Category: startups

Building the artificially intelligent business

Artificial intelligence and machine learning are a great opportunity for small business says Xero founder Rod Drury

It’s been another big year for Xero after the company passed its million user milestone, at the recent AWS Summit in Sydney founder Rod Drury to spoke to Decoding the New Economy about what’s next for the company and for small businesses.

For a company founded a decade ago, having a million paying customers is a substantial milestone and one Drury seems quite bemused by.

“It hasn’t really sunk in yet. When we did our IPO our promise was a hundred customers and I can remember when it was our first year our target was twelve hundred customers – I think we got to 1300 – so to pass a million is pretty nuts.

“What we’ve found is the accounting software market is probably one of the key industries where you’ll see the benefits of machine learning and AI. The reason for that is massive amounts of data but a pretty tight and structured taxonomy so we processed 1.2 trillion pieces of data in the last 12 months so the graph of data is huge.”

Far more modest volumes of data threaten to overwhelm smaller businesses and this is where Drury sees Artificial Intelligence and machine learning as essential for simplifying services and driving user adoption.

“One of the challenges is that small businesses might be great landscape gardeners or plumbers but they are terrible at actually coding transactions so we’re now seeing that wisdom of the crowd and all that data that we can code better than most normal people can. So the big epiphany was ‘why don’t we get rid of coding?’

“Effectively all a small business has to do make sure things like the data of the invoice is in the system and we can do the accounting for them and the accountants can check and see what’s going on.”

This automation of basic accounting tasks, and how these features are now embedded in cloud computing offerings, is changing how businesses – particularly software companies – are operating.

“You can’t run domestic platforms any more, because every accountant will have customers that are exporting and what we’re seeing now is global platforms connecting together so, for example, HSBC announced its bank feeds and what we’re doing with Stripe and Square.

All of the accountants need to be coaching the small businesses exporting. That’s what creates jobs.”

That global focus of business is now changing companies grow, particularly those from smaller or remote economies like Australia and New Zealand.

“What we’re finding now is the last generation of the late 90s and early 2000s was very much enterprise technology and normally companies would get to a certain point and then a US public company would have to buy them.

“Now we’re seeing truly global businesses that aren’t selling out quickly they’re actually creating businesses from this part of the world. People don’t have to live in Silicon Valley anymore, they can live in Sydney’s Northern Beaches or Auckland or Wellington and do world class work.

That remoteness is something that challenges Xero though as the company tries to get traction in the US market which is dominated by Intuit and fragmented across regional and industry lines.

“As you start off as a company listed in Australia and New Zealand it’s harder as you don’t get the benefit of the density in a smaller market. Now we’ve done enough to get these bank deals, we can now attract executives of the calibre that feels like long term leadership and that’s the benefit of doing the hard yards for a few years.

We’re past the beach head phase now and now we’re building the long term business. We want to be a big fish in a small pond.”

Overall Drury sees the cloud, particularly Amazon Web Services, as being one of the great liberators for business as smaller companies follow Xero’s footsteps.

“This is one of the amazing things AWS have done, they’ve created this flat global playing field.”

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Small business and the importance of design

For most small businesses and founders hiring a professional designer could be a very good investment indeed.

One thing the iPhone era has taught us is the importance of good design.

In a piece for Fairfax Small Business this week, I had a look at some small businesses that had used compelling design to launch their products.

As part of the research for this I interviewed Murray Hunter, founder of Sydney’s Design + Industry, about what businesses should be looking for when taking a product to market.

One of the interesting points about the story was the two businesses featured, Elanation and Pod Tracker, didn’t use professional designers as the founders of both had expertise in that field themselves.

But it is clear, good design matters to users and it will avoid problems down the track with manufacturers shippers and possibly regulators so for most small businesses and founders hiring a professional could be a very good investment indeed.

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Bootstrapping to success

Bootstrapping is the easiest and cheapest form of investment, maybe we should celebrate it more.

One of the downsides of the current tech startup boom is the obsession with investor funding, the race to be a billion dollar ‘unicorn’ like Uber or AirBnB obsesses most of us reporting on this space.

The paradox is while we gleefully report businesses raising hundreds of millions of dollars at ever increasing valuations, we’re also discussing how the cost of entering industries or launching new companies is collapsing, making it easier to launch a venture than every before.

Which leads us to good old fashioned ‘bootstrapping’ – funding a business’ growth out of sales.

