Australia’s IT startup scene: Blooming, not dying

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analysis This morning the Sydney Morning Herald published a series of articles claiming that Australia’s technology startup ecosystem is unable to support local entrepreneurs, causing them to increasingly head to the US in search of the financial backing they are unable to attract in Australia. The only problem is, the evidence doesn’t support this assertion.

If there is one thing which Australians love, it is to have a big fat whinge about why they can’t access the same goods and services locally that residents of larger first-world countries such as the United States can. In the nation’s technology sector, this kind of complaint is an ongoing theme with respect to a number of disparate issues. From the inflated cost of gadgets, software and video games locally to the availability of high-speed broadband, from the delayed launches to geo-IP-blocked content, Australians simply love to criticise the powers for be for not giving them everything the Americans have, and we love to do it loudly and proudly.

Nothing illustrates this trend more than a series of articles published by the Sydney Morning Herald this morning on the topic of technology entrepreneurship in Australia. Headlined by the case of high-profile and glamorous young entrepreneur Nikki Durkin, who recently joined the Y Combinator technology startup incubator program in the US after her Australia-based startup 99dresses shut down following financial issues and a need to re-work its business model, the SMH’s articles paint a story of doom and gloom.

Durkin’s dream, she says, is to “build a billion-dollar” company. But Australia “won’t let her”, so she’s heading to the US.

The rest of the articles are similarly inflammatory. US venture capitalists chip in with comments that local startup BigCommerce could become the next Microsoft, but “Australia ignores its innovators”. According to local entrepreneur Kate Kendall, the local market is “conservative”. Australian investors “scoff” at local entrepreneurs. There’s a “constant flow” of talent overseas and so on. Virtually every big name of note in Australia’s technology startup scene has their say, and the vitriol is incredible. Criticism is heaped upon many parties, but principally it’s venture capitalists — those evil, evil, greedy financiers holding the nation back — and the Government who are the target of most of the scorn.

Now, if this series of articles had been published seven to eight years ago, I would have broadly agreed with them. At that stage, in the wake of the dot com bust, very few Australian technology startups existed, and those that did found it very hard indeed to obtain early stage angel investments or venture capital. With the exception of a handful of companies like Wotif.com and Seek, Australian dot coms of any stripe found it hard to get off the ground in that threadbare period, and I pity the lot of those that tried.

But over the past few years, Australia’s technology startup scene has completely changed, and the truth is that it now offers Australian entrepreneurs a very supportive environment and plenty of funding opportunities.

Now, I don’t want to fall into the same trap that the Sydney Morning Herald has with its series of articles this week. In my analysis of this situation, I don’t want to simply have a “he said, she said” style of debate. I have stated again and again that the debate in Australia’s technology sector should be based on evidence. So what evidence do I have that Australia’s startup scene is thriving right now? Firstly, let’s look at the history of investment in Australian technology startups over just the past six months:

It’s a huge list, isn’t it? And these are literally just the startup investments in Australian technology startups which have happened in the past six months since November 2011. And they’re also only the investments which are believed to have come primarily from Australian sources. In addition, these are only the investments which have been reported by Delimiter.

Do you get what I’m saying here? I’m saying that just in the past six months, Delimiter has reported on a dozen major investments by Australian investors in Australian technology startup companies. That’s not counting major investments by international investors in Australian startups remaining in Australia (there have also been plenty of those), or major acquisitions of Australian startups by global companies. I have also not listed here many of the government-backed investments by groups such as Commercialisation Australia.

I also want to highlight a secondary list of news stories which highlight the strength of the Australian technology startup community at a lower level — pre-angel investment. These are startups which need basic help in starting their operations, but aren’t yet really ready to take funding. A number of technology startup incubators have arisen in Australia over the past several years to help get local startups off the ground. These are basically programs like the Y Combinator program which 99dresses’ Nikki Durkin has gone through.

