There are a ton of opinion pieces written every day about what is lacking from Australia’s startup ecosystem. So much so that it’s easy to be confused about what we really need. Who do we listen to? Who does government listen to? Is it broken employee share ownership legislation? Is it a culture of risk-averse venture capitalists? Is it an overall lack of capital in the ecosystem? The reality is that there are a lot of things lacking — first and foremost an actual blueprint for how we can build a sustainable industry around venture capital. The foundations To build a venture capital industry, certain foundations need to be in place, namely a solid and supportive regulatory environment and skills. Arguably, Australia has both. We rank in the top 10 on the World Bank’s ease of doing business index despite the fact there are some things we need to do better. Employee share schemes, for example, are seriously broken and despite the rhetoric, nothing of any substance has been done to rectify the situation. Government is also distracted with crowdsourced equity funding (CSEF), which I don't believe is the right priority at this stage. Overall though, Australia is a pretty easy place to set up and manage a company. On the skills side, we definitely have a big issue around the take up of education in STEM subjects. In a time where one of the coolest jobs in the US is to become a “hacker”, I'm still shocked to hear Australian kids think technology is “nerdy” — apparently, they are immune to the Zuckerberg-effect. This one will take time, and we absolutely have to fix it. But we do excel in two other areas important to startups: design and business. We have monumental talent in these two areas and in the short-term we need to be tapping it to plug the gap. Programs like Disrupt@Scale (which is backed by Mirin Capital in partnership with BlueChilli) aim to do this, and we need more of them. Disrupt@Scale is not tailored to technical founders; it’s for first-time entrepreneurs who can go on to solve real problems if they have support on the technical side. Of course, non-technical founders can always outsource development, but it is (without a doubt) exponentially better to have a tech team that also has skin in the game. The early stages So we have the foundations for venture capital and the capability to create companies. That’s a good start, but these companies need a lot of support in their early stages, which comes from mentorship and investors. There is no shortage of startup mentors in Australia, with nearly half of Australian startups having at least one mentor, according to Startup Muster. Co-working spaces in Australia have taken off and, despite the debate in Silicon Valley on their effectiveness, for Australian entrepreneurs they provide tremendous value in terms of networking, support and motivation. The support networks are in place and will only grow more efficient over time. In terms of early stage investing, Australia also does this exceptionally well. There are lots of angels and seed funds operating in Australia, and if you have a solid team and are chasing a big, disruptive market with some early customer validation, then you can raise a seed round relatively easily (easy by VC standards anyway). Again, we can't make sweeping statements about a shortage of venture capital without the context around which stages we are talking about. The key issue at the early stage is not lack of capital; it’s lack of opportunities or deal flow (as we say). The problem is, it’s not exactly an efficient market and finding the right early stage investors can take time, but perseverance is a critical entrepreneurial quality. Marc Andreessen summarises this nicely in his blog post, When the VCs say “no”, which I’ll paraphrase: One “no” doesn’t mean anything Three “no’s” could be coincidence — keep trying Five or more “no’s” is no coincidence — something is wrong with your plan. Investors and their capital are out there and most I know want to invest more, but are constrained by the number of high quality deals that come through their door. For now though, we are getting by and this is really something that will be fixed over time as we plug gaps in the foundations — more high quality founding teams solving big issues adds to the deal flow funnel helping early stage capital to be more efficiently and effectively deployed. Over the last few years, Australia has built a great early stage funding and support system for startups, which has the momentum to keep growing of its own accord. It’s time now to shift the focus to the next level. Growth stages The next layer we need to focus on is the growth stage — this is where the biggest gaps are. There are very few Series A deals from Australian VCs and even fewer Series B/C because we don't have many funds big enough to do those rounds. To play in this space, a VC needs to have committed funds of $50-$100m for Series A and at least $200m for Series B/C/etc, but raising a fund this size needs institutional money and Australian institutions refuse to play ball. Big investors, like superannuation funds want to see a track record before investing in VC, but by the time that comes around, they will have missed the boat. It will take us another seven to eight years before Australia’s top funds reach maturity and while I have no doubts that we will have some great results, the time to invest in the next stage of tech growth in this country is now, not in another seven to eight years. If we wait much longer, we won't be able to keep our growth stage companies onshore. We have some fantastic companies around the Series A mark and VCs should be able to tell these stories to raise later stage funds. Just like an entrepreneur sells the future value of his or her company to investors, so too will VCs need to sell the opportunity of investing in growth stage companies to institutional investors. VC is about investing in future potential, not past results and the pipeline for future potential right now is pretty strong. It really shouldn't be too hard a sell once the stigma associated with Australian VC is overcome. In reality, these investors already play in assets with the same kind of risk profile as Series B or C startups. Private equity, commercial property trusts and publicly listed exploratory mining companies are not all that different from a risk perspective than a technology startup with customers and revenue looking for growth capital to scale the business. Illiquidity is also not such a huge problem at this point, as most companies are around five years into their journey and hence maybe another three to five years from a potential exit. To be clear, this is where I believe we have a huge opportunity to tap into the trillions of dollars managed by superannuation funds. I don't think the government has a role to play in this, but both industries need to be working more closely to come up with a solution. Apparently there are over 360 superannuation funds in Australia with assets over $50m, so surely some of these are willing and able to support VC — it’s just a matter of finding the right partners. On top of that, we need to tap overseas investors, especially from neighbouring Asia. All in all, this should not be an impossible task. Exits Exits are a huge and important part of the venture capital industry. Exits allow funds to return profits to investors, which can then be reinvested. It also gives founders the opportunity to give back to the community by having additional time to mentor other founders as well as becoming investors themselves or even starting a new company. The recycling of capital and knowledge in the ecosystem has been an important factor in the success of Silicon Valley and is something that can be replicated here under the right circumstances. The exit opportunities for Australian startups are plentiful. Foreign companies have proven that they are not averse to making cross-border acquisitions and there is precedent for the listing of small and medium sized companies on the ASX. I won't focus too much on exits in this post — I’ll leave that for another day. What next? We have the platforms to support early stage companies and to enable lucrative exits. However, we really can't capitalise on these until we fix the gaps in the growth stage. Currently, successful Australian startups are going overseas for their Series B rounds and beyond (some even for Series A) and there is little incentive to return. Once these companies move offshore we maintain the right to call them Australian, but we lose the right to share in their success. Foreign staff are hired, foreign investors take the lion's share of returns and foreign governments collect the company’s taxes. This is a lose-lose situation for Australia if we don’t bridge these gaps. I wholeheartedly believe that we can do this, but it'd help if we were more aligned and working closer together towards a common goal. If you have thoughts on how we can achieve this, let me know. James McKinnon is managing partner of Mirin Capital — an Australian Venture Capital firm based in Sydney and Melbourne. You can reach him at firstname.lastname@example.org or on Twitter @jrmck. This post originally appeared on Medium. Follow StartupSmart on Facebook, Twitter, and LinkedIn.