A recent story I wrote on Sydney based HR tech company Expr3ss! reminded me of that where owner Carolyne Burns described how she financed her business initially through the sale of her house and has never taken a cent from investors over a decade of profitable operations.

Bootstrapping is the traditional way generations of business owners and entrepreneurs have funded their ventures and it’s only in recent years with the rise of the tech startup that venture capital or private equity has been seen as investment sources for most small businesses.

That rise of VC and PE investors though could be partly due to the banks stepping out of their role of financing small businesses as they’ve focused on financial engineering and funding speculators.

Also driving things in the last decade has been the flood of cheap money that’s washed across the world as governments and central bankers try to stave off deflation.

Many businesses needing money to fund capital investment or expansion have found it’s become harder to go to banks or traditional investors and that partly explains the rise of VC’s, Private Equity and the range of new online lender and crowdfunding platforms.

Venture Capital and investor money though never really comes cheap and having raised funds from investors, a founder or business owner’s job becomes as much about managing investor expectations as running the company.

 

For many business founders, the whole reason for starting their own company was to run their own show. So answering to a bunch of investors defeats the purpose of going on one’s own.

Carolyne Burns’ story is a reminder that the best, and cheapest, form of business financing is profitable sales. It’s something we should remember in an age that celebrates loss making companies dependent upon indulgent investors.

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When startups should think like designers

Design, funding and research are critical parts of getting a product successfully to market says Design + Industry’s Murray Hunter

Thinking about design and getting to market should be a priority for startup businesses says Murray Hunter, founder of Sydney’s Design + Industry.

Having won over 160 design awards during 30 years of running Design + Industry and employing 50 specialist designers and engineers in his Sydney and Melbourne offices, Murray has many insights in what makes a successful product.

“Some of those companies have gone on to become world leaders, it’s a hell of ride and it’s a fabulous relationship where 15 or 20 years later you have a client relationship that’s dominating the world.” he recalls.

Thinking like designers

The current startup scene in Australia provides an opportunity for the country, Murray believes.

“We’re losing manufacturing industry but there’s a whole new wave of businesses and startups based around new technologies, particularly around IoT”

Cyclone pruning shears

“The world wants to think like designers and lead by innovation, which is a really interesting line. You have the American government that wants to design think and you have all these large accounting firms that want to be design thinkers as well.”

“But everyone wants to be innovative and provide a better experience to the customer and we have all these new technologies that are giving us the ability to have a lot more information, be more informative.”

“It started with Apple with the iPod and then the iPhone and it’s led right through so we now have high expectations of what we want for products and services.”

Finding funding

His advice to startups is blunt, “the first thing you need is funding, If you don’t, start the process of development sufficient to develop collateral which enables you to gain investors.”

The development process itself starts with knowing the market.

“Products should be designed to suit the market, not on a hunch,” he says. “So you start with what the market wants and you go backwards. You don’t get dressed and say ‘where are we going’, you find out where you’re going and then get dressed.”

“The intelligent and qualified entrepreneur will have a lot of the problems solved, they’ll have done research, they’ll have knowledge of the market, they’ll know the segments it’s aimed at and quite often they’ll have route to market realised.”

BlueAnt Pump HD earbuds

“Crowdfunding makes a big difference as entrepreneurs can run a crowdfunding campaign, get initial sales and worldwide recognition for it. If it isn’t successful, that could be the end of it. Others know people who can fund it.”

“They may not have funding or they may, we have quite a few suppliers around us who will help with the funding process. We also know private individuals with deep pockets who are interested in investing.”

Changing the design industry

Over the past few years, the design industry has changed dramatically with the rise of Computer Aided Design, 3D printing along with new materials and manufacturing methods. Medical devices are one area that’s seen a rapid change.

“Thirty years ago medical products were low volume,” Murray recalls. “In Australia typically we’d make them out of sheet metal. Now the volumes have increased because the world is more easily accessed so we’re designing for higher volumes.”

CliniCloud non contact thermometer

“We’ve also got low cost manufacturing sources to provide solutions so we can develop a more sophisticated product that will be better received worldwide.

“The biggest change I think has been CAD (Computer Aided Design), the Internet and 3D printing.”

“CAD because we went from 2D drawing to 3D models, the internet because we no longer send DVDs or CAD files to our manufacturing partners and it means we can access manufacturers all over the world.”

