Australia is fast becoming a hot place to do startups

Posted by: roger in Venture CapitalstartupNBNIncubator on Print PDF

Australia’s entrepreneurs have long lamented that if you really want to create a successful global technology startup that you have to leave Australia and go to Silicon Valley. It’s just too hard to do startups in Australia, they say. The market is too small, there’s no big tech companies doing real product development here (it’s just Sales and Marketing), the government doesn’t support tech startups well enough, there’s not enough venture capital, the tax structures are wrong, employees would rather get a fat pay check than equity, people here are more interested in having a great lifestyle than putting in the hard yards…. These are just a few of the excuses that have been offered as to why we don’t have a thriving tech startup scene. Well guess what? I think that the tide has turned and that Australia is about to become one of the next hotspots for startups. Let me tell you why…

 

 

It’s the Economy Stupid!

The world has seen most established western economies implode over the past 3 years. While bailouts have be de rigueur for the US and most of Europe, they merely treat the symptoms of economic malaise and do little to redress their cause. In fact, it can be argued that the bailouts are a kind of Ponzi scheme that merely shifts the problem of too much debt from the private sector into the public sector where it will hide for a little longer before it ultimately has to be solved. Some of the squeals we’re hearing from the PIGS (Portugal, Ireland, Greece, and Spain) could well portend the arrival of another set of shocks to the credit markets and a repeat of the slide of 2007.

Now look at Australia’s economy. In stark contrast to elsewhere, the unemployment rate currently sits around 5.0%. There’s a huge regular flow of capital into the equity market from Superannuation, Australia’s a compulsory retirement savings plan that requires all employers to contribute a minimum of 9% employee earnings. And finally house prices have largely held up, despite all the doom and gloom. Yes there is quite a bit of mortgage stress around, but while unemployment is low people will still find a way to service their debts and house prices will likely hold.

What this all adds up to is a relatively insulated economy in which the consumers are still willing to spend and into which new offerings can be introduced.

Australia’s Consumers are Great Proxies for the US and Love Tech

While Australia’s consumers are small in number they are pretty good proxy for advanced economy consumers around the world particularly those in the USA. Australian’s love their tech and will “give things a go” to see if they work or not. One only has to look at the love affair Australian’s have with smartphones and tablets. There’s over 2.1 million iPhones in Australia, at least 600,000 iPads, and pretty much anyone over 12 years of age who can afford a phone has one.

All of this means that if you want to try out an idea on the other side of the world, you can do so safe in the knowledge that whatever mistakes are made will largely be contained in Australia and have little effect on consumers in other markets. Conversely any wins that are had can be shouted from the tree-tops having had the most of the risk removed and being safely deployable.

Simply put, Australia is a great test market.

Its Cheaper Than Ever to Start a Company

Some 10 years or more after Scott Nealy proclaimed “the network is the computer” we’re finally seeing what this really means. Amazon, Google, Saleforce, Rackspace and countless other players are showing that infrastructure is no longer something that you buy outright, it’s now something that you rent as you need it. The implications of this shift are profound.

No longer do startups need to secure a big chunk of change to buy boxes before they can even start, they just sign up to could provider to rent a small slices of a few server and a basic pay as you go data plan. But it get’s better. Amazon’s EC2, Google’s App Engine, and Salesforce’s Force.com all provide the means to scale up the basic infrastructure that underpins the delivery of websites. Need more servers, more bandwidth, a bigger database, multi-continent replication with live replication? No problem, this is now largely built right into the base offering. Basic scaling is now no longer an issue. Once it does become an issue, your probably got a winner on your hands with enough regular to take care of it.

Labour is now something that also scales. Design, coding, marketing, accounts, legals… in fact pretty much anything that you don’t have inside your team can now be outsourced to experts around the globe who will work for you on a part time basis and more often deliver a great result. Interestingly, one of the biggest players in this space is the Australian company freelancer.com.

In this new world, the excuse “I can’t start a company because I don’t have skill X” no longer holds water. Provided you have good customer focus and know how to manage distributed teams it’s possible to keep the core competencies of business model, customer engagement, brand, design, and technical architecture and outsource most everything else.

