A look at the seductive qualities of Silicon Valley

Man pressing a start button

Aussie start-ups are fleeing abroad, lured by Silicon Valley, which is undoubtedly the best place to nurture a tech business. That said, all is not lost in Australia and you just need to look a little harder for the support and success stories. 

Barkles App closes its doors and poof, another start-up goes up in smoke! It’s no shock with the number of businesses failing in Australia up by 57 percent.  And when you consider startups in Australia have also fallen by 95 percent in the last 12 months it’s a scary scene right now.

To make matters worse businesses going into bankruptcy are also up by 48 percent! It is clear it is not just tech businesses struggling to get going in Australia either, the bricks and mortar businesses are choking as well.

So it’s no wonder every media outlet out there is spreading the doom and gloom of the Aussie startup market, telling us how all the great people are leaving our shores to go to the US’s highly acclaimed and very cashed up Silicon Valley.

Let’s face it, the stats don’t make it look very enticing to stay here either. The million-dollar question is: “Why are so many Aussies feeing to the US?” The answer is simple: a lack of access to funding.

No lending or investment

A few months ago we were told that Australian banks are 68 percent behind the business lending figures of high growth countries like Russia, China, India and Brazil. Aussie banks are racking up record profits but Aussie businesses and startups are struggling. I should point out the banks’ record profits are not being made through loans to business and it is choking the life out of startups and small businesses nationwide.

There isn’t much funding coming from the Australian investment community either. Corporate advisers I have spoken to tell me that there is $2.5 billion sitting in VC hands in Australia right now, looking for a good home. Good luck trying to get them to write you a cheque, as they are very risk averse.

The Australian venture capital scene has even been referred to as a joke of late, prompting some backlash from investors who are also saying the returns they have seen from VC funds are dismal as an asset class and that they are getting better returns from bank bills with less risk.

Domenic Carosa understands the Australian investment landscape very well, having built a $100 million company seven years ago and is now chairman and director of Future Capital Fund, which invests in internet start-ups with significant growth potential.

“When an Aussie makes money in tech they typically go and invest that money in property. In the US they become investors and go looking for the next tech and do it over again” Carosa says. “In Australia we have a very different culture around past failures and see it as a disease to be avoided in startup founders’ resumes. In the US however, and especially Silicon Valley, that is a prerequisite. They want to invest in people who have failed as they know that is where the valuable lessons are and if you haven’t learnt them, chances are you will learn them with their money.”

Rick Baker of BlackBird Ventures has been involved in the world of VC for well over a decade and was responsible for investing millions for the behemoth MLC. He tells me: “There is money in Australia but in my view not as much as many would have you believe. There is money here for early stage but the later stage is a struggle. Startups just need to get savvy when it comes to finding the funds and then pitching for them.

“Investors, whether they be angels, VCs, syndicates or even micro funds, are all looking for essentially the same thing: a great team, a well thought-out vision driven by people who are very determined, knowledge or insight into a specific industry or problem and that little bit of magic that is hard to describe; sometimes you just meet people and think yeah, they have something magical here.”

Our VC model is broken

Speaking with Matt Barrie, CEO of Freelancer.com, he made a clear point that “The Australian VC model is broken for a range of reasons. As a result we are losing the best deals, not just talent, to the US VCs coming to town to do what we can’t, and take the deals head on. For example, Accel partners have been on an Aussie investing spree closing a $60 million deal with Atlassian, a $70 million deal with OzForex and a $35 million deal with 99designs.com.”

Peter Thiel, co-founder of Paypal and an early investor in Facebook, is also looking to start an Australian VC firm to take advantage of the lack of competition in this market from Aussie VCs who are inexperienced and slow to move on tech. “It’s not just the US shopping here either. Seqioua Capital is in town right now doing meetings and looking for deals.”

So why are all the people with the money coming to town?  Barrie says: “Aussies have great ideas, great businesses and great work ethic but most importantly there is no competition here from local VCs. The competition in places like San Francisco and New York is huge but not here.”

So is it any wonder startups are leaving in droves for the shores of the US to access the widely publicised capital available, that by all appearances is being thrown around left right and centre from San Fran to New York and now spilling on Australia?

The truth is the exodus of tech talent isn’t in droves; it’s more like a trickle. In some cases for good reason and in others it is done blindly without getting a full picture of how much help is available right here on home soil.

But Shoes of Prey got $3m?

Some might just be throwing out the baby with the bath water as the Australian Government, some local councils as well as a few Aussie investors, are doing a lot more to support startups than we are being led to believe. But the trick is knowing where to look to get the help.

Just ask Jodie and Michael Fox and Mike Knapp of ShoesofPrey.com, who just secured $3 million in funding from Australian, as well as US, investors recently. With all those zeroes it sounds very sexy but take into account they have poured blood sweat and tears into the project since coming up with the idea in 2008.  They also did more than 100 pitches over the last 18 months to VCs from Australia, the US and even Europe.  So in truth it wasn’t as easy as many would have you believe.

What separates the Foxs and Knapp from the many who are out there right now is they have taken an approach that has enabled them to make the most of their Australian address. Like many, they were told it would be easier to get funding if they moved to the US where they could have a closer relationship with the funders. But when I spoke with Michael Fox he said they didn’t want to for a few very good reasons.

“There are four reasons we haven’t moved. One, our friends and family are here and we like to be around them and on top of that we love Sydney,” he said. “Two, our networks are here and relationships with key people in PR, journalism and business. Thirdly, China is our second biggest market and being here means the time zones are closer and it is an eight-hour flight to Hong Kong, making it easy to run the business and jump over for important meetings without too much fuss. And finally, Government support here far exceeds anything you will find anywhere in the US and we are taking full advantage of it.”

