Wow! Now there’s a sexy topic of a blog post I probably never thought I’d find myself ever writing. Over the past week however, starting with a tweet from Paul Graham of Y-Combinator, a debate has been raging about the form the capital should take in early startups. Paul says in the tweet that all of the Y-Combinator investments in this round have been convertible notes and announces that this form of funding has won.
Plenty of other experts have chimed in with their views, so I thought I’d take a few minutes and try to give a pretty simple breakdown of what the options in play here are.
First of all, there is traditional equity funding. In the most basic sense an investor invests money into the company, the shareholding of existing shareholders dilutes and the company gets an increase in capital. Where it takes on a bit of a life of its own in the Angel funding space is with regards to “risk vs reward”. The investment in early startups is always “Preferred Equity”. Again, in the most basic view, Preferred Equity, in sale event gets paid back first (sometimes with a multiple against it) before common shareholders get paid. Often times there are other “company control rights” that come with Preferred Equity – for example, setting the CEO’s salary, issuance of more shares, etc. Preferred Equity always has the ability to convert into common shares in an advantageous way.
Next there is Convertible Debt. In its most basic form, a Convertible Debt is a loan made to the company which allows the debt holder to convert that debt into equity in a future round of funding. There are parameters around this type of conversion, so usually there is a discount rate for the debt holder on a per share basis, but there is almost always a cap on the value of the discount. Alternatively, the debt holder could request that the debt be repaid rather than receive equity.
So why is Convertible Debt winning? I’m not an expert, but it would seem that it is easier and cheaper without all of the legal costs which in a small round of funding can really eat into the equity raised. For a more thorough analysis, I refer you to a post by Seth Levine, a very highly regarded VC from the Foundry Group in Boulder, Colorado.
I just read an interesting court ruling from California in a case between TechCrunch and Fusion Garage. The case in question is about the JooJooPad (previously known as the CrunchPad). In short, Fusion Garage and TechCrunch worked together on a tablet computer and ultimately before the commercial launch, Fusion Garage decided they didn’t want to or couldn’t partner with Arrington and TechCrunch, so they launched without him. The facts and innuendo of the case are all over the internet – feel free to go look them up yourself.
I’m going to write about two things here: first of all, my non-lawyer insight into the ruling and second, how you avoid getting yourself into this situation as a startup.
In summary, Arrington initially was seeking injunctive relief from the court in the form of freezing all proceeds from JooJoo sales. This was dismissed. This was an injunctive roll of the dice that has no bearing on the overall facts of the case so why not try. The basic idea is that Fusion Garage was in bad financial shape prior to the launch of the JooJoo Pad, if any profits were to come out of it (which at a later point a court may rule Arrington is entitled to a share) then they may be squandered or lost and Arrington would be unable to recover any proceeds he may be entitled to. It was nothing more than a lottery ticket, as the judge writes, “Even assuming TechCrunch prevails on the merits, however, that would not give it a claim to 100% of the revenues Fusion garage derives from selling the product.”
The more telling parts of this ruling come from the judge’s comments around Fusion Garage’s defence. Everything I’ve read online says Arrington copped the smackdown, but truth be told, Fusion Garage’s defence is torn to shreds by the judge. Essentially, “the heart of Fusion Garage’s opposition” (according to the judge) is that it never entered into a partnership or joint venture with TechCrunch and therefore it had no fiduciary obligations to TechCrunch in relation to marketing the product. Fusion Garage also contends that they solely own the product and developed through their own endeavour. They have to add the last comment as part of their defence even if they know it isn’t true otherwise they’d be acknowledging that TechCrunch has a position.
The first thing the judge does is demonstrate case law (precedent) where parties have in fact been in partnership or joint venture together by the way they’ve acted rather than what they’ve agreed contractually. This is the very first thing he elaborates on in the Discussion section of the ruling which is an indicator to how he is viewing the facts so far. Before even getting to the detailed defence of Fusion Garage, the judge is already putting forward a hurdle that they have to overcome
The judge then proceeds to point out the six elements of the defence by Fusion Garage. He then proceeds to go through each of the six points and using existing case law show how these points don’t hold up. He also dismisses the argument of Fusion Garage creating the product of their own endeavour throughout the various points by concluding that the parties worked together closely and collaboratively.
