blog Every so often you come across something in Australia’s technology sector which infuriates you because of its counter-intuitiveness. Today’s item is the news broken by Mahesh Sharma at ZDNet.com.au (I recommend you click through and read the whole story, it’s a good one) that local technology incubator Startmate has successfully advised its entire latest batch of companies to become incorporated in the state of Delaware in the US instead of in Australia. Sharma reports:
“Startmate co-founder Niki Scevak explained that the primary reason for this was because of the payments infrastructure in Australia, which is managed by the big banks. It is extremely difficult for start-ups to navigate the red tape and bureaucracy involved.”
Now, I’m not just a journalist — I’m also an entrepreneur, having founded Delimiter in January 2010 — and I can understand the rationale behind this move. When you’re a startup trying to get off the ground, Australia’s taxation and regulation system seems pretty onerous. There’s leagues of red tape and condition after condition which you have to satisfy. I personally recall an hour and a half meeting with the Australian Taxation Office which was pretty pointless in terms of what it accomplished. And I’m pathetically grateful to my accountant for taking much of this off my hands.
In addition, there is a strong argument to be made that just because a company is incorporated in the US, that’s just something happening on paper. It doesn’t mean that the startups concerned won’t seek financing in Australia, find their first customers in Australia, employ staff in Australia and, of course, pay taxes in Australia and support the Australian ecosystem. After all, how often do you really think about where your company is incorporated? The global nature of capital and of capitalism these days — especially associated with Internet startups — would appear to mean that it shouldn’t matter where your company is incorporated.
However, I must say that this move gives me a deep feeling of unease. My gut tells me that Startmate’s approach to this matter has the effect in practice of re-orienting the startups under its wing to focus on the US.
Like Sharma, I suspect that when these companies look for funding, they will do so in the US. I suspect that when there is a chance for them to be acquired, it will be US companies that will be doing so. And I suspect that many of these companies will increasingly not only be incorporated in the US, but base their operations there as well. If this occurs the way I suspect, it will partially transform Startmate into a bridge for Australian technical and entrepreneurial talent to transition to the US.
There’s also something which just seems duplicitous about the practice. Why would you set up your Australian company, right from the start, to avoid interacting with the Australian regulatory authorities — the ATO, the Australian Securities and Investments Commission, and more?
Now this is an issue about which I’ve personally had ferocious arguments with Scevak and others. He and many other senior entrepreneurs in the Australian startup landscape see it as beneficial for our talent to head overseas to centre of gravity locations such as Silicon Valley, believing that they will bring that experience (and funding) home and help to fuel the entire Australian startup ecosystem. But I haven’t seen much evidence of that so far. It has always been my philosophy, and the philosophy of many businesspeople in many industries, that continuing to invest in the Australian landscape where possible will pay everyone locally dividends in the long term.
One company to consistently buck my expectations in this regard is local software house Atlassian, which despite taking a huge round of US venture capital funding in July 2010 and establishing substantial international bases has retained its commitment to development work in Australia. In fact the company last week revealed it was poaching European developers for relocation to its headquarters in Australia. Atlassian’s founders are investors and mentors in Startmate, which may bode well for the incubator when it comes to maintaining its Australian feel and focus.
On this matter I’d love to hear responses from people — especially those involved in startups — about what they think.
Image credit: Krystle Fleming, royalty free
There’s a reason why Delaware specifically was chosen and not, say, Los Angeles: “Delaware is well known as a corporate haven. Over 50% of U.S. publicly-traded corporations and 60% of the Fortune 500 companies are incorporated in that state.” http://en.wikipedia.org/wiki/Delaware_General_Corporation_Law
Very interesting; just read through that Wikipedia page. It appears Delaware has quite a few attractions for corporations. As an entrepreneur myself some of them sound attractive; buy as a citizen some of them also sound … a little too convenient for companies looking to get away with more than many jurisdictions would like ;)
Hi Renai, In the comment that you excerpt, Nikki talks about banks and their red tape, not government regulation. Whether or not you consider this issue to be a deal breaker, it’s true that it’s very hard and expensive for a new business to convince an Australian bank to provide the infrastructure they require to accept foreign currency credit card payments. Nikki’s argument seems to be that incorporating overseas helps these startups to sidestep this mess. I’m sure they see other benefits too (e.g. the exit) but I didn’t see any mention of government regulation in Mahesh’s article.
Fair point; but it’s my impression that much of that banking bureaucracy has its roots in the regulations of the Australian Prudential Regulatory Authority, rather than specifically the banks themselves.
From my own experience getting set up (from scratch) to accept credit card payments can take between 3 and 6 months in Australia. When you’re in an incubation program trying to launch within 3 months this is a massive set back. By incorporating in the US they’re giving themselves access to professional payment solutions like Stripe, which means they can think less about charging and more about their product.
