Written by Andrew Mooney and Roland Kulen:
Why do so many Aussie Startups head Overseas?
“The Australian tech startup scene has a lot of energy and optimism and has made tremendous strides in the last few years. At the same time, it does face a number of challenges which make it tougher to build a startup in Australia than it does in some other places. Chief among these is access to capital — which is why many of the best local startups end up establishing themselves offshore in order to access not just larger customer markets, but greater opportunities to access capital.” Andrew Dowling, Founder and CEO of Tapestry.
Blossom Street Ventures recently undertook an analysis of 41 software companies to determine the founder ownership at the initial public offering (IPO) stage.
These 41 companies listed in the USA between 2017 and 2020, and the range of founder ownership was extreme, from a low of 2% to a high of 93% (this company bootstrapped itself to the public markets and did not take VC money and is definitely an outlier).
Rapacious Venture Capitalists
The range was determined by several factors, perhaps the most important being the ability to command high valuations during fundraising and capital efficiency.
Note – a capital efficient venture is one that does not require multiple rounds of equity investment for it to grow quickly.
The median level of founders ownership at the IPO stage is 14%, while the average is 23%. Seven of the companies had founders owning less than 5% equity at the point of IPO.
If the tech scene in the USA is so rapacious, then why do so many Aussie start-ups continue to head overseas?
Anecdotally, the answer seems to be that the Australian early-stage, angel and venture capital investors are considered even more rapacious than their American cousins.
UOW: iAccelerate Seed Fund
Founders can apply for two tranches of early-stage funding. The first tranche: 6% of your company you get $30,000. The second tranche: 15% of your company you get $150,000.
iAccelerate says, “It’s a win-win all round.”
The second tranche of $150,000 assumes you succeed with your application. If so, founders give up 21% of their company for $180,000.
PS – What can you get done for $30,000? Does it include crafted legal documentation?
PPS – The average cost of an app in Australia is $170,000!
The follow-on investments by iAccelerate do not provide how much equity founders have it give up. Let’s look at what this equity could be.
Typical Capital Raising Rounds in Australia
Typically, there can be several rounds of financing and at each round the founders (and subsequent investors) will get diluted. The following represents a typical sequence of financings from Stone & Chalk – Capital Raising Guide for Startups.
Round :||: Capital Raised :||: Dilution
- Pre-seed :||: <$150,000 :||: 20%
- Seed :||: $150,000 to $1 million :||: 15%
- Series A :||: $1 million to $5 million :||: 25%
- Series B :||: $5 million to $20 million :||: 20%
Note – the pre-seed round aligns with the iAccelerate Seed Fund.
Australian Venture Capitalists
And why do venture capitalists get away with this?
Because the early-stage investing pool in Australia is small and essentially a closed shop. If you want seed money in Australia, there are only two or three (if that) options open to you. And, the VCs all know each other, between them, they determine the rules.
The VCs determine the valuation of your company and if you don’t like their number, they say – “you’re welcome to go somewhere else.” But there is nowhere else in Australia. Moreover, if you don’t have the money to head to the USA, then you only have three choices: accept the VC’s valuation, try and bootstrap your way to success or give up on your dream.
The Australian tech sector deserves a better model.
A better model can only bring good things to Australia. A PwC paper concluded that, “the Australian tech startup sector has the potential to contribute $109 billion or 4% of GDP to the Australian economy and 540,000 jobs by 2033 with a concerted effort from entrepreneurs, educators, the government and corporate Australia.”
AppCurate: A Better Model
Co-founders should consider building their MVP BEFORE raising capital because you’ll end up giving less equity in your company to venture capitalists.
Also check out this Startup Incubator page (scroll half way down) on AppCurate.
Finally, build your MVP in a Startup Incubator Sydney that can help you raise capital.
For more information on AppCurate email us at firstname.lastname@example.org. Let’s together get on a Faster Path to Commercialization and you’ll end up owning more of the upside!