to 30 and Duncan realised he didn’t have the skills a rapidly growing business needs in a chief executive. Six months after taking investment, Duncan stood aside as CEO and appointed his COO, Zach Johnson, to take the reins. “There are lots of emotions involved in stepping down as CEO, but I needed to hand over the baton,” Duncan says. “When you’re the founder CEO for a long time, you’re so tied to the business. If you’re not reaching the full potential you’ve got to ask some big questions and get the right people on board to catapult it.” Duncan took on the role as CTO, looking after the tech and product teams. He says while it’s early days in the new roles, they’re both learning a lot and dealing with the inevitable challenges as they come up. The Atmail team is now ready to vie for world dominance, something Duncan says the team has been raring to do. They’ve just signed their biggest ever deal with an American telco and yesterday received a purchase order from KDDI, Japan’s second largest telco. Locally, eight of the ten largest ISP companies and several of the major telcos use the software but the company is looking internationally and hoping to set up offices in Japan and the US later this year. Duncan adds they’re on track to bring in $4 million this year, with a goal to grow the business to $50 million in the next five.
Australia’s lack of serious venture capital was thrown in the spotlight last week with a public exchange between Nitro chief executive Sam Chandler and Blue Chilli chief executive Sebastien Eckersley-Maslin, sparking an invitation to discuss the issue from Minster for Communications Malcolm Turnbull. Thanks for the support @TurnbullMalcolm! Since writing that @smh article, @nitrosam and I have connected and we're meeting to discuss— Seb Eckersley-Maslin (@sebeckmas) March 17, 2014 It’s an issue that has continually plagued Australia’s fledgling startup community, despite huge industry growth over the past couple of years. The discussion comes at a time when rumours of a significant fund out of Sydney (said to be up to $50 million) are making the rounds in the community. Chandler argued in a column for the Sydney Morning Herald that Australia's innovation funding environment is “akin to having a great primary school system but no secondary schools or universities”. He called for government, in partnership with the private sector – specifically the superannuation industry – to do more. He points out smart founders with a good idea can probably raise a few hundred thousand dollars in seed capital to get off the ground, but when looking to raise a Series A at around $5 million, companies don’t have much choice. Raises for Series B and C just don’t exist locally. It was this reason, along with desire to be at “the centre of the technology universe”, which saw Chandler move his company Nitro to Silicon Valley in 2009. In the end he was lucky enough to be backed by an Australian VC, Starfish Ventures, but he says this doesn’t happen often enough. In a follow up piece in the SMH, Eckersley-Maslin agreed with Chandler that there is still a lack of bigger funds in Australia, but believes that the VC industry can be built from the ground up with successful entrepreneurs returning to invest in Australian startups. Eckersley-Maslin says things were different when Nitro was established, but given the growth in the industry, Australia is only now ready to add the next layer of investment. “A $30 million Australian venture fund cannot put $5 million into a $25 million Series B round very often, and to participate in $100 million rounds or greater we have much more work to do,” Eckersley-Maslin says. “But you build an ecosystem from the bottom, not the top.” Blue Chilli chief growth hacker Alan Jones will be part of a group, who along with Eckersley-Maslin, plan to meet with Turnbull to push the issue further and gain support from industry super funds. “We need to convince these guys to invest in Australian startups and better understand the industry,” Jones said. Jones said while he disagreed with Chandler that Series A was not possible in Australia, there was definitely a lot that needs to be done with Series B and C raises. He was hopeful that Turnbull could help them tap into this market.
A Melbourne club for entrepreneurs is hosting its first “reverse pitching” night, where six start-up investors will pitch to a room of entrepreneurs. Scale Investments chief executive Laura McKenzie, Square Peg Capital partner Gavin Appel, Rampersand managing director Paul Naphtali, Melbourne Angels president Jordan Green, Starfish Ventures investment director Tony Glenning and IFM Investors Investment director Gareth Adams will be presenting on the night. Each investor will speak for three to five minutes, followed by an hour-long question and answer session. Churchill Club chairman Brendan Lewis told StartupSmart the event was designed so start-ups know exactly what investors are looking for. “We’ve run events for VCs before and one of the things that pisses me off is when you ask them what they’re looking for, they’re vague, but also very quick to say no,” Lewis says. In their pitch, the investors will outline what exactly a good team looks like, a good business opportunity looks like, what level of validation they want to see, what kind of pitch they want to hear and when they want to hear from start-ups in their development. “All of them, every single investor I know in the tech space has suggested there is a dearth of good deals. There are lots of deals, but no great ones. So I reckon the onus is on them now to be specific about what you want and what a good deal is,” Lewis says. They’ll also explain what they prefer to see their funds spend on, and why start-ups should take their money. Lewis adds he was delighted that every investor they approached said yes after mulling the idea over. “We want people to recognise everyone else is being specific, maybe they’ll all be a bit more honest and direct,” he says. He adds this will be increasingly important for local funds as international funds look to Australian start-ups for good deals. The event is on February 20 at the Leveson Hotel in North Melbourne.
