Venture capital elusive despite local startups attracting interest from US investors

Perth’s entrepreneurial community needs a success story if it’s to secure venture capital, particularly from major players overseas.

THE OzApp awards this week demonstrated the growing interest in Western Australia from venture capital heavyweights, with representatives from the Silicon Valley Bank, Qualcomm Ventures, and SingTel Innov8 among the attendees.

Their presence at the Perth-hosted awards -which recognise outstanding mobile app developments - has been heralded as a boon for the local entrepreneurial community.

Despite the enthusiasm for local innovation, however, the US money has, for the most part, remained in US investors’ pockets.

Bubbling over

In the few years since US venture capitalist Bill Tai first came to Perth to help launch the WApp (Western Australian app) awards, which became the national OzApp awards, the entrepreneurial community has grown dramatically.

Recent developments in the sector include the establishment of Spacecubed (a co-working space for entrepreneurs) on St Georges Terrace, the first 54-hour workshop held by Seattle-based not-for-profit organisation Startup Weekend, and the launch this month of global startup incubator Founder Institute.

Those developments have added to the already existing clique of entrepreneurs that meets regularly to brainstorm, discuss each other’s ideas, or get mentoring from the network of angel investors in the city.

No matter who you talk to, all agree entrepreneurs are coming out of the woodwork and the network is becoming more collaborative.

“Spacecubed estimates their membership is about 10 per cent of the market,” Mr Tai told WA Business News.

“If they’re right, that means there’s about 2000 products being developed - so things have definitely changed.”

Founder and chief executive of Perth-based online graphic design company Canva, Melanie Perkins, echoes that sentiment, saying the sector was “absolutely growing through the roof’.

“When we started we’d never heard the word startup, and now it’s becoming more and more common,” Ms Perkins told WA Business News.

Canva is one of the five companies in which Mr Tai has invested since his first trip to Australia; he has also invested in four companies based in the eastern states.

Mr Tai said despite the sector’s strong growth, more US venture funding was needed and would only be forthcoming following the success of companies such as Sydney-based software development company Atlassian.

“I think that company is going to be worth a couple of billion dollars very soon. We just need an example, so as soon as that goes public not only will young entrepreneurs be thinking that it’s possible, but ... you will see US money starting to flow in,” he said.

It’s a double-edged sword, however, as without the initial funding, success is hard to come by.

Funding gaps

Ms Perkins was forced to self-fund her first company, Fusion Books, because capital wasn’t available, while Sydney-based founder of website Posse, Rebekah Campbell, said it took her 18 months and 750 pitches to raise $1.5 million from angel investors.

“I couldn’t even imagine how hard it is otherwise you wouldn’t do it. There are groups of people that like to put in maybe five, 10 or 20 thousand dollars and are kind of pottering around with little companies, but there’s a gap of people willing to invest $1.5 million, which is what you really need to start a company,” Ms Campbell said.

Beyond the seed funding stage, which is typically raised from friends and family, Perth has a network of angel and high-net worth investors.

Charlie Morgan is one such example and is behind the SEE Forge mobile app, which came runner up in the OzApp awards to Sydney duo Soundbyte.

In pitching to the award judges, SEE Forge co-developer James McDonough said while Mr Morgan’s angel investment enabled development of the digital paperwork app, it needed venture capital to commercialise and go global.

WA Angel Investors Network chair Greg Riebe said while the money was available, Perth entrepreneurs lacked the experience and connections needed to argue the case for investment.

“Capital is out there, but it’s a matter of actually preparing yourself to being able to communicate your value proposition and get access to that capital,” Mr Riebe said.

“It’s not just a matter of saying ‘I’ve got an idea, come and join me’, it’s a matter of saying what the value proposition is and why should the investor actually participate.”

Creating networks

It’s that lack of experience the involvement of Silicon Valley investors and entrepreneurs in events like the OzApp awards is aiding.

Silicon Valley venture consultant and now Perth resident, Larry Lopez, has been instrumental in enticing the US investors to WA, and said the local market’s lack of experience led to unrealistic expectations.

“We’re really lucky that Silicon Valley Bank, which is the undisputed global leader in tech finance and enabling the marketplace, is really interested in participating in this market (WA),” he said.

“They’re really excited and I’ve worked with these guys for 15 to 20 years, so they’re not going to come and give me a lot of bulldust.

“But part of the problem is because this market’s so small, people have unrealistic expectations; the reality is that most ideas, whether you’re in California or Perth, don’t get funded - it’s a really low success rate.”

Matthew MacFarlane from Perth-based venture capital firm Yuuwa Capital said the OzApp awards and involvement from US investors was mainly about establishing connections.

“These people coming into Perth is about inspiration, it’s about role models, it’s about mentoring, it’s about creating networks; it’s not about investment,” he said.

Mr MacFarlane agreed with Bill Tai that one successful Perth company would encourage further investment.

“Success breeds more interest, so if we can get a couple of companies that have made a lot of money all over the world then more people will want to invest. There aren’t enough of those stories,” he said.

“All around town there are plenty of stories of people who have made a bomb with a tenement, drilling some holes and discovering that there’s iron ore under there or something, but there are almost no stories of a software business that took it to the world and made a fortune.”