Australia’s tech startup industry is held back by early-stage investors hoping to invest in a sure thing. We don’t have enough ‘venture’ in our venture capital.
Too many Australian tech investors focus on “but what if this doesn’t work?” when in the early stages they should be focusing on “but what if this does work?”
In the past, I’ve been as guilty of this as anybody else. But I’m trying to do better as I see some return on my earlier investments. Because for our local industry to grow as fast as we all want it to, we need to learn to back crazy ideas.
If your goal as an investor is to back five early-stage startups a year which will probably succeed, you don’t get there by investing in only five startups which you’ve convinced yourself will probably succeed.
First, no matter how good you are at picking startups, nobody is right every time. Even the best investors will back something too early (or too late) to hit the growth sweet spot in a market, that right place/right time/right team/right tech/right point on the adoption curve where an investment succeeds.
And even when you’re right, random bad shit happens to good startups. Relationships between founders, spouses and partners, investors and key customers break down through nobody’s fault. Macro-economic forces crush the credit market, tighten up employment or make old, unviable alternatives to your product viable again. Your weaker competitor gets bought by Microsoft or Google, who stomp all over you with big bad well-capitalised boots on. You can’t predict that stuff.
So to make five successful startup investments, you need to pick maybe seven you’re certain are winners, another three that look 50/50 and another three that look crazy. Facebook for dogs. Deliveroo for smartphone recharging. Renting out a spare room in people’s private homes to complete strangers… oh wait, that’s AirBnB ;-)
See what I did there? Any Australian early-stage tech investor would not have invested in AirBnB at seed stage. Oh sure, they’ll tell you they totally would have done the investment — they’ll tell you they would have identified the potential in founder Brian Chesky and invested on that basis. But that’s total 20–20 hindsight bullshit because people who didn’t back him will tell you, Brian Chesky seemed just as crazy as AirBnB was in the early days.
Funding didn’t come right away for AirBnB, but it did come. Silicon Valley backs the necessary percentage of crazy founders and crazy ideas to ensure they get some unicorns in the outliers; in Australia, we do not.
In Australia, we worry that our newly-grown tech investment ecosystem depends upon the precious “Cycle” — a cycle of successful investment that proves we know what we’re doing. The thinking goes: if we get too bold with our capital, we won’t be successful. Without success, the investors in our fund will walk away and the pitiful level of Federal Government support our industry receives will shrivel up altogether. The Cycle will break.
I say: forget trying to preserve The Cycle. We’ve got a lovely cycle right now. A tiny, insignificant cycle not growing fast enough, ironically pushing most of its return on investment over to the Silicon Valley venture funds who can afford to outcompete our local funds on valuation and round size.
Whose opinion should we believe when we want to find out if there is enough venture capital available to Aussie startups? For some reason we always seem to listen to the investment community itself, despite the clear conflict of interest.
When we leave it to the investment side of the marketplace to determine how many startups get funded, their answer will be, “there’s enough capital in the market to fund all the good ideas/teams”. What they really means is, “I don’t need any additional competition — I like the deal flow and I like the valuation and I like the deal terms as they are right now. Why would I want to make it harder for myself?”
Go to the US, and an investor has to be on their game to even hear about the best investments before they’ve closed, much less get invited to participate. Silicon Valley capital has to work just as hard as US founders have to, and that’s the way you create efficient, optimum funding events — both sides have to work hard to participate.
The Australian ecosystem of tech investors and investments is growing at an organic rate. If we agree we would like it to grow at a faster-than-organic rate, there are a number of levers we can pull: physical colocation, education, advisory, cost of establishment and operation, access to capital and tax treatment of investment returns among them.
We should be arguing about whether to turn the dial up to 10, or to 11. Saying we think there’s enough venture capital in the local market at this point is like saying, “let’s leave that dial at 3. We wouldn’t want to have the cycle spin too fast.” Too fast? We’re not even at cruising speed.
But we’re all trying to find “already great” teams. I’d encourage more of us to back “potentially great” teams.
I don’t think there will ever be a day when founders raising investment complain there’s too much easy capital around, or a day when most investors will tell you there are too many great ideas/teams around.
But when Australian tech investors tell you there’s enough capital to back the good ideas and the good teams, don’t believe them — they don’t want the market to grow faster than they do, so they can continue to run their cozy business.