Australian Commercialisation Stories

My name is Alan, I’m a co-founder of BugHerd, one of last year’s Startmarte companies. Some shameless self promotion first of all:
The 10 Start-ups to Watch
Aussie tech startup BugHerd strikes gold, raising $500k

We just raised $500k from Starfish here in Melbourne after having previously raised $240k 50/50 here and in the US in early 2011. We really wanted to stay in Australia, not only because we love it here, but because we felt an obligation to prove to other budding entrepreneurs that you can stay here and be a success (we’ve got a long way to go to be that success ourselves!). It’s been hard to see our Startmate colleagues, Grabble and Chorus, up and move their companies to the US with great success and wonder if we could’ve benefited from the same move. The big issue for me is that no company should be leaving our shores for greener pastures…ever.

Remaining in Australia has meant we’ve encountered significant challenges, not just from a business perspective, but a legal one. Many of the concepts that are natural and sensible in “the Valley” are foreign and complex here in Australia. For example, a couple of years ago I wrote a blog post about how difficult it was to get a USD Merchant account from the banks here in Australia. http://blog.angrymonkeys.com.au/why-being-an-aussie-startup-sucks

Ironically I was forced by our bank to take the blog post down before they’d open an account for us. The irony being that a post about lack of choice in banking was taken down because I had no choice in bank. I recently reposted it by request with the bank name removed. The fact that the bank couldn’t even grasp what a subscription model was or why anyone would give us money only compounds the problem.

Since that day we’ve encountered many other issues specific to being here in Australia. We’ve been trying for many months now to set up an Share option pool for our employees, but after having spoken to no less than 5 different accountants/lawyers there is still no consensus on how best to go about setting up (due to draconian tax laws here in Australia). A simple task in the US, but difficult to replicate here in Australia. Similarly, as founders, our own shares which vest over a period of time (another common fixture in the US) leaves us open to possible taxation events which we’d not be subject to in the US. This lack of understanding and acceptance of tech startups is prevalent throughout banking, legal and accountancy firms in Australia. Try getting a credit card or merchant account when your business has only been registered for 6 months! The difficulty in getting access to good advice and services makes it even more difficult to do business here in Australia.

Possibly the hardest thing about running a startup in Australia is finding talented people to work with you. The culture of “working for the man” is so ingrained in school leavers that the thought of running your own startup (or even working for one) simply doesn’t cross one’s mind. If it weren’t for my co-founder persistently harassing me to work with him on projects I may still be in my old desk job. With a lack of available talent and funding here in Australia, entrepreneurs are forced to take either their skills and companies to the US in search of that talent and funding. The more these people take their skills and success OS, the longer it will take us to combat the apathy towards this new, low-capital way of generating employment and wealth in this country. Until startups become a viable (and obvious) place for employment in Australia, top graduates will continue to gravitate towards high paying corporate roles meaning there will continue to be no one to start the next generation of companies.

One simple change that would turbo-boost our country’s innovation industry would be to alter the way we tax stock option grants to employees. In the US stock options are a means of aligning a new employee’s motivation and reward with the needs of a cash-poor, pre-commercialisation startup.

If Australia’s leaders really want to stem the tide of innovative Australians heading to Silicon Valley, they really have to address this fundamental problem. Nobody will ever become wealthy on a startup salary, and we need to be able to incentivise our early hires with a tax-effective employee share option system in order to keep them in Australia.

I founded and run Viocorp, an Australian online video software business. I have likened running a technology start-up in Australia to skiing in Scotland. There is a bit of snow, but the conditions are awful – wind, rain, ice, rocks, heather. But if you learn there and enjoy it, when you get to the perfect conditions in the Alps or Colorado, you are an amazing skiier. If I had started Viocorp 15 years ago, I’d have done it in Silicon Valley. But I love living here! Which makes up for a lot.

After describing Australian startups to a key partner at Bessemer, I was pleasantly surprised to hear him say, “sounds like they are just like Israeli startups”. If this were true, we wouldn’t have an innovation problem in Australia. Israel has created the closest thing to Silicon Valley with outstanding success and very limited resources. Australian startups have all the characteristics of the inexperienced entrepreneurs that found them – most boil the ocean chasing the revenue they need to keep them alive and stubbornly survive waiting for the big win that never comes. In the past 10 years the context of this has changed a lot, but the core has not. To be fair, Australia is far away, has no large tech verticals, and most successful Australian entrepreneurs came to Silicon Valley to discover success. But wait, isn’t that also true of Israel?

