The global start-up treasure hunt
With Australian venture capitalists unwilling, or unable, to back new ventures, Aussie start-ups are increasingly heading to the departure lounge in an attempt to secure funding.
Whether it is the likes of WeTeachMe or WooBoard heading to the US, or even the Aussie duo who managed to score $40,000 from Startup Chile, of all places, Australia is becoming less of an isolated outpost for investors.
Indeed, even some of the heavy hitters behind Facebook are checking out what the Aussie market has to offer.
Many of the venture capital firms stalking the Australian market hail from Silicon Valley. The Valley accounts for nearly 40% of all VC investment in the US.
But there are many other VCs outside California. Some Australian start-ups have had to relocate to the United States, others say it works better for them remaining here.
So, what’s the secret to catching the eye of an overseas investor?
Distance not an issue
“It doesn’t really matter where you’re from,’’ says David McKinney, founder of Perth-based smartphone app maker Filter Squad.
“It makes it a bit more challenging because you can’t just go and meet with them and have a coffee with them, but all of these firms are actively looking at investment both in and outside the Valley.”
“As long as it’s a good team and an interesting product, they’ll talk to you. It’s just as hard getting noticed in your own home town as anywhere else.”
“You just have to have something good.”
Filter Squad was approached by several US venture capital firms but, in the end, McKinney decided it was better to go with an Australian VC.
“It’s serious for us to have people we can work with on a day-by-day basis and so someone local for us is useful and important,” he says.
But as Filter Squad grows and its reputation spreads, it might well be speaking again to overseas VC firms.
eCommerce company BigCommerce raised $15 million in the US last August and has still kept its office open in Sydney. It also has an office in Texas.
The business has given up an undisclosed stake in return for the money from Boston-based VC firm General Catalyst Partners, although co-founders and co-CEOs Eddie Machaalani and Mitchell Harper have retained a majority share.
BigCommerce provides online tools that allow clients to build their own online stores and market themselves, using eCommerce applications for mobile phones and Facebook.
BigCommerce, which started in 2009, had been on the radar screen of American VCs for some time. Machaalani says VCs had been in touch with BigCommerce right from the start.
“That’s just the way the venture capital community works,’’ Machaalani says.
“They have associates who do the grunt work and are practically cold calling start-ups.”
“We would take their phone and their emails at the time but we never committed to doing anything. We just shared our story and continued to tell what we are doing.”
“But once we decided to pull the trigger and we were at a point where we really wanted to raise capital and become the leader, we had a whole list of contact and we had different firms to choose from.”
“Once we made the decision, literally within six months we had closed the deal.”
Hungry for cash
He says that it didn’t matter if the company was Australian.
“They jumped at it,’’ he says. “A lot of them didn’t care we were Australian and we weren’t literally headquartered in the US.”
“What they were more interested in was what we had done. They were interested in the business and the metric and the growth opportunities.”
He says US venture capital firms are more likely to fund Australian start-ups than their Aussie counterparts. They’re hungrier.
“When you look at the US VCs, they market themselves in their PR campaigns, they are talking about their investments, they are talking about their success stories, they are showing people who they are and they are making a big noise for themselves,’’ he says.
“And when you’re a start-up, you always want to raise money from the best. If you have that luxury, you would want to go to a firm that knows what they’re doing, they have done it before, and they have contacts in the industry.”
“That’s what we did. We looked for someone who had done it before and when we were looking at the Aussie guys, they hadn’t done it before. They didn’t add value to the conversation.”
“We spent a lot of time with the Australian firms really trying to get them to understand what it is we’re doing and that got nowhere. So in the end, we decided to go with General Catalyst.”
Nevertheless, BigCommerce put General Catalyst through the hoops of due diligence.
“We told them we wanted to speak to five or six enterprises they had invested in,’’ he says. “It’s just like hiring someone.”
“You have to be careful with venture capital firms. You have to do your reference checks to see what they’ve done, but your chances of success are higher with a venture capital firm that’s done what you want to do before.”
“If you went with a VC firm that hasn’t done it before, you’re more likely to fail.”
Competition for funding is intense so BigCommerce had to offer something different and stand out from the pack.
Machaalani says that other eCommerce sites, including those like Amazon and Yahoo, were focused more on their platforms so BigCommerce channelled its efforts and marketing around drumming up more business for its clients.
Cutting the bullshit
He says Australians are well regarded in the US because of the complementary management styles.
“It’s a no bullshit approach to managing companies,” he says.
“What we are here to do is build the business, look after our people and look after our customers."
"When you get to the US, there are a lot of companies in the start-up scene that spend too much time talking and hyping up their business. In Australia we don't have a choice but to get on with the job and build a great business.”
He says rather than relocating to the US, BigCommerce had decided to keep its main office in Sydney as there is good talent here and it’s a better lifestyle.
“We can build a great environment here whereas in the US we would be competing against the likes of Google and Facebook.”
“We decided to be a big fish in a small pond as opposed to a small fish in a big pond.”
That said, the company only secured the funding when Machaalani and Harper spent time in the US.
But Richard Horton, an Australian who is a partner with the global law firm DLA Piper and who is based in Silicon Valley, says most America VCs would expect Australians to relocate.
“Most American venture firms won’t invest in anything they can’t drive to,’’ Horton says.