Do you see where I am going here? There are at least half a dozen sizable technology startup incubators in Australia which are constantly touching base with Australian startups at the moment and acting as nexus points through which startups can connect with business and technical resources, attract funding, meet other entrepreneurs and seek staff. Most of these incubators also receive direct technical support from technology vendors like Microsoft, Ninefold, Amazon and so on to a allow them to get off the ground quickly.

Now, I don’t want to harp on this topic too much. And it is definitely also true that, as the Sydney Morning Herald’s articles mention, some Australian IT startup entrepreneurs such as Durkin, especially those whose initial business models have failed (this often leads to disillusionment) have found it frustrating and limiting dealing with the Australian technology startup ecosystem.

It is also true — in fact, it should be blindingly obvious — that Australia will never be able to offer IT startups the same level of support or infrastructure that exists in the US. We are a much, much smaller country, and we don’t have the same global technology and financial institutions headquartered here. It’s always going to be easier if you take your company to the US, to get a level of scale and open doors for larger and easier deals than you can get Down Under. This is a fact of life, and we need to accept that comparing Australia with the US is not a fair fight. We need to run our own race, and recognise our own significant milestones for what they are.

But hard work and breaking through barriers is part of every entrepreneur’s journey (if you don’t believe me, ask me over a beer sometime what I’ve gone through with Delimiter itself). What I wanted to prove with this article is that many Australian IT startup entrepreneurs have not found it frustrating or limiting dealing with our local ecosystem. For those that are positive and enthusiastic (qualities every entrepreneur needs), the technical backing, staffing resources and financial funding is definitely available in Australia. If dozens of companies can attract millions of dollars in any given six month period in Australia, this ecosystem is very far from being a wasteland.

Indeed, from where I sit, I can see a thousand flowers blooming.

22 COMMENTS

  1. “What I wanted to prove with this article is that most Australian IT startup entrepreneurs have not found it frustrating or limiting dealing with that ecosystem.”

    One of the startups you point to having raised in Australia is us (BugHerd). I’m proudly and passionately Australian; that is the reason we raised here. We could have (and should have) moved the company to the US and raised money there. We would’ve raised more, on better terms and have better support than we do in Australia. Yes we raised money here, and yes our mentors are flipping awesome, and yes we want to go on to do great things, but that is in spite of the resources here in Aus, not as a result of them.

    The teams graduating from Startmate in 2012 (and Grabble who moved to the US in 2011) are proof of the difference between staying in Australia and moving to the US. Far better access to funding, customers and expertise. The laws are easier to deal with, the banks are easier to work with, the tax system is easier to work with. Ever tried opening a Merchant account in Australia selling in a foreign currency? Ever tried setting up an employee share pool in Australia? Ever tried executing a convertible note in Australia?

    The argument isn’t that you CAN’T do well in Australia. You can do well anywhere if you put your nose to the grindstone. The argument is that if you want to increase your chances of success, the smart person moves to the US. Just because companies have had success in Australia (us included), doesn’t mean they didn’t find it frustrating and limiting.

    • Hey Alan,

      thanks for your comments, I really appreciate them!

      “The argument isn’t that you CAN’T do well in Australia.”

      Actually this is precisely what the argument is. It is blindingly obvious that things are easier in the US. It’s a bigger market, there are a billion more VCs and angels, and a lot more technical talent. That’s what you get when you have a country with a population of 313 million which is home to many of the world’s largest financial and technology companies.

      That fact is so obvious that it’s not even worth debating. But what people are arguing right now is that you can’t do well in Australia. Quoting from Asher’s article:

      “Ms Durkin’s aim is clear: “I want to build a billion-dollar company.” But she says Australia won’t let her, so she’s joining thousands of other Australians pursuing their dreams in the US.”

      The truth, however, is that Durkin is wrong. You can build billion-dollar businesses in Australia, and for Australia’s size and regional location, we have a strong, thriving and growing IT startup ecosystem. That’s what I showed with this article today :)

      Cheers,

      Renai

      • Last year VCs across ALL sectors in Australia invested $120 Million.

        In the US… $7.9 Billion….just in I.T.