The judge summarises his discussion on the injunctive relief by writing, “Accordingly, TechCrunch has made a credible showing that it may be able to establish the existence of a joint venture under which Fusion Garage owed it certain fiduciary duties.” Now considering that the judge hasn’t heard all of the facts, has left the door open in a few places (ie Fraud and Competitive Damage) for TechCrunch to amend its filing and has basically cast a heavy shadow of doubt on the defence, its hard to see how Arrington “lost”. His injunctive request was too broad, but that was certainly the intent and it was refused.
Now how does this impact you and your startup company. I think the first thing you need to realise is that it isn’t always what you SIGN, but also how you BEHAVE that is important. In this issue, the crux of the defence is that Fusion Garage didn’t have a firm agreement with Arrington and that ultimately their relationship wasn’t workable. The truth is, as the judge pointed out, both parties behaved as though they were working together and that alone constituted a joint venture. So be careful about this kind of thing – don’t commit to working with other companies until you have a firm documented agreement in place.
I’ve also seen this apply with relation to customer agreements. I’m familiar with a case where a customer agreed to a scope of work, a price and terms of reference but then did not sign the contract. In the course of doing business the supplier simply didn’t realise the contract had never been signed and sent back. The supplier did the work, billed the customer, the customer paid their bills, commented on the work (positively and negatively), the supplier fixed things the customer were unhappy with and even gave them contractual service credits when they were entitled. Then one day the supplier got an email from the senior person at the customer (who by this time are three months in arrears on payments) that because they haven’t signed the contract, they were not obligated to pay any outstanding amounts. The supplier responded to that with the view that they’d carried out the relationship in good faith, expected to be paid in full and asked if the customer wished to invoke the notice period for the service. No response. After a few months of effort and both sets of lawyers getting involved, the customer paid in full all outstanding amounts, including the months during the dispute because they didn’t terminate the agreement properly.
In that case, the supplier were pretty lucky for a number of reasons. However one thing they did was try and tighten up on signed paperwork. This is a must! While it is exciting to win the business, you have to implement the discipline in your organisation from Day One that unless the legals/contractuals are in place, you’ve not yet won the business and you shouldn’t undertake any work.
Take the time, at the beginning of starting your business to get a good legal advisor. Someone who can give your broad business/contractual advice and when necessary get you in tough with specialists for things like IP law. For most startups, legals are one of the most neglected areas of the business until they get caught out. Make sure you get your legal ducks in a row early on because otherwise, it can become a massive distraction.
I was floored today as I read the joint statement from Google and Verizon expressing their collective views on the Net Neutrality debate which is ongoing in the US. I think everyone should be paying attention to how this one works out because it will impact the internet at its very core – the free and unimpeded exchange of content, and thus ideas. This will affect startups in a very profound way potentially.
The concept of Net Neutrality is very misunderstood by a large number of people, including some professional commentators who talk and write about it an awful lot. They tend to view this as an American issue (that’s their frame of reference) and they liken it back to the messy telephone deregulation and break up of the Baby Bells. That’s unfortunately misguided as Net Neutrality is much more important than that.
Whether we like it or not, the US is the heart of the internet. I don’t mean that in some ridiculous emotive sense, but I mean from a physiological perspective. The underlying services that drive the internet, the circulatory system of the thing, are really very US centric. We can debate that another time, but that’s not what’s in play here – who runs DNS and stuff is an esoteric issue for geeks and jingoistic academics to debate. The US is the main source of internet content and traffic for the vast majority of the world (the blood) and it runs through pipes and routers (the heart muscle) owned by a few small number of carriers. To carry out the analogy, Net Neutrality is a bit like the heart muscle deciding on where blood will go in the body based on which organ its going to and what those organs are willing to give back in return. Imagine if that’s how our heart worked?
