opinion/analysis by Renai LeMay
19 November 2013
Image credit: Freelancer
Australian technology companies have been virtually absent from the the nation’s public stockmarket over the past decade as the stigma of the dot com bust took its toll on investor confidence. But a clutch of new listings planned for the closing months of 2013 shows renewed interest in the sector and that local entrepreneurs are smelling money in the air once again.
If you were at all involved in Australia’s technology sector during the first global dot com boom, you could have hardly missed the hype it generated in the financial community at the time.
Company after company launched, took initial steps towards proving their business model, and then headed straight to the bank through initial public listings that were long on hype and short on substance. Investors, seduced by the world-changing promises of charismatic technologists, believed the sector was on fire at the time and were pouring money into the pockets of technology entrepreneurs like their lives depended on it. And each listing was accompanied by the obligatory champagne party, where the sector toasted its new found fortune with wild, sometimes bohemian abandon.
Malcolm Turnbull made much of his fortune during the dot com boom. So did Trevor Kennedy, who co-invested with the Communications Minister in early ISP OzEmail. Evan Thornley made a packet from Looksmart, while Steve Outtrim banked a heavy payday from his company Sausage Software.
Many of those fortunes still remain largely intact. But many investors, both of the large institutional kind and stay at home mums and dads, were burnt badly when the sector’s valuations crashed back to realistic levels in 2000. Throughout the past decade and more, that history has led much of Australia’s investment community to regard the technology sector with arch suspicion.
Such tech sector IPOs as have happened in the interim period have been businesses with established revenue models cannibalising existing sectors, such as REA Group, Wotif.com and Seek, or safer infrastructure or telco plays such as PIPE Networks and NEXTDC which were much more predictable in terms of generating recurring revenue through providing fundamental services. And even these companies have had to work hard at times to convince investors that what they were selling was worth investing in.
However, over the past several months, this situation has dramatically changed. For the first time in many years, Australia’s sharemarket is currently looking at prospectuses from half a dozen local technology companies looking to list on the Australian Stock Exchange. And there is substantial indication that a great deal of enthusiasm has returned to the investment community for the sector.
The most visible face of the renewed tech sector assault on the ASX, is, of course, Freelancer, which last week slushed some 30 million shares onto the bourse, representing a meagre 6.8 percent of its issued capital.
Freelancer’s IPO could hardly have been better planned. The company is led by a team of experienced entrepreneurs and managers, especially its rockstar chief executive Matt Barrie. It’s based locally but taps into a global contractor market that would appear to offer it unlimited revenue growth opportunities from a very similar low base cost, and it has experienced strong upward momentum on its numbers over the past several years. It’s riding the same ‘crowdsourcing’ trend which has seen a clutch of similar companies grow rapidly over the past half-decade and can almost be viewed as the bastard child of first dot com era companies such as eBay.
Perhaps more importantly, immediately before listing, the company declined a $400 million offer from a massive Japanese HR and recruitment giant. You can’t get better publicity than that.
And the result was spectacular. Freelancer briefly broke the billion dollar company valuation mark as its shares, initially listed at 50c, exceeded five times’ their value on their first day of trading. They’ve since settled down to around $1.85, making the company worth a little over $800 million, but that still makes Matt Barrie personally one of the richest people in Australia, woth a fortune worth several hundred million dollars. Not bad for a few years’ work: Barrie bought Freelancer six years ago.
Examined from a top-level view, Freelancer is a classic case of a dot com-style company.
It’s revolutionising an existing industry — the contracting or labor hire field — through using the Internet to make organisation of that industry more efficient, connecting service providers with service buyers and taking a cut as the middleman. It has low revenues (Freelancer will only make around $18 million this year) but significant opportunities. And it’s hyped through the roof. There is simply no way a company making $18 million a year in revenue should be worth $800 million. But then, that’s the nature of the stockmarket. It’s likely Freelancer’s share price will eventually settle further as investors realise the company is not going to become the next Google overnight.
