Chasing start-up value through venture capital
- 24 May, 2017 09:00
As the once-in-a-generation mining boom winds up, and the need to identify new sources of growth increases, the nation is once again chasing innovation.
Billed as the engine room for Australia’s future, the country is becoming a breeding ground for talented creators to carve out new market opportunities.
Acknowledging the surge of Australian entrepreneurs and successful start-up businesses in recent years, several venture capital firms have been established.
Because as the industry’s entrepreneurs can attest, access to finance is an important framework condition for the creation, survival and growth of innovative new ventures.
In short, fast growing start-ups require investment.
For Australia-born start-up, Autopilot, strategic investment partnering has opened a global gateway to future development.
Co-founded by three Sharkey brothers — Chris, Mike and Peter — in 2012, the multi-channel marketing automation software integrates with the Salesforce platform, alongside Slack, Segment, Twilio and Zapier.
Five years since starting out, the business has raised over $22 million from two separate rounds
of capital raising, working closely with investment partners such as Australian native, Blackbird Ventures and the strategic division of Salesforce in Salesforce Ventures.
“We have a huge market opportunity but the technology needed to address the problem required a huge amount of upfront investment,” Autopilot co-founder and CEO Mike Sharkey explained.
“That is what led us down the venture capital path, although we self- funded the business for a period as we were formulating how it would all work.”
At its heart, Autopilot software bridges the gap between basic email and complex marketing software, specifically targeting the larger enterprise market.
Specifically, the Salesforce independent software vendor (ISV) helps marketers move beyond a standard marketing email, instead enabling the design of multi-channel customer platforms capable of addressing customers in highly personalised ways.
Created due to a gap in both the local and global market, according to Sharkey, 61 per cent of marketers in the US — and a similar amount in Australia — still use “batch and blast” email marketing that is neither personal nor contextual.
“In the past, very few companies could even dream of using marketing automation because the barrier to entry was too steep — the price too high and the technology too complex,” he said.
“Autopilot is making it possible for businesses of any size to create personalised customer experiences at scale, and at an affordable entry point.”
In addition to basic marketing automation functions such as distributing email campaigns, Sharkey classifies Autopilot’s unique touch as a touch capable of triggering hand-written thank you cards when a customer accepts a deal, or follow ups with those who failed to open an email the first time.
“It’s our belief that every company should be creating personal experiences for their customers and raising venture capital has helped us scale our distribution much faster over a large horizontal market,” he added.
Venture capital market
Considering changing market dynamics, turbo-charged by the influx of new and emerging technologies, it’s never been a better time to be a start-up founder.
With easier access to investment, and an industry willing to supercharge Australia’s most ambitious founders, entrepreneurs are advancing at a rapid rate through utilising venture capital firms.
Through investing in Autopilot, Salesforce Ventures targets early creators of customer-centric enterprise technology, technology capable of transforming the end-user experience.
Across the Pacific Ocean, the venture capital market is experiencing record highs, with more than 300 billion assets under management globally.
During 2016, the industry reported 17 technology-based initial public offerings (IPOs), billed as “very low” for US standards.
“Although we did have two successful ones this year in Snapchat and MuleSoft, what we are seeing is that companies are staying private much longer,” Salesforce Ventures vice president Matt Garratt observed.
In assessing the market through a local lens, the magic of Silicon Valley is beginning to filter back into the industry, as successful Australian entrepreneurs return to their roots to offer insight and advice to the next breed of emerging businesses.
“The founders of companies that were built a decade ago are investing and helping the next generation,” Blackbird Ventures managing director Niki Scevak said. “Getting help from the best kind of people is an exciting addition.”
During the past year, local venture capital firms raised $568 million from superannuation funds and other institutions, including AirTree Ventures’ $250 million fund and Blackbird Ventures’ $200 million equivalent, according to the AVCAL (Australian Private Equity and Venture Capital Association Limited).
Echoing Scevak’s observations, and as a US-based venture capital firm assessing the Australian landscape, Garrett added that in 2017, start-up activity remains high across the country.
“The Salesforce business here is growing and it’s clear that the market is taking off and there is more investment,” he said.