        Yes Australia is smaller. Yes there’s less money. Yes, that’s why you move to the US if you want a billion dollar business. Even allowing for the difference in population, we’re investing a tiny fraction of what’s being invested in the US.

        Contrary to the evidence you’ve provided, there isn’t a single IT business in Australia anywhere near a billion dollar valuation. The only company even worth mentioning north of $100M is Atlassian, and they did that over 10 years and in the end with US funding…not Australian. So I agree with Ms Durkin in that regard. You cannot grow a Billion dollar tech startup in Australia (with Australian funding). There simply isn’t the available capital to do it.

        Saying we have thriving ecosystem “for our size and location” is a cop out. It’s like saying a kid did well in VCE “for someone who grew up in the bush”. It’s irrelevant unless you pretend you’re not competing with the rest of the world. My customers certainly don’t care that we’re doing well “considering we’re Australians”, they just want the best product. We’re in a global market and as a nation we’re ill prepared to compete with the resources available elsewhere. If I can’t give my customers the best product and service on the market from here, then I have a duty to take it somewhere I can.

        • hey Alan,

          thanks for your continued engagement on this issue.

          Actually, Wotif.com listed in 2006 at around $400 million and is now worth, according to the data I have from e*trade, $891 million. Seek is currently valued at $2.2 billion and REA Group 1.9 billion. Technology One is an enterprise IT software company similar to Atlassian based in Queensland with a market cap of $369 million. I’m not sure how up to date these figures are — I just pulled them from e*trade. There are many similarities between these Web 2.0-style transactional companies and some of the startups I mentioned, such as Airtasker, Designcrowd and so on.

          Given these examples, would you agree that your statement that “there isn’t a single IT business in Australia anywhere near a billion dollar valuation” is factually incorrect?

          In the IT services scene there are also companies like SMS Management & Technology ($376 million), Oakton ($113 million), MelbourneIT ($145 million), UXC ($171 million). All public. And of course there’s telco, datacentre, online retail and more. In all these areas there are companies publicly listed locally worth hundreds of millions of dollars which were formed within the last two decades as startups in Australian garages. Perhaps one of the better known ones in telco would be iiNet.

          Cheers,

          Renai

          • Sorry, that was a mistake on my part. I was talking with regards to the recent investments you mentioned (investment being the context in which we’re discussing).

          • No worries. I understand why people feel it’s difficult to build billion-dollar businesses in Australia. But (as with many issues) I wish the debate was more evidence-based. Billion-dollar dot com companies have been built in Australia and will again ;)

  2. Huge list? Seriously? Do you have any idea of the level of tech investment that takes place in the US? Let me put it in perspective for you: Let’s take your list and assign 500k to the ones where amounts are undisclosed and 1m each to the two local deals mentioned (which is probably way more than they got). That is a whopping 13.2m in 14 total funding events spanning from November to April 2012. Let’s compare this to the US in the same time period: Q4 saw $3.3bn with 524 deals (http://bit.ly/Kk2MV5). In Q1, it was $2bn and 257 deals (http://bit.ly/Kk2Nsa) in what is considered a slow quarter.

    Take the US population/AUS population which is roughly a 16x difference. Divide the US number by 16 and you get a ‘per Aus capita’ equivalent of for the US. That means US companies in this space received 343m which can be compared to the Aussie 13.2m, i.e. 26 times the activity in the US relatively. On the amount of deals, the 782 US deals in ‘Aussie terms’ would be 49 deals compared to the 14 listed here.

    Also, look at the deal size, which is an indicator of the strength of the funded entities, as well as the valuation on the entities. In Aussie equivalent terms, while Aussie companies raise less than 1m on average, US companies raise 7m. And remember, the US numbers list VC investments, it does not count angel investments, which has been rising steadily in the past few years.

    Yes, I know the list in this article is not exhaustive, but it is not far from the total.

    So if you are a tech company in Australia you cannot stick you head in the Bondi Beach sand and think you will succeed. There are companies and investors across the pond that will eat your lunch any time, anywhere.

    • Yes, you’re right, Australia should just give up on developing its own IT startup ecosystem because we’re never going to catch up with our US brethren.