Everyone will have Access to Broadband (whether they think they need it or not)

The importance of Australia’s much praised and maligned National Broadband Network (NBN) in company formation will be crucial factor in differentiating Australian based startups from those based elsewhere. I’ve written about the NBN before in a blog post back in March of 2009 on why I think the NBN will yield some great opportunities that I’d like to revisit here in this one. For a deeper dig again take a look at the NBN Myths Site.

Regardless of whether you think the NBN is the best thing since sliced bread, an expensive white elephant, not needed, a complete waste of money, or a folly of the government of the time, the NBN will become a reality. Those who say that we’ll never need the bandwidths on offer, or that the technology will become obsolete fail to understand both the history and technology of communications and technology. History teaches that the advent of each new communication technology results in the emergence of new ways of doing business and entertainment that the vast majority people would never have guessed possible up until that point. From the technical standpoint fiber is the solution. Current best practice for a single fibre over 200km is 69 Tbit/sec (that is 69,000,000 Mbit/sec). There’s plenty of headroom for expansion and any advances in communication technology will only see further improvements to this speed over the existing fibre plant.

Perhaps the biggest and most important feature of the NBN is ubiquity, its presence alone will be a huge game changer. Companies looking to deliver new services over the internet to customers will now have a major headache removed from their business plans. The question of “what do we do for people who don’t have adequate connectivity?” is now effectively rendered moot: If a company comes up with an idea that requires interconnectivity of a particular flavour to customers, any customer who could afford to pay for the company’s service will now be able to choose a plan sufficient to access it. This means they can put their energy and talents into creating a great experience that is available to everyone without having to worry about laggards as there needn’t be any.

Incubators are Springing Up Everywhere

When I first returned to Australia from the US in 1999 there wasn’t much startup action happening and over the next 5 years as the dot-com bubble burst many of the big tech employers, such as Motorola and Nortel, pulled up stumps and left. Over the past 5 years we’ve seen some of these big employers replaced by Google (thanks to its acquisition of Lar and Jens’ Rasmussen’s Where2) and some local upstarts that have succeed in going global, most notably Atlassian (who last year took a $60m placement from Accel partners, but more on that later). But what’s more interesting is what’s happening at the small end of town.

Three years ago we saw Pollenizer first establish itself as a Startup Factory that helped entrepreneurs get their companies kickstarted on a combination of fee for service and a slice equity and now as an incubator that helps entrepreneurs with the business side but in need of help with tech. Another incubator, Startmate, has also just started that takes the converse of approach of helping founders who have tech but need business help and want to go to the US. In the middle of this year we’ll see another incubator, Pushstart, commence operation with what will be a different take again. [Full disclosure: I am one of the founders of Pushstart and not able to divulge more at the time of writing]

What’s important about all these incubators is not that they’re all loosely based on the Y-combinator / Techstars model of leveraging the “cheaper than ever to start” phenomenon mentioned earlier, providing $20,000 -$25,000 of cash funding, and a 3 month in-house mentoring program. What is interesting is these incubators are self-organizing to service different market needs and while they’re based in Sydney many of the mentors come places other than Sydney and span more than one incubator. A much more holistic less fragmented community is definitely emerging.

Access to Capital is About to Explode

The last several years have been pretty grim for Australia’s technology entrepreneurs. Bootstrapping on the smell of an oily rag, followed by a quick transplant to Silicon Valley has tended to be the way to the way to go. The cancellation of the Commercial Ready grant scheme was widely lamented and hurt a number of promising startups that had already invested significant effort in the application process. The last twelve months however have seen a change.

First, the $196m Commercialisation Australia Grant Program came online and provided an avenue to top up the funding that is available for upskilling entrepreneurs, proof concept validation, and early stage commercialisation. While this program has been a help to the well positioned, it is competitive and a little tricky to gain access to. Fortunately, the Federal Government also runs two other programs that are requirements based (i.e. not competitive) that offer about the same level leveraged uplift: The Export Market Development Grant (EMDG) program and the R&D Tax Credit. To be sure that requirements are met, startups are best advised to engage professional consultants to help prepare the paper work for these grants, but even after they have been paid it’s not unusual to stretch $1 investor capital into $1.40 of expenditure or more using the combination of properly prepared EMDG and R&D Tax Credits.