Really? It was pretty easy to set up Delimiter to take credit card payments for our eBook launch last year. We just had to file a bit of paperwork with PayPal. Aren’t there similar payments gateways available locally for bigger scale companies? Three to six months seems like a long time.
PayPal is about your only option in Australia (afaik) if you don’t want to go the Merchant Gateway route. Nowadays many people are scared of taking business payments through PayPal because of all the horror stories. Also PayPal is really geared towards larger payments that have some sort of goods attached. If you are doing recurring payments or micro-payments it’s much more difficult to use.
Individually it doesn’t sound so bad but the combination of Merchant Account + Payment Gateway + PCI Compliance ends up being awful, even if you are using something like http://spreedly.com/.
Fair point.
However, I still don’t understand why you couldn’t do something like register your company in Australia, then register a subsidiary in Delaware for payments. Incorporating your entire Australian company in Delaware seems like overkill if all you’re trying to solve is the payments issue.
There has to be more to it than just that angle.
You just doubled registration fees, accounting fees, and the amount of administration required to maintain what is now a multi-entity multi-national structure. That’s not lean, Renai! :-)
I’m not saying that one is better than other, as where you incorporate is a function of specific need. But doing both so early has consequences that startups don’t have the time, funding nor inclination to understand.
C!
Ben – Paypal is one option (and personally, I think a fairly limited one). But other options exist, without having to go through the banks. Securepay is one (apparently they’ve been acquired by Australia Post – when did that happen?), Ezidebit is another, and I’m sure here are more.
For larger businesses/revenues, dealing with the banks make the most sense, but for small or just-launching businesses, these kinds of service providers are, in my experience, much simpler to deal with than the banks, and much more flexible than PayPal.
So Securepay looks interesting..
But still — $395/month, PLUS 45c/transaction PLUS you need your own merchant account and associated fees.
Stripe is 2.9% + 30c/transaction and you can sign up on the spot.
I was under the impression that Securepay was much more affordable than that, but to be honest I haven’t signed up any clients with them recently. Possibly they have changed pricing since coming under the Australia Post umbrella? I’m not sure, but will look into it for my own interest.
Oops. That was meant to be $395/year.
I think in general this makes me sad, but individually its understandable.
For each individual company they should be taking the easiest, quickest and most proven path to success.
However overall I would like to see more startups based in Australia contributing to Australian growth.
Making these two ideals line up is difficult, but at least the recent rise of Australian based incubators is helping.
This is opinion, and an unscientific one at that, but this smells like a mechanism to make selling to larger US businesses easier to me.
Which, I might add, is okay.
I just think the excuses used are just, well, excuses.
Renai, there is no deep, dark plan to push people to the US. And you kind of argue against yourself anyway (it is just the incorporation, the people are still here. the local payment stuff is a mess but it’s not really the gov).
Firstly, let me re-iterate what Startmate is: We invest in technical founders who are building businesses where the majority of customer acquisition is online and where they are trying to be the best in the world. Given that definition of who we want to help and by the simple fact the world population is nearly 7 billion and Australia has 22 million that will mean most of the customers will be outside of Australia and not paying AUD.
In Australia this means an extremely small set of options that are all bad. Go and interview entrepreneurs in this situation outside of Startmate and ask them if they had a good experience. I truly mean that. Do it and write articles about it, raise the awareness of the issue because it is totally shit out there at the moment.
Compare that to the US where you have companies like Stripe, Braintree, Chargify etc. and it’s just no competition.
Note by definition Startmate is not interested in Internet startups where the majority of customers are in Australia or where the majority of customers get invoiced and paid through other non-online ways.
That is the primary reason but the other secondary reasons are investment and also some of the founders want to live in the US (note: they don’t want to live there forever and abandon Australia and turn their back on the startup community).
Also note that every decision is in the founders hands.
On the investment side, there are simply not a lot of people in Australia that want to invest in small Internet startups. The startups look here and we help them to find investors here but the reality is you’d be shooting yourself in the foot if you didn’t look here and in the US. Again, go and ask the people who try to raise angel rounds here and see what they say. It’s hardly fireworks on the streets.
It’s also not about skirting Australia. A lot of the companies have Pty Ltd companies as well and you need them to pay and hire local people.
Never has a legal detail been so powerfully charged.
I am happy to realise that “Brain Drain: Evil Startmate sends Aussie entrepreneurs to US” will get page views as the lead but the real story for me is the dismal and pathetic payment landscape Australia finds itself with at the moment and I really think that folks like http://www.pin.net.au when they launch will kill it.
hey Niki,
thanks for the response. I appreciate it, and also admire the work you guys are doing with Startmate.
If you have some time, would you be able to provide some further details to help flesh out the argument? For example, I’d be interested to know more about what payments options you’ve looked at in Australia, and why you feel they’re all bad.