“We’re working on a 3D printer that can make biomatter, in other words skin, there’s talk of doing teeth with the rigid externals and soft nerves. So where we go I can only think of organs, prosthetics, replacing cartilage which is a big thing for the elderly.”

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Government cargo cults and community building

Melbourne hopes a culture of government subsidies will build an industry ecosystem, history isn’t on its side.

Following the post on Building Digital Communities a few weeks ago, some friends forwarded me an excellent article from New Zealand tech evangelist Dan Khan on what he learned from from observing the development of Boulder’s tech community.

Khan’s view is values are at the root of building a startup community, an open and distributed network of people bringing their disparate but relevant skills to a region is what builds an industry cluster.

Equally it’s about values being aligned so the community reinforces its own strengths and advantages.

To many, the startup community is not a tangible thing. Instead, it’s an amorphous, ever-changing network of support, knowledge, resources, and relationships which gives those creating ventures, a boost up to the next level when they need it.

It’s simultaneously a safety net that eases founders down when their ideas fail; and a resounding cheerleader and network of scale for those flying high.

The New Zealand experience is informative as Wellington’s tech sector explodes on the back of special effects studio, WETA along with Xero and the vibrant startup community based around initiatives like Enspiral. So much so the city is offering free trips to prospective workers.

Enspiral itself is a good example of grass roots community initiative where a contractor’s collective has grown to 300 strong organisation building connections between Wellington’s creative, tech and businesses groups.

History is on the side of those building grass roots communities as almost every industrial hub has grown out of motivated individuals harnessing a local region’s advantages to dominate a sector.

As Steve Blank’s Secret History of Silicon Valley describes, the rise of today’s venture capital tech sector business model came out of a group of driven individuals leveraging the United States’ massive electronics research spending through the mid Twentieth Century along with a boost from tax changes in the late 1970s.

Silicon Valley’s startup culture owes a lot to government spending and policies but the development of today’s ecosystem took fifty years and many motivated individuals working together.

Which brings us to to the Victorian state government’s funding the establishment of a 500 Startups outpost in Melbourne. This is part of a sustained campaign to subsidise global tech companies’ setting up their regional offices in the city.

As part of that campaign the Victorian state government has promised to spend sixty million Australian dollars on building a startup ecosystem in Melbourne, it’s a classic example of top down planning.

History hasn’t been kind to Victoria in its tech industry subsidies, with the state government spending ten of millions at the beginning of the century to develop region’s gaming industry only to see the sector collapse as a high Australian dollar and soaring costs saw international studios leave and local producers close.

In 1998, then Victorian Premier Jeff Kennett, triumphantly proclaimed subsidising Netscape’s Australian office would lead to Melbourne becoming a global tech centre. Twenty years later, that game continues.

500 Startups founder Dave McClure hints at how the outpost will be limited, “Partnering with Melbourne and LaunchVic helps us bring a slice of Silicon Valley to Australia through our startup, investor, and corporate programs.”

So there’s a strong sense of deja-vu, dare one say even cargo cult thinking, in the weekend’s announcement.

While bringing a slice of Silicon Valley to Melbourne is nice, it doesn’t build an ecosystem which will take years of patient encouragement of local, motivated individuals. What’s worse, the government intervention threatens to distort the market and stifle the culture of grass roots development Khan identifies as being critical.

The question for Melbourne’s startup community is how much patience does the government have? The nation’s political culture of announceables, which the current state minister is an enthusiastic participant, doesn’t bode well.

For the moment, the priority for the Melbourne startup community is to decide if public sector funding should be a critical part of their ecosystem. If government subsidies for foreign businesses are the answer then ensuring bipartisan and long term political support for strategic initiatives should also be close to the top of the list.

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Australia’s changing startup landscape

The 2016 Startup Muster report tells us a lot about the state of Australian business.

Last week, the annual Startup Muster report on the Australian startup sector was released, giving investors, founders and policy makers a valuable snapshot of a vibrant sector of the economy.

The 2016 report had 2711 responses to the online survey which the researchers whittled down to 685 startup founders, 239 potential founders and 474 startup supporters.

Compared to the previous years, the replies are an increase from the 602 in the 2015 survey and 385 the year before. It shows how the Australian scene is growing and evolving.

Still a boys club

A key finding from the 2016 Startup Muster report is the changing gender composition of a group that, quite rightly, has been criticised for being too much of a ‘boys club’. This year’s survey found 24.6% of founder respondents were female, up from 17.4 and 16.1 in the previous two years.