Second, we’re finally starting to see the emergence of a genuine multi-stage pipeline of capital for startups at all stages of need / maturity.

As mentioned earlier there are a number of incubators (Pollenizer, Startmate, and Pushstart) that can provide $20k - $25k in funding to get a company going. Around these incubators many of the same people also run regular angel diners being run that introduce seed-stage startups to angels where investments of $150k - $400k are made. Some examples (by no means exhaustive) include Innovation Bay (Sydney), Angel Loft (Sydney), Sydney Angels (Sydney), Brisbane Angels (Brisbane), SA Angels (Adelaide), Melbourne Angels (Melbourne), and Aurellius Digital (Melbourne).

In addition to a number of funds coming specifically designed to make placements in the $300k - $4m range. Typically these funds take advantage of the Early Stage Venture Capital Limited Partnership (ESVCLP) structure provided the Federal Government. ESCVLP usually manage up to AUD$50m and are of particular interest to Investors since the Revenue and Capital Gains are tax-free (the rub is that losses can’t be distributed). The Federal Government also runs an Industry Investment Fund (IIF) program that enables investors to get government co-investment on dollar for private dollar matching basis ($20m + $20m) to create a ten year fund of up to AUD$40m. At the time of writing three such funds have been approved, more details can be found here.

The combination of ESVCLP and IIF are slowly opening up the gates for early stage investment. Notably one Melbourne-based ESVCLP fund Adventure Capital, has made one investment and has 3 term sheets outstanding before it even has its website up or closed its capital raise. Clearly there is significant latent demand. Further the fund’s CTO and General Partner Adrian Vanzyl serves also serves as the CTO for one of Blumberg Capital’s large US-based VC funds thereby providing a quicker path to a large US round for the right company should one be required for a startup that needs to move to the US. [since I wrote this Brad Howarth has published a great article on Anthill that talks about funding and Adventure Capital in particular]

Beyond this mid tier level funding we have the standard funds of $100m or more, the Starfishes and SXVPs both of whom have open funds and good track records. Interestingly, I’m also aware of at least one larger fund with $250m+ or more under management that is planned to launch this year as well.

Third, we’re starting to see a number of Entrepreneurs achieve sizable success and some exits for their businesses. As was mentioned earlier Atlassian, took at $60m placement form Accel Partners in July 2010, but more importantly the business continues to be headquarter in Australia. Accel also made an investment in OzForex in November 2010.

The Ecosystem is Emerging

Finally, we’re also starting to see a much more collaborative ecosystem emerge. I’ve really noticed a big change in the conversations I’m having with people in all parts of the entrepreneurial ecosystem. There really seems to be an awakening that when people help each other, whether it is to confirm a customer need, to refer them to someone else, or to help them understand where they need to focus their attention next to improve the startup’s offering, everyone wins. Less energy and time are wasted on unproductive directions, deal flow improves, and the community as a whole creates more value and more opportunities for people to participate.

People are now not just paying lip service to this way of thinking they are actively backing it up with their actions.

One way this manifests is via a measurable thawing between what was traditionally a rivalry between Melbourne and Sydney (and other Australian capitals too). There is definitely a much greater crossover in terms of investment, people, and deals between cities than ever before.

Another way is the way we’re seeing people choose to help each other is via the choice to actively seek out co-working opportunities AND to pass on war stories while doing so. This is really starting to take off in Sydney and we’re even seen entrepreneurs band together to access office space en mass in a more structured permanent way. An example of this is Fishburner based in the Sydney suburb of Ultimo who offer startups space on a per desk basis at well below market rates. The shared learning that spaces such as this provide is invaluable and can take months of a small companies timeline to creating a viable product and becoming cashflow positive.

This phenomenon of co-working is one that I expect that we’ll see more of going forward, particularly in Sydney. The reason for this is that the Barangaroo development between Darling Harbour and Walsh Bay will see a huge turnover in real estate in the Sydney CBD as the bigger companies take advantage of the opportunity to aggregate multiple small leasholdings into cornerstone leases in new the new stock that is built. Remnant real-estate for startups will be available everywhere and I fully expect to see the emergence of a “remnant” secondary market for startups in offices between permanent leases to emerge.

So is Australia a great place to do a startup?

Absolutely.


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