Tag: investment

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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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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Rethinking startup rules

Much of the current mindset around investing and supporting startups creates barriers to founding new businesses. What can we do better?

What are some of the barriers to increasing diversity in the startup community’s monoculture? Yesterday we had an insight into some of the changes needed at the Women in VC forum held in Sydney.

Samantha Wong, partner at early stage startup accelerator Startmate and Head of operations at Blackbird Ventures, described how Startmate identified some of those barriers among the 51 companies that went through the program and the steps to overcome them.

What Samantha and her team found illustrate how the Silicon Valley model of founding and funding businesses inadvertently creates obstacles for women, older workers, disadvantaged groups and poorer people.

Insisting on Solo Founders

“Previously we had a rule that you couldn’t be a solo-founder. It’s too much work to do it by yourself,” she explained.

There’s good reason for that belief as building any business on your own is hard, regardless of whether it’s a tech startup or a dog walking franchise.

It’s understandable that investors are reluctant to get involved with a ‘one person show’, although a lack of capital is going to make life extraordinarily harder for a sole founder or proprietor.

The myth of the tech co-founder

“You had to have at least one technical co-founder in the team.” Samantha explained, “the reasons for this rule were historical.”

This belief goes back to the origins of the Silicon Valley business model where companies like Apple, Hewlett-Packard, Microsoft and even Google were founded by ‘two men in a shed’ where one was the marketing or sales whiz and the other delivered the product.

Interestingly many of the recent successes like Facebook, Uber and AirBnB haven’t had that dynamic, probably because the technology industries have matured to a point where developer and product managers are established trades or professions are easily available as well as cloud based tools making technology itself more accessible.

So a ‘tech co-founder’ will almost certainly be useful but isn’t essential to get a business off the ground in today’s tech environment.

Being in attendance

“We had a blanket rule of requiring participants to be in Sydney for the full duration of the program,” says Samantha. “The reason for this we know from experience that ninety percent of the program’s value comes from that sharing which happens between founders, the support and the friendly competitive pressure you get from them. It brings the best out of you.”

Startmate changed its policy so only one of the co-founders needs to be in Sydney. While it doesn’t solve the problem of solo founders with family obligations that don’t want to move, it does make it easier for those with dependents to participate.

Dropping the blanket rules

Over the six years Startmate has been running, they’ve seen a change in the nature of startups joining the program. “When the program started in 2011 we gave a small amount of money to a couple of people to build a product and start attracting customers,” Samantha said.

“By 2016 we were attracting much later companies that already had revenue and the program’s focus became growth and fund raising.”

“So instead of blanket rules we started to ask ‘what does this company need to grow in the next three to six months?’ Do they enough resources right now? Is the product good enough to sell? If you can get good answers to those then it’s worth considering them joining.”

The lessons from Startmate in increasing diversity among their intake are instructive and it indicates the limits of the Silicon Valley model that favours young, middle class men over other groups.

For the tech industry, that focus on one group is a great weakness and means investors are missing a world of opportunities. Ditching existing biases and established wisdom could be a very profitable move from everyone.

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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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The shine goes off the wearable tech market

FitBit and GoPro lose their lustre as smartphones take many of their features

Friday was a bad day for former startup darlings FitBit and GoPro with both companies disappointing investors.

GoPro, whose cameras for a while defined a new wave of adventure videos, announced a loss of $104 million dollars on the back of production issues and further disillusioned stockholders with a forecast of further poor sales in the upcoming holiday season.

Those shareholders have many reasons to be disillusioned with the camera maker’s shares reaching $98 two years ago after floating at $24. Today they are sitting at $11.

FitBit shareholders have suffered similarly, with the fitness band’s shares falling to eight dollars after listing at $20 almost two years ago. Their announcement of further problems on Friday saw the stock price dropping thirty percent on the day.

It may be easy to scorn investors in hindsight, but both companies were emblematic of a new generation of wearable technology and much of their problems today owes as much to them trying to stay ahead of the curve as it does from smartphones developing most of their products’ functionality.

The travails of FitBit and GoPro are typical of a time when new technology is changing business. Some companies  shine brightly then fade while others have a rocky road to success. We’ll have to wait and see if FitBit and GoPro survive.

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An entrepreneur’s journey – a conversation with Muru-D’s Ben Sand

From a scrappy and underfunded inner Sydney startup to Silicon Valley and back, Muru-D’s Ben Sand has a fascinating entrepreneurial journey

As part of Telstra’s Muru-D business accelerator opening its latest startup intake this week, Annie Parker and Ben Sand, the organisation’s co-founder and Entrepreneur in Chief respectively, spoke to a small group of journalists on Tuesday about what they were looking for in the next batch of applicants and how the tech startup sector is changing.

Ben’s entrepreneurial journey from a scrappy, underfunded Aussie startup to a hot Silicon Valley property and back to a corporate incubator is an interesting tale in itself.

His first venture, an edu-tech startup called Brainworth founded in 2010, operated out of a dilapidated inner city Sydney terrace. The business acheived traction and Ben’s team won a ScreenNSW interactive media grant two years later.

Failing the Kickstarter test

Ultimately Brainworth petered out after missing a Kickstarter round. As Ben says, “I focused on getting out the maximum viable model rather than the Minimum Viable Model and the money ran out.”

As Brainworth withered away, Ben joined former university friend, Meron Gribetz at his Augmented Reality startup Meta which went onto join the Y Combinator program. The company went on to attract $23 million dollars in investment, primarily from Hong Kong and Chinese investors, and now has 150 employees.

Earlier this year, Ben returned to Australia after seeing Mick Liubinskas’ blog post about moving to the United States. In that article, his predecessor put out a call out for those interested in replacing him at the Sydney office which Ben answered.