The Financial System Inquiry has taken a “slow and steady” approach to financial crowdfunding, despite perceptions that Australia is lagging behind in this area. While acknowledging the wide range of global crowdfunding models, the report focuses on securities-based crowdfunding such as crowd-sourced equity funding (CSEF) or debt, and peer-to-peer lending (P2P), recommending: Graduate fundraising regulation to facilitate crowdfunding for both debt and equity and, over time, other forms of financing. The aim is to eventually have a holistic regulatory setting that can facilitate internet-based financing, including crowdfunding. For the moment, it will be an “adjust-as-you-go” approach with the regulations, but the focus will be on disclosure requirements of issuers and protection of retail investors. Since CSEF has far more regulatory requirements than P2P, the inquiry recommended a consultation on CSEF regulations, leading Treasury to immediately release a discussion paper on CSEF. The government’s measured approach is justified if we realise we are looking at the tip of a very huge iceberg. Crowdfunding is a whole new market with its own ecosystem. Just like we have emerging markets, frontier markets and so on, this financial crowdfunding market is expected to disrupt financial intermediation similar to what Amazon did to bricks-and-mortar bookshops. Tagging on keywords like collaborative finance, fintech, platforms, algorithms, networks, engagement, equity slices, social validation and momentum-investing, this market is projected to reach US$93 billion by 2025 and an astonishing US$300 billion once the developing countries release their crowd. With the new market comes new asset classes such as venture capital for retail investors. Take the case of Australian entrepreneurs Dan Joyce and Jared Mooring, now living in London, who pitched their venture My Mate Your Date (MMYD) on the UK equity crowdfunding platform Crowdcube with a target of reaching £130,000 representing 20% equity by 21 December 2014. The project was pitched on the platform around 29 October 2014 (according to its Facebook entry). By 9 December MMYD had raised £110,550 (representing 85% of funds) from 97 investors, with the largest investment being £20,000. The pitch’s links to MMYD’s Facebook and Twitter, the stream of messages, “likes”, and “shares” and “comments” matter as much as the financials and key data. The social validation of a venture can make a casual observer become a curious investor, and then a self-appointed brand ambassador, passionately following the firm as it grows and into a possible IPO. This is the power of a networked, engaged crowd. The returns in these ventures are clearly much more than financial which explains the rush by even banks and large companies to back these ventures. SocietyOne Australia is backed by Rupert Murdoch and James Packer as well as Westpac’s Reinventure Group. Financial crowdfunding is a brilliant solution for the small and medium-sized enterprises’ funding gap issue, as well as for the economy’s innovation and industry competitiveness agenda, while delivering along the way the gift of efficient risk-return transactions to the crowd. That’s a lot of wins and doesn’t justify the slow approach. But, here’s why one needs a steady approach too - new market, new risks. Recently, Aurora Labs, a Perth-based startup that launched on Kickstarter on 23 September 2014 cancelled the campaign on 9 October despite receiving $304,755 from 122 backers - three times its $100,000 target - due to the company’s concerns over protecting its intellectual property (IP). Aurora had failed to understand Kickstarter’s disclosure requirements: When a project involves manufacturing and distributing something complex, like a gadget, we require projects to show a prototype of what they’re making, and we prohibit photorealistic renderings. The funders want as much detail as possible, while the issuer wants to protect IP. Questions around what “showing a prototype” really means and the level of detail required in its disclosure, need to be addressed. Other risks such as cross-jurisdictional/cross-border complexities, securitisation of unsecured loans, and a lack of disclosures of “real” returns have been highlighted in recent reports from Infodev/World Bank and the International Organization of Securities Commission. We also need to understand the “real” business model of these Fintech companies. LendingClub debuted this week on the New York Stock Exchange under the ticker symbol LC with a highpoint value of US$5.7 billion, but rose to more than US$9 billion on the first day of trading. Is it a “fin” or a “tech”? It is being valued as a technology company. We are back to the question: “What’s this fintech’s business model”? Well, that explains the “understand before you regulate” perspective of the inquiry. After all, we don’t need a regulation that turns out to be a lemon. This article originally appeared at The Conversation.
A new initiative called Crowd Valley says it wants to increase the level of democracy in the crowdfunding market, potentially offering a new path to funding for Australian start-ups.
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It’s official: Australia is the second easiest place in the world to start a business, according to the World Bank.
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