      Give me a break. My point that this space has advanced incredibly fast in the past few years in Australia still stands. There is a lot more support for Australian IT entrepreneurs than there used to be only a few years ago, and we’re seeing new deals every single month now — usually quite a few per month. We’re never going to be the size of the US.

      But the point is that we’re improving — and rapidly.

      • One 26th. That’s 3.8% per person what the US invests in tech.
        AND they have 16x as many people as us, providing a much, much greater intensity at the center of the money. *Yes, I”m spelling it the US way.

        Australia has a few chance to retain the fleeing founders:
        * make better crowd funding law than the new stuff coming in in the US. US crowdfunding law caps it at $10k each, $1M max and has a reporting burden that could be compensated or mitigated.
        * change tax issue on shares so you pay tax when you sell shares and get the money, not when you’re given the shares and have nothing to pay it with. This is absolutely essential and everyone will keep incorporating in the US until this is fixed, even if they keep operations in Australia.
        * strengthen valley connections: setup some ultra high quality video conferencing (Cisco Telepresence or better) for free with a 10 year guarantee on service. One end in Sydney CBD. One end in Sand Hill Rd. Give the US money and advice a chance to make it to early stage (seed and Series A) in Aus.

        We could be aweome. But we’re not now. Right now we’re 3.8%. And it doesn’t matter if that’s10x what it was 8 years ago. It’s still shit. If you could increase chances of success by 26 fold, just by moving and you don’t, you’re not a patriot, you’re an idiot.

  3. I am not suggesting it will be as the US. But I am not seeing nearly enough to try go get it there. Yes, things have improved, but there is not nearly enough focus on this. The government is clueless in what to do, and although they have great grants and tax schemes, there is no active involvement to facilitate what the private sector seems to be unable to itself.

    • Personally, I do feel the government is doing a lot in this area. Most of the State Governments have investment programs, as does the Federal Government, there is a certain level of tax support (probably not enough, however) and money is being ploughed into IT infrastructure at a rate of knots through the NBN and local datacentre investment.

      The NSW and Victorian Govts in particular are highly active at the moment in IT industry development, and Queensland is moving that way.

      To my mind, startup ecosystems are not created by governments. They are created by local incubator companies like Pollenizer, and successful reinvestment by entrepreneurs who have exited their companies with capital and become VCs. That’s largely how it happened in the US, and that’s what’s happening in Australia.

  4. There’s another angle to the startups doing it harder in Australia’ story. A business model that works in adverse circumstances (short funding, hostile market conditions, small consumer base) is a business model that thrives when those conditions relax.

    In that sense, you can see the Australian marketplace as a kind of crucible – if it works here, it’ll sing and dance in a fatter and lazier marketplace.

    That’s what we’re doing in our own business, anyways :)

  5. Renai, thanks for your contribution to this debate. I thought your piece was a lot better than Asher’s in the SMH. A lot less “tabloidy” and balanced. But then you are not trying to sell mass-market newspapers…

    I can speak here about this with a fair degree of experience. I started Viocorp (a software-as-service video platform business) in 2002. I needed a job when I arrived here from Scotland. I had an Australian wife, an 18 month old kid with another one on the way. I knew very few people here and really was starting from scratch. We’ve built it up over 10 years into a valuable and profitable business. We employ over 50 people, have offices in Melbourne and have started exporting into Asia – opened a Singapore office earlier this year. We have taken some funding along the way, eg took a $5m round from Bailador, a private equity firm in December 2010.

    I can definitely say that the journey has not been an easy one. Starting and growing any business is tough. But is has been (and remains) terrific fun. The truth is that the ecosystem is better in the US for technology start-ups. If I had started Viocorp as a younger, gung-ho 25 year old with no family I probably would have gone to the US.

    But here’s the main truth – I’ve had an amazing lifestyle here in Australia. I’ve lived near the beach in Sydney. I have a mere 20 mins commute to work on my bike. And I’ve been able to find a sensible work/personal balance that has allowed me to watch my kids grow up and to become pretty quick on a bicycle (and pretty average at computer games). I’m really not sure that the US tech start-up scene is conducive for that kind of balance. 12+ hour days, regular weekend work and 2 weeks holiday a year seems to be quite normal. Ouch.