Effectively companies like Verizon who own large parts of the underlying infrastructure (along with Comcast and even Time Warner) are putting forward an argument that a select few content providers are dominating the traffic on the internet and those companies are relatively paying very little for that service. This argument is absolutely true, companies like Google and Facebook produce most of the internet traffic in the US. What is left out of that argument is that this content take up is driven largely by the customers who are all paying a fair, market driven price for their internet connection. So that argument doesn’t hold much water.
What’s really at play here is much bigger…
Companies like Time Warner and Comcast are now in the infrastructure business, the delivery business AND the content business. What they want to do primarily is prioritise their own properties across the networks so that they get a higher level of service and ipso facto, their competitors get a lower quality of service – so for example, if you’re a Comcast subscriber for cable and internet and you want to stream NHL Hockey over Versus (on the Comcast Cable Network) they will ensure more bandwidth, availability and performance to Versus than say YouTube or Ustream.tv might get.
It gets a bit more sinister than that…
The carriers will then be able to go to companies and charge them a premium to be on the “Tier 1″ internet as opposed to the “General Public” internet. That’s where it gets ugly for startups. If you’re a small company trying to do something innovative a throttled and tiered internet is going to kill your user experience. Add to this that most startups wouldn’t be able to afford to pay the fees for “premium” service and you can now see how the carriers get to pick the winners and stack the deck.
It gets even more crazy when you start looking internationally. Carriers do peering agreements to exchange traffic with each other internationally. So imagine a scenario where Telstra has a peering arrangement with AT&T, but AT&T and Comcast don’t have back-to-back agreements and they each de-prioritise the other’s traffic. Now you have no idea what kind of service we’re going to get internationally. If a website you’re looking for is a Comcast customer, you could get terrible performance from here in Australia. More importantly for international competition, imagine if you’re an Australian business selling to American customers and your customer is on Comcast – they are going to get low grade service domestically which has nothing to do with you. That’s a killer and is why Net Neutrality is an international issue.
The other piece of this puzzle which came out this morning is from Verizon. They are quite happy to give in on “wireline” Net Neutrality, but they believe that for the US wireless networks to progress, then “wireless” access must not be subject to Net Neutrality. How convenient for Verizon! They don’t own a major content provider like Comcast and Time Warner do, so wireline isn’t such a big deal for them – there’s no extra money in it. However, in the “wireless” space, by being able to create “special categories of service” they will be able to roll out their 4G network and charge premiums for certain types of traffic.
More disgustingly, Google threw us all under the bus. As the biggest provider of content on the internet, having Net Neutrality on wireline suits them to the ground AND by opening up wireless services to premium grade capabilities gives them a potential revenue model they can create with wireless carriers for things like YouTube – you sign up for a Verizon 4G plan, pay the “Premium” and YouTube comes faster AND doesn’t count against your plan caps. Whatever happened to “Do no evil”? This is about as evil as I’ve seen.
Again, for startups, this is a diabolical situation. All of the companies out there producing mobile apps and functionality will be put in jeopardy. You could create a service like Flipboard only to find that it is unbearably slow because Verizon have decided to make it low priority, “General Public” internet type traffic as opposed to the shiny Google competitor product which is “Premium Service”.
Competition depends on a level playing field. What Google and Verizon have done is release a joint statement that feathers their own respective nests, tilts the playing field in their favour and puts the entire internet as we know it at risk. It is scary to see terms like “General Public” and “Premium Services” placed in front of the word Internet. What those two companies are pitching is a multi-level internet that allows them to set the rules of racing – I would prefer the single, capital “I” Internet that we currently have.
Worst of all, the whole joint statement was filled with the cheek to basically tell the US government how the FCC should be run. Who on earth do these companies think they are? President Obama campaigned as a strong supporter of Net Neutrality, it is now time for him to stand up and run the country for everyone’s good.