Australia has traditionally had a poor VC ecosystem, and most capital has been raised thru stockbrokers, micro-cap IPOs, sugar cane millionaires or west Australian mining cowboys. Now in fairness to both the entrepreneurs and the investors, it’s damn hard to build a tech company when you aren’t in a big tech market. Investment terms are tough in an ecosystem of constraint, and founderitis exacerbates this valuation obsession – instead of taking dilution founders chase revenue and end up on the treadmill of purgatory. What capital is raised is not enough, to minimize dilution for entrepreneurs, and risk for investors – but again, it’s the reverse result. There have been a number of well-publicised private equity deals done by so-called US VCs in the past years. These are not VC deals, they are PE deals done with profitable companies that don’t need the capital, but they enable the founders to take cash off the table. Its great that US investors are investing in Aussie deals outside of Silicon Valley but they are not helping the companies that need it – i.e., the VC deals that are done every 15 minutes in the valley. This is what needs to change in Australia, as it did in Israel.

The reason these investments haven’t happened (although US VCs have done early stage in Australia back in the 90s (Mayfield, Sequoia, USVP, Kleiner, to my knowledge, but they moved the company to the US) is largely because they only invest in things that they can add value to, and its hard to add value in another country. Now you can do this with partners in large markets like China and India, but without an ecosystem of entrepreneurs and local VCs – who do you partner with? You can’t have good VCs without good entrepreneurs – in fact in given VCs do at best 1 deal in 10, you need them in 1:10 ratio! The other main reason is even simpler – Australian entrepreneurs and investors rarely think BIG. Both are too quick to pull the trigger on a deal to get a return. Traditionally Aussies have happily pocketed $5 or 10M and gone into property development back home, or gone surfing. Radiatta was a stellar deal, proving that you could actually build a semiconductor company in Australia (like Israel), and commercializing Australia’s ground breaking invention of WiFi – but it wasn’t Atheros.

Imagine having the hubris to think that you could discover a life threatening disease that no one believed existed, prove it killed people, invent a cure and go build a multi-billion dollar, category creating public company that is still growing and investing in new indications and technologies 20 years later – yet this is exactly what Peter Farrell did with ResMed. Imagine Kevin Kalkhoven transforming a tiny OEM laser company with worse margins than the rag trade, into the Telecom behemoth JDSU that completed biggest tech acquisition in history? We need to see this in Australia.

There is a spark of hope – something that happened in the valley in the late 70s – we are starting to see a new generation of Aussie entrepreneurs (many of whom came here to learn) taking the gains from their first company, and re-investing it in their peers. They are making time to help the companies they invest in, and rather than competing for scraps in an ecosystem of constrain they are working together to create an ecosystem of abundance and value creation. Unlike prior generations, they are not inflicting the same draconian terms or constraints that were forced upon them, but rather, they are breaking the cycle and forming the virtuous circle. We must embrace this phenomenon; its what made Silicon Valley.

If Australia can nurture this entrepreneurial spirit, embrace all forms of innovation (not just research), hail the entrepreneur, and educate her children to be good employers rather than employees then she will transform herself from a resources and services based economy into a knowledge economy that will easily weather the inevitable end of the commodities cycle and invent her way into whatever future may evolve.

Australia traditionally lacks a deep entrepreneurial class of people from the world’s fastest growing technology market segments. Local career choices are often limited to being an employee of a branch office or a subsidiary of global technology businesses. This means being far away from the core group of innovators and business builders these people aspire to become.

Entrepreneurial aspirations need support through a “network effect” of exposure to like-minded people, who have experienced both international success and failure. This can come from active mentors who have already been on a similar journey, committed partners or other people within a broader network.

While the best and brightest need to leave Australia in order to be active participants in technology industries, returning expats with successful international careers at industry leading companies are often sidelined upon their return. Silicon Valley repats (returning expats) from India, Taiwan, Singapore, Israel and China are fuelling the growth engines of new technology industries and developing leaders in their home countries. Australian capital and business still tends to regard their own indigenous Global Alumnus as “sort-of-misfits”. These Australian pioneers, while respected, aren’t taken seriously commercially and aren’t regarded as a leverageable resource.

As a result, many choose to adopt the strategy of either not returning to Australia until they are ready to leave the industry or retiring. This one-way brain-drain robs the community of Australian-domiciled engineers, business managers and marketers, keeping the domestic industry subscale. It also prevents engagement with very expatriate Australians whose deep relationships, rolodexes and experience in building businesses in complex, sophisticated and rapidly growing markets could help open doors and guide careers. These people should be being tapped as the mentors and guiding lights of locally funded technology industries that seek to get up to speed with global competitors.

While this is changing because of the recent emergence of the “lean capital” investment model, internet based shared infrastructure and globalised demand, Australia now runs the risk of being an “entrepreneurial maternity ward” as successful businesses born in Australia, leave in order to grow. While Atlassian, Kaggle, NICTA and CSIRO have developed a critical mass of core engineering and commercial talent, for Australian businesses, the challenges of harnessing entrepreneurial talent, scaling a business, attracting growth capital and building market share in key markets, still means leaving for the US and increasingly Asia.