One area where Australia’s startup community does boast diversity is in its industry composition with 17% of the country’s startups in 2016 being focused on the most popular category of Fintech. Notably that sector came in at seventh in 2015.

2015 2016
Marketing Fintech
Content/Media Retail
Retail Content/Media
Big Data Internet of Things
Health Education
Education Marketing
Fintech Social media

Also notable in that list was the disconnect between startups and investors. While 17% of Australian startup founders were focused on Fintech, 42% of investors were. The area most of interest to investors was medical technology (47%) with the Internet of Things second (43%).

Over the next few years it will be interesting to see how investment fashions change, in the UK the bottom seems to have fallen out of the fintech boom while global investments seem to have increased. It’s likely Australia will follow a similar pattern to the wider global trends.

Sydney’s decline

Another interesting shift is the balance between cities and states with New South Wales and Sydney remaining dominant but its position slowly falling,

2015 2016
outside capital cities n/a 23.1
NSW 44 40.9
Vic 17 18.8
Qld 16.5 19.3
WA 8.9 7.3
SA 2.9 6.3
Tas 0.6 2.3
ACT 6.4 6.2

The fall in Western Australia is probably due to the state’s economic collapse in the face of the dying mining boom – many of WA’s skilled and affluent workers are moving out rather than struggling with a declining economy.

Efforts by the Victorian and Queensland governments to promote their startup sectors seem to have had some success although the real winner is South Australia, something underscored by US incubator TechStars’ recent launch in Adelaide.

The big question though is how attractive Australia is as a location for startups and investment capital.

Funding woes

In the 2016 Compass Global Startup Ecosystem Ranking report, Sydney fell four points from the 2012 survey to 16th while Melbourne fell out of the top twenty city rankings.

Due to its position as the second lowest on the Growth Index within the top 20, and its comparably weak statistics around Performance, Funding, and Market, Sydney now ranks #16 (down from #12 in 2012).

Compass’ findings show a critical problem for the Australian sector, regardless of its location, industry or founders’ gender – the lack of later stage investment funds.

That lack of funding means Australian startup founders are particularly sensitive to money issues with Startup Muster finding the most common hindrance to people launching startups is life circumstances requiring a stable income. In a high cost society, the need for a regular salary isn’t surprising.

Startup Muster’s 2016 report is a very useful snapshot of the state of Australia’s tech startup community. It serves as a good guide to what business founders, investors and policy makers should be considering.

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Scamming the Jobs Act

JOBS Act equity crowdfunding replaces the ‘fools, family and friends’ that startups relied for seed capital. Hopefully there won’t be too many fools

When the Obama administration approved the US JOBS Act in 2012 it was almost certain the crowdfunding aspects would attract charatans looking to separate gullible investors from their money.

And so it has turned out, with the New York Times reporting how some crowdfunding sites are worried by the poor quality of startups touting for funds on some platforms.

The Times piece follows the story of Ryan Feit, the founder of New York’s Seedinvest who tells how he has rejected substandard proposals only to have seen them embraced by other crowdfunding platforms with often terrible results for investors.

One of the early companies he rejected was shut down by regulators — who labeled it a fraud — after it raised $5 million from investors. And Mr. Feit expects it won’t be the last.

That fraudsters would be attracted to crowdfunding sites is unsurprising and with regulators still working out how to manage investor protection the field is still very much ‘buyer beware.’

High valuations are also an investor warning sign.

Mr. Feit has been particularly worried about companies that have assigned themselves sky-high valuations that will make it hard for investors to ever make their money back. In several cases, companies that he rejected because of their high valuations have shown up on other sites with the same valuations

The unicorn mania of recent years is the cause of this focus on high valuations and is strange for investors as those richly priced stakes are not in their interests or those of employees taking equity in the business. If anything, a ridiculous market valuation should be the biggest warning of all to potential stakeholders.

Ultimately though it may be that crowdfunding equity isn’t about taking a stake in a business but more showing one’s support for a venture suggests, Nick Tommarello, the co-founder of Wefunder.

Mr. Tommarello also noted that many small-time investors so far were viewing their investments more as donations to businesses they like, rather than as investments that will make money.

As JOBS Act equity crowdfunding campaigns are limited to a million dollars each, being the modern equivalent of the ‘friends, families and fools’ may be the future of these capital channels. Hopefully there won’t be too many fools.

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