However, what some readers may not realise is that there are also a clutch of other tech sector businesses currently planning to list on the ASX.
Some, such as managed web hosting and cloud computing company Bulletproof, are tech sector spins on infrastructure companies. Bulletproof provides rock solid web hosting services to many of Australia’s largest organisations (and some small ones such as Delimiter) and is currently engaged in a reverse listing that will see it raise $1.6 million for future expansion.
Bulletproof actually doesn’t make that much less money than Freelancer at the moment; in the 2013 financial year its revenues were $14.83 million. But it obviously doesn’t have the sky high opportunities that Freelancer has; its customers are mainly Australian and it wins them major contract by major contract, rather than through a constant drip feed of small online sales.
There’s also PS&C, a new company being formed by the merger of a clutch of other companies in the traditional enterprise IT services space that will raise some $25 million. PS&C will bring together two security firms, Securus Global and HackLabs, with Melbourne-based SAP integrator Systems and People, as well as Allcom Networks and Allcom Consulting.
PS&C isn’t really a high-profile ASX listing by any measure; not even to the extent that Bulletproof is. In addition, investors are likely to see it as less exciting because it’s a traditional ‘roll-up’ play where a number of companies merge to form a larger company which is then publicly listed, bringing capital to consolidate the mergers and expand while allowing founders to exit their investments in a satisfactory fashion.
However, it will still constitute one of the first listings which Australia’s IT services scene has seen in quite a few years; PS&C will join fellow IT services players such as SMS Management & Technology, Oakton, UXC and ASG on the exchange.
There are even traditional retail players joining the sharemarket. Consumer electronics retailer Dick Smith, which retail giant Woolworths foolhardedly sold to private equity firm Anchorage Capital Partners in September 2012 for just $20 million, will put the bulk of its value on the ASX in December in a listing which will value the company at around $520 million.
While Dick Smith is a traditional retail operation, its fortunes do directly rise and fall with the consumer technology sector, with the company now making a large portion of its revenues from product lines such as televisions, phones, tablets, laptops and PCs and video games. It’s no longer the traditional circuit board and home electronics manufacturer that it once was.
Online retailer DealsDirect Group — one of the few Australian retail players to be able to compete against global giants such as Amazon — is also about to enter the ASX, courtesy of an acquisition by Mnemon Limited (PDF). The company will subsequently seek to raise up to $8 million by way of a share placement after the aquisition. Like Amazon, DealsDirect makes a lot of revenue — $67.8 million in the 2013 financial year, although again, like Amazon, its earnings on that revenue are slim. In 2013 the company actually lost $15.8 million.
If you were to take a detailed view of these companies, you’d find it hard to find similarities.
Freelancer.com is a traditional high revenue, high margin dot com play revolutionising an existing sector. Bulletproof is a gradually growing technology infrastructure play which wins major corporate contracts. PS&C is a people-heavy IT services play rolling up a number of existing companies to be capitalised. Dick Smith is a traditional retailer specialising in technology which has been refurbished by a private equity firm. And DealsDirect is an Amazon-style online retailer which has high revenue but very low margins — and even losses.
However, what is common to all of these companies is that just a few years ago, none would have seen listing as a path to success.
Instead of listing, Freelancer would very likely have taken a venture capital round from the US to fund its expansion. In fact, this is precisely what fellow online player Atlassian did in July 2010, when it took a $60 million minority investment round from US-based VC Accel Partners. As an infrastructure play, Bulletproof probably would have taken investment in Australia or been acquired by a company in an adjacent field such as telecommunications. PS&C’s portfolio companies would have been sold off in trade sales.
Dick Smith, to be honest, would have probably been shut down, which is what many people have been expecting for the brand for years, and DealsDirect probably would have seen further private investment by a major media player, probably from the Packer, Murdoch or Stokes empires.