    I’ve been prepared to accept the slightly-worse-than-optimal technology start-up landscape for the pay-off of a better life balance.

    However I don’t think the landscape is going to remain “bad”. I, and many like me, am passionate about start-ups and helping them succeed here. I co-founded Innovation Bay in 2003 with the aim of doing just that. As well as regular speaker events, we run quarterly angel dinners where we select awesome start-ups to come and pitch to a room full of angel investors and VCs. We have run 11 of these angel dinners and have had around 40 start-ups pitch in total. These include businesses like Spreets, Posse and Image Brief. We are sponsored by Deloitte and Ninefold, amazing businesses that are equally passionate about this space. Out of the 40 start-ups that have pitched we think that around 25 of these have received funding as a result. All of that in the last three years.

    It’s not the government or “venture capitalists” that are to blame for the poor funding environment. It’s everyone. However, this is definitely changing.

    As you rightly pointed out, Renai, there is a ton of activity happening in this start-up space now. It will take time, but the end result will be an environment much more suited to helping tech businesses flourish. I am hugely optimistic about the future here.

    • hey Ian,

      thanks for your post, it was very insightful and adds a great deal to the debate.

      I feel exactly the same way as you do.

      There is no doubt that I could have started a site covering the global technology industry from Australia. It would not have been the biggest or the best site, but it would have been much easier for me to source articles, attract readers, fund the site through advertising and so on, if I had been covering international technology news on Delimiter.

      However, I chose instead to start a site which covered Australia’s technology industry only, sacrificing page views, revenue and so on to do so, and going only for the local audience, while Delimiter’s competitors cover global news constantly. Why? Because I believe in Australia, I love our local industry, and I want to see it grow and succeed, becoming the best in the world. And I didn’t think we had a good local site to cover Australia’s technology sector the way it should be covered.

      Of course Australia’s technology startup ecosystem is smaller than that of the US — that is a truth which is self-evident. We’re always going to be smaller, and the opportunities here more limited.

      However, there is so much positive stuff going on in Australia right now in this space, the Innovation Bay dinners being a fantastic example of that, that it makes absolutely no sense at this point to continue bemoaning how far behind Australia is. It makes a huge amount of sense to instead look at how well we’re doing and how fast the Australian ecosystem is growing.

      I am so tired of this ongoing meme that Australia’s startup sector is garbage. The truth is it’s not — it’s doing really well — and we should recognise that.

      Renai

  6. Hey Renai,

    thanks for adding some balance to this debate. Sure there are some issues with the local community however the ECO system is growing fast and its much easier to get a startup launched in Australia than 5 years ago. As you have pointed out there are now great startup groups in each state and increased co-operation between the groups. River-City Labs, Fish Burners & The York Butter factory allow entrepreneurs to work in each of the offices when interstate. The Australian AAAI (Australian Association of Angel Investors) run a large Event in March in Melbourne that largely went unreported by the Media. There were representatives from all over the world at the conference and it had many of Australias leading Tech business people and investors there. Did some of our local complaining entrepreneurs bother to attend ?We are now seeing deal syndication between various Angel Groups around the world and many new investment models being launched or planned. There are lots of opportunities here for seed investment. In Queensland has been many deals funded and River City Labs has only been open 3 months and is half full. There is also lots happening in Sydney Melbourne and the other states.

    Can you keep the focus up on this in your Blog as I think its an important debate.

    • Cheers for your comment Craig!

      I agree — all the things you have mentioned are tremendously positive. One of my biggest gripes about coverage of this area by the media is that these things only get covered when there’s a huge funding round (eg Atlassian), an Australian company gets bought out, or something goes sour, a with the SMH’s articles this week.

      On Delimiter I try and cover every single funding round by Aussie startups as I believe it’s important to highlight these — publicity around them gives other investors more confidence about dipping their feet in the technology startup waters.