DesignCrowd, an online marketplace for graphic design, has raised $3 million from Starfish Ventures. The funds will go towards setting up offices and launching teams in the United States in early 2014, and the United Kingdom and Canada in late 2014. Co-founder and chief executive Alec Lynch is also exploring markets in Europe, South America and Asia, and says they plan to launch the service in two yet-to-be-determined languages in mid-2014. Lynch told StartupSmart the expansion would enable them to better scale the company. “We’ve done a really good job at scaling from Australia, but about 75% of our revenue comes from outside Australia. We’ll be looking to hire local sales and marketing staff first,” Lynch says, adding he will be based in the United States with the new team from early next year. According to Lynch, there are 40 start-ups worldwide offering design marketplace services in a global graphic design market worth $44 billion each year. DesignCrowd is one of several Australian graphic design start-ups such as 99designs and Canva that are performing well in the United States and increasingly globally. “Australia is emerging as a bit of a powerhouse when it comes to crowdsoucring and design services online, and that’s really exciting. We’re really happy to be contributing to Australia’s leadership in that space,” Lynch says. He adds given the size of the market, the increasing global penetration of technology and the rapid uptake of online design solutions he’s confident there is space for a range of companies. “Crowdsourcing sites around the world have a tiny fraction of that market share. It’s very early days, and there are huge opportunities in the space,” Lynch says. “The big challenge for us is scaling our infrastructure and designer community along with the customers demand which is taking off.” This is the second $3 million installment from Melbourne-based Starfish Ventures. Starfish Ventures investment director Tony Glenning sits on the DesignCrowd board. DesignCrowd processed over a million dollars’ worth of transactions in October 2013.
Accelerator and incubator programs are increasingly popular in Australia, with the promise of expert help and guidance during the difficult early stage development and fundraising process. But what kind of impact do they have on start-up founders, and would they work for everyone? Today we launch the first story in a four-part series exploring the impact of one of Australia’s first accelerator programs, Startmate. Now open for applications for their fourth intake, StartupSmart spoke to one company from each intake to gauge the impact Startmate had on their entrepreneurial journey. When Alan Downie first started working on his start-up, online bug-tracking software BugHerd, with co-founder Mateja Milosavljevic, the idea of entering an accelerator program had never occurred to him. “It was 2011 then, so still early days in the Australian start-up community. I hadn’t got my head into the fact we were doing a start-up, I just thought it was a business. But my co-founder was into the community,” Downie says. Both from technical backgrounds, Downie and Milosavljevic had recently launched a software testing app but it hadn’t fared as well as they hoped. “We realised we were good at building stuff, but we were probably missing something. We hoped that Startmate could fill that,” Downie says. “Matt and I are both developers and product guys, so we had that covered. It was about the business knowledge, and how once you’ve got an idea or product, how do you get it to market and grow it into a real business?” Melbourne-based, they both moved to Sydney for the three-month program. Downie says his concerns before the program were moving his young family, rather than being rattled by mentors or having to give up too much equity. “A lot of people worry about equity and being asked to give away too much by accelerator programs, but at that stage there wasn’t much company to give away and we had no idea if we even had a valid idea, so there wasn’t much to lose,” he says. With not much to lose and a steep learning curve ahead of them, Downie says it was probably helpful he wasn’t particularly aware of the start-up community before he began the program. “I didn’t know exactly who the mentors were; which in hindsight was probably a good thing because they’re pretty impressive,” he says, adding he struggled as an introvert from a corporate background to get used to the collaborative environment at first. Downie says any start-up signing up for Startmate needs to be aware it’s not for the faint-hearted. “We had one mentor come in, sit down and say ‘this is stupid and you shouldn’t do it’,” he says. “There are two ways to go after that kind of advice. You can go believe them and give up. Or use it to harden your resolve, and it did for us. Some people can’t handle that, but that’s what you really need if you want to build something big.” The other big discovery of the program for Downie and Milosavljevic was realising they were targeting the wrong market, a strategic decision that Downie says would have crippled their start-up had they not switched focus. Originally pitched at start-ups, the co-founders realised they probably wouldn’t pay for their own product, and that pitching to people who by definition have little or no funds probably wasn’t the best idea. “During one of the mentoring sessions, we realised that start-ups wouldn’t pay for it, because we wouldn’t and we knew its value backwards. It was a wake-up call,” Downie says. The team has since pivoted to focus on digital agencies and enterprise clients. They began raising a seed round of $250,000 during the January to March program, and closed the round shortly after the program. The transition from developer to accelerator participant to fully-fledged start-up founders was tough, especially graduating from a closely supported program. “Personally it’s been very difficult. You’re a developer one day, and then the next you’re actually a CEO, which means you need to be the lawyer, the accountant and the HR person all at once,” Downie says. “You toughen up and get used to it, and the Startmate guys are always contactable, but leaving the program can be a bit of a shock.” Since then, the team has gone on to be part of leading American accelerator 500 Startups, and raised a second round of $550,000 in January 2012 from this program and Australian venture capital fund Starfish Ventures. “As an unfunded, untested company, Startmate was harder. 