Source: The Age - March 12 2014
Australia's innovation funding environment is akin to having a great primary school system but no secondary schools or universities. Start-ups need a better go from the public and private sector, including superannuation funds, argues Sam Chandler.
It has been exciting to see Australia's start-up scene develop significantly in recent years. And with it, the media attention dedicated to new and high-growth companies and entrepreneurs has increased dramatically. But when you look a little closer, beneath the shiny gloss of the big-name later-stage success stories (such as Atlassian) or the buzz-worthy seed-stage incubator labs (such as Pollenizer), you realise something troubling: there is almost no capital available in Australia for mid and late-stage start-ups.
If you're a smart founder with a good idea, you can probably raise the few hundred thousand dollars you need in seed capital to get your nascent business off the ground. But imagine you are successful – and several years from now, you have a team of 20 people, some revenue, and want to raise $5 million, the typical minimum size of a Series A venture capital financing in Silicon Valley.
Well, good luck. There simply isn't a lot of money in Australia looking for a home in Series A-sized rounds. There are too few VCs, and not enough capital.
Now imagine you are really successful. Your business has grown dramatically since founding, you now employ more than 100 people, and reaching the next level doesn't require a $5 million cheque, it requires $20 million. That's more like a Series B or C financing in the Valley. Raising $20 million in Australia right now for a Series B or C financing is effectively impossible. The only VCs writing big cheques in Australia today are American (the recent $30 million SiteMinder investment by Technology Crossover Ventures is an example).
So what does this all mean? It means that many mid- or later-stage start-ups looking for funding have no choice but to look offshore. And quite often, that means moving offshore, too. It also means that a lot of the wealth generated is generated in places other than Australia (usually, the US).
Let me put that another way. Talent is leaving Australia, companies are leaving Australia, and the gigantic returns generated by late-stage start-ups when a "liquidity event" happens (when they IPO or get acquired) are not happening in Australia. Clearly, this is not a good thing for the Australian economy, whether you are talking about job creation or wealth creation.
There is quite a bit of talk about the "brain drain" in Australia – our most talented people leaving for (usually) bigger ponds. But it is more than just brains leaving start-up land. A "company drain" is just as bad, if not far worse. There are real long-term consequences for the Australian economy if we do not have a well-developed venture capital market that supports start-ups through their multiple phases of growth – from zero revenue, to a few million in revenue, to tens of millions in revenue.
And by the way, those companies doing tens of millions, are they "start-ups"? Yes, they are, if they are still chasing hyper-growth and scale. They're just later-stage start-ups.
Take our company, Nitro. We're doing tens of millions in revenue, but we're still growing fast, and we absolutely consider ourselves a start-up. Our culture, our attitude, our growth ambitions – we are the epitome of what we think it means to be a start-up. And start-ups need capital.
Nitro was founded in Melbourne in 2005, but we've been based in Silicon Valley since 2009. We moved for the talent, to be at the centre of the technology universe, and for access to capital. Ironically, we ended up raising money from an Australian VC who we liked a lot, Starfish Ventures, after bootstrapping for a long time, but we are one of just a handful of lucky companies that are Aussie-backed. There simply aren't enough other similar stories.
Back in 2008-09, when we made the decision to move to San Francisco, Australia's early-stage start-up ecosystem was almost nonexistent. Certainly, the seed funds, incubator programs, shared working spaces, meet-up events and angel investor networks did not exist.
They do today, and it is a vibrant ecosystem that Australia should be proud of. Many great businesses are getting their start in this ecosystem. But the problem is that the situation in Australia in 2014 is akin to having a great primary school system but no secondary schools or universities. There is nowhere for these talented students – sorry, start-ups – to go.
There are many reasons why start-ups leave Australia. But a lack of mid- and later-stage venture capital funding should not be one of them. The businesses that this type of capital supports are precisely the businesses that as a nation we want to foster and retain. They employ hundreds or thousands of people, generate huge wealth, and create a future-proofed innovation economy. While venture capital is, and should be, a private sector activity, Australia's federal and state governments could and should play a role in stimulating investment in this asset class. And our colossal $1.6 trillion superannuation industry? I'm looking at you, too. Almost zero money flows from superannuation into VC.
The situation in the US is starkly different. US pension funds are some of the largest investors in mid- and late-stage VC firms. The result? According to the National Venture Capital Association, 11 per cent of private sector jobs come from venture-backed companies and venture-backed revenue accounts for 21 per cent of US GDP. That is the power of pension fund support combined with the craft of venture capital.
We need a bigger and better venture capital industry in Australia, or when start-ups become grown-ups, they'll go elsewhere for university. Oh, and that success story that I mentioned earlier, the one that is so frequently touted in the Aussie press? Atlassian raised $60 million from American VCs, and now they're talking about an American IPO, after reincorporating in Britain. The company drain continues.
It is time for our government, in partnership with the private sector and specifically our superannuation industry, to do more.
Sam Chandler is chief executive of Nitro.