Creating Future Companies: How to Improve the Support for Early Stage Businesses
Here are the ways to ensure we're giving our founders the best chance at success
There is more support than ever for entrepreneurs in Australia to translate an idea into a business venture. On any given week there are dozens of events, programs, or workshops available to founders. There is also a growing number of individuals and groups within the startup community who are willing to share their experiences through mentorship and introductions within their network.
However, despite the increasing number of resources available, incubators, accelerators, co-working spaces, programs, meetup groups and associations, Australia's startup ecosystems are sliding down the ranks, according to the 2019 Global Startup Ecosystem Report. Sydney fell six places from 17th to 23rd, while Melbourne fell out of the top 30 altogether.
The research methodology measured nine success factors – four of which outlined funding, knowledge, connectedness and market reach as key components of a high performing startup ecosystem.
Many Australian companies struggle to grow beyond the 'early-stage' because of a number of barriers including their inability to access angel/VC level funding, access to distribution channels and networks, and challenges with scaling into different markets.
So, what can we do to ensure we're giving our founders the best chance at success?
Access to Capital
One of the biggest hurdles that early stage companies face is obtaining angel and VC level funding. With 46 per cent of Australian founders identifying as first-time entrepreneurs, many lack the experience and understanding about what's required to become investor-ready. This results in reduced deal velocity for investors and the loss of valuable funding runway for early stage businesses.
The angel investor market in Australia is still in the early stages of development and seed investing as an asset class is a relatively new concept. This is especially evident when compared to other startup economies such as Silicon Valley, Tel Aviv, New York and other leading ecosystems in the world.
Due to the fact that seed investing is generally riskier compared to traditional asset classes, investors are more inclined to conduct extensive due diligence – from requesting company growth data points and patterns to conducting in-depth technical reviews on the product – all efforts which aim to reduce information asymmetry.
While a larger, later-stage company may have more data points and information for investors to make an investment decision, an earlier stage company is still working through validating a myriad of business assumptions; and the metrics that matter for the business now may not even be relevant in 12-18 months time.
Rather than prolong the due diligence process, one of the biggest risk mitigation tactics for investors is to access a highly diversified portfolio. If investors are not comfortable with the level of risk involved, sometimes the best thing they can do is to reject a company sooner rather than later.
Access to Networks
Especially pertinent to early stage companies in the business-to-business sector is the difficulty when it comes to accessing networks to larger business or enterprise clients, suppliers, and partners. Founders need to identify which companies to target, who to approach within that company (at what level), and the best method to engage them. On the other hand, companies need to identify the best way to engage early stage businesses in a productive manner.
The value that results from this network access has not yet been fully realised in Australia and that's partly because there isn't yet an established intermediary who can bring together these stakeholders in a mutually beneficial way.
Andreessen Horowitz achieves this accessible network model through their Executive Briefing Center, which provides larger companies with access to industry trends and the opportunity to collaborate with emerging products and services (provided by their portfolio businesses). When founders meet with these companies at the Executive Briefing Centre, these companies are already primed to potentially become a customer or partner.
At some point in their life-cycle, founders will need to consider entering markets overseas in order to scale. However, there are different challenges involved with expanding a business and team internationally. For example, it is difficult to navigate a completely new business and regulatory environment, as well as employment landscape.
Another common issue is understanding and complying with foreign employment and tax laws. Examples include understanding how social security works in that country, where to access talent and understanding the relevant foreign tax system.
Having access to industry bodies which facilitate international trade and investment can be a tremendous advantage and save founders from having to navigate these challenges in isolation. Programs such as the Tel Aviv Landing Pad provide startups with access into a local network of investors, corporations, governments, investors and service providers (i.e. lawyers and accountants).
More great companies than ever before are being established in Australia and the startup economy is growing rapidly. However, there are still many opportunities to further develop our investment, deal velocity, industry connections and scaling potential so that Melbourne and Sydney can become leading startup ecosystems on a global scale.