Tech momentum builds: Crossroads 2020

Denham Sadler
National Affairs Editor

The Australian technology sector has never been in better shape, with an abundance of capital and emerging success stories, but complacency risks early-stage companies being forgotten.

That’s the key takeaway from the StartupAUS Crossroads 2020 report, according to its author and StartupAUS chief executive Alex McCauley.

The annual report, which provides a snapshot of the Australian startup sector and recommendations for growth moving forward, paints a largely positive picture, with an explosion in huge local tech companies enjoying rapid growth, and a huge influx of capital for the sector.

StartupAUS chief executive Alex McCauley

“The big headline is that the emerging tech sector in Australia is in the best position it has been in ever. There’s this huge wave of high value companies coming through the system that keeps building year on year,” Mr McCauley told InnnovationAus.

“Over the last five years Australia has developed a capacity to produce high value, globally focused tech companies that are now able to build global businesses from an Australian base. That’s the bottom line in terms of what this sector can do if it has the right settings in place.”

The report outlines a number of local tech firms reaching maturity at the same time, with Canva, Airwallex and Judo Bank now valued at over a billion dollars. And these firms are “just the crest of the wave”, the report said, with a “substantial swell” of newer tech firms set to follow in their footsteps.

The key driving force behind these successes has been a vast increase in the venture capital on offer to fund them. Levels of this funding has vastly increased, the report found, with tech firms raising almost twice as much on average as they were in 2015, to an average of nearly $US19 million, up from $US9.73 million in 2015.

And the huge amounts of funds hasn’t been hogged by the likes of Canva and Envato, with firms under five years old seeing a growth in average deal size of nearly 80 per cent in the last five years.

“The single biggest factor that underpins that success in the last five years is the shift in availability of capital. Five years ago founders had to leave Australia to raise big rounds of capital, that’s not true now,” Mr McCauley said.

“The capacity for companies right across the spectrum of growth phases to raise big rounds of capital is significantly higher than it was a few years ago.”

But Australia still hasn’t completely solved the fundraising question, Mr McCauley said, with local raises still lagging the rest of the world in terms of size and quantity, but this could change in the near future.

Major investment and reform is still needed just for Australia to keep pace with the rest of the world, according to Crossroads, with the country needing to “run fast to stay still”.

The report warns against complacency, with more effort needed to ensure early-stage startups still had the support they need to eventually hatch more and larger success stories.

“Right now we have this high-value crop of companies but we don’t want this to be a golden generation of companies, we want a system that produces great companies in the medium-long term rather than a rash of high value companies then nothing to follow,” Mr McCauley.

This year has seen Australia’s largest airline, largest telco, largest accelerator and even the Victorian government turn away from supporting early-stage startups, in favour of more established, less risky tech companies.

It has also become more difficult for these young companies to find the capital needed for expansion, with 2018-19 seeing about half as many early-stage deals than 2016-17.

Angel and seed investment has fallen over the last three years both in terms of the number of deals and the aggregate value of the investments, and this has been a “steep decline”, the report found.

The Pitchbook report for 2018-19 found that there were only 138 deals valuing $US75 million in total, a drop of nearly 50 percent in volume terms and nearly 30 percent in aggregate cash.

Compared to international competitors, it becomes even more dire, with the 2018-19 figures representing early-stage funding of about $US3.05 per capita, compared with $US15.84 per capita in the UK over the same period.

This is a “natural consequence” of there now being larger tech companies based in Australia, Mr McCauley said. But it’s important to turn attention to incentivising investment in very young firms.

“I don’t think we need to be alarmist about this. We can manage a dip in early-stage funding, but we can’t manage long-term downward trend. We need to arrest that slide and reinvigorate the early-stage support,” he said.

“We’ve got really successful companies in the growth stage and we’ve got lots of them, so of course funds are going to follow those successful businesses that are must less risky but still presenting very good returns for investors. We need to re-incentivise investors to look at early-stage deals.”
And when there is early-stage cash, it isn’t necessarily good quality either.

“For the most part, seed investment remains a cottage industry, with individual investors sourcing deals directly and with little amalgamation or professionalism. Seed investment is fragmented and opaque, making it hard for founders to connect with investors. This fragmentation also means best practice is hard to find, increasing the risk of poor or harmful deals,” the report said.

According to StartupAUS, many accelerator programs and later stage investors have seen many startups that accepted seed funding with such onerous terms that they are unable to attract further funding, effectively “crippling the business from the outside”.

The Crossroads report flags the need for standard terms for early-stage investments, education for angel and seed investors and a governing body to oversee the sector.

Once there is a high-level of competition in terms of funding and support for later-stage tech companies, many organisations and funds will return to the early-stage sector, Mr McCauley said.

“As more players get involved in the space you tend to get a crowding out in any particular area. Everyone would like to be involved in the lowest risk, highest return companies but that’s not possible if there are lots of players. You get a natural specialisation and diversity of interests in the sector if you’ve got enough competition,” he said.

Do you know more? Contact James Riley via Email.

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