In addition, I’m interested to know why Startmate explicitly isn’t interested in startups where the majority of customers are in Australia? Dot com companies focused on the local market such as Wotif.com, Realestate.com.au, Seek, Spreets, Jump On It and more seem to have done fairly well in the local market.
Also, it’s a contentious issue, but I’d love to get your thoughts on why you feel the angel investment scene is small in Australia. From my perspective, I’ve reported on a large number of angel-level investments in Australia over the past year, and there have also been many incubators set up. From my perspective, the scene has never been better locally (tho it’s obviously never going to reach Silicon Valley levels ;)).
As for page views … well, articles about Australian tech startups very seldom get many page views — I cover the scene because I’m interested in it. But most of the page views come from stories about enterprise IT, the NBN, and evil government Internet filter policies ;)
Cheers,
Renai
So Niki, is what you are really saying is there is a market waiting to be disrupted by a local startup, in the form of the Australian online payment industry? I’m genuinely interested to hear more about your thoughts on this.
My thoughts in one word: YES! :)
I think it’s safe to say some angel funding could be easily found for this project ;)
In support of the need for options in the non-cash payments market in Australia:
http://www.abc.net.au/news/2012-03-13/australians-shunning-cash-for-cards/3885930
C!
Sorry I didn’t mean to indicate that Internet startups that were targeting Australia were a bad investment. It’s a hugely successful way to invest and way to be a successful entrepreneur. As well Wotif, Seek, REA, Jump on It, Spreets there were eCorp and Netus and scores more.
I just think when investing money you have a better chance of success if you focus on a really small piece and try to be really useful to the small number of people who are interested in building businesses there. And that’s the focus at Startmate and the types of teams/companies that we enjoy working with and think we can help the most. So it’s just a question of where we should spend our time. Both can be successful investments.
Here’s one experience: http://blog.angrymonkeys.com.au/why-being-an-aussie-startup-sucks by the Bugherd guys (pre-Bugherd btw)
Simply there is just no interest from the banks to cater to this market. That’s fair enough but it’s tough luck if you’re trying to build these businesses.
I don’t want to call out names but most of the players (Banks, Payment Gateways etc.) are just indifferent, couldn’t care less, charge huge fees, lock up your money for 6 months, shut down your account randomly, reject valid credit cards from around the world etc.
Honestly, what would you do in that situation?
Atlassian went through the whole mess in the beginning as well and had to fight through it.
RE: Angel investment for sure it’s getting better but that’s because it was so bad before. Even now it’s just really tough and there really isn’t an appetite in general. It’s getting better because the first people to say yes to investing in startups are successful founders. Other rich people will say yes but they wait for someone else to say yes first. And the number of successful founders in Australia is going up and that makes me really optimistic.
Also, on the whole brain drain stuff: The successful founders when they come back, they are those first yes’es in the angel round. So the pool of those people is going up and it will keep getting better but it’s not a great situation out there at the moment by any means (and will never even go close to Silicon Valley and we shouldn’t expect it to)
Cheers, thanks for the response! Very interesting comments, and especially re the post from the Bugherd guys.
It all comes to population size. The US is a market with close to 300 million consumers.
You capture a small slice of any market there, and the streets are paved with Coke and Hookers for you so to speak.
It’s also a lot easier to find funding for new ventures. Go to the banks for any sort of business loans here and they will look at you like you’re some sort of mad man. If it ain’t bricks and mortar, they just don’t care.
Successful companies in small countries like Australia get to a point where they are so successful that they are bought by overseas companies or investors. Think about Speedo (The Great Aussie Cossie), Arnotts and Fosters. The Swedish companies Volvo and Saab faced the same bitter sweet success when they were bought by non-Swedish interests. That point in time for todays tech start ups may be sooner than for manufacturers of the past.
Renai,
Just to put my 2 cents. Happy Inspector is part of the Startmate ’12 group and on our final leg of our US trip.
First, I will say that it is a possibility to have a successful startup anywhere.
Now having said that, I’m a believer in being in the best environment to get the highest chances of success. And for me, that is Silicon Valley by a million miles!
if you get a chance, I would advocate that you spend a month in SV to soak up the culture, attitude and the environment. There is a culture of abundance, where competition is seen as a plus and room others. Everyone walks around with a “pay it forward” mentality, not the tall poppy syndrome we are used to in Australia. And it has a positive, tech entrepreneur friendly environment that provides the right stimuli for us geeky dudes to thrive in.
In terms of attracting investment, I’m not going to say it’s easy, but one saying that you hear constantly from investors (good ones) is that they “leave enough on the table for the founders of the business to be motivated to get out of bed everyday”. To me that is why it’s a place like no other.
At the end of the day, we are Aussies and in one shape or another will come back to Australia or at least contribute to the Australian economy.
If you want to be an actor, you would live in L.A. right?
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