An Australian founder on why startups listing early on the ASX is a dangerous “shortcut” that could ruin it for all tech companies

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Pete Cassidy Stackla

Early-stage startups with little if any revenue attempting to list on the ASX are taking a risky “shortcut” that could ruin the avenue for more established Australian tech companies, Stackla co-founder Pete Cassidy says.

The ASX is currently considering a series of proposals that would serve to shut out some early-stage tech companies from going public, including lifting the market capitalisation minimum to $20 million and the net tangible assets test to $5 million.

Cassidy says he supports these changes and that startups often look to the ASX when they can’t find private funding and are yet to establish a sustainable business model.

“There’s the potential to turn the Australian retail investor market a little bit sour on these tech companies in Australia which is a really sad thing,” Cassidy tells StartupSmart.

“Australia has done a great job of investing in technology companies. We should be embracing it but I think we run the risk of the public markets getting burnt too early with very premature early-stage listings which have the potential to turn away companies that are more later-stage and would look at an ASX-listing for strategic funding.”

A “shortcut”

Stackla is a social media aggregator platform directly competing with Silicon Valley startup ShareRoot, whose co-founder recently told StartupSmart about the virtues of listing on the ASX and the dangers of accepting VC funding.

“What we don’t have is two or three guys sitting in our office with a majority share telling us what we need to do, who we need to fire and which levers we need to dial up,” ShareRoot co-founder Noah Abelson said.

“If you can do it without getting VC money, then don’t get VC money.”

Shareroot completed a backdoor listing on the ASX last year with a $10 million IPO.

But Cassidy says these early-stage companies looking to go public should instead look to develop a more profitable business model that would attract early-stage private investors.

“There are no real shortcuts in building a startup,” he says.

“You still need the traditional model of finding product-market fit, customers and revenue. You’re going to have to go through that process to validate that there’s a business there.

“If you’re at the stage of still finding product-market fit and a business model then having the weight of being a public company on your shoulders is unrealistic.”

He says that some tech companies may be using the ASX as a last resort if they can’t find private funding.

“Every talks about persistence and perserverance – you might get a no from the very first VC you pitch to and you should keep going,” Cassidy says.

“But if you get a no from every single one then you should spend more time proving the model and looking inwards.

“You need to prove that others have validated your idea and want to invest in that idea.”

The founder says it should be left up to experienced and knowledgeable tech investors to pick the potential winners rather than retail investors.

“The investor community in Australia can help identify the best startups with the most potential and then deploy capital in strategic ways to help them grow,” Cassidy says.

“We’ve got some really high calibre VCs here that provide a hell of a lot of value to startups like us. They see so many businesses come through the door and they’re getting better and better at picking the best ideas and the brightest entrepreneurs to invest in.

“This is what they do for a living; they spot early-stage startups and great opportunities. Retail investors don’t have that level of acute focus on early-stage tech companies.”

From a chicken shop to the ASX

Stackla closed a $2 million seed round in 2014 after the company was bootstrapped for its first two years of existence. It then secured a $3 million Series A round led by Bailador Technology Investments and Rampersand last year.

“We wanted to validate our business at each stage before talking about investment,” Cassidy says.

“We had a clear path to build the business we wanted to and achieve the things we wanted to achieve.”

Of the six tech companies currently working on an IPO, four have revenue of less than $140,000.

He says that when Stackla was at a similar stage to these startups, going public was never even a consideration.

“I look at some of these backdoor listings and think of the revenue they’ve got when they’re listing,” Cassidy says.

“When we had that revenue we were four people working above a chicken shop in north Sydney. I can’t fathom how we would have listed at that stage and still achieve what we have without the strategic investors we have.”

As well as the capital, he says having experienced investors involved with your startup can help when the going gets tough.

“We’ve never done this before, we’re first time founders and to have that expertise is fantastic,” Cassidy says.

“When you’re in tough spots there are always things that crop up that you’re not aware of. When times get tough, having investors in your corner that have gone through this before is super helpful.”

A long-term aspiration

Since securing the Series A round, Stackla has brought on some significant clients including Disney and McDonalds. The tech company now has 60 people on its team and recently opened an office in Singapore.

Cassidy says that he does hope for Stackla to one day be listed on the ASX when the time is right.

“As an Australian company that’s something we would aspire to,” he says.

“We’d feel very honoured to think of it as an option when the time is right and when we’re at the scale to think it’s the right decision.”

