The rise of the start-up accelerators

A few years ago, the funding scenario for an innovative start-up was simple. Get a bank loan to get yourself started before turning to a grateful Australian-based VC who will help propel your business into the big time, in return for a juicy equity cut, of course.

However, this tried-and-tested formula is undergoing a radical shift. Declining VC activity in Australia, strong interest from US investors and the plummeting cost of setting up and establishing a business are bringing great opportunities, as well as uncertainties, to Aussie start-ups.

“Venture capital is broken in this country at the moment,” states Rowan Gilmore, CEO of the Australian Institute for Commercialisation.

“A large number of investors are retreating and the amount of dollars going into early-stage start-ups is reduced, which is horrible.”

“The returns for VCs in the last 20 years or so haven’t been good. There’s always space for biotech start-ups in their portfolios, but other businesses, such as serviced-based businesses, will struggle.”

Happily for Australia’s premier start-ups, US investors are stepping into the breach, as evidenced by several recent deals, including Accel Partners’ $35 million investment in crowd sourcing site 99designs.

The dog-eat-dog competition to find and invest in the best Silicon Valley start-ups has seen American VCs like Accel turn their attention to markets such as Australia, where there’s a clearer field. I

It’s unlikely that Melbourne-based 99designs would’ve got funding if it waited for a local partner, as founder Mark Harbottle puts it: “In the first three years of the business, I didn’t get a single phone call from an Australian investor. Not one. But I was getting calls from US VCs every week.”

With such disinterest in even a market-leader like 99designs, what hope do the next generation of start-ups have without going overseas?

A glimmer of hope is being provided by the rise of start-up “accelerators” such as Pollenizer and the establishment of seed and mentoring programs such as Startmate and PushStart.

Inspired by the success of YCombinator and TechStars in the US, these “angel aggregators” invest a small amount of money, typically $15,000 to $20,000, in a promising start-up, in return for a minor stake.

The start-ups are then offered mentoring and other help to get to the next level. Each works differently – Pollenizer, for example, is more like a incubator, nurturing a business until it’s ready for its big pay day, as in the case of Spreets’ $40 million sale to Yahoo!7.

Startmate, which kicked off at the end of last year, hand-picked five start-ups to be mentored by a star-studded line-up of mentors, investors and industry experts.

PushStart, the latest arrival, has a strong focus on mentoring. Its Mentor Connect program matches seasoned business owners with budding entrepreneurs, with a funding element set to kick in at the end of this year.

Kim Heras, founder of PushStart, says that Australian VCs have been missing in action when it comes to identifying and backing start-ups.

“For early-stake web and mobile start-ups in particular, there hasn’t been the backing there,” he says. “In comparison to the US, the funds for start-ups are so small.”

“Before StartupSmart, there wasn’t really a professional start-up media, so you had to be on the ground to know what was going on. The VCs just haven’t had the appetite to do that because the vibe is that nothing fits with their investment portfolio.”

“The US guys are far more willing to take a punt, there’s a real sense of adventure there.”

“There’s been a real disparity because Australian start-ups have seen all this cash being thrown around in the US and they’ve had an expectation that they will get some of that cash.”

Heras says that he created PushStart after seeing the success of YCombinator – it’s top 21-backed companies are worth $US4.7 billion – and TechStars in the US.