500 Startups was a bigger cohort with some great guys, but in Startmate we learned a lot faster than we ever thought we could. The pressure was much more intense,” Downie says. With thousands of users, six full-time staff and plans to hire a few more in the coming weeks, the BugHerd team are preparing for growth. Downie says the ongoing mentoring provided by investors and Startmate mentors has enabled them to make two decisions, both of which doubled their sales. The first was scrapping the free trial offer and charging users from day one after their free trial. Downie says this led to increased engagement with the product. “We’re very analytical in our approach, probably thanks to Startmate’s AB testing focus, and we did a lot of testing of that first. We tested not showing the free plan option to 50% of the audience. By positioning it as a product that needed to be paid for, they were twice as likely to try it out, use it and buy it,” he says. This, coupled with the realisation browser extensions were far more likely to be used than packages that had to be downloaded and installed, has seen the Bugherd customer base skyrocket. They’re planning a Series A funding round next year.
The Nitro story: How to grow a software company from five guys to over $25 million in annual revenue10:51AM | Friday, 4 October
Taking on the “gorilla in the room” competitor doesn’t always end well, but it seemed like a great idea to the founding team of now international software company Nitro when they squared up to Adobe in 2005. Since then they’ve grown into an international software company of over 120. Cofounder and chief executive Sam Chandler told StartupSmart they’ll bring in more than $25 million in revenue this year. PDF software may not seem sexy, but it was a major pain point for the five co-founders of Nitro when they first started kicking around start-up ideas. “We had come to understand that Adobe was generating over $600 million at the time in Acrobat revenue on the desktop alone and was growing rapidly. We could see it was going to be a billion-dollar software category,” says Chandler. “We thought it was an industry space that was really ripe for innovation and disruption, and thought that going after the gorilla in the room was a pretty attractive strategy as we thought there wasn’t a lot of love for Adobe out there.” They launched their first PDF software product in 2005 and made their first sale 45 minutes after launching the website. They’ve gone on to release a series of productivity-boosting document management tools since then. They had built their user base up to just under 100,000, generating $1.6 million in annual revenue in 2007. The growth was mostly due to PR campaigns that focused on being the first real Adobe alternative, but growth was beginning to plateau when Chandler decided he was ready to catalyse the business. He pitched a then-emerging strategy that would become ubiquitous for software companies in the coming years. “I proposed a strategy at that time which I struggled to get board support for initially. Essentially it was the concept of ‘freemium’ (free capped service with premium, paid options), but this was before it was a word, or even a concept,” Chandler says. The plan was Nitro would launch a new series of fully functional products with capped use. “So our user acquisition would skyrocket, and we assumed that a certain percentage of those users would need to do more, and when they did they would pay for the premium version.” They did. In 2008 the company made over $4 million. “Freemium has driven most of our growth, although at the time there was a sense that maybe this was just a massive roll of the dice,” Chandler says. “It was basically an SEO strategy. We called it the ‘all roads lead to Nitro’ strategy. Anyone who was searching for anything PDF or document related would find us.” While the idea of giving away software for free was new at the time, Chandler says when he weighed up the potential to reach millions of users against the cost of the media and marketing spend he would need to reach that many via more traditional routes, he says it was a no-brainer. “People really struggled back then to get their heads around giving away software for free,” Chandler says. “The platform has now got over 8 million users per month. Only a tiny, single digit percentage of those pay, but our user acquisition cost is very low. This means our job is to convert the users into customers when they’re ready to do more.” Nitro’s strategy for converting users to customers uses automated, targeted email software, which is the second major factor Chandler attributes their growth to. “The best way to look at the marketing function in a modern software business is to view it like a big funnel with prospects at the top. You then invest in a range of strategies to bring users through the funnel to ultimately become customers,” Chandler says. “We were then, and still are today, quite ground breaking in our uptake of marketing