State of the Union

The StartupMuster survey is probably one of the best sources of data on Australian startups that we currently have. While the results are not dire, it has definitely uncovered some weaknesses that we need to address.

Here’s some of the key insights from the survey.

Founders

Only 19% of Australian startups are founded by Women. While this is an improvement on previous years and lightyears ahead of the US and UK the number is still far too low. I’m not a proponent of forced diversity quotas (I believe every position should be filled based on merit), but I am absolutely for women in senior roles, especially founders. More needs to be done to encourage women to found startups and to join startups early in senior roles.

Another interesting statistic is that only 27% of Australian startup founders are under 30. I don't believe age is an important factor when founding a startup and there is an argument that younger founders are more willing to take risks (no family to provide for, lower salary expectations etc), but what this suggests is that we are not pushing entrepreneurialism hard enough in schools and universities. If we don't do that, Australia’s startup ecosystem will fail to scale to the size it needs to to have a real economic impact.

One of the biggest issues though is that a whopping 28% of Australian startups involve solo founders! Conventional wisdom (i.e. Paul Graham) suggests that 2 founders are ideal and there should never be more than 3, however 12% of startups in Australia have 4 or more founders. Meaning that 40% of startups have a founding team that is not ideal, and in many cases unfundable. Compounding on these arrangements is the fact that only 31% of founders are working on their startup full-time. Again, take a quick look at some of the most successful startups around and tell me how many have part-time founders? Startups are high-risk, high reward. Part-time founding teams don't work. Successful founders are the ones that go “all in” on the problem they want to solve.

Skills

The most successful companies these days come from teams that can meld technical brilliance, business savvy and design, yet only 33% of founding teams have any design skills (a figure backed up by the fact that 63% said they outsource graphic design skills). Australia has a great pool of talented designers (probably more than software developers) but this talent is being relegated to the role of freelancer instead of co-founder. Why are very few designers founding startups? In the future, I’d prefer to see founding teams that are Tech and Design heavy and lacking on Business skills. Business skills are a commodity that can be learnt on the job with the support of investors and mentors. Tech and Design skills are what differentiate startups, yet while 33% of Australian Technology Startups say they have no technical talent and 67% have no design talent on the founding team, this is but another issue holding us back.

Product

One of the most interesting responses is around Product/Market Fit. PMF is hard to quantify and like Brad Feld’s recent post, I too am sceptical of teams that declare they've passed that “milestone”. So let’s take a look at the responses:

• 51% of Australian startups are “getting close”
• 24% have “found it”
• 21% are a “long way from finding it”; and
• 3% are “unsure”

I’m going to go out on a limb and say that less than 30% of these responses are accurate. How did I come up with that number? Only the respondents who said they were unsure or a long way from finding it, plus a small number of the other responses are right. Most, if not all, of the respondents who feel they are getting close or have found it are probably under the illusion that they have. It’s an optimistic point of view to have if you are starting to see some paying customers but this doesn't mean you have found it, or are even close.

To really get an idea, there are some other answer responses that we can look at to get an indication of product/market fit. Some more quantifiable metrics if you will:

1. 84% of startups have not raised any capital (either tried and failed or haven’t tried). Finding PMF takes time and money. I find it hard to believe that that many startups could be getting close without taking investment. In reality, only a small number of bootstrapped companies will truly find PMF because they don't have the funds to scale large enough to prove it. OK, maybe you don't agree, so what else is there?
2. Only 4% of startups had revenue that puts them in the PMF league. That is, startups earning at least $1M annually in revenue. 96% of startups had revenue of less than $1M (55% had $0). To have found PMF, you generally need to have lot’s of people who are willing to pay for your product. Brad’s threshold mentioned above is $1M MMR (monthly recurring revenue). If we took that as the bar, then the number of Australian startups with PMF is only 1%.
3. 47% of startups had NO user base growth. Startups that have found PMF are growing fast! Of the startups that are growing, only 24% are growing their user base at a pace that could signal they have found or are close to finding PMF, that is 50% or more per month.

The reality is that PMF is a never ending journey. Whether it’s launching in a new market (product or geographical) or eventually becoming the target of disruptors, there will always be something that makes you assess where you stand. In the end, the biggest insight from these results is that entrepreneurs in Australia need support from investors and mentors to challenge them on their thinking. More on this in another post.

Market Size

OK, this is a sore point for me as can be seen here and here. As an investor though, I just can't let this one slide. 70% of startups are targeting markets that are less than $1B in size. That essentially makes these companies unfundable, yet apparently there is a shortage of capital because not enough startups are being funded. See the potential connection here? Investors need a big market opportunity to hedge against the risk of investing so early on and if you're not chasing a market that’s $1B or more, then you're unlikely to grow to a point where we can make a good returns. If we can't make good returns, we can’t raise funds. If we can’t raise funds then the amount of capital in the market dries up and everybody loses, so please, shoot for the stars. In your pitch deck I want to see ambitious targets, not conservative estimates. More on this in another post.

Again, I applaud Murray and the team for collecting this data. It definitely gives us the best view we've seen so far into startups in Australia and provides some real insights that we can use to improve the ecosystem.

James McKinnon is Managing Partner of Mirin Capital — an Australian Venture Capital firm based in Sydney and Melbourne. You can reach me at jm@mirin.vc or on twitter @jrmck.