In Australia, we have a structured venture capital fund entity called the “Early Stage Venture Capital Limited Partnership”. This entity allows fund managers to raise between $10m and $100m to invest in early stage businesses excluding industries like property development and construction. When you read about it, aside from the actual capital raising part, the barriers to entry look quite minimal, so why aren’t we seeing more of these in the tech sector and what, if anything is wrong with the scheme.
First of all, let’s talk about what’s attractive. The ESVCLP allows for carry and returns to be completely tax free for both investors and partners. For the fund managers any fees or interest on carry are treated as tax free as well. So basically, any return generated by or through these funds are fully tax free! Obviously investors and partners can’t claim losses as a tax deductible – this is an upside structure, so that makes sense.
There is one significant item within the structure that needs to be addressed and that is around the mandatory disposal of high value assets. It is completely flawed that is a requirement to offload investments that exceed $250m in assets. This virtually eliminates the massive home run – companies like Zynga and Facebook would have exceeded that threshhold very early on. I totally understand that the government is trying to use this structure to encourage investment in smaller companies, but if someone has had the foresight to invest early on in a winner, making them cash out early is very harsh and counterproductive.
On the other hand, employees of small startups who are keen to take an option on some equity in the employer are really rather harshly treated. In the ESVCLP scheme, a fund manager gets his carry (about 20% of the positive return the fund makes), fees and interest on carry all tax free, but the humble employee who put in the hard yards, was granted some options, allowed them to vest and waited until a liquidity option was available gets slugged all over the place with taxes. That hardly seems fair, the VC who invested someone else’s money gets his fees and return (plus any interest) tax free, but the employee with options pays capital gains tax.
I think the ESVCLP structure is good and I’m surprised that we don’t see more people setting up funds under that umbrella. When you consider the abysmal rate of return on our superannuation funds over the past decade, it would seem to make sense for a few shekels to get flicked into a potentially high return basket. I think the ESVCLP really needs to be changed to allow investors to fully reap the benefit of picking a winner – hey if Lotto winnings are tax free, why not well placed early stage strategic investments. The other piece of the puzzle is allowing the staff of these early stage companies that do well to participate in the win without the taxman clobbering them. The tax rules around employee shares and options needs to be amended to afford small startups the luxury of incentivising staff with shares.
Once that’s done, then there should be no excuses about government rules and regulations.
Back in the late 90′s people were investing in all kinds of crazy schemes trying to get rich off of IPOs and whatever the “internet” had to offer. Everyone was building some new way of doing business that was going to revolutionise everything we knew and change civilisation at its very core. None of these businesses had any revenue, some didn’t even have a product but that didn’t stop people. Plenty of money was made by day traders, speculating on which new shiny internet or technology company would be the darling of the day on Wall Street with several hundred percentage points of increased valuation on launch day.
It was a period of madness and your classic “bubble”. The hype outpaced the reality, the internet itself making it easier for individuals to do their own trading and ramp their own investments. Australia was certainly not immune to this global craze either. Companies like Sausage Software and Solution 6 were bought and sold for silly sums of money and K*Grind was the “cool, hip” urban youth portal with no business model, a high cash burn rate and ultimately a very short lifespan.
One story jumps out at you though from Australia and it re-appeared in my mind today courtesy of the Sydney Morning Herald. A young guy named Adam Clark, back in 1998 made bold claims that he could produce the technology to run high definition video down a standard telephone line. Clark purports to have knocked this technology out in a little over three weeks with the final “ta da” moment coming to him like divine inspiration. Of course, Mr. Clark could produce no proof or evidence of this stunning breakthrough and he wouldn’t allow anyone to test his technology outside of his environment. So what happens next? In April 2004, Mr. Clark releases a prospectus of course and raises $27m dollars from Australian investors!
The case is now before the courts as you may have come to realise the whole thing was a scam. Clark, had flung together some off-the-shelf encoding technologies and rigged it to look like he created something. It is alleged that he proceeded to move $17.7m of the $27m raised into other interests he controlled and within 12 months of raising the money, the company directors were declaring the thing a colossal mess.
