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.
MetaCDN, a web start-up born out of the University of Melbourne, has secured $US2.3 million in an investment round led by Australian venture capital firm Starfish Ventures.
The co-working concept is spreading its tentacles across Australia, with the past week seeing a series of “first ever” launches – in Newcastle, Adelaide and, most recently, Perth.
Clean technology accelerator Ignition Labs has selected five teams for its inaugural program, including an online peer-to-peer rental platform to encourage collaborative consumption.
Honesty is a virtue often underrated by start-ups seeking investment, according to local start-up ScriptRock, after it raised $1.2 million in a round led by vaunted US serial entrepreneur Peter Thiel.
Local online shoe retailer StyleTread is remaining tight-lipped about its clash with Westfield, after the start-up’s kiosk was closed at Parramatta following a conflict with existing tenants.
Australian-founded mobile solutions provider 5th Finger has been acquired by customer relationship management firm Merkle, five years after relocating from Sydney to the US.
Sydney-based games studio Bubble Gum Interactive has bucked the trend of local gaming companies going under, after raising $2.5 million in a second round of funding.
An online retail expert says New Zealand can be a lucrative market for start-ups as long as they localise their offering, after online shoe store StyleTread announced its New Zealand launch.
Melbourne-based gaming start-up Scalify is set to rapidly ramp up its growth after receiving a $2 million investment from Starfish Ventures.