Partner Nick Abrahams discusses the attractiveness of the Australian technology sector to US Venture Capital in an opinion piece published by The Australian Financial Review.
This article was originally published by The Australian Financial Review and is reproduced with permission.
The $1billion love affair with Aussie tech
The call started normally enough. "Hi, my name is Chris and I need a lawyer to help me sell my technology company." So far so good.
The next line caught me a little off guard. "I am on the Central Coast."
What tech companies are there on the Central Coast, I wondered. Little did I realise I was just about to hear one of the great Australian tech stories.
Chris Strode went on to describe Invoice2go. It sounded interesting but I was still dubious about the scale of a business neither I nor hardly anyone in the Australian tech sector had ever heard of. I asked him who he thought would be interested in investing in the company. With his trademark casualness, he said a number of American venture capitalists had expressed interest but he had a term sheet from Accel Partners and thought they were the right fit.
I thought, "Accel. This is big – from the Central Coast and big!"
Over the past few years, the US VC community has pored over hundreds of Australian tech companies and have made more than 10 major investments, worth almost $1 billion.
Accel are the leaders of this wave, putting Australia on the map with their big plays into Atlassian, OzForex and 99designs. Their $35 million investment valued Strode's Invoice2go at more than $100 million, rivalling Erina Fair as one of the biggest businesses north of Newcastle.
Not bad for a guy who started the company with his wife Michelle nine years ago.
Atlassian has been the poster child for how a bootstrapped tech company can grow a global customer base from Australia. Accel found Atlassian because so many of their investees used the software that they invested in it, and a global tech superstar was born. It has been a sensational investment for Accel and its halo effect has brought many other US VCs to Australia's shores.
There are at least six US venture funds making regular trips here, scouring our tech successes such as Campaign Monitor ($266 million from Insight Venture Partners) and our unsung heroes like SiteMinder ($30 million from Technology Crossover Ventures).
One US VC told me he loves Australian tech companies because in Silicon Valley entrepreneurs expect huge valuations based on little more than a fancy PowerPoint deck but Australians can bootstrap ourselves to $10 million of earnings before interest and tax.
I did not think it necessary to disabuse him of this notion. While I am not sure we have a lot of companies that fall into this category because of the lack of early stage venture capital, our entrepreneurs are more likely to build businesses with prospects of early revenue than taking a "build it and they will come" approach.
It's hard to pay off a Sydney mortgage with "eyeballs".
The US experience with our entrepreneurs has been positive.
According to regular visitor to Australia, Alok Pandey of Vector Capital, "I have met many Australian technology entrepreneurs over the last few years and I am very impressed by their intelligence and work ethic."
The sheer weight of venture capital in Silicon Valley has caused valuation inflation in the US early stage tech world.
Simply put, US VCs can get better priced investments in Australia than at home.
Silicon Valley's emperor of early-stage investment Dave McClure says, "Australia has a lot of smart people, you speak English and the prices are good."
He should know. McClure runs the incubator 500 Startups and has invested in over 20 Australian companies. He says his success rate with Australian investees is higher than his average.
It used to be that to break a business in a new territory you needed heavy marketing and physical presence. Not the case online – virality (or what we used to call "word of mouth") is the order of the day.
Invoice2go built a massive global customer base with almost no marketing – just a great application that people loved to use.
Campaign Monitor built a $600 million global business from Cronulla.
So Australian tech companies can build global markets without the need to open offices (or even do marketing) overseas.
Betting on Australia
US venture capital: Large deals (valued at over AU$10m)
|2014||Atlassian||T. Rowe Price||Software/IT||AU$150M||Software|
|2014||Invoice2Go*||Accel Partners||Software/IT||AU$35M||Mobile invoicing|
|2014||LIFX||Sequoia Capital||Software/IT||AU$12M||LED smartbulbs|
|2014||Campaign Monitor Pty Ltd||Insight Venture Partners||Software/IT||AU$266M||Email campaign management|
|2014||Siteminder*||Technology Crossover Ventures||Internet||AU$30M||Online hotel booking|
|2013||Bigcommerce||Revolution Growth||Software/IT||AU$40M||eCommerce enabler|
|2012||Bigcommerce||Mike Maples and General Catalyst Partners||Internet||AU$20M||eCommerce enabler|
|2010||OzForex Group||Accel Partners||Internet||AU$70M||Payments|
* Transactions worked on by the author and team at Norton Rose Fulbright
US venture capital: Small deals (valued at or under AU$10m)
|2014||BugHerd||Australian based Tank Stream Ventures and Starfish Ventures and US based 500 Startups||Software/IT||AUD$1M||Software|
|2014||Canva||Shasta Ventures and Founders Fund||Internet||US$3.6M||Online|
|2014||Yuruware Pty Limited||Unitrends, Inc and Insight Venture Partners||Software/IT||AU$10M||Cloud|
|2013||Bubble Gum Interactive||Bill Tai and various other investors||Software/IT||AU$2.5M||Games|
|2013||App.io||Quest Venture Partners||Software/IT||US$1M||Applications|
|2013||BuyReply||Valar Ventures, Square Peg Ventures and Adrian MacKenzie||Internet||AU$1M||eCommerce|
|2012||Happy Inspector||US investors||Internet||AU$1M||Property|
Australia: easy-access Asia
Until the past three years or so, all Silicon Valley venture capitalists wanted to talk about in the Asia region was China. However, the bloom has come off that rose.
Many VCs have discovered that China is a tough market to crack, business practices are not familiar and, frankly, China doesn't need their capital.
The VCs see Australia as an easy-to-access proxy for Asian growth. Pandey says "The Australian technology industry is ripe for significant growth in the years to come because of the talent and drive of Australian entrepreneurs and sheer size of the APAC market."
There is no doubt the success of Accel's Atlassian investment has attracted other venture capitalists and it has also given them comfort about deal risk. It used to be if an American VC invested in an Australian company, the investment had to be made via a "flip-up" into a more familiar US structure like a Delaware corporation – an expensive and time-consuming effort.
These days American VCs are generally happy to invest directly into Australian proprietary limited companies and are comfortable with our IP protection regime. They still regard our employee share options tax regime with incredulity but thankfully the federal government is fixing that.
For the most part the big VCs want to go big. Their preferred cheque size is minimum $30 to $40 million for 20 to 30 per cent of the company. One VC I spoke to, reckons there are over 30 unlisted fast-growth Australian tech businesses which would command valuations in excess of $100 million.
Potential investees need to solve a problem for a global market. The VCs are not interested in Australia-only businesses. Their preference is for a proven track record with global expansion.
They are heavily focused on the big picture. They may well look for an investee which can be bolted on to one or more of their other investees to create a global powerhouse in the relevant vertical.
In the future smart money, like the US venture community, will gravitate to successful businesses. Australian tech companies are getting more successful offshore and success will breed further success.
We can build great global businesses from our distant island.
To borrow from the old New Yorker cartoon with the dog in front of the computer:
"On the internet, nobody knows you're Australian."
Nick Abrahams is partner and leader of the APAC technology practice for global legal practice Norton Rose Fulbright and is also a director of Integrated Research Ltd. Follow Nick on Twitter @NickAbrahams
The Australian Financial Review