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The Silicon Valley Gold Rush, Are Australian Small Business Tech Start-ups Getting Trampled? Technology

Getting trampled in the Silicon Valley gold rush

By Oliver Milman
Monday, 25 June 2012

feature-gold-bars-thumbGoing by economic indicators such as unemployment, inflation and interest rates, Australians should feel pretty good about how we stack up with the US.

 

But the US retains a perennial edge when it comes to start-ups, thanks to a booming Silicon Valley.

 

While the US struggles with high unemployment and a yawning deficit, its start-up investment community hasn’t gone to ground.

 

Indeed, American investors are increasingly looking beyond their own borders for the next hot venture to back, with Australian entrepreneurs keen to be part of the gold rush.

 

Aussie start-up talent is being backed by Americans like never before – Apple acquired app search provider Chomp for an eye-watering $50 million in February while there have been smaller, but no less significant, deals for Australian newcomers Flightfox and tech entrepreneur Kate Kendall, who has teamed up with the founders of YouTube to launch a new business.

 

Budding tech entrepreneurs could be forgiven for thinking that the US is a cash cow that anyone can milk for money and expertise, necessitating relocation to California as soon as possible.

 

But Australian investors are keen to point out that an early dash to the US could be counterproductive, with many start-ups in danger of being dazzled by the seemingly easy cash on offer.

 

“There’s been a fair bit of commentary in the media recently about start-ups going to the US, which may create a certain expectation among businesses,” says Richard Dale, head of business advisory firm Argo Partners and committee member at Sydney Angels. “We need a bit of balance in the debate.”

 

“There’s no question that there’s a lot of money in the US and it is a big market. But what some people don’t realise is that it isn’t just 20 times bigger, it’s also 20 times more competitive.”

 

“While there is more depth and breadth in the US than here, that doesn’t necessarily make your chances any better. When you move to an unknown country where you don’t know the rules of the game, it’s a big risk. In fact, moving offshore is the highest risk thing you can ever do.”

 

Dale stresses that shifting to the US at the first opportunity should only be done for very specific reasons.

 

“Business isn’t about raising capital, it’s about getting customers,” he says.

 

“If your customer base is primarily in the US, then fine, but there is a lot of support in Australia if you’ve just started and you need investment.”

 

A key criticism of Australian investors is that they are somehow “asleep at the wheel.” Sydney entrepreneur Robert Yearsley recently hit out at local investors for failing to back his venture Cappture, which is set to relocate to the US after getting glowing feedback from American funds.

 

Dale, however, feels that the start-up ecosystem is steadily growing in Australia. He points to Sydney Angels, a formalised network of business angels of which he’s a member, that mull over pitches before deciding whether to invest or not, as a prime example of why Aussie entrepreneurs should look at their home turf first.

 

“Around four years ago, there was no real structure to the angel community in Australia,” he says.

 

“There were pockets of activity, but now there is a framework of angel investment in all of the capital cities, shifting money from the property market, which does nothing but drive up property prices, to entrepreneurial businesses that create value. That’s a very positive development.”

 

“Every time I speak to an American and they find out the level of support available here, they say ‘that’s fantastic.’ The problem we have is that we are a small market, which there isn’t anything we can do about.”

Dale accepts that there is a “dead zone” for Australian businesses looking to raise more than $2 million, but less than the megabucks shelled out by venture capitalists.

 

For a fast-growing start-up, the lure of the US is stronger if you are beyond the seed funding stage but are still small fry for VCs looking to make big returns on their large investments. Despite the rapid emergence of a funding environment around early-stage businesses, entrepreneurs continue to struggle to raise money in this middle ground.

 

One local business that did manage to beat the odds is online customisable shoe retailer Shoes of Prey, which secured $3 million earlier this month.

 

The business did this by cobbling together a group of nine investors, seven of them hailing from Australia, including Atlassian co-founder Mike Cannon-Brookes.

 

Michael Fox, co-founder of Shoes of Prey, says that the process was a long one but one that didn’t disillusion him.

 

“We pitched to about 80 investors in 18 months, so we had a pretty good hit rate with the investors we got,” he says.

 

“The feedback from the US investors was ‘we love what you’re doing but you’ll need to move here to make it worth our while.’ We couldn’t justify that, so we had to try to get together a group of investors.”

 

“It was a bit like herding cats, but once you get one like Mike Cannon-Brookes on board, it really helps. All of the US investors contacted us, while we had to chase all of the Australian people, but it was all worth it.”

 

“There are good benefits to being in Australia. You can raise money here, there are big government incentives to stay here and you have your network around you. Plus, we like living in Sydney.”

 

Even if you are set to expand your horizons beyond Australia, you might want to question any automatic preference for the US.

