Getting trampled in the Silicon Valley gold rush

Going by economic indicators such as unemployment, inflation and interest rates, Australians should feel pretty good about how we stack up with the US.

 

But the US retains a perennial edge when it comes to start-ups, thanks to a booming Silicon Valley.

 

While the US struggles with high unemployment and a yawning deficit, its start-up investment community hasn’t gone to ground.

 

Indeed, American investors are increasingly looking beyond their own borders for the next hot venture to back, with Australian entrepreneurs keen to be part of the gold rush.

 

Aussie start-up talent is being backed by Americans like never before – Apple acquired app search provider Chomp for an eye-watering $50 million in February while there have been smaller, but no less significant, deals for Australian newcomers Flightfox and tech entrepreneur Kate Kendall, who has teamed up with the founders of YouTube to launch a new business.

 

Budding tech entrepreneurs could be forgiven for thinking that the US is a cash cow that anyone can milk for money and expertise, necessitating relocation to California as soon as possible.

 

But Australian investors are keen to point out that an early dash to the US could be counterproductive, with many start-ups in danger of being dazzled by the seemingly easy cash on offer.

 

“There’s been a fair bit of commentary in the media recently about start-ups going to the US, which may create a certain expectation among businesses,” says Richard Dale, head of business advisory firm Argo Partners and committee member at Sydney Angels. “We need a bit of balance in the debate.”

 

“There’s no question that there’s a lot of money in the US and it is a big market. But what some people don’t realise is that it isn’t just 20 times bigger, it’s also 20 times more competitive.”

 

“While there is more depth and breadth in the US than here, that doesn’t necessarily make your chances any better. When you move to an unknown country where you don’t know the rules of the game, it’s a big risk. In fact, moving offshore is the highest risk thing you can ever do.”

 

Dale stresses that shifting to the US at the first opportunity should only be done for very specific reasons.

 

“Business isn’t about raising capital, it’s about getting customers,” he says.

 

“If your customer base is primarily in the US, then fine, but there is a lot of support in Australia if you’ve just started and you need investment.”

 

A key criticism of Australian investors is that they are somehow “asleep at the wheel.” Sydney entrepreneur Robert Yearsley recently hit out at local investors for failing to back his venture Cappture, which is set to relocate to the US after getting glowing feedback from American funds.

 

Dale, however, feels that the start-up ecosystem is steadily growing in Australia. He points to Sydney Angels, a formalised network of business angels of which he’s a member, that mull over pitches before deciding whether to invest or not, as a prime example of why Aussie entrepreneurs should look at their home turf first.

 

“Around four years ago, there was no real structure to the angel community in Australia,” he says.

 

“There were pockets of activity, but now there is a framework of angel investment in all of the capital cities, shifting money from the property market, which does nothing but drive up property prices, to entrepreneurial businesses that create value. That’s a very positive development.”

 

“Every time I speak to an American and they find out the level of support available here, they say ‘that’s fantastic.’ The problem we have is that we are a small market, which there isn’t anything we can do about.”