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How Aussie start-ups can crack the US

Tuesday, 29 November 2011 | By Oliver Milman

Atlassian is held up as something of a trailblazer among Australia’s start-up community, and with good reason.

 

The business, which creates enterprise and developer software, pulled off one of the biggest investment deals in Australian IT history when original Facebook backers Accel Partners ploughed $US60 million into the venture in July last year.

 

Atlassian was founded in a bedroom by Australians Scott Farquhar and Mike Cannon-Brookes in 2002, who were both 22-years-old at the time. The company now has more than 20,000 customers in 140 countries.

 

But Atlassian hasn’t just taken the money and run. It is still headquartered in Sydney and the founders play an active role in developing the next generation of Aussie tech start-ups.

 

Both Farquhar and Cannon-Brookes, fourth in this year's BRW Young Rich List with a combined wealth of $360 million, are mentors for the Startmate program and have thrown their weight behind the Launch48 scheme.

 

Working there isn’t too bad either – Atlassian has been ranked near Google as one of the best places to work in the world.

 

Cannon-Brookes is also involved in the Advance Innovation Program, which recently kicked off in Sydney and Melbourne. Advance is the leading global network of Australians living overseas, with more than 20,000 people in 80 countries.

 

He speaks to StartupSmart about Australia’s start-up scene, his tips for entrepreneurial success and why he dislikes the “build to flip” business model.

 

 

 

How are Australian start-ups doing in the US at the moment?


Probably the best that we’ve been doing in the last five years. There have been a series of Australian successes over in the US, both large and small businesses.

 

We’ve been helped by the fact there is a more global outlook now from the US. Investors there are looking outside the US and Australia appeals to them.

 

Did you purposely build Atlassian so that it would catch the eye of a US investor?


I don’t think we built it for investment, as such, but we built it to be successful. It’s important to get things right such as IP and legal structures.

You need to get advisors in and get your ducks in line early. We did that and it helped us.

 

Investors would say “Tell us about your IP” and, boom, there are the documents. They will ask you about the market and you’ll have a decent answer for them. That impresses investors.

 

When both parties can do due diligence easily, you feel better about things. Ultimately, though, someone giving you $20 million will care about the details. If someone investing $100,000 cares a huge amount about the details, they are probably not for you.

 

Was the process tricky?


I’d say it was controlled and executed well. We didn’t have a huge amount of difficulty, but we had to make sure the process, which took a few months, didn’t mean that we took our eye off the ball. We had to keep the business going.

 

You have to treat it as a hiring exercise. You have to get the best you can get, of course, but you also have to remember that, hopefully, you will be with these people for a few years.

 

You need to trust them and have that personal connection. The big asterix next to that is that you need to keep the business moving forward. That is more important than getting hung up about investment.

 

We chose a very reasonable investor. When we said something would take a week to get back to them, they weren’t bothered. It’s a good sign if an investor isn’t hung up on details. It shows you that they value the business for what it is and its potential.

 

Were you ever pressured into moving to the US?


Not really. When you get funding north of $20 million, the expectation to move is a lot less. They don’t want to screw up an established business by moving them.

 

When the numbers are smaller, especially if it’s just a couple of you, they will probably look for you to move.

From the early days at Atlassian, we never thought about moving. We’ve maintained a strategic advantage being in Australia. We are a big fish in a small pond, which has aided us.

 

What differences in business culture stood out to you when you headed to the US?


In the US, the attitude is that things need to be done yesterday. They want to move quickly on everything, while we are a bit more conservative here.

We have a foot in both camps – in Sydney and San Francisco – so we aren’t always moving at a breakneck pace.

 

Start-ups get a maturity in terms of pitching very quickly in the US. Some people I know were going over there and I offered to look over their pitch and give some feedback.

 

When they came back, they had done 30 or 40 pitches and their pitch was 10 times better. They really got down to the nub of what their business’ proposition is. You have to be rigorous about pitching in the US.

How do American investors view Aussie start-ups?

 

It’s a great time at the moment; Australia is in a very good position in the world. If you say you come from Australia, it is a positive thing.

 

US investors would say that we build very old businesses. The three Australian businesses that Accel have invested in are profitable, all of them are growing, all of them have real products that solve real problems.

 

We are known for our good products and our good management. Because Australia is a much smaller market, there isn’t as much money, so we have to manage it more carefully. They like that.

 

Plenty of start-up incubators (Startmate, PushStart, AngelCube and York Butter Factory) have launched in Australia over the past year. You must be encouraged by this?

 

Well, it’s certainly easy to get money at the seed funding stage now. If you want a very small amount of money, you are okay. It’s more about the mentorship you get, anyway.

 

I’ll be fascinated to see how many of these incubators survive. There are a few around now, but it was similar to the early 2000s and they all dried up. I think that people are a bit smarter about incubators now, though.

 

I’d say around 2005 and 2006 was a turning point for Australian start-ups. A lot more people began to jump on the bandwagon.

 

Incubators are an important piece of the puzzle, but they aren’t everything. We are still lacking some things.

 

Such as what?


I don’t think we have a very good angel community here, or series A venture capitalists. Then again, I don’t think there’s the deal flow either, so it is an open question really.

 

The question is, do all start-ups need to go to the US to get a $2-3 million funding round, or do they wither and die? Can we find 20 $2 million start-ups in the next year? I don’t think so.

 

So, what do we need? More government help?


It’s easy to blame the Government. I think their VC programs are generally pretty good. The problem is that super funds don’t see venture capital as having good returns.

 

We just don’t have the entrepreneurs for them to invest in. Start-ups can blame everyone else, but you need to either get on with it or accept it.

 

You can work on your weaknesses or you can get on with a job that leverages your strengths. Maybe we don’t need an entire funding market here in Australia.

 

Maybe we will lose people to the US and they will come back and help improve things here. It may take 20 years, but it will still help the community.

 

But given recent examples such as Nikki Durkin of 99dresses, aren’t you worried about a brain drain to the US?


People complain about that, but if you were in any of those business’ shoes, what you would you do? You’d probably do the same thing.

 

Australia needs stronger, deeper connections to Silicon Valley and that will involve some, or lots, of start-ups moving there. We shouldn’t be worried about that.

 

The Australian film industry is a good analogy. We don’t want to beat Hollywood. But we can still have great effects studios in Sydney and make our own decent Aussie films.

 

If Warner Bros films Superman in Australia, it will employ people and help improve skills here.  Start-ups are similar. The more highway between us and the US, the better.

 

How is Startmate going?


I’m pretty happy with how the whole experiment has gone. For a first year project, the end result was very good – two out of five start-ups moved to the US and one was acquired.

 

We will look to beat that in the second year, but I think it has got off to a good start.

 

As a mentor, what kinds of things are you looking for in a start-up?


I look for people who are passionate about what they do. I like people who are really interested in what they are building.

 

This attitude builds better businesses than someone with no passion, who has run a spreadsheet and found a hole in the market, whatever it is.

 

For tech start-ups, both founders need to understand technology at a basic level, with one of them being a technical co-founder and writing code.

 

Innovation loops get harder if you don’t have a technical co-founder. Everything takes longer and costs more if you have to explain something to someone else, rather than just sitting down and doing it yourself.

 

Finally, I’d say that people have to have a long-term sustainable business. I realise it’s very hard to paint that vision when it is just an idea, but you need to show that you will be offering solutions to problems.

 

I’m very anti the “build to flip” model. Your business exists to serve the customer. If that customer is just someone you want to sell the business to, you’re in trouble.

 

You can take shortcuts, but they will come back to haunt you. You’ll find that the people who were interested in your business will drift away.

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