DUH!
I won’t bother talking about Adam Clark that’s for the courts to decide, but I will talk about the investors. What on earth were you thinking? A bit more due diligence about this kind of revolutionary technology seems to be in order before plunking down a whole bunch of money, don’t you think? One report from a US testing company was enough to convince you? Why not hire someone locally to go have a look at the thing? Surely when Mr. Clark started talking about not letting the technology out of his lab, someone should have smelled a rat – that’s a tough thing to sell when the inventor won’t let it off his equipment. The whole thing smells bad yet they managed to raise $27m and go public.
The lesson out of this for both entrepreneurs and investors is – due diligence! It just isn’t good enough to read a few test results before plunking down some money. Obviously the level of technical due diligence depends on the stage of the company, but if there is a product, then seeing it work and testing it yourself shouldn’t be too much to ask. In fact, as an entrepreneur, one thing you should try and do if you have a working product and you’re raising money is send potential investors a trial account. If the company has revenue, then more formal due diligence looking at existing bookkeeping standards, record keeping (contracts, leases, employment arrangements, etc) and the technical team’s background should be par for the course. A lack of willingness to undertake or comply with this type of diligence should be a warning signal for either side.
Right now there is a fantastic debate going on in the US technology “investment” scene. Since the global financial crisis hit, there’s been a marked increase of investments by “Super Angels” and “Seed Funds”. Much of this money is coming from previously successful entrepreneurs who cashed out and are now putting some of their money to work for them investing in very early stage ventures.
There’s a great deal of logic in this if you think about it. As of late, all VCs are saying that they base much of their decision on investing in a company based on the entrepreneurs and the team involved. Well, many of these new Super Angels are themselves successful entrepreneurs, so logically, you’d think they’d be just as good, if not better at being able to spot startups and teams with positive characteristics. Also, these Super Angels, having been there before will have something tangible to offer.
The discussion has now moved onto, “Is there a bubble in Angel/Seed investing?” Some people are arguing that with all of the competition for deals among Super Angels and early stage Seed funds that valuations are being driven up due to competition. There’s a couple of really good articles on the topic, my favourite one is from Chris Dixon’s blog. Chris links to Paul Kedrosky’s piece which kicked off the debate and basically summarises the situation by saying the young entrepreneurs now have more information to make smarter decisions and that’s driving the smaller deal size which is right in the sweet spot for Super Angels and probably a bit low for most traditional venture capitalists. Lower deal sizes allow the entrepreneurs to have less dilution and when added to the fact that it is generally cheaper to get a product off the ground in the Web 2.0 world, you have a slight shift in the traditional equilibrium.
So, what’s happening in the US is that these Super Angels or small investment syndicates are driving new waves of young entrepreneurs with lower entry levels of funding. Here in Australia though, there’s almost a complete lack of dedicated angel investing in the technology startup sector. As Domenic Carosa pointed out last week there’s a gap in the market for investors looking to place tens to low hundreds of thousands of dollars in startups. Without that Angel Investment piece, entrepreneurs are more dependent on bootstrapping their ideas or seeking funding in a “Friends and Family” round.
I think this is a key problem holding back the technology startup sector in Australia. Take a business like Foursquare, they are doing something ambitious and have had access to funding that’s allowed them to focus on executing their technical plan without having to worry about revenue. That would be impossible in Australia and is the simple answer as to why Australia isn’t building more technology startups. We simply don’t have the right ecosystem of funding.
How do we fix this at a practical level? Let’s not talk about changing government policy or the tax system – what practical initiatives can we take as a community to do this ourselves? I’m open to suggestions and looking forward to your comments and feedback!
When you are raising money for the first time from VCs, there is no other way to say it than you are swimming with the sharks. That doesn’t mean that all VCs are out to get you, it just means that you’re doing something perhaps a bit unnatural (raising capital) in an area that they are perfectly comfortable and know all of the tricks of the trade. Like anything else, the best way to level the playing field somewhat is with knowledge. Entrepreneurs are very lucky now because so many VCs, Angels and former Entrepreneurs are blogging about their experiences that it is becoming easier and easier to work out what things to pay attention for.