automation. We do a lot of very targeted and relevant email around particular user flows, and that can be customised quite dramatically.” On top of the targeted email marketing, Nitro uses strategies such as interactive product experiences and feature discovery campaigns via free tutorials for non-premium users. Despite the consistent growth, Nitro has experienced some “catastrophically bad” product releases and cashflow issues that put their business at risk. In the video below, Chandler talks about the time they came closest to losing it all, and how they navigated their way back to growth. In 2008, Chandler went across to the United States to launch their office there in January 2009. “I went across on recon, and felt like I was starting again because I was again one guy in a room,” Chandler says, adding he’s from Tasmania and always wanted to play in a big pond. “We looked across to Silicon Valley, saw the talent pool, and realised if we were going to hire dozens of great people, that was where we had to be.” The San Francisco team has now grown to 95 people, and Nitro will be launching an office in Dublin this month to drive growth in Europe. Their hiring and growth plans were brought forward after they received their first venture capital ($3.5 million) funding in May last year from Starfish Ventures, and another $3 million in the May this year. Chandler says the next 12 months will be focused on the launch of a new product and international expansion. They’re hoping to get to 100 million users within three to five years. “We’re trying to build what we call an IPO-able company. My vision of a great company is one that makes 100 million or more in revenue and has 30 to 50% operating margins,” Chandler says, adding while they’re not planning on floating the business on the NASDAQ anytime soon, it’s the most likely exit strategy in the next five years. Chandler adds even though it’d be hard to “give up the baby”, he’s undecided about his own journey with Nitro if it became a public company. “I would have to ask myself, do I want to be a public company CEO? I’ve always been focused on building, and managing is just part of the business getting bigger,” Chandler says. “But when you come very close to losing it all, and we’ve had a few cashflow crises in our earlier years, you’re suddenly more appreciative of what you’ve got.”
Raising capital is a breakthrough for disruptive tech start-ups, so entrepreneurs need to hone their pitching skills as they develop their business model. Given the importance of pitching, leading venture capital group Starfish Ventures is hosting a (sold out) how to pitch presentation during the Startup Spring Festival. Investment director Tony Glenning told StartupSmart they receive over 1000 pitches a year, and conduct about 300 face-to-face follow-up meetings and pitches. They invest in one to two companies a year. Glenning says many of the pitches are dismissed outright if they aren’t designed for a big enough market or don’t fit within the fund’s mandate: technology companies, especially life science and software. “There are many great business ideas, but not all of them are suitable for venture capital. Venture capital is where we’re going to invest millions of dollars into a business ideally worth hundreds of millions, so you need to be reaching for that,” Glenning says. Glenning says start-ups seeking venture capital need to be relatively well developed, and many companies don’t make it to a meeting or face-to-face pitch as they’re not far enough along in their journey. “At the end of the day there is no hard and fast rule for what we’re after, but an ideal investment for us is where the founder or founders have raised a couple of hundred thousand, brought on-board a few team members, have launched their product or service, and they have an idea of what the end business model needs to be,” Glenning says. While customer traction is important, Glenning says the team and the founder or founders come first in their assessment. “Ideas and businesses evolve so what people walk in the door with probably won’t be the successful business in the end. So what we really want is great entrepreneurs who are flexible and can take feedback, and who are willing to do what it takes to fix the problem they’re trying to solve,” Glenning says. While investors are increasingly backing co-founders over single person teams, Glenning says Starfish has successfully backed single founders in the past, and probably will again. “Start-ups are a hundred times harder and better that other business,” Glenning says, adding they recommend co-founders. “Things will go well and things will go horrendously, so it’s invaluable to have someone on the journey with you. You need someone to high-five when you get that first customer and someone you can literally or figuratively cry on the shoulder of when things go badly.” Once a company has reached the face-to-face meeting stage, Glenning says the main red flag is unworkable business models, such as relying markets that are hard to reach. “You need a healthy business model, where the cost of customer acquisition is outweighed by the customer lifetime value. This is often quite a subtle thing to work out,” Glenning says. Starfish Ventures are increasingly looking at emerging fields such as data-related start-ups, enterprise software, mobile, cloud-related start-ups and near field communication technologies. “Some things are more appealing than others, but that changes pretty rapidly,” Glenning says. “We look for really green fields. There is a lot of activity in these areas, but we haven’t seen the perfect opportunity yet. But I’m sure there is someone somewhere, or lots of people in many places, who are going to make that work.”