 

With the rapid growth of cashed-up consumers in Asia, Australia’s geography could become a boon rather than hindrance for the next generation of businesses.

 

Willie Pang, CEO at Asia Pacific sales specialist ViDM Group and former managing director of Yahoo! Search Marketing, says that Australian start-ups should start looking north rather than just east for investment and business opportunities.

 

“The US market is large, there’s lots of capital and there isn’t a language barrier,” he says. “But I tend to think of it as similar to actors who move to Hollywood and hope to become the next Eric Bana. The chances of success are very slim.”

 

“In the digital and tech space, Asian markets look to Australia as a thought leader. We are a little ahead of south-east Asia and start-ups can take advantage of that.”

 

“There are digital businesses being bought in China for 60 to 100 multiples of revenue and I know there are plenty of VCs looking to buy up Australian talent.”

 

“It isn’t that hard to connect with investors and organisations like AusTrade can help with those kinds of connections. There are great opportunities in Asia.”

 

But what of the oft-repeated fear of “brain drain” as entrepreneurs flee Australian shores?

 

“The whole idea of a brain drain from Australia is terribly overblown. But all the talk of losing Australian start-ups to the US has at least raised awareness that there’s this nebulous area of funding from $2 million upwards. I think that we’ll see some of the big guys, such as PwC, concentrate on setting up smaller funds to address this market.”

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After having just returned from a trip to Silicon Valley and exhibiting at Demo...the launch pad for new technologies to present Business Planning HQ, I feel quite well informed on this topic.

There are a number of Aussies doing very well not just in Silicon Valley, but also in the San Francisco area, which also has a fantastic start up community. One omission from this article was the type of start-up considered for funding. From the companies that presented at Demo, a large number of them would never attract funding in Australia due to the long cash burn and lack of protectable intellectual property.

If you can move to the US and your market is there, I would suggest pitching at Demo and giving it a go. PS: The weather in San Francisco is not that different to Melbourne so I don't see acclimatisation as any thing significant

PSS: Competition is significant with retail prices for software significantly less than in Australia, however if you have a niche product such as mine, sometimes that niche simply not large enough here for commercial scale rollout.
Marcus Tarrant , June 26, 2012
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Summary: Local investors lack the DD (due-diligence) skills to evaluate the merit of a modern startup.

TL:DR
I've built two successful businesses from OZ (now on my 3rd) and funding is a critical component to scale.
The 2M+ deadzone is NOT the issue. If a startup has got to that phase, they've already figured out where they need the HQ to access their customers and funding. The issue really is the angel deadzone.
Local angel funding's primary filter is "revenue is a deodorant". In contrast: bay area investors use other filters like social proof, team, user adoption, user engagement. The latter may be sneered at as vanity metrics but get a startup critical funding to outflank startups in other countries. I've seen local startups with potential falter due to not accessing cash to get to product/market fit. Thank goodness for StartMate, PushStart (and the like) that actively create a bridge.

My take is that the local community will grow based on those who've built product (startup) businesses - they have the collective DNA to do high quality DD. The awesome progress of the StartMate 2012 group is a reflection of experienced insiders focussing energy (and some funding) on talent and potential. Whilst others sit on the sidelines rubbing their chins about "needing to progress a scalable revenue model", StartMate hot-housed that potential into some of the successes you read about here an in Asher Moses' articles. The lesson really is that StartMate 2011's lessons informed the DD for StartMate 2012 and so will that evolve better DD for StartMate 2013. Its a skill being honed based on practise - not theory and not based on spreadsheet thinking. Spreadsheet DD is only viable in the absence of competition and disruptive business models.

To paraphrase a recent Andrew Chen blog post on the `business models are a commodity`- the goal is not "nailing revenue prior to funding" - its about "product/market fit" => "monetization". Sounds like the same thing but the "=>" implies focus on the first.

Other comments:
I agree with Richard's assessment that "move to your customers" is essential:
a) With my first startup we had 90 enterprise customers local and global when we were acquired by Surfcontrol without leaving Chatswood.
b) With ThreatMetrix establishing in SF was essential because the pool of local prospects was woeful. In contrast the

I don't agree with Richard that:
a) "In fact, moving offshore is the highest risk thing you can ever do.” - seriously??? The E3 visa is so tempting its only the ozzy zealots like me that ignore the logic. The aussie network in the bay area is strong and supportive - people don't realize the depth of wisdom in the community that reduces risk in the US (at least).
b) only move for customers.... I sold a company by a chance meeting at a Las Vegas trade show. A BD deal got started by chance meeting a Menlo bakery. Serendipity happens.

I agree with Pang - lets not fixate on the US. But as they say in the movies "its complicated". I defy you to not spit your coffee when a term sheet includes an executive role for the investor's nephew :)

David Jones
streethawk.com
David Jones , June 27, 2012
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