Australia must engage their talents and energy, not continue squandering the talent, ingenuity, energy and creativity of our best and brightest.

As one of those people who is on that journey, I can see that Australia could end up on either side of the barrier, between those economies boasting the fastest growing businesses and vigorous entrepreneurial ecosystems and those countries who just wished they had and wondered what happened.

The most important ingredient for a successful high-tech venture, indeed its very canvas, is the critical domain expertise and core competency of its founders. The most effective incubator of such expertise is usually one or several successful large companies which shaped their careers. Creativity alone is not sufficient. To become successful innovation, creativity has to be complemented by a keen sense of business, timing, and reality. That is why most successful ventures I have come across worldwide, including Silicon Valley, were founded by entrepreneurs with a solid track record in leading companies in their industry segment. Many startups are however funded based on mediocre expertise or technology ideas, often coming straight out of academia. Unless the academic founder is a proven world expert with a track record of commercialized contributions, the odds are that the company will fail for lack of critical value proposition that can be validated with a reasonable funding runway. Making funding available to the average university professor in the hope of accelerating the incubation of new enterprises is most likely going to be wasteful. Australia has some very good universities. However, like in many other regions that try to replicate “Silicon Valley”, the “competency density” is not sufficient to generate sustainable innovation. The first recommendation for policy makers is therefore to encourage the development of truly competent entrepreneurial talent by increasing the talent density in universities, exercising stricter due diligence on funding proposals, and providing incentives to genuinely experienced entrepreneurs.

The second most important ingredient is execution. Superb execution demands deep experience not just in science, but also in technology development processes, product lifecycle management, market introduction, operations, supply chain management, etc. It also requires a motivated, dedicated, and energetic team, ready to “burn the ships of retreat”. A high-tech venture can seldom be successful with key employees working 40 hrs/week (or less) and indifferent to the value of their equity holding in the company. Until a region develops sufficient success stories that provided the inspiration, role modeling, and training of entrepreneurs and startup employees, it is difficult to expect different behaviors. Mixing teams in such regions with management and/or employees from a successful and established entrepreneurial region (such as Silicon Valley) can be a powerful tool to accelerate the paradigm shift. Working closely and systematically with US experts and business leaders helps transfer technical know-how, business experience, best practices, and provide role models to motivate and empower new venture employees.

I often think that Australian startups were the original “Lean Startup” practitioners long before the movement became fashionable. More truthful however the Australian characterisation is “undernourished”.

My first startup (EmuTech) exited in late-2000 to British listed Surfcontrol. At that stage we had raised angel funding, a great product, local and international customers, channel partners—basically had everything nailed—we were ready to scale. We needed to access capital to sprint ahead of the competition in a global market with some big incumbents—but angel and VC had “dried up” in Australia because the dot-com bust scared investors. So the decision was made to join a big company rather than become a big company—no regrets and great result for founders and investors but it was interesting to see that other US companies enter the market after us and create even more wealth and jobs by “staying in the game”. My second startup ThreatMetrix is an eCommerce fraud protection solution and is on its way to being a big business. I raised two rounds of capital (effectively a ‘seed’ and series-A) but latter rounds have been led by US VCs who have deep pockets and network to help the company take a leadership position. It would be nice to think the company could be HQed in Australia but the reality is the “financial scaffolding” (a Kleiner Perkins term) and depth of network is just not available. Further, to build a big company the taxation infrastructure in the US allows sensible “Share Option Plans” and other vesting aspects which have been decimated in Australia in recent years—there are many strong incentives to build larger US teams than Australia teams—very frustrating.

My latest startup StreetHawk was intended to build and grow a company from Australia. But daily reminders of “access to network”, “access to capital” create a tension to move to San Francisco. In the US now there is an angel investor bubble whilst I find that angel investors in Australia are rarely from the tech sector (perhaps they come from property development or mining or legal or medical) and need help to understand the potential and the challenges. It seems the choice of where to base your HQ is becoming Darwinian—thats a shame for Australia.

I don’t believe in blind handouts—I value the presence of various grant programs and R&D tax offsets but I’d make a few tweaks based on my learnings as an actual practitioner. I am against a “nanny-state” because I believe that being lean, hungry (and maybe even a little undernourished) drives creativity, hustle and guile. However, its not absolute—we need to create an eco-system that can build world class businesses—that’s a combination of network, experienced practitioners and “capital to scale”. I love being involved with StartMate because its a practical actionable program already delivering results—Adrian’s book is a valuable plank in the process to get the Australian eco-system cranking if its recommendations are actioned.