Crowdsourcing design marketplace DesignCrowd has this week announced it has hit $10 million in projects going through the site. DesignCrowd.com.au allows users to upload design briefs and source hundreds of designs to choose from. The designer network includes over 132,000 designers. The website was launched from founder and chief executive Alec Lynch’s family garage in 2008. “The idea stemmed from problems that I could see in the traditional design industry. I could see from the outside that for businesses buying designs, it was slow, expensive and risky,” Lynch told StartupSmart, adding that the process for designing the London Olympics logo was informative. “It cost half a million and took a year. Imagine if they’d run a design competition instead of going to an agency? They would have got thousands of applications, great press and a better result.” In 2009, he received $300,000 in angel funding and brought his co-founder Adam Arbolino on board. In 2011, they received $3 million in venture capital from Starfish Ventures. In the last two years, their team has grown from three to 20 people, and they’ve launched the service in the UK, Canada and Asia, and acquired two US websites. In the last six months, they’ve seen a 120% increase in demand, with the key areas of growth being business card design (317%), t-shirt design (121%) and graphic design (116%). Lynch attributes the growth to the international expansion, traction around the working model and word-of-mouth marketing. “The venture capital has supercharged the business and allowed us to expand internationally. Most of the growth has come from that and clients outside Australia,” Lynch says. “The model works and we’ve received a certain level of scale so we’ve reached a tipping point where there is a really good viral loop and word-of-mouth dynamic.” Australia is the site’s second largest market, with 133% growth in demand from Australia in the last six months. Lynch says developments to the standard online marketplace model are fuelling growth. Clients pay some of the designers a participation rate, even if they aren’t successful. Rates are set by the client, and are most commonly $20 or $50 split between a few designers that didn't win the project. “There is no reason why crowdsourcing needs to be winner-takes-all. We think this is an improvement to the marketplace model. It’s better for designers and better for businesses,” Lynch says, adding that designers are ranked via an algorithm, with higher ranked designers getting paid more. As the designer’s work is the key product of the service, Lynch says his team is committed to retaining the best designers available. “The vanilla crowdsourcing model is completely open and allows designers to see each other’s work during the course of a contest. This can lead to copying and group-think. We keep the designs private during the contest stage, and this leads to a greater diversity of designs and no group-think,” he says. The top five countries winning the design contests are India, US, Indonesia, UK, and the Philippines. One of the American websites DesignCrowd acquired last year has been transformed into a stock logo selling site for the over two million unsuccessful designs pitched in the DesignCrowd contests. With most of their sales are now coming from the US, Lynch says they’re looking to open an American office in the coming year. They’re also exploring options in Asia, South America and Europe.
The federal government is set to consult with Australian industry over the tax treatment of employee share option schemes, which start-ups say needs to be overhauled to promote growth. The government is aware the current tax situation around employee shares creates difficulties for some sectors of the economy, especially start-ups, and will consult with industry on the impact of tax and administration requirements for the schemes, StartupSmart has been told. Revamping the tax treatment of employee share option programs is fundamental to growing the start-up sector in Australia, says Malcolm Thornton, investment director at venture capital fund Starfish Ventures. “It’s a key currency that people employ to keep highly talented people on board while conserving cash,” says Thornton. The start-up sector can expect consultations with the relevant federal government departments in the future, with sources telling StartupSmart the government is aware the current tax situation around employee shares creates difficulties for some sectors of the economy, especially start-ups. Employee share option programs enable start-ups to attract and retain leading talent to their company by offering staff a proportion of the future company on top of the (often low) wages they are able to pay. The complexity of the current system has held Australian start-ups back from embracing the system. A key drawback is that employees can become liable for significant amounts of tax based on the asset’s value, even if it’s not currently earning any capital. Thornton says an update of taxation rules around the program is “imperative” for the start-up sector. “It’s completely complicated and convoluted in Australia, compared to when our companies are US-based, and we can just take a program off the shelf and every lawyer in San Francisco knows how to manage the process.” Thornton says the current system fails to grasp the variety of companies that would benefit from the implementation of such schemes. “Start-ups and high growth companies have very different characteristics to large, mature multi-decade companies,” he says. “One of the key elements to appreciate is that there is little