It’s easy to see why so many Australian and New Zealand technology companies still consider the US west coast to be Mecca. The huge but fragmented US market is a tempting target, where one sale can deliver a return ten times greater than its proportional equivalent in Australia. It’s also the home of the technology VC industry, with more free capital for early stage investments crammed into 50 square miles than you would find pretty much in any country on earth. It was interesting to read a report from SiliconValley.com back in October that suggested that US VCs are eagerly stuffing cash into the hands of internet entrepreneurs at a reckless rate – even when some of the entrepreneurs don’t even really need it. Dare we say the word ‘bubble’?
On my last trip to the US I was able to catch up with Konstantin Guericke, a start-up marketing wiz and co-founder of the successful social networking web-site LinkedIn. According to Guericke, many of the successful dot-com entrepreneurs of yesteryear have altered their model this time around and are actively working to avoid taking on VC funding. Of course, being successful the first time around means that many have the ready cash to control their own destiny. But the mantra now is to stay small and retain control. Venture capitalists, however, have an agenda that pushes their investees to become as big as they possibly can, as quickly as possible, to maximise their return. Guericke’s advice is to focus and be successful in one area, and hence earn the right to expand into others.
Of course, questioning the wisdom of receiving venture capital money is a luxury that few Australian companies have to contend with. Many are happy to take what they can get (although the language is usually more grudging). Of course, one of the solutions to the funding gap is to seek money in the US, which is a component of ANZA’s mission. The flipside is that, despite rhetoric to the contrary, few American VC firms will even consider making an investment in an Australian company – especially an early stage venture that is still domiciled in Australia. Their belief remains that it is much easier (ie, involves less time and cost) to put money into something in their own back yard.
Guericke’s lesson is hence one that needs to be learnt by Australian companies. There is no point going out to take on the world from day one if you can’t get the backing to fulfil the vision. Many companies have raised fistfuls of cash, only to burn them quickly on rapid expansion and expensive marketing campaigns. Many of the successful start-ups of tomorrow will be companies that have used a slow burn model to achieve success, relying on quality products and services and word of mouth to achieve success. Google is an often-cited by prime example of how to be successful with this model.
Brad Howarth is a journalist and author of ‘Innovation and the Emerging Markets: Where the Next Bulls Will Run’, a study on the challenges facing small Australian technology companies. You can read his blog at lagrangepoint.typepad.com