Caitlin Fitzsimmons Online editor

Caitlin covers social media, marketing and technology and is BRW's social media editor. She has worked as a journalist in Sydney, London and San Francisco, writing for titles including The Guardian and The Australian Financial Review.

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Why US venture capitalists are looking at Australian tech start-ups

Published 01 April 2013 11:01, Updated 03 April 2013 13:39

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US venture capitalists are actively looking to invest in technology start-ups in Australia – so it is no longer necessary for entrepreneurs to move to Silicon Valley.

That’s the view of the Ernst & Young US technology M&A leader Jeff Liu, who met with BRW on his recent trip to Sydney.

“The Australian technology entrepreneur environment and community is starting to attract the asset pools of technology investing, both at the early stage and the mid stage,” Liu says.

“In technology, in particular what’s happened with cloud and mobility, you have a set of solutions that don’t have to be anchored in the market [in which] they’re developed.

“Whereas in many other verticals, your end market is typically the country where the company is based, with technology it can be done over the web or mobile networks and so some of the innovative ideas, when they turn into products and services here – especially with software and e-commerce – have natural applicability elsewhere in the world in markets like the US.

“You take Australia as a smaller but well-developed economy and it means products and solutions can get beta-tested in this market and if they’re successful there’s a better chance they’ll be successful elsewhere.”

Liu’s advice runs counter to that of Silicon Valley mentor and angel investor Mike Loftus who says being “great in Australia is like being great in Texas” – it’s all well and good to test a concept but entrepreneurs need to “live and breathe Silicon Valley” to take it to the next level.

Global opportunities

Liu says it is true that the biggest pools of venture capital are in Silicon Valley but these days investors are actively looking for opportunities in the US and around the world. India has been one of the biggest beneficiaries because it has a billion citizens, a rising consumer class, and growing numbers of Indians with Silicon Valley experience returning home.

Liu says the same thing is happening in Australia on a smaller scale. He declines to name names but says US investors are interested in Australian start-ups because of some recent success stories. He adds that Australian entrepreneurs who have sold or floated their businesses abroad are also looking for ways to benefit the next round of Australian start-ups.

“I get questions from entrepreneurs asking if I think there will ever be a venture community in Australia similar to Silicon Valley and I think there are certainly data points that suggest you are getting close to one – there have been Australian success stories that have attracted US investments and some of those investments are going to exit over the next 12-18 months and some of those successful exits will help build the necessary critical mass.

“It’s nice to hear that some of those Australian entrepreneurs are trying to bring that capital back to Australia and bring that talent back to Australia and really form a national effort.

“If you look at the way country trends have gone, countries that were observed to have a lot of ‘brain drain’ in the ’80s and ’90s, like China and India, those countries have pretty robust venture environments now, and Australia is just a bit behind the curve.

“US investors are looking at more than just the US for investments. You gradually did see a lot more venture-type investment within the US move out of the valley, to the east coast, the south-east, the north-east. I have conversations with venture firms and they’re looking in Europe, certainly in India, and [at] more than a handful of investments here in Australia and the southern part of the Asia-Pacific.”

The drivers of tech M&A

Liu says establishing an Australian start-up and venture capital scene is not just about the investment pools but also a whole “ecosystem” of early-stage attorneys, banks specialising in the field, and service providers like his own firm.

He adds that the main drivers of M&A activity in the technology sector right now are strategic acquisition and geographic expansion, and this applies across both business and consumer technology. The top half a dozen business software companies are active acquirers of start-ups – to keep their edge in a consolidated market – while acquisition in the consumer space is driven by trends.

“Having returns come from selling a company rather than an IPO is a wonderful exit for many entrepreneurs and investors,” Liu says. “M&A is no longer a silver medal.”

For companies that do go for a public listing, Liu says listing on the Nasdaq is likely to be more lucrative than the Australian Stock Exchange, but dual listings are another possibility.

Meanwhile, Liu says shareholder activism is fuelling the amount of M&A activity by encouraging more mature companies to sell business units or subsidiaries in order to realise a return on prior investments.

Three tech start-ups serving the world from an Australian base

  • Atlassian is an enterprise software company based in Sydney that turned over $102 million in 2011. Silicon Valley venture capital fund Accel Partners paid $US60 million for a minority stake in 2010 and the company is reportedly heading to an IPO. Co-founders Mike Cannon-Brookes and Scott Farquhar topped the BRW Young Rich list in 2012 and are backing the launch of Australian venture capital fund Blackbird Ventures.
  • BigCommerce is a cloud-based e-commerce software company based in Sydney with a sales office in Austin, Texas. The co-founders and joint CEOs, Eddie Machaalani and Mitchell Harper, were finalists for BRW’s Entrepreneur of the Year awards last year and on the Young Rich list. The duo co-authored a useful guide for BRW readers on how to build a global business from Australia.
  • Freelancer.com is another Sydney-based company with a global customer base. Founder Matt Barrie was BRW’s Entrepreneur of the Year in 2011 and debuted on the Young Rich list in 2012. Barrie grew up in Sydney and moved to California to attend graduate school at Stanford and work in Silicon Valley but returned to Sydney and says he wouldn’t want to live anywhere else.

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