Good Government support

I’m sorry, did he just say Government support? It’s true. ShoesofPrey.com tapped into the very healthy grants scheme that is making Australia a very smart choice to start up. That is, if you know about it.

Michael told me “There are essentially three fantastic grants available if you know where to look and are willing to do a little work to get them.” First is a Grant for research and development (R&D) where the Government will give you a tax break of 45c for every dollar spent in almost any kind of development. That includes market research, websites, product development and more.

Second there is the Export Market Development Grant that gives a tax break of 50c on the dollar for any of your overseas efforts to make money including in this case, PR fees, marketing costs offline and online and even fashion shoots that will be used in overseas promotion and any activity to build your market offshore.

Last but not least, Commercialisation Australia is giving $1 for $1 for early stage commercialisation grants up to $2 million. Meaning for every dollar spent on scaling, testing and distribution they will match you and considering they take zero equity it is happy days if you can get approved on this. No VC required!

How much work was involved to secure these grants? Fox tells me “60 hours and the help of an accountant for a small percentage of what we get. It really wasn’t that hard”. Sixty hours for potentially millions in subsidies is not something to scoff at. There is nothing that comes even close to this kind of support from Government in the US.

What do incubators offer?

The only downside is they are not providing you with some of the vast networks and business development contacts required when scaling and growing a business.  This is the plus side of angel and VC funding, which not only provides funding but gives you access to intelligence, a wealth of experience and networks that would appear almost impossible to penetrate without an introduction.

On top of the Government support you have the incubator craze that has gained huge popularity in Australia. An incubator (also known as seed accelerator) is essentially a shared workspace owned by, in most cases, a company, VC fund, angel investor or public institution like a university. They can provide a desk at low rent and in some cases early stage funding ($15 to $20,000) in return for equity, with the support of the people who own it, and offer their network in the form of education, mentoring, networking opportunities and introductions.

The US has again led the way here with incubators such as the $7.8 billion dollar gorilla Ycombinator in Silicon Valley, that has unearthed and supported some great start-ups such as DropBox, Air Bnb, Cloud Kick, Appjet and Reddit. An incubator is a great way for SMEs and startups to accelerate their growth by giving them access to advice and administration services and allowing them to establish a physical presence without incurring large costs.

They have become increasingly popular as a hedging strategy for investors as it enables them to build relationships with up to 100 or more startups very quickly, nurture them and see what cream rises to the top. Investors know that it is typically a one in 100 bet so having the incubators provides economies of scale and increases strike rate and chances of success through the support on offer.

Just a small sample of incubators in Australia getting traction are AngelCube, Start Mate, Blue Chilli, Green Lane Digital, StartPad and ATP Innovations. Considering Australian group buying site Spreets started in the incubator Pollinizer before being sold to Yahoo for $40 million, it just goes to show how much value they can add.

Councils and universities

City Councils are getting in on it too. Sydney City Council’s Activation Project at 66 Oxford Street, saw the council take an empty building, throw in some desks, add some Wi-Fi and create their very own council-funded incubator offering everyone from artist to creative and techs, low-cost space with plenty of benefits. This project has worked so well there are two more in the pipeline.

Victoria is also keeping up with The Monash Business Incubator. You can come in and work in a co-working environment, network with other startups and vie for intros when the heavy hitters come in.

Even universities are jumping on the bandwagon with the UNSW Venture Incubator Space opening up last year and the University of Queensland has a Joint Venture with the State Government creating the incubator ilab.

Microsoft is also investing $3 million over three years in Brisbane with the Microsoft Innovation Centre that opened its doors in May this year. The centre will partner with other local incubators to help to accelerate the growth of software startups and small businesses in the state.

Limited talent pool

So with all this local support why does it appear that we are losing so such talent? Barrie, of freelancer.com, sums it up pretty well. “We have a very limited talent pool to start with when it comes to the engineers who are creating and building these tech businesses. Engineering courses in Australia have declining enrollments and unless the whole educational model changes, the small amounts of people we lose will appear to be much bigger than they are. The educational model is screwed and that is what we need to fix. We need to do it fast through the introduction of courses and subjects in high schools that get kids interested in this field at an earlier age.”

So to sum up: there is money here, there is talent here, there are networks here, there is support and Government programs here. We have it all so why would you would to be anywhere else?

Ryan Junee, one of the Aussie mafia from Silicon Valley who sold his company Ominiso to Google for $15 million, says: “Quite simply the Valley is the best place in the world to start a technology company.  The entire ecosystem is designed to support technology entrepreneurs, from serendipitous meetings with other experienced entrepreneurs, to a fundraising ecosystem that understands technology startups inside and out, to all the other support functions you need when you are growing a startup (lawyers, accounting, PR, HR, etc) who have done it many times over.”

Give Aussie a go!

After spending a month in the US and a week in the Valley doing ground work for my own startup, I can honestly still say there is something magical about Silicon Valley that you can feel and is evident to everyone I spoke to. The fact still remains it can and has been done from Australia and there is plenty of incentive to start from here.

You would be mad not to at least know your options. If you are going to take the plunge, it is best to know both sides and then just trust your gut like most other great entrepreneurs before you.

“You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life,” said Steve Jobs.

  • http://www.freelancer.com Matt Barrie

    Sequoia is a Silicon Valley VC.. not Chinese. You quotes from me are a bit inaccurate.

  • http://youroutsourcedmarketingdepartment.com.au/ Denis The Marketing Expert

    That’s a long post but very informative! Thanks!