“They need to have their best people here, not just the R&D, and the relocation is usually taken to mean they are moving to the United States. They want to invest in the parent, not the Australian subsidiary, because the parent owns the organisation.”
“They think they are hard workers and they are uncomplicated for the most part.”
He says IT businesses are usually the stand-outs to get the attention from VC firms.
“These IT businesses are capital efficient, unlike clean tech people or manufacturing businesses, they have a small amount of capital and if it works out, you have scalability.”
A US helping hand
He says American finance has two great advantages: more solid valuations of the company and the chance to work with skilled entrepreneurs who have done it before and who can mentor the Australians.
“You tend to give away less of the company for more money than you would in Australia and you have access to experienced entrepreneurs, experienced venture capitalists and of course, all the customers and potential acquirers.”
He says Australian start-ups that have failed after getting funding are the ones that have refused to give away part of the company.
“In the past, Aussies have come out and said we are not going to give away any of our company, we still have good revenues in Australia and we will go out and get customers.”
“What they don’t realise is that they still have to give away some of their company. The value of the business grows with the investment so that means your small percentage is growing.”
“You can’t hire people without having good cashflow and raising money to ramp up.”
Aussie start-up 99designs, a crowdsourcing design site has more than 140,000 designers registered in 192 countries, secured a $US35 million ($A32.8 million) capital investment from Silicon Valley-based Accel Partners last year.
It has given away an undisclosed stake and Accel now sits on the board.
Accel has also brought in other investors like Dave Goldberg from Survey Monkey, Flickr co-founder Stewart Butterfield and former Yahoo executive Andrew Braccia. That’s a lot of expertise.
Working across the Pacific
The company’s CEO Patrick Llewellyn relocated to America in 2009. The company’s main office is in Silicon Valley.
The other big one, with its engineering team, operates out of the Melbourne suburb of Collingwood.
The San Francisco office has 30 people, the Melbourne office 20. Speaking from San Francisco, Llewellyn says he shifted to America because that is where most of the company’s clients were.
Venture capital firms immediately zeroed in on the company.
“A lot of early adopters were our initial customers. Some of them were Valley-based start-ups so VCs in the US knew about us well before other people,’’ Llewellyn says.
“The business got a lot of inbound interest because VCs kept hearing about us from start-ups.”
“It gave us the opportunity to meet a bunch of people. We didn’t actually need to take the funding at first because we had been running the business out of cashflow.”
Accel was a perfect fit. The company, which backed Facebook in 2005 and is the fourth biggest shareholder in the social networking company, had just invested $US60 in Sydney software company Atlassian. Australian start-ups were already in their sights.
Llewellyn says he had been talking to Accel right from the beginning.
“We had built a strong relationship with them so they were a logical choice. We felt comfortable with them and they felt comfortable with us,” he says.
He says Accel’s investment was the “pay off for making the decisions that we did. Because we were able to fund it ourselves, it put us in a pretty strong position,” he says.
He says 99designs could have still got the funding if Llewellyn had decided to keep the head office in Melbourne, but it would have been a different proposition.
“It would have been a much more standard deal where they just write a three or five million dollar check to grow the business,’’ he says.
“It would have been possible because were still getting on peoples’ radars and they were reaching out to us.”
“But relocating increased the pool of people how were interested in us. As soon as we had operations there, they could touch us a lot easier and that was why we had a pool of investors we could speak to.”
Running before you can walk
With the funding, 99designs is now looking to expand into Europe. It is planning a British version of its website next month, allowing clients to pay in their own currency and access localised services. Mainland Europe is next.
Llewellyn says the big danger and common cause of failure is growing too fast where companies try to run before they can walk.
“We were a three year old company when we took the money. It’s still a danger but less of a danger because we didn’t take the money until we knew what we could spend it on.”
The expertise and mentoring from board members has helped the company in many areas, including recruiting the best possible talent.
He says Australians command respect in the valley because they have a different approach to business.
“In Silicon Valley, the thinking is along the lines of where am I going to raise my first $5 million?”
“Australian enterprises think how do I get my first customer who will pay me something? It’s a different eco system that’s creating businesses that are attractive and post-crash of ’08, VCs are interested in businesses that can demonstrate sustainability and a business model that has been tested so therefore, we are seeing more interest and investment going into Australia.”
Russell Lyons, a partner at Sydney-based law firm Middletons, says investors are not only looking at tech companies.
Lyons, who has negotiated many investment deals with overseas investors, says they are also interested in companies from the services sector, particularly mining services and engineering services.
“These are the foreign companies that aren’t sure they want to go into the Australian market but wouldn’t mind someone else starting-up in an area they are interested in,’’ Lyons says.
He says the investors not only include private equity and venture capital firms but also companies that want a stake in another business to get a foothold in the market and stop anyone else investing there.
He says the high Australian dollar has increased the returns for investors when they convert the investment back into their own currency.
On the other hand, it has also increased the price of Australian assets.
“Investments in start-ups by private equity and venture capital is usually a five-year time horizon so you end up taking a little bit of a guess where the currency will be in five years time and that can be an additional consideration for companies making investments,” he says.
Overseas funding checklist:
- The start-up needs to get on to the radar screens of overseas VCs.
- Relocating to the US, or at least spending some time there, gives the company access to a wider pool.
- Be prepared to give away a stake in your company.
- Foreign investment provides expertise and mentoring opportunities from experts.