Instead, all of these tech-related companies are now looking to take advantage of the time-honoured path to capitalisation through the stock market.
The reasons why this trend is occurring right now are fairly simple to explain. In short, it’s all about money — and not so much about technology.
After the dot com boom, especially in Australia, capital to fund the startup, growth and expansion of technology companies almost completely dried up. Investment flowed into other sectors, especially the rapidly growing resources sector, and also the financial services sector, which has seen a plethora of new major players enter as it has become increasingly deregulated over the past decade or so.
To a certain extent, this upset the natural order of the market. While Australia is never going to be the technology powerhouse that Silicon Valley or Tel Aviv in Israel are, as a country we still have regular successes in the technology sector which require investment in order to grow. For many years, that capital was absent, unless you had a breakthrough company like Wotif.com which was impossible not to fund.
In the years from 2008 onward, the sector started to recover. As I’ve previously chronicled, Australia’s IT startup industry started to see new levels of activity and early funding around that period. And now the national IT startup scene is hopping, with capital everywhere for early stage technology startups. In today’s tech startup environment, it’s hard not to get funding of some kind, if your tech startup is at all serious about its mission.
What we’re seeing with these tech-related ASX listings is a recognition by the big end of town and many private investors that the industry is now starting to throw up legitimate growing technology businesses which need higher levels of funding in the tens of millions that private investors generally aren’t able to provide. These businesses are worth investing in — and so investors are starting to forget the dot com bust and to look at the sector once again, as they do every other sector. In short, Australia’s early stage IT industry is actually legitimately booming — and this is having the inevitable flow-on effect for listings.
The other factor is that other sectors have actually depreciated in value in the eyes of investors. The resources sector, while still hugely important to Australia, has started to settle down, and so investors are looking for other opportunities to achieve high growth. The tech sector, with its historical successes, is a natural fit.
All of this has led tech sector entrepreneurs back to the ASX. If they want money for expansion, if they want to be able to take some of their investment off the table and consolidate their personal fortunes, if they want to be seen as serious competitors to larger listed companies, the ASX is once again a worthy path. Much of this is because renewed investor interest is likely, as we’ve seen with Freelancer, to drive much higher valuations than have been possible for Australian tech sector stocks over the past decade.
Then too, there are international examples hyping up the sector.
Australians have noted the multi-billion listings of international giants Facebook and Twitter in the US over the past several years. While it’s unlikely Australia will see a listing anywhere near as large — the local stockmarket couldn’t support it, for one — those listings in the US have still created a giant wave of renewed interest in listed tech stocks. We are starting to see ripples of those mega-impacts in Australia.
It’s not realistic to talk about a revival of the dot com boom in Australia. For starters, investors are much more realistic about the financial fundamentals of tech companies in 2013, compared with 1998. Hype exists, as the Freelancer IPO clearly showed — but investors still look much more closely at underlying ‘organic’ company valuations rather than market value.
But what we are definitely seeing is a return to the ‘normal’ state of play. Once again, after a long drought, Australia is going to be seeing regular tech sector listings on the ASX. The clutch we are seeing at the end of 2013 is just the start of what is, once again, going to be a regular drip feed. That’s a fantastic thing for the local technology sector and entrepreneurship in general, because it provides a long-term growth path for local companies which doesn’t necessarily involve selling Australian firms to multinationals. It’s a fantastic thing for local workers who want to work for great Australian technology companies. And it’s a fantastic thing for Australian investors, who once again can gain local exposure to what has historically been one of the most exciting areas of the market. It will be fascinating to see where it goes next.
If you were walking past the Sydney building of the Australian Stock Exchange in Bridge Street at about midday last Friday, you would have seen a sight rarely witnessed: Technology entrepreneurs lifting glasses of champagne to celebrate a major tech sector listing with the financiers who made it possible. Even the champagne is back, it seems — and there’s a certain scent of money in the air.