For these later-stage, sustainable tech companies to list, it’s important that young startups don’t tarnish the market, he says.

“The scary thing for us is we want it to still be an option when we’re at that stage,” Cassidy says.

“We want it to be available to us. We’re somewhat nervous that some of the activity that’s happening now with very early-stage startups listing is going to make it tougher for us as a proven, scaled software company to go down that path.”

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Denham Sadler is the editor of StartupSmart. He was previously a journalist at the publication and has worked as a freelancer for the Guardian, the Saturday Paper and the ABC. In his spare time he likes puns and jaffles.
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  • Angus Mackay

    This is the second article in as many weeks that has sought an opinion on the suitability of early stage tech companies for the ASX. Whilst the opinions seem reasonable they’re made without knowledge of the history of the ASX. Penalising a particular sector that happens to be in vogue is a terrible idea and a dangerous precedent. History shows you can always lose 100% of your investment in any listed company on the ASX. The mining sector wouldn’t be where it is today in Australia if we were worried about retail investors losing their money. It doesn’t need to be fraud (e.g. Pan Pharmaceuticals) to lose 100% of your investment either which the recent failure of Dick Smith Holdings reminds us. Even alleged blue chips stocks run up massive losses on investments like Woolworths has with Masters. Sound risk management is a complex endeavour and the ASX is a professional market where it is always incumbent on any investor to manage these risks. The tech sector should be rallying to protest against any changes to the ASX listing rules.

    • Boyd

      Angus. I see both sides to this. I’ve been involved in 5 IPOs in the last 10 months, including some FinTech, and am aware of how hard it can already be to get a listing.

      For mine the issue is not market cap or NTA, its quality of investment. Tightening the listing rules won’t impact a company such as AfterPay, for instance. (Note: No qualitative reference is inferred by their mention other than to note they have minimal revenue but a market cap of what….$165m?……so how would the ASX tightening impact a company like this?)

      Overall I agree with the tone of the piece and think it is timely- it is lack of revenue we can find most concerning. Some of these are not even expansion stage, they are early stage. The business model isn’t proven, the directors aren’t proven, the revenues aren’t proven. For some this will end in tears, my concern is that the flow on will be that companies that do have EBITDAs’s and NPATs, and good SaaS style recurring models, will be marked down, and may find it difficult to find further expansion capital if the sector is hurt too much.

      But what can we do? As you say this is the point of the free and open market and so how will restricting access to capital help develop the sector? I mean the last decade was a story of exploration mining companies right!

      We shouldn’t hinder a sector that we do want to nurture and develop.

      We shouldn’t forget we have some very responsible investors neither. Stackla as a case in point was funded by some very responsible investors who wouldn’t go near most of these recent IPOs. So let the market decide. It doesn’t have to invest in these IPOs.

      Is the ASX going to start delisting or suspending underperforming companies with declining revenues, or losses? Why stop here right.

      As long as it is transparent, well audited, and projections are reasonably based investors are welcome to do their dough or make money.

      My 4 main concerns are:

      1. Too many RTO’s which may not be in the companies best interest to list

      2. Fee gouging by Sponsors removes necessary working capital

      3. Being listed there is a focus on early revenues rather than sustainable growth

      4. Are the investors being properly informed about what they are being invested into?

      I hear you but I doubt the Tech sector will respond to this. It should, after all the IPO is a very definite Exit Strategy for its investments. But is there a peak body? A co-ordinated group, a central body? Who would be the champion?

      What I do expect is the tier 3 stockbrokers will because this is their bread and butter.

      • Angus Mackay

        There is a new group called TechSydney that have taken on the challenge of being the coordinated voice but it’s early days.

        • Boyd

          That’s a good move. I work with the brokers who put these IPOs away, and closely with the ASX as well- happy to join some people together if there isn’t already to make a coordinated approach. Having said that knowing the names involved I am sure they have that all under control…if either these companies or larger brokers have any desire in helping the smaller micro-listings, that is.
          Do you think the cost to be a member will make it prohibitive to those who need the services of membership?

  • Joseph B

    Let the market decide. Let retail investors make their own decisions based on their own risk appetite. Venture Capital in Australia has a long way to go. Brokers won’t be in business long if they burn their clients. If we are ever going to be an innovative nation as Turnbull proposes, risky early stage companies need access to capital and be valued based on their potential risk reward potential