Over at Delimiter, Renai LeMay has written an interesting opinion piece about the capital raising just undertaken by Atlassian. Renai has asked why did this company have to go offshore to raise this capital and he speculates on the impact to the local startup community. I think Renai’s argument is unfortunately clouded by jingoism and not looking necessarily at the bigger picture. I agree with where Renai is going with his idea, that Sydney or Australia needs to improve in building a vibrant startup culture, but I think he’s looking at it the wrong way.
Let me start by defining what this is a little bit better because I don’t think it is a pure VC play in the traditional sense for a number of reasons. First of all, Atlassian are a sizeable company with real revenues, they are profitable and have a good global footprint – that is not a Series A type round. Secondly, with how the deal has been described, it looks like the founders used it as a partial liquidity event for themselves and senior staff – this is now more common in a Series C round of financing. Also, what’s been made public talks about an eventual listing, again, in line with a late round like a C or D round. So this deal is really a liquidity event and some might describe it almost as a private equity placement with only a partial dilution.
Over the last couple of years we’ve seen a few Australian software companies go down this road. SpringSource last year (founded by Aussies) were bought outright by VMWare for a monster sum of money – something like $450m all up. That was a strategic investment by a global software and frankly, I doubt any Australian company or group was as good a match or had the capital to pull this deal off. The other company that comes to mind is Aconex from Melbourne who raised about $50m just at the time in September 2008 when the GFC started. This was again very similar to Atlassian in that it was a strategic placement that bought out many smaller existing investors, gave Aconex back some flexibility in a regulatory perspective (they had so many shareholders under Australia law they had to become a Public company without listing, they’ve subsequently become Private again) and allowed them the capital to expand aggressively into the US. Aconex would have had a very difficult time raising that kind of money locally at that time from anyone, particularly for overseas expansion.
This leads to the question of why can’t that money come from Australia? My personal opinion is that it comes down to simply not having a good environment for startups. We have the Super Funds with MASSIVE funds under management. As a rough figure, Australia has over $1 TRILLION dollars of Superfund assets of which 50% are invested in equities and unit trusts – so that’s about $500B of reasonably liquid assets that need to be invested. That says that we don’t have the excuse that the money doesn’t exist, because it does.
I certainly think that the Federal Government doesn’t do enough to encourage private venture capital through good tax laws. I have tried a number of times to understand the tax and regulatory situation for venture capital funds in Australia and it is mind numbing and complex. There are certain tax concessions available, but it isn’t quite clear. I believe the punitive tax system here in Australia also contributes to a lack of real Angel Investing which is now a requirement of a good startup ecosystem.
The tax regime can be fixed and the money is certainly around if, but there is also a lack of history in Australia of people successfully starting software companies. I think Australia is very similar to New York a few years back. Right now, New York is a hotbed for startups with companies like Foursquare, Stack Overflow and Hunch all running out of there. Each of those three have something in common – their founders are serial successful entrepreneurs. Dennis Crowley of Foursquare sold Dodgeball to Google, Joel Spolsky from StackOverflow started Fog Creek Software and Hunch is run by Chris Dixon who sold SiteAdvisor to McAfee and also has become a superstar seed stage investor along with his partner Caterina Fake in the Founder Collective.
Historically, New York has struggled to be a place for startups because the big banks simply could pay top dollar for the best talent. So the risk reward ratio just didn’t add up for people in New York to start their own business when they could get massive salaries and huge bonuses for working at the banks. With the GFC and this group of entrepreneurs on their second or third time through, a much better investment ecosystem has sprung up led by VCs like Fred Wilson from Union Square Ventures. Almost all of the big VC firms are now established in New York and are actively investing there.
In Australia, the most important thing that can happen is for companies like Atlassian and SpringSource to have their liquidity events. Who owns those companies and where they are listed has nothing to do with building a startup culture. With those companies having liquidity events, many of the staff may now have the financial independence and the knowledge necessary to break away and start their own companies. We need to grow the base of entrepreneurs – the companies they came from are trophies.
Once you have smart people who’ve been successful once, starting their second companies, then investors will find them. The entrepreneurs will also have the contacts and the profile to attract investment themselves. The key is keeping THAT stage company here. If you have a great idea and can attract funding, it is very compelling to consider relocating to Silicon Valley. The reason is simple, you can get good people at a reasonable salary who are willing to take some risk in shares. Good luck trying to find a Cassandra developer in Australia with great Rails skills who is willing to work for $65k/year and options worth about 0.5% of the company as employee #4.
I think turning Australia into a startup hub requires a number of things to go the right way. One of them is obviously leaving the nanny state behind, ditch InnovationAustralia and setup a framework for the private sector to drive higher return investments in early stage companies. We also need to be able to encourage liquidity events for successful entrepreneurs without slugging the hell out of them with Capital Gains Tax. Finally, we need to make encourage more entrepreneurialism in young workers and the only way to do that is to have the environment where their options end up being worth something.
This is a ten year piece of work, we should be looking at things like SpringSource and Atlassian as a win for Aussie entrepreneurs, not as a blow to misplaced nationalism. I think it would be totally amazing if two or three times a year Australian entrepreneurs sold their startups to big overseas companies – let’s be an innovator, a net creator of new companies and value. Let’s always remember, the VALUE comes from the creation, not from the acquisition!
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{ 6 comments… read them below or add one }
You make some really good points here, Sean.
Couldn't agree more that the Atlassian deal. Even though it's been done in the US and will likely turn the company's focus more US-ward, is a massive win for the local tech startup industry.
Also, re: the local tech startup scene, there are already a wide range of grassroots initiatives, that have been going for several years now, that are building a strong tech community. The next step as you mention, is to turn that into a genuine tech startup industry.
The good news is that things are already underway that will help make that happen. That includes the building of better early stage investors and investor groups, better supporting industries with a real understanding of the needs of tech startups and new programs, being planned as we speak, to help educate and guide entrepreneurs in how to build genuine tech businesses.
On top of that, through the success of Atlassian and other startups, there's a growing belief amongst students (including the all-important computer science grads) that tech startups are a genuine career option.
We're not there yet, but my feeling is that, based on the current momentum, we'll get there with or without the help of Government and sooner than 10 years.
Sean, this resonates, there is much to be done.
Like get rid of the new ridiculous early taxing on ESOP's (or we will see talent and start-up flight), perhaps mandating our Super Funds with a Fed requirement that a small %-age must go to defined early stage ventures and a defined geographic, such as Aust & NZ. Similar to the Canadian Pension Fund plan. Then work out how to repatriate some more experienced talent back here. Begin training 8-year-olds that a life in maths and hard sciences is cool so that they can innovate & make things when they get older.. I could go on.
We setup Cleartext in Sydney in 2005 with a view to staying here, but the real world has shown us that Australia really can't handle new tech startups as well as the US and EU can (and I've been in senior management roles startups in both those markets).
We launched our new platform on June 1st this year and our first leads and sales are from offshore deals, yes we have lot's of interest from local business, but it's USD and GBP that are flowing into our bank account.
We plan to stay here but my first round of client visits, and some prospects visits are in London next week, not Sydney, Melbourne etc, that's life in high tech.
+1 mate. +1.
The truth is, Sean that two or three times a year Australian entrepreneurs do sell their tech startups to big overseas countries. I have reported quite a few
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