One of the things you need to understand when you raise your first round of funding are the terms like: “Pre-Money”, “Post Money”, “Liquidation Preferences” and “Option Pools”. I’m embedding a video from the ThisWeekIn.com show, This Week in Venture Capital hosted by Mark Suster. Mark is a VC at GRP Partners and has previously founded and started two companies, one of which sold to Salesforce.com. The episode in the video discusses valuations, terminology and is a great primer for entrepreneurs on how to understand much of the basics in their discussions with VCs.
The other resource that Mark offers up in this video is the Cap Table spreadsheet. To make it easier for you, I’ve pulled the link to it out and you can now fid that spreadsheet right here. This is a pretty hand resource as well that Mark has kindly given away.
Are there any terms or concepts that you’ve heard in relation to raising money that you’d like explained? Feel free to leave a comment or send me an email and maybe we can make that the topic of a new post.
One of things I said I’d setup here is a Jobs Board aimed at keeping the recruitment costs down for startups and early stage companies. That module has now been implemented.
The standard rates will be:
Featured Ads – a 30 day listing for $50
Standard Ads – a 30 day listing for $25
For startups and early stage companies I’m going to be offering some free ads and ongoing discounts depending on the size of the company:
Startups/Early Stage Companies with less than $1m in revenue:
5 Free Standard Job Postings (or 50% off Featured Ads)
Ongoing 50% discount on all other ads
For Startups with over $1m in revenue but less than $5m:
1 Free Standard Ad (or 50% off Featured Ad)
Ongoing 25% discount on all other ads
To get the appropriate discounts you need to send an email to jobboard@startupsdownunder.com and we’ll send you back the appropriate discount code.
Hopefully this feature goes well and helps startups and new companies recruit valuable, talented people at very low cost.
On the weekend I was chatting with someone who was interested in starting a software company here in Sydney. The conversation moved along to fund raising and my acquaintance said rather flatly, “I don’t really understand what people mean when they refer to different rounds of funding.” I quickly realised that if one person didn’t understand what funding rounds were, there were probably a fair few people who didn’t, so why not do a brief overview.
What I’m going to talk about below are industry terms that are commonly used in the US. I’m also envisioning a company going through the process that does some kind of consumer internet software or small SaaS product – I’m not talking about people trying to build semiconductors or compete in the Enterprise software space, that requires MUCH greater capital. Also, just remember this isn’t legal or financial advice, so before raising funding, get in front of some proper advisors.
Friends and Family Round – This is a very early round of funding (probably less than $100k) where you put forward an idea that you’re working on or would like to explore to those people who know you best. Most VCs would say that these people aren’t necessarily investing in your idea, they are investing in you. While you may have raised this round of funding informally, make sure you go through and get it documented correctly for everyone’s benefit. Improper documentation or vagaries with this type of funding might mean later on that potential investors may be turned off because of uncertainty of future claims.
Angel or Seed Round – This is also a very early round of funding, usually when you have a solid idea, can articulate a potential market and have some kind of prototype. The common trend in this particular round is that the Angels or Seed investors are getting 10% to 15% of the company post-money and are investing somewhere between $250k and $1m. This round is seen as being necessary to take the idea/prototype through to a launch ready product. You may also have to setup a more formal Board of Directors at this point, because some of these investors will want to oversee where you’re taking their investment, but this also gives you a vehicle to tap into their expertise as advisors.
Series A Round – At this point, your company will certainly have a ready to go product or thereabouts. This is commonly seen as a round that’s raised to take a product to market. Series A investors are usually proper venture capitalists with funds, but this round might also include Seed round investors who have the right to invest in future rounds to avoid dilution. In an “A” round, you might be raising $2m – $7m depending on who you are and what type of market you’re tackling. By this stage, outside investors will probably own 30% – 40% of the company and there will almost certainly be a requirement for the founders to set aside a portion of their shareholding for future staff options. If you haven’t had to form a formal Board up to this point, you most certainly will now. Expect your VC to want at least one seat on the board and they’ll probably push for an independent director too. Angels will probably drop off your Board at this point.
