Category: startups

Startups feel the squeeze

As funding becomes tighter, startups fell the squeeze

A key factor in the unicorn startup valuations is the prospect of the company building a near monopoly. Over the years this is what’s driven the valuation of companies like Microsoft, Google and Amazon.

This is what underpins the valuations of companies like Uber and Lyft and their potential monopoly positions have been entrenched with ride sharing service Sidecar deciding to wind up.

In the food delivery space, things are more competitive and with no clear leader which makes things even more difficult for the companies operating in this space. High profile service Instacart yesterday announced its laying off recruiting staff and increasing delivery charges as it deals with a tighter market.

Instacart and Sidecar’s woes are an indicator of what’s to come for more of the tech startups which haven’t achieved some sort of profitability.

 

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The victims of unicorns

A highly valued business is not good news for all shareholders, particularly employees who’ve taken equity.

It’s not all good news when a tech company becomes a unicorn reports the New York Times as it often means employees and other ordinary stockholders may be diluted out by later investors holding preferential shares to secure their big bets.

The danger with these high private valuations is the later investors whose big cheques created the unicorn mythology insist upon preferential shares to protect their stake. Should the company go public or be sold for less than the valuation then it’s the common stock holders who take the greatest hit.

Good Technology’s sale to BlackBerry is the example cited in the New York Times’ story. The company’s last round of funding valued the business at $1.1 billion but it’s eventual exit was less than half of that.

As a consequence, the common stockholders lost 90% of their wealth in the company while executives and late stage investors came out with only a slight dip in the preferred shares valuation. The CEO walked away with nearly six million dollars.

With the last two years investment mania and the clear topping of the market, situations like Good’s are now becoming common. The New York Times points this out in the story.

The odds that the unicorns will all reap riches if they are sold or go public are slim. Over the past five years, at least 22 companies backed by venture capital sold for the same amount as or less than what they had raised from investors

For employees in these highly valued startups, those valuations and the risk of losing most of your own equity is a serious concern. Analyst firm CB Insights flagged earlier this week an exodus of talent from overvalued firms with dubious prospects is a great opportunity for the top tier companies.

While the headline numbers for unicorns are impressive, the reality for employees, founders and early stage investors is an overvaluation is a dangerous place to be.

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When startup growth pains prove fatal

The startup investment model can work against building a sustainable business

One of the most dangerous things for a startup business is trying to grow too quickly.  In his blog, Jun Loayza describes how RewardMe, one of the startups he was involved in, failed after it tried to scale to fast.

In his list of factors that led to RewardMe’s demise Loayza cites an undue focus on customer acquisition, however this is a fundamental part of the current Silicon Valley greater fool model.

As the exit strategy is to sell the business, whether it’s to a trade buyer or through an IPO,  the aim is to maximise the value of the operation ahead of that sale. Boosting the numbers of users is a key task for management.

Loayza says in retrospect he would have liked to focus on product development rather than user acquisition, but that’s a luxury not available when you’ve taken venture capital funding.

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Atlassian and the changing tech investment mindset

Atlassian’s float may mark a change in the Silicon Valley mindset. It’s also a warning to Australian business

Last week’s successful float of software collaboration tool service Atlassian may mark a number of turning points for the tech industry, both globally and in the company’s home country of Australia.

Unlike many of the high profile unicorns which have dominated the tech industry headlines in recent times Atlassian is a real, and profitable, business with revenues of 320 million dollars that has grown at over 40% in each of the last three years.

An even greater difference to the unicorns is Atlassian has raised little in external funding, instead the company was bootstrapped from a $10,000 credit card debt as this BRW profile of the business describes.

Having a profitable, debt free business not beholden to a small army of investors is distinctly different to the Silicon Valley greater fool model hoping for cashed up sucker to buy their unprofitable, but well publicised, operation out. In fact it appears the greater fools themselves are dropping out of the market.

Atlassian’s float may well be the marker that investors are looking for more substance in tech companies than just the promise of millions of eyeballs.

For Aussies the lessons are sharp, Atlassian shifting its corporate functions to the UK last year and now listing on the US stock is a sharp reminder of just how out of touch with the technology sector Australian industry has become.

Had Atlassian listed on the Australian Securities Exchange at the same capitalisation, it would have been the market’s 38th biggest company sitting between two property companies and one of the few technology listings on the board.

On the ASX Atlassian would be one of a handful of technology businesses on the banking, mining and property dominated Australian exchange. It was that dominance of old world businesses and local investors’ lack of understanding of technology stocks that saw the company’s co-founder Mike Cannon-Brookes long maintain that Atlassian would never be listed in Australia.

Another weakness for the Australian markets are local investors’ obsession over yield with businesses large and small paying out dividends at a far greater rate than global equivalents. This makes it hard to retain earnings and invest in new markets and R&D. Basically an Amazon could never exist in Australia.

For companies looking at following Atlassian’s footsteps the lesson is clear – the Bay Area startup model of chasing investor funding with the hope of finding a greater fool isn’t necessarily the best way to build a business and that bootstrapping a cash flow positive business gives founders greater control and flexibility.