      I’ve personally witnesses the huge growth and collaboration going on in Australia’s technology startup sector over the past few years. I find it hard to believe that people are complaining so much about the scene, given the fact that we now see several sizable deals a month in the space locally (from local funds) and basically ongoing angel/seed investments.

      Renai

  7. There’s no doubt that Australia is becoming a much better place to do startups. Let’s look at some of the key ingredients. . .

    As others have pointed out, there’s an increasing pool of Aussie entrepreneurs cycling back into the system and sharing their experience (acquired mostly in the US) with fledgling companies.

    There are some great incubators, accelerators and co-working spaces – most of which didn’t exist two years ago. Accelerators in particular have started to bridge an important funding gap – the seed stage, sub-$50k where most angel groups are still reticent to play. They’re also breaking the largely dated model of long-term incubation which can actually retard the growth of companies that can could otherwise reach a value inflection point in ~3 months if pushed hard. It’s great to see this model working well in Sydney and Melbourne, and soon to get underway in Adelaide. I’m pretty confident there will also be an accelerator spring up in Brisbane soon.

    The part of the ecosystem that’s still broken, however, is VC. Alan and JT have summarised the problem well – there are too few VCs per capita in Australia, they are not investing anywhere the same amount per deal, and they often don’t have the same investment philosophy and risk appetite as their US counterparts [Larry Marshall of SXVP has some great insights on this at http://www.blueskyminingbook.com/australian-commercialisation-stories/%5D. The total VC dollars in Australia are also not a good guide – $120m in VC funding is across all stages – not just the risky first institutional rounds. I don’t know the number, but suspect the startup VC investment is considerably less than the top line $120m figure. Think of it this way. . . if you were to round up all of the Australian early stage VC managers (those with money to invest, not those in the last few years of the closed end fund life), and invite them round to your house for a BBQ, you could feed them with one packet of sausages! That’s an appalling situation for a country that desperately needs to build a knowledge economy before it is relegated to being a low-value-add economy and a quarry for the rest of the world.

    The “brain drain” that is often cited by the media as a terrible outcome can and should be viewed as a valuable educational program for aspiring Aussie entrepreneurs. There’s no other way to pick up the same skills and networks in the same timeframe by staying in Australia. As more of these successful Aussies return home they will contribute to the gene pool of startup talent and mentors, they will most likely start more companies, invest in others, and use their wealth to indirectly create jobs in Australia. Let’s hope that the media steer clear of the spurious and simplistic economic argument that startup migration equals “jobs going offshore” equals “bad”.

    • Great points Colin. Hopefully there will be some return of entrepreneurs back that can provide some guidance. But as you point out, there is a complete lack of risk capital in this country, and even “seed” investors are asking for customer traction. Perhaps there are just too many other choices that provide a good return (mining, property) but also that simply – speaking for the tech space – there is not enough of a basic understanding of what it takes to succeed in tech. I have seen here, as I have seen in other smaller VC markets, that there is too much focus on the market rather than the team, and that complex ideas are avoided simply because investors lean to what they can understand as consumers. Luckily I have seen a couple of funds that are trying to break the trend, and unsurprisingly they have strong ties to the US. But the current level of activity, although promising, will not plug the brain drain for another decade for entrepreneurs that are hungry to succeed.

    • It is a common refrain that VC is broken. And there is a certain degree of evidence for this.

      However, again I’m not sure that the evidence actually supports this as strongly as people suggest. As a conversation starter, perhaps I’ll leave the nugget of information here that Atlassian didn’t approach Australian financiers of any kind before they took their $60 million round from Accel. Had they spoken to the local market, given their strong success and existing revenues, I have no doubt they would have found some options. Perhaps not as good options as they would find overseas, nor with as much expertise in the technology sector.

      But the huge amount of capital being ploughed into Australia’s mining sector illustrates that there are sources locally which could be tapped for technology startups as they are in the resources industry. Perhaps a lack of imagination on both sides is one reason why the connections are failing at the moment.

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