Tuesday, 29 March 2011 17:00

The state of early-stage funding in Australia

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Seeking funding for your new venture? Or maybe it's time to attract new investors to help your fledgling company grow. Four experienced players talk about the state of play for Australian Internet and other IT companies.


Although the GFC had a big impact on the investment industry in Australia making it harder for startups and other early-stage companies to raise capital, the environment is "pretty attractive at the moment," John Dyson, investment principal at Starfish Ventures told the Funding Connect 2011 event held in Melbourne today.

But Martin Hosking, managing director of RedBubble, stressed the need for a strong business model if a company is to attract investors. He pointed to the recently launched Color.com (a new-generation photo sharing facility), which he said needed rapid and massive uptake to become a success. Acquiring the color.com and colour.com domain names cost the company $500,000, he claimed.

Although Color.com raised $41 million from venture capital funds, "You can't do that in Australia," said Hosking, Instead, you need a clear business plan, a strong customer proposition, and the ability to scale the business and pick up investment as you grow: "a clear, steady path to growth" rather than requiring "a monumental step change" along the way.

A growing amount of investment money is becoming available in Australia, he said, and some investors are prepared to move a portion of their funds into more risky areas - ie. to become angel investors.

David Jones, founder and advisor at ThreatMetrix, believes the old model of identifying a market, creating a product and then building a team to make it a reality (as well as the more recent variant of putting together a proven team to identify a market opportunity and then create a product to address it) is no longer the route to funding.

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He suggested that would-be entrepreneurs need to start building relationships with potential investors before they have anything to invest in. That way, those investors already know you and what you're doing by time you need to attract funding.

And a good relationship with one or more angels who then are prepared to put in some money provides "social proof" for others. If you can attract at least one big name in the angel community, a "herd mentality" kicks in and others are likely to follow that lead.

Jones also noted the existence of local groups of angels that are prepared to help early stage businesses. While giving up 7% of the equity for a $25,000 investment might seem like a lot, he suggested it can be good value for companies that value the networking component that such an arrangement brings.

But he warned that while some businesses can use the local market as a springboard to overseas growth, if your market is predominantly overseas, that's probably where you need to be. Another advantage of moving the company's base overseas - or at least establishing a significant presence there - is that it makes it easier to obtain investment in that country. Furthermore, "you don't have to go back to the same well if you're overseas" (ie, there are more potential investors in the US than there are in Australia).

The fourth and final speaker on the panel was Adrian Vanzyl, general partner at AdVenture Capital and VTO of Blumberg Capital. He believes there has been a "profound shift" in the venture capital industry in the US and Australia as a result of the emergence of 'capital efficient startups'.

Such companies no longer need big budgets for hardware and software in order to get off the ground. They can use highly scalable, pay-as-you-use hosting services such as Amazon to run open source platforms instead of shelling out for their own servers and licences for proprietary software from companies such as Oracle.

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Furthermore, the emergence of social networks and social media has slashed customer acquisition costs to cents rather than tens or even hundreds of dollars.

Together, this allows companies to make money from Day 1, he suggested, and eCommerce and advertising revenue have supplanted eyeballs as a measure of success. Vanzyl said this shows "we are not in a bubble" because tech companies have revenue to support their valuations.

But the changed environment can lead to a problem when it comes to finding investors, as it may put a business into the "valley of death" between the traditional realms of angel and venture capital funding.

Fortunately, that gap is being filled, in part by the rise of the 'super angel' in the US (the high profile investment leaders that are followed by their peers, as pointed out by Jones).

In Australia, angels and groups of angels may invest up to a few hundred thousand dollars. There are also seed stage investors and incubators such as StartMate and PushStart. Vanzyl also noted the emergence of early stage venture capital funds that have actually invested amounts in the $1-2 million range.

 

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Stephen Withers

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Stephen Withers is one of Australia¹s most experienced IT journalists, having begun his career in the days of 8-bit 'microcomputers'. He covers the gamut from gadgets to enterprise systems. In previous lives he has been an academic, a systems programmer, an IT support manager, and an online services manager. Stephen holds an honours degree in Management Sciences and a PhD in Industrial and Business Studies.

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