To Australian entrepreneurs Atlassian’s lesson is to find a worldwide problem to solve and go global immediately. A domestic market focused primarily on property, banking and mining while being obsessed with short term yield isn’t going to be hospitable for local startups.

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Changing the Australian investment mindset

Can the Turnbull government’s Innovation Statement reset Australia’s investment mindset?

“Of course I’m minimising my tax. If anybody in this country doesn’t minimise their tax they want their head read,” media tycoon Kerry Packer growled when asked about his financial affairs at an Australian Parliamentary committee in 1991.

Kerry Packer’s attitude towards tax minimisation runs deep in the Australian psyche so the announcement of a range of concessions to encourage investment in startups as part of the Federal government’s Innovation Package, branded as The Ideas Boom, may well succeed in unexpected ways.

The National Innovation and Science Agenda should be welcomed by any Australian concerned about the nation’s role in the 21st Century. After 25 years of neglect – if not wilful ignorance – by successive Liberal and Labor governments there is now at least a recognition that developing new industries and businesses is essential to maintain first world living standards.

Many of the proposals in the package are long overdue such as a commitment to open government data, initiatives to support STEM education, programs to encourage women in the IT industry and recommitment of funding for the government scientific agency, the CSIRO.

Australia’s quiet tragedy

The defunding of education and CSIRO research by successive Liberal and Labor governments has been one of the quiet tragedies of Australia’s turning its back on the 21st Century. The reversal of the focus on property speculation and mining is hopefully the start of renewed government efforts to restore the long term competitiveness of the country.

While many of us hope this is part of a broader, bipartisan vision of where Australia should be in the connected century, at this stage no-one can have confidence that these long term measures won’t be the victim of short term political expediency.

Short term gains

In the short term however the focus will be on the immigration and investment incentives. In some respects they are disappointing – the $200,000 annual limit for tax benefits should be contrasted with there being no such restrictions on property speculation – and both the investment and immigration proposals are still overly complex and will be a boon for well connected advisors and consultants.

However the changes are a start in shifting the attitudes of the nation’s risk averse investment and business culture and may well be well timed as the real estate price bubble starts to deflate forcing investors and speculators to look elsewhere for returns and tax breaks.

That chase for tax breaks could well mark the change for Australia’s investment starved small business and startup community, at the time Kerry Packer made his comments to the Parliamentary committee one of the most popular tax minimisation strategies was investing in locally made movies under the 10BA scheme that allowed generous deductions for investors.

Following film

Most of the films made under the 10BA regime were at best forgettable and the scheme was wound up in the mid 2000s but the wave of money that flowed into the Australian film industry helped launch the careers of many of today’s globally actors, producers and industry professionals.

If these changes can have similar success in the technology industries then they may be well worthwhile.

Another aspect to the Innovation Statement may well be the shift in Australian government industrial policy from a failed ‘think big’ mindset that assumed local businesses had to dominate their domestic markets to compete globally into a view where smaller, nimble operations can succeed internationally.

Welcoming change

Overall the Turnbull government’s Innovation Statement is a welcome change from the last twenty years of complacent policy around Australia’s economic development. One big challenge remains though in changing the nation’s complacent business culture.

Ultimately, the biggest challenge is move Australian households and investors on from the tax minimisation mindset. While Kerry Packer may no longer be with us, his mindset remains the driving force of Australian business.

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Innovation and the Australian investment paradox

The Australian government’s Innovation Statement hits an obstacle in the nation’s risk averse culture of regulation

Even before its breathlessly awaited release it appears the Turnbull government’s innovation statement seems to have hit rough water as industry figures and the opposition criticise the proposed requirement for companies to be public before they can raise money through crowdfunding.

In itself this requirement isn’t a major barrier as prominent industry figures have pointed out although it will have the effect of making crowdfunding an option for more established ventures rather than early stage startups, which probably won’t be a bad thing for investors, employees and founders.

The requirement though does show a deeper seated problem in Australian government and regulation – a desire to legislate risk out of the system.

An Australian paradox

For tech startups, along with other businesses in new industries this creates a paradox as most of them will fail and their investors lose their money. Trying to protect backers of these ventures guarantees they won’t raise money.

So in trying to create a risk free environment, regulators end up killing the ecosystem.

From an Australian perspective, the risk free environment makes sense to a mindset that believes property is guaranteed to double every decade. Why invest in something that will probably fail when borrowing to speculate on an apartment is certain winner?

Protecting property

Strangely that attitude towards property has created another Australian paradox where the real estate industry is exempt from most consumer and investor protection law. The sad truth is the average Aussie has more protection in buying a smartphone case from a two dollar shop than they do when purchasing a two million dollar home.

Because property speculation is seen as risk free, there are few regulations or barriers to Australians gearing up into houses and apartments but for productive businesses and startups the obstacles for raising capital are substantial.

Ultimately, if Malcolm Turnbull and Wyatt Roy want to change the focus of Australian business and investors they are going to have to change the mindset of regulators and voters.

To change that mindset will take some brave steps, for the moment it’s far more likely the budding Australian innovation renaissance is likely to be suffocated by risk hating regulators.

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