Series B Round – When you begin looking to raise the “B” round, you should have a product (or products) in the market, incoming revenue, a client base you can reference and some market intelligence and feedback to drive decisions. The typical “B” round is used to fill out sales and marketing to try and grow your footprint. You’ll probably find that your “A” round VC will want someone else to lead this round although they may certainly invest and take up as much of the round as they can. This isn’t an insult – this is their way of “pricing the deal”. If your company is doing well, your “A” Round VC will be out banging on doors, using their network to help get another investor to come on board. By this stage it is hard to start estimating how much you’ll raise because it depends on so many variables, but as a CEO or Founder, try and get yourself as much runway as possible out of this round. Expect by this stage to not own the majority of your business and it is unlikely your Angels or Seed investors will want to invest at this point because it is probably priced out of their scope.
Series C, D, E Rounds – I’ve just lumped a bunch of these together because they all serve more or less the same purpose. You’ve built a company to a stage where your investors (and probably the founders) are looking forward to some kind of liquidity event. The purpose of these rounds are to set your business up to achieve that liquidity event. Your investors may want you to use the money to bring in a professional CEO and some high powered senior execs. If you’re company is considering an IPO, then this round will be used to get the balance sheet in order and have the cash on hand to go through that process. Again, it is impossible to say how much money you should raise from this round, but the founders will probably own 30% or less of the company now.
This list is by no means exhaustive, you’ll often hear terms like Bridge Loans and Convertible Debt being bandied around. These types of funding effectively are loans from an investor that can be turned into discounted investment in future rounds if certain outcomes are met. Normally, companies that run out of money and aren’t quite in a position to raise more look to existing investors for these types of finance. These are not financing rounds directly as they are not capital injected into the business in return for shares, they are loans with warrants.
I’ve been interested in startups for the past ten or fifteen years. I worked through the dotcom boom and bust, watched the train wreck that followed and then observed as new, stronger companies grew up over the last few years. The environment for startups has changed so much over the past decade it is almost unbelievable. Services like Amazon’s EC2 and S3 make it so much easier and cheaper to get your company off the ground and on the development side, advances in techniques like the use of Agile and in frameworks like Rails have made building software much faster. It has been an amazing thing to watch and I’m excited to think that most intelligent commentators still believe that we’re at the beginning phase of the internet revolution.
A few months back I decided that I wanted to participate a bit more in the “startup community” here in Sydney and in Australia more broadly. Like most things, life conspired against me and I haven’t really done much beyond register a few domain names and give the idea some thought. Then something happened – Atlassian raised money from Accel and that sparked my interest in startups again.
More importantly than that though, Renai LeMay wrote an interesting opinion piece about the longer term impacts this might have on Australian IT. I instantly fired back on my blog with a rebuttal that took what I believe is a more focused but longer-term view of building a really good startup community in Australia.
To say the comments went off the chart on Delimiter would be understating the obvious. Renai got hammered for his point of view. What it did generate though was a whole bunch of passion from some people who are in the space or people who want to understand it. It also highlighted to me that there is the genesis of really strong community made up of existing and potential entrepreneurs. Unfortunately, there is also a complete lack of underlying infrastructure to support their ambitions and their businesses.
So I say, let’s work on changing that. In many respects, Renai makes a fair point – why should a company have to go offshore to raise $50m or $60m of funding when we Australians have invested over $1 TRILLION dollars in our superannuation? If a company like Atlassian has such a great future (and I totally believe they will be a massive success), how come our retirement funds aren’t going to get a piece of that action? Why can companies like Rio and BHP sustain dual listings in Australia and overseas, but tech companies are massively undervalued one the ASX and ignored by investors?