to no value in the options until the company has grown and either lists or is acquired.” Alan Downie, chief executive and co-founder of BugHerd, a visual bug tracker for web developers, has recently implemented an employee share scheme for one of his six staff and is working on setting the scheme up for another employee. “It’s a critical issue for start-ups,” says Downie. “As a start-up you don’t have a lot of cash so it’s the way to keep talent. If you have to compete with guys like Telstra and Atlassian for developers, all you’ve really got is the growing company equity.” Downie and his co-founder Matt Milosavljevic spent 12 months working out how to implement the scheme for their first hire, a developer. “It was a very long and tedious and expensive process,” he says. “There is no standard way to do it and that’s the problem.” “When our developer started with us, he was on a third of what he could make as a developer. But he was so engaged and he got we didn’t have the money, so it was really important to him to get a piece of the company.” Downie says he spoke to four accountants, a few lawyers and several entrepreneurs about how to implement an employee share scheme, and they all had different answers. “It’s still not ideal for the employee, as they still have a bit of uncertainty. From the employer’s point of view, you want to have solid understanding of what the government wants, rather than jumping through hurdles.” He says the Australian Tax Office hasn’t spoken to any of the parties involved, so it’s still untested. According to a report by the ABC, the employee share options scheme will be explored in the next update to the National Digital Economy Strategy.
Coming up with a brilliant idea is the first key step to becoming a successful entrepreneur. But unless you execute that idea in a timely fashion, others could beat you to the finish line. This was the challenged faced by Alec Lynch when he founded DesignCrowd, an online marketplace providing logo, website, print and graphic services via a worldwide network of freelance graphic designers. According to DesignCrowd, the top crowdsourcing countries are the United States, the United Kingdom and Australia. However, the company is also seeing strong growth from the likes of Brazil, Singapore and Germany. Designer demand for crowdsourcing has doubled in the last 12 months, with 100,000 registered designers now on DesignCrowd. Small business demand is also booming – DesignCrowd has seen more than 50% growth in posted projects already this year. But as Lynch explains, the company almost didn’t make it past the starting block. “The biggest mistake I made when I was starting DesignCrowd was not starting sooner. I first had the idea in 2006 but at some level I assumed I was the only one with the idea. I was wrong,” Lynch told StartupSmart. “After getting my co-founder (Adam Arbolino – a friend from uni) to build a prototype, I sat on the idea for six months while I worked in management consulting at Booz & Co before quitting my job and starting to work fulltime on the business in 2007.” “Within four months of quietly launching DesignCrowd out of the garage in January 2008, two competitors had started and both were better resourced.” “One had three staff and the other had $3 million in funding while I had $10,000 in savings and three credit cards.” “The reality was, while I was working on my business idea trying to perfect it, other entrepreneurs were working on the same idea.” What did Lynch learn from this? Entrepreneurship requires speed. “Moving too slowly meant that our competitors, initially, grew more quickly. They raised money more quickly, and they were able to hire staff and grow in key markets like the US,” he says. “One of the solutions to this challenge was raising capital. In 2009, I raised $300,000 from three angel investors, which helped us get our first office and employee, and grow the business 14-fold in two years.” “Then, in 2011, we raised $3 million from Starfish Ventures. “Since then, we’ve grown from three staff to 20 staff, acquired two US websites, launched in the UK, Canada and Asia, and more than tripled the business.” Lynch believes the business is better off as a result of his early experience. “My early experience taught me the importance of speed and the value of capital, which helps you move more quickly. It also trained us, perhaps most importantly, to do more with less. It forced us to develop a better product and make every marketing dollar count,” he says. “For example, we’ve been able to grow in the US, which has become our biggest source of sales, without having any staff there. “We’re now approaching $10 million in projects and the US accounts for about 40% of our business. We’re now planning to open an office in the US this year and make our first hire there.” “Whatever we do, we’re going to move quickly.”
Entrepreneurs have spoken of their experiences at the “start-up pitch-fests” held for the Advance Innovation Program, highlighting the importance of preparation and the structure of your pitch.
It’s well known that some universities have a heavier focus on entrepreneurship than others. But when it comes to funding prospects for student start-ups, does the university make a difference?
Start-ups often underestimate the time required to raise capital, says the co-founder of Starfish Ventures, following a $2 million investment in an email and web communication company.
Australian crowdsourcing marketplace DesignCrowd has made its first foray into Asia, after launching its service in Singapore, India and the Philippines as part of a global expansion plan.