Sitting down with Startup Playbook’s Rohit Bhargava on what’s holding back Australian venture capital


Melbourne is a city known for its wild weather. Residents never missed a chance to tell me their city experienced ‘four seasons in a day,’ shifting from a frost-like chill in the morning to a warming noon, then back into oscillations between warm and cold rains the rest of the day. But I was here to investigate not a season, but an era. Melbourne is unfolding startup scene, enriched by a cultural mosaic and expanding steel jungle of new R&D and business centers (ergh, centres).

The economy is changing here though. Australia’s mining boom is over and companies are bolting for the new economy. In the past year alone, there have been several acquisitions of Israeli tech startups by Aussie resources corporations that have little to nothing to do with those big companies’ previous businesses: Azonto’s acquisition of smart gun company Clipfort, Aurum’s buyout of wireless charging startup Humavox, and Consolidated Gems’ move on cyber security company Genome Technologies. It promises that new era of tech investments, but there are some growing pains and hunger pangs.

“Things are changing over here. Traditionally, we’ve had money go into property and resources,” Rohit Bhargava, community manager at Startup Victoria, told me over coffee in the center of town. Bhargava is an entrepreneur, the former CEO and founder of fashion crowdfunding platform StageLabel. He’s moved from the catwalk to the studio, hosting the Startup Playbook podcast where he has interviewed investors, authors and founders.

“The problem in Australia is you have a lot of funds who announce that they’re raising rather than actually having money in the bank,” Bhargava bemoans, “because traditionally there’s been a dearth of investment options, so even announcing [a fund] is a big deal here.”

That isn’t to say some funding stages have been completely empty. Bhargava thinks companies in the market for a Series A have far more options, but otherwise Australia has work to do even as options grow. Banks are in the game with Westpac’s ReInventure and NAB’s venture fund both having AU$50 million pools. Melbourne’s Square Peg Capital has an AU$200 million fund while other local VCs Rampersand (AU$50 million), AirTree Ventures (AU$60 million) and Blackbird Ventures (AU$110 million) are all evidence of the city’s growth.

Australia’s map gap and risk aversion

Despite the 24-million-strong national population, people working in the nascent tech scene aren’t looking at things as Australians, but rather as Victorians, Queenslanders and New South Welsh.

“Even within Australia, we focus on at a city-by-city level,” Bhargava says, saying more B2B and fintech go to Sydney while B2C and marketplaces operate in Melbourne, though he says those are broad stroke descriptions.

Melbourne's Southbank Pedestrian Bridge against the colorful midnight skyline (image credit, Gedalyah Reback)
Melbourne’s Southbank Pedestrian Bridge against the colorful midnight skyline. Photo credit: Gedalyah Reback / Geektime

That isn’t necessarily a bad thing. Canada, with 35 million people and four urban ecosystems revolving around Toronto, Montreal, Vancouver and Waterloo/Kitchener, also has a naturally regional focus. The difference is a matter of geography. Canada’s hubs are close to where the big action is in San Francisco, New York and Boston. Australians need to take two long flights sometimes only bearable when flying in Business Class (this author is writing in the middle of a 31-hour, Melbourne-Hong Kong-Tel Aviv journey — the things I do to bring you the story).

That could change if in addition to 15-hour trips to California, Aussie airline Qantas follows through with its prediction of non-stop flights from Europe by 2017. But even those would be 18 hours long (seriously, de-cramp economy class if you want more people to make the trip more often). That distance also holds back attracting foreign investors, even the more aggressive venture capitalists, who prefer to be close by in order to nurture their startups.

If foreign VCs are holding back, that means more dependency than usual on domestic capital to get growing. And therein lies a bigger problem: Not only are many angels not putting serious money into the ecosystem in Melbourne or Sydney, some unnamed connections tell Bhargava, but they’re also eating new companies before they can grow.

“There has been a shift recently in a lot more investors pulling money out of more traditional areas such as property into Tech. However there is a real lack of education from startups and first time angel investors in making equity decisions that align both their long term interests. Startups are willing to give up way too much equity early on, with not-so-tech-savvy investors migrating from other industries trying to take as large of a chunk upfront as possible, which causes issues with future funding rounds”. He says he knows of one company, which he didn’t name, that had missed out on American investments because those would-be funders “looked at their cap table and didn’t touch it. They didn’t feel the founders had sufficient incentive in the long term growth of the company.”

Australia’s flag waves just outside the new Peter Mac cancer research center in Melbourne. Photo credit: Gedalyah Reback / Geektime

“Both founders and investors win through the long term success of the company. Trying to gauge startups of equity too early on limits both parties chances of success”. He notes that some of the prominent accelerators such as StartMate (founded by Blackbird’s Niki Scevak) or Telstar’s muru-D programs provide a better grounding of the needs of startups at the early stage and don’t dilute the startup cap table early.

Things are improving, though. According to the 2015 Startup Muster survey, the largest survey of its kind in Australia so far, fundraising rounds are becoming more successful. In 2014, 32.7 percent of those surveyed tried but couldn’t raise any capital. In 2015, that number fell to 27.6 percent. In the meantime, successful rounds increased from 35.4 percent to 39.9 percent, while oversubscribed rounds jumped from 5.3 percent to 9.8 percent. Of course, their figures might be flawed if they are surveying startups who survived 2014 but not the ones who were already out of business.

A culture unbecoming entrepreneurship?

A common motif I encountered in both Melbourne and Brisbane was a culture gap: Aussies aren’t venture capitalists and they aren’t capitalizing on their work.

“One of the things we talk about is the Tall Poppy. Culturally, we have been quick to chop down anyone who does something slightly different,” Bhargava describes. “I go to university, find a corporation [to work for] and get a house. Again, that mindset is changing slowly.”

“It’s just that Australia is very early in even having a startup community here . . . we haven’t had that [large] amount of people who have been through that process to come back, who are investing in startups, who have that expertise and are able to mentor.” Even two years ago, it was tough for Aussie startups and the new economy to grab exposure, and it shows in the attitudes of the country’s emerging engineering grads.

Bhargava emphasizes that the Australian startup ecosystem is still young, but countrymen at all contours of life — politicians, investors, engineers and researchers — are aware of the desire to change that. In the meantime, the country hasn’t seen a slew of big exits and only has a handful startups that might stand taller than the other poppies in the field.

“When I first got into the startup space six or seven years ago, some of my friends asked me all the time, ‘What the hell are you doing?'” reminisces Bhargava. But that pendulum is swinging the other way as all verticals start settling down under. “I just got a text from one of those same friends asking about bitcoin companies in Melbourne.”

Geektime recently had the opportunity to visit Australian science, technology, and innovation firms through an Australian Department of Foreign Affairs and Trade-sponsored international media visit.


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