When assessing the merits of a technology-focused start-up from an investment standpoint, Blackbird Ventures works off a checklist based on four key principles — world class founding teams, global ambition, scalable big market products and early stage metrics.
“To back a business, we have to believe that it’s better placed than anyone else in the world to succeed in that chosen area,” Scevak said.
For Scevak, the company also questions ambition, analysing whether a business is well placed for future expansions overseas.
“Australian businesses used to find ambition in doing something for Australia,” Scevak said. “But during the past decade that mindset has dramatically changed.
“Entrepreneurs now want to be the best in the world, they don’t want to restrict ambitions to being the best in Australia only.”
Alongside global ambition from the outset, Scevak said Blackbird Ventures also seeks classic entrepreneurial DNA, recognising the fundamental characteristics required to be successful in a start- up environment.
In short, it’s the ability to get things done with limited resources, under intense pressure and within a chaotic environment.
Bucking the trend that technologists can become true leaders, Scevak believes great developers can evolve into great CEOs, with venture capital firms playing a key role in the personal progression of a start-up founder.
“We root for people doing their life’s work,” he added. “Capital takes two things to be a success.
“Firstly, it takes a company building a product that is needed by customers. And secondly, you need an entrepreneur who is carrying out their life’s work because they need to be able to say no to the $20 million exit from Salesforce when they’re just starting to succeed.”
Pros and cons
But despite the allure of greater levels of investment, partnership with a venture capital firm means agreeing to a roller coaster ride of emotions for start-ups.
And crucially, entrepreneurs must be ready for the ride.
“The process for successful businesses is have control, have no control, then have control again, Scevak explained. “Every triumphant company has given up control when they have IPO’d or created new shares with the founders through earnings.”
As a general rule of thumb, when a start-up agrees to any round of financing, it instantly gives up 20 per cent of the company.
A business won’t lose control or equity distribution in the first two rounds, but Scevak said it’s almost inevitable the entrepreneur will give up ultimate control.
While seeking extra help from venture capitalist firms is chiefly designed to maximise the impact of the product as soon as possible, it’s a very deliberate decision to make, and shouldn’t be taken lightly.
For Scevak, as a CEO, entrepreneurs must be clear on the control tug-of-war that will emerge once entertaining a venture capital play.
“Venture capital is not right for so many businesses,” he acknowledged.
From an Autopilot standpoint, Sharkey said partnership with a venture capital firm represented a “no-brainer” for the business, because it made “strategic sense” from a product perspective.
“Venture capital organisations want billion dollar exits or are often looking for a return in excess of 10 times their capital,” he added. “The reality is some opportunities or business models just aren’t positioned well to offer this kind of return or potential growth.
“But venture capital firms also specialise in helping companies achieve this kind of growth with capital, connections and insight.” As an Australian entrepreneur, Sharkey believes such a decision comes down to the end goal of the founding parties.
“If your objective is to create a lifestyle business, or your product is more niche, sometimes it often makes little sense to pursue venture capital,” he acknowledged.
“Even if you are positioned to build an enormous company, there are always other options to fund a business. Atlassian self-funded using credit cards for a long time and only later when they became successful, raised funds.”
Fundamentally for Sharkey, a start-up’s ability to tackle the tiers and advance to the next level in the market is underpinned by its overriding ambition.
“Every year the stakes go up,” he said. “You think you are at the highest level you can go, that it’s the hardest puzzle and once you solve it, it feels great.
“But feeling great is the sickest feeling in the world because you always think what is going to go wrong now? You really do bleed for the problem. And it comes back to whether you have the ambition to keep going.”
Echoing Sharkey’s assessment on the qualities required to be successful in a highly competitive technology market, Garrett said that success comes to those that understand the journey never ends.
“You talk to first time entrepreneurs and once they’ve raised a series A funding round from Silicon Valley they think they’ve made it,” Garrett said. “But then the pressure just increases.
“Then suddenly, the same entrepreneur sells the company or goes public and it’s very anti-climatic and a very long-drawn out process.
“And then — after all of that — they realise they have another set of stakeholders still to deliver for. So, even when you ultimately exit, it never really stops.”