These things are all fixable – I ardently believe that capital flows to areas where there is the most growth and potential. Equally and unavoidably, the best ideas and the best entrepreneurs gravitate towards places where they can get the most value for their assets. The key is to foster a community of entrepreneurs who have access to good local talent, world class advisors and affordable and available capital from investors who understand what these entrepreneurs are aiming to do.
I think it is so important to learn from this experience with Atlassian, like Renai says, analyse what happened here, but rather than lament the opportunity lost, celebrate the fact that our startup community has had a win on the global stage and work out how we can foster more wins, bigger wins and develop a better ecosystem here to make sure that there are more Atlassians in the pipeline.
The main question is, how do we make change and make a difference? Well, I have a number of ideas of what I’d like to do with this site:
Regular posts, updates, videos and profiles of startup companies in various stages of their lifecycle to help all of us keep across who’s out there and what people are working on;
A startup Newsletter highlighting what’s going on in the community with companies, happenings and events;
Scheduled events with speakers who can offer help, advice and guidance to entrepreneurs – this could be lawyers, accountants and other entrepreneurs, just offering insights into some area they know something about;
A Job Board to help startups finds suitable candidates without breaking the bank on recruitment fees;
Allow open submissions to the blog so if you think you have something to add, feel free to write a post, send it to me and if it makes some sense, then I’ll post it and attribute it accordingly;
Compile a list of “REAL” technology Angel Investors and Venture Capitalists in Australia along with a list of startups - kind of like our own Australian version of Crunchbase;
Look into the idea of creating a Venture Hacks’ style “Angel List” for Angels and VCs to opt into and for entrepreneurs to submit their ideas to; and,
Within 12 months, all things being equal, I’d like to put together something like a “Techcrunch 50″ style event in Australia bringing together launching companies with the investor community.
There’s quite a few ideas there and that’s just what I’ve come up with. I’m happy to drive this in my spare time as a hobby, but please remember I have a real job. I’m also going to be reaching out to those of you who were very vocal on the topic and seemed to have experience to share – I will hold you to it. Any help you want to provide to this initiative is something I’m most certainly open to. I’ll be building out the site a bit over the coming weeks.
One thing I’ve listed above that I’ve been very keen to see is an event like the Techcrunch 50 or something akin to what Jason Calacanis is describing as his “Launch Conference” but operating here in Australia. What I’d like to do is spend the next bunch of months fleshing out who the players (Angels and VCs) are in the tech investment community here in Australia and trying to get them involved. Likewise, if there are any overseas investors who want to come here and play, they’re more than welcome. I’d like to see an event that allows a bunch of companies to launch on stage in front of real investors and their peers and have another group of companies in the various startup stages with an area to showcase what they are doing. Then whatever profit an event like this draws, roll it up into some kind of early-stage seed fund and invest it right back into the startup community here in Australia.
I firmly believe that the best way to build a vibrant startup community in Australia is to get people involved, make it economically viable, challenge government to make sensible policy and celebrate our victories.
If that’s something you want to be a part of or help to build, feel free to let me know via comments or by email at: sean@startupsdownunder.com
On the weekend I was chatting with someone who was interested in starting a software company here in Sydney. The conversation moved along to fund raising and my acquaintance said rather flatly, “I don’t really understand what people mean when they refer to different rounds of funding.” I quickly realised that if one person didn’t understand what funding rounds were, there were probably a fair few people who didn’t, so why not do a brief overview.
I’ve been interested in startups for the past ten or fifteen years. I worked through the dotcom boom and bust, watched the train wreck that followed and then observed as new, stronger companies grew up over the last few years. The environment for startups has changed so much over the past decade it is almost unbelievable. Services like Amazon’s EC2 and S3 make it so much easier and cheaper to get your company off the ground and on the development side, advances in techniques like the use of Agile and in frameworks like Rails have made building software much faster. It has been an amazing thing to watch and I’m excited to think that most intelligent commentators still believe that we’re at the beginning phase of the internet revolution.