Future proofing the Australian startup ecosystem
Smart growth, not lazy growth
Australian venture capitalists are raising three times more money this year than last year, with more than a billion dollars of fresh capital raised — or being raised — to invest in the nation’s technology start-ups.
This will no doubt further accelerate the 800 per cent growth in tech investments in Australia and New Zealand over the past five years. As that money searches for opportunities, more businesses should attract more investment and more capital, and there should be more competition to invest in the best companies.
While that’s a great situation and a level of interest we haven’t seen since the dotcom boom, how do we avoid a scenario such as in the US, where the past five or so years of virtually “free capital” has led to allegations of founders and start-ups “becoming soft”?
Soft in this case means becoming used to high levels of capital and very limited focus on core commercial fundamentals such as unit economics or profitability.
Many luminaries argue it is this phenomenon that led to overvaluations, unsustainable business models and unsavoury business practices, with a unilateral focus on headline growth at the expense of everything else.
Eventually, rational behaviour returns to all markets
The current market correction has seen major falls in public technology company valuations, an absence of IPOs in Q1 and some high-profile start-ups either having down rounds or not getting funding at all.
This all proves that, eventually, rational behaviour returns to all markets.
Meanwhile, back here in Australia, the “ideas boom” is in full flight. This is uncharted territory for Australia and a welcome, not before time, embracing of innovation. But it is a situation that deserves respect and rationality, lest we ignore the lessons from international markets.
Despite the sudden increase of interest in the space, I’m confident Australian start-up investors won’t lose sight of the elements that have driven the growing success of #StartupAus.
As a culture, the scarcity of capital here has bred very fit and focused start-ups that have never lost sight of the requirement to generate revenue, and to do so in a way that makes sense at a unit economics level and creates pathways towards profitability. Those that don’t have this focus typically whinge about the lack of capital in the country, while the rest just get on with business.
We’ve been able to balance the quest for growth alongside the requirement for commercial fundamentals
There’s no doubt there has, historically, been too little capital for tech start-ups in Australia. But even over the past few years as credible VC firms such as Blackbird, AirTree, Tank Stream, OneVentures and rampersand have injected new capital into the market, we’ve been able to balance the quest for growth alongside the requirement for commercial fundamentals.
So the new wave of capital is very welcome and signals not just a pleasing change in support of innovation, but also an overdue relaxation of our historically underdeveloped risk appetite (when it comes to tech anyway — we never hesitated to plunge money into a hole in the ground if there was a chance of ore).
The best Australian companies have combined high growth with core commercial fundamentals
But along with that, we hopefully don’t lose sight that in good times and in bad, business fundamentals will always be required.
The best Australian companies have combined high growth with core commercial fundamentals, which is why so many international investors are now so positive towards Aussie start-ups.
Pleasingly, we’re seeing more and more ambitious and highly talented start-ups coming out of Australia, but at the same time we have seen unsustainably high valuations and party rounds driven by fear of missing out with very little (or no) chance of commercial success, let alone investor returns.
That’s not to say we shouldn’t back the moon shots — we absolutely should (and we do), but those of us who’ve been through a couple of cycles have learned to distinguish the high-growth moon shots with ultimately sustainable value from the hype-based businesses, and new investors will hopefully learn the same.
This is a truly exciting time to be in Australia’s tech community. All the elements of Australian ingenuity, increasing commercial acumen, growing risk appetite and access to global markets — both customers and capital — put us in a very healthy position to take our place on the global stage and, in fact, exploit the downturn in other markets.
And if we do that without losing our heads, this ideas boom will help us become a truly sustainable world-class ecosystem.
Originally featured in The Australian Financial Review