Australian advantages

Now firmly settled into his Sydney role, Ben sees computer vision as one of the biggest opportunities in the tech sector. Bringing together disparate technologies like virtual and augmented reality, artificial intelligence and smart sensors, computer vision allows machines such as autonomous vehicles, drones and medical diagnostic equipment to pull together sources of data that lets machines see what is going on in the world around them.

Computer vision is a field where Australia has an advantage, Ben believes. “Adelaide is the second most funded city in the world in computer vision,” he points out with investments like Cisco’s into South Australia’s Kohda Wireless driving the local industry.

Ben and Annie don’t see the next group of Muru-D applicants being restricted to any one field despite Ben’s background in AR and interest in machine vision. “It’s more the psychology of the founders,” he says.

Mentoring the next wave

Three years of experience is also delivering dividends, observes Annie. “I’m starting to see the early cohorts starting to mentor and support the newer ones. That’s part of what Muru-D is part of, creating the ecosystem.”

Over the three years, there’s also been quite a few adjustments to the Muru-D process, Annie observes. “We change the model each year by about thirty percent.” she says.

Another thing that has changed is that later stage startups can apply for the program which will be open until November 4.

“I’m excited and I’m very confident we’re going to get great outcomes for these people,” says Ben of the next Muru-D cohort. “We’ll be working on getting the most confident founders on board and hopefully helping them to aim high.”

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A goldmine in your back yard

Accessible capital, a huge market and a collaborative culture are why startup founders are making their way to Silicon Valley and San Francisco

This is the first of four stories I did for The Australian on why entrepreneurs are making their way to the United States’ Bay Area. 

A combination of accessible capital, a huge market and a collaborative culture are why startup founders are making their way across the Pacific to Silicon Valley and San Francisco.

Despite their government’s ideas boom and an easier funding climate, Australia’s startups still see San Francisco and Silicon Valley as being the promised land. In this four part series we spoke to Aussie entrepreneurs about why they’ve made the move across the Pacific Ocean.

In a noisy coffee shop just off San Francisco’s Market Street, PixC founder Holly Cardew explains why she moved to the city. “It’s a place you fall in love with straight away – it’s the people and the attitude,” says Cardew. “You can do anything, people don’t look at you as if you’re crazy if you want to do something big.”

Wider horizons

Cardew made the relocation to San Francisco to find funding for Pixc, a photo editing service that in 2014 was one of the first group of startups accepted into Telstra’s Muru-D accelerator program. In moving to the US she found American investors have far wider horizons than Sydney’s business community.

“Investors ask ‘what’s next?’” Cardew enthused, “in Australia, you don’t even think about that. Americans tend to think a lot bigger. Australians aren’t trained to think about it.” Another aspect Cardew highlights about the Bay Area business culture is how individuals are always happy to help out, “people always ask ‘how can I help’ she says.

One of those credited by Cardew and by many of the people interviewed for this is Temando founder Carl Hartmann. In an archetypal open plan shared office in San Francisco’s Financial District Harmann explains why he’s quick to help, “I’m here today because people who were kind enough to pay it forward.”

Being there

Temando, a logistics service founded in Brisbane, was started to address the difficulties retailers had in fulfilling customers orders across Australia. Hartmann moved to the United States at the beginning of 2015 to access North American customers and to tap local capital markets. “When you talk to the SV funds it’s very hard to raise money if you aren’t here,” he says. “In Silicon Valley it’s where the action is. If you’re not here you are out of sight and out of mind.”

“It’s difficult to build those sort of relationships from the other side of the world. When you’re here, things can move along quickly because it’s easy to collaborate on things. It’s easier to work face to face. For us it makes sense to be here,” Hartmann says. “There’s a unique energy where everyone has come from all over the world.”

Jack Gonzales of location mapping service MapJam is an example of how fast things can move for companies in the Bay Area. “Last year we were approached by some of the big players who asked if we had our own map tiles,” he recalls. “We realised we had an opportunity.”

Gonzales was speaking at the somewhat chaotic San Francisco campus of 500 Startups across from the city’s Moscone Convention Center. Mapjam was accepted onto the prestigious startup investment and acceleration program last year.

A goldmine in your backyard

“You have a goldmine in your local backyard and you have to capitalise on that. Sometimes it’s really spontaneous, ‘hey can you guys come in on Friday?’ You can’t do that when you’re overseas,” Gonzales says. “Our main customers are here and I really want to conquer the backyard before I conquer the globe, just within walking distance from here there are thirty major players.”

Australia does have some advantages for startups, particularly in labor costs for skilled developers. “It’s three times more expensive to employ staff in the Bay Area,” says Affinity Live’s Geoff McQueen in explaining why he’s kept the company’s technical team in the firm’s home town of Wollongong

McQueen, who moved to San Francisco in 2011 to seek funding for his venture believes “Australia is a good place to do a minimum viable product or proof of concept” and warns budding entrepreneurs to have more “than just just a PowerPoint pitch” when they decide to make a permanent move.

In McQueen’s view it’s important to at least visit the Bay Area early in the process of developing a business. “Come over as soon as you can – even if you only have a light idea,” he says. “Anchor your visit around a conference, whatever is relevant to your target industry.”

Achieving your aims

Despite not finding gold on San Francisco’s grubby streets, most of the entrepreneurs The Australian interviewed were all happy they’d achieved their aims in moving to the US which vary from easier funding availability, access to bigger markets and a more vibrant ecosystem than those in Sydney, Melbourne or the smaller centres.

Ultimately though everyone mentions the supportive nature of the Bay Area’s startup culture, “people ask what can I help you with,” says Pixc’s Cardew. “You can do anything, people don’t look at you as if you’re crazy if you want to do something big.”

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