Dotcom rivers to run again

A new boom has begun. Since the last BRW Young Rich was published, there has been a major re-pricing of technology companies.

Click here to see the BRW Young Rich List 2011

Technology entrepreneurs have always held a prominent place on the Young Rich list but this year they constitute 26 per cent of the list – the most ever.

This year’s line-up features a number of dramatic revaluations after US venture capitalists bought into local firms, which has boosted the personal wealth of the individuals involved.

Lessons learned during the dotcom crash a decade ago have helped shape the new trend. The first generation of technology entrepreneurs – many of whom made their fortunes in the dotcom boom – invest capital, time and energy in bringing the next generation of technology companies into being.

In 2001, electrical engineer and entrepreneur Robert Newman sold his US-based company Atmosphere Networks for $150 million. After a short sojourn he returned to Australia and used the funds and skills he had picked up in the 1990s to work as investment director for venture capital organisation Foundation Capital and by 2003 venture capital and angel investment was occupying much of his time.

In a similar vein is Adrian Giles, who made his fortune when Hitwise, the web statistics company he founded in 1997, was sold in 2007 to British group Experian for $300 million. Now working as managing director of Yarra Ventures, he’s looking to invest in fast-growing, web-based companies.

It’s a similar story for Simon Clausen, who made a personal fortune when his security company, PC Tools, was bought by Symantec in 2008. In 2010, he launched a boutique start-up investment fund and incubator called startive.com and has gathered a portfolio of web-based companies, including freelancer.com.

“There are some big headline valuation numbers being thrown around but out of the companies getting funds it’s a pretty small portion that join the billion dollar club,” Clausen warns, pointing out that investors are now far more professional than they were in the 1990s when there was little understanding of how to value software or web-based companies.

And while he’s cautious about some valuations, he says the current level of interest in information technology should not be thought of as a bubble.

“I don’t think all the companies currently getting massive rounds make good investment sense; I wouldn’t invest in a number of them,” Clausen says.

“I don’t think you can call it a bubble as there are some amazing young companies out there that have received funding, deserve the valuations and will be successful.”

The climb in valuations of US-based companies, however, is forcing US-based venture firms to look offshore, a trend that has directly affected this year’s Young Rich List.

Mike Cannon-Brookes and Scott Farquhar, founders of software company Atlassian, and Mark Harbottle , founder of design services website 99Designs.com have rocketed their way up the list thanks to significant investment from US venture capital firm Accel, which has spent $165 million to take equity only in Australian tech companies in the past 18 months.

Unlike their predecessors, Atlassian and 99Designs.com were able to attract large funds from overseas while maintaining their headquarters in Australia.

“It seems like there is a whole industry in Sydney now, whereas 10 years ago there was nothing here really,” says Farquhar. “Even when we started, no one wanted to start their company here but we’re seeing that change so that the entrepreneurs and the job creation stays in Australia because there’s been a whole series of success stories.”

Although Farquhar says it remains slightly more difficult to start a company in Australia than it is in the US, he believes this adds to the attraction for international investors as it makes the local IT industry a little tougher and more creative than some US-based counterparts.

And while much is made of the rapid product development cycles associated with the current generation of software and web-based businesses, young technology entrepreneurs are also creating a rapid feedback loop within the angel investment space. Rather than waiting until they have exited their first venture, many of the young rich IT entrepreneurs on BRW’s list are already funding and mentoring newly formed ventures.

Many of these tech entrepreneurs are channelling their resources and skills through an organisation called Startmate, which provides a small amount of start-up cash and a lot of advice to turn wantrapreneurs’ ideas into fully fledged profitable businesses.

After living in New York and founding an online real estate agent information site called www.homethinking.com, Niki Scevak returned to Australia in 2010 and began to draw together successful technology entrepreneurs with the view to creating a tech incubator.

Startmate, invests $25,000 in newly formed tech companies and leads the founders through a structured entrepreneurship program. It features a number of the young rich and contenders among its mentors.

There is also a vibrant tech entrepreneur networking group called Silicon Bay that meets on Friday evenings in the Grace Hotel in Sydney and an innovative incubator called Pollenizer, which takes businesses from the back of an envelope to so-called “ramen profitability”, where the business is making enough to support its founders, even though they are living on ramen noodles.

And it’s not just software companies that are benefiting from previous successes. Bevan Slattery made his fortune building an undersea fibre cable to connect Australia with the Pacific data interconnection point on the island of Guam and has subsequently reinvested in the construction of data centres through a company called NEXTDC. His business partner in the PIPE Networks cable project, Stephen Baxter, has taken a place on the board of newly listed telecommunications company Vocus.

IT industry veteran, Young Rich contender and BRW Entrepreneur of the Year Matt Barrie says there is a huge amount of entrepreneurial activity being generated within the IT sector. Seventeen of the engineers he worked with in his previous business, Sensory Networks, have gone on to found their own companies and some are even onto their second start-up.

And although he says the propensity of entrepreneurs within the IT sector to share their skills and knowledge is having an impact, he suggests that the main driver behind the flurry of entrepreneurial activity is the dramatic reduction in the costs associated with starting and testing a web-based business.

“The reason so many people have suddenly become investors is that it is now so cheap to start a technology company but that doesn’t mean they all grow to the point where they will become sustainable in the longer term,” Barrie warns. “A lot of these deals will flame out horribly down the track when they are looking for their next stage of investment.”

He nonetheless recognises that the culture producing the ideas and the willingness to have a go will also create some of the largest and most successful companies of the 21st century. It is these companies that will go on to propel today’s young rich entrepreneurs into the BRW Rich 200 lists of the future.

BRW

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