AirTree Ventures

How Aussie start-ups can scale up and avoid hitting the wall after getting funded

When I decided to come back home to Australia and join the team at Airtree Ventures, I knew I’d be jumping back into the Australian tech ecosystem at an exciting time.

At my previous fund Accel, I got to witness the growth of the Aussie ecosystem from afar through our investments in companies like Atlassian, Campaign Monitor, Invoice2Go and 99Designs. But when I moved back to Australia permanently a few weeks ago I was still blown away by just how much the ecosystem has changed in the past few years.

The amount of early stage activity has exploded. Everywhere I look now it’s wall-to-wall meet-ups, tech conferences and demo days. Accelerators and incubators are being set up all over the country and there’s a new breed of globally ambitious founders popping up everywhere.

The whole ecosystem seems to have a new-found confidence that it can now go toe-to-toe with the rest of the world. It’s been awesome to see.

James Cameron, former Accel Partners vice-president turned AirTree partner.
James Cameron, former Accel Partners vice-president turned AirTree partner. Rory Lindsay

And while all this early stage activity is pretty incredible, the thing that’s excited me most about coming home is the number of start-ups that are now scaling up.

We seem to have hit an inflection point – and it’s now quite common to see great Aussie and Kiwi start-ups like Canva, Prospa, CultureAmp and 90Seconds break through all the noise in the early stage ecosystem and reach real scale.

Scaling is never easy

But this doesn’t mean that it’s getting easier to scale a company here. The rate at which companies are getting to initial scale in Australia (say $10 million-plus in annualised net revenues) is still growing disproportionately slower than the growth of start-ups overall.

This is partly because it’s getting much easier to launch a company in Australia. Things like open source knowledge, cheap computing and mass global distribution channels have made it easier than it’s ever been to build a product here and get to your first $1 million in revenue.

Aussie startups make it to series A when compared to the US or even Europe, and the gap gets even bigger at series C and ...
Aussie startups make it to series A when compared to the US or even Europe, and the gap gets even bigger at series C and beyond.

But this also means that getting to $1 million in revenue is not as strong a predictor of whether a company can reach real scale as it was five years ago. And that’s because scaling is still just bloody hard.

If you look at the graduation curves for the number of companies that go on to raise follow-on rounds, you’ll see that a much smaller proportion of Aussie start-ups make it to series A when compared to the US or even Europe, and the gap gets even bigger at series C and beyond.

We tend to spend a lot of time talking about how we can get more founders to start companies – but if we’re serious about building the ecosystem we need to focus more on ways to help narrow this gap for later stage start-ups as well.

Path from $1m to $10m in revenue

Getting from $1 million to $10 million in annualised revenues is one of the most agonising phases that any software company can go through.

It is a slow and painful journey of discovery. Sure, you’ve hit some initial product/market fit, but now you’ve got to figure out how to sell and how to build your growth engine.

This is a long, hard slog and founders often feel like they’re wandering in the wilderness for ages. And a lot never make it through – they either burn out or hit a wall. The struggle is real.

The good news? Once you do hit $10 million, your destiny will be in your own hands. There’s no guarantees that you’ll go on to become a unicorn – but at this point you’ll be very hard to kill off and there will usually be at least some options for funding or a path to profitability.

So why is scaling still so challenging in Australia? And how can you maximise your chances of making it through the wilderness?

Money does matter

The usual reason people give for why Australian companies have difficulty scaling is the scarcity of local capital. The traditional wisdom has always been that there’s enough local investors around to do seed rounds, but then the local capital dries up and you have to bootstrap until you’re big enough for the big global funds to be interested (usually around $10 million in revenue).

Go back a few years and I think this was a very valid criticism of the local VC market. It’s why many of Australia’s first-generation start-up successes like Atlassian and CampaignMonitor had to bootstrap themselves to scale.

But today the situation is changing quickly. More than $1 billion in new VC funds have been raised in the past three years, and several sizeable funds ($200 million-plus) have emerged, which have the capital and the risk appetite to support founders through this scale stage and beyond.

We’ve also seen international investors like Matrix, Horizons, Tiger Global, Index, Point Nine, Accel, Felicis, Sequoia and Valar showing that they are willing to make the jump to Australia and invest earlier than global funds have traditionally.

But even if it is easier to find capital, you still need to be clever deploying it as you scale. Even with great unit economics, you’re unlikely to be at cash flow break even at this point, so growth usually means increasing your burn substantially.

If you’re a software business think carefully about payment terms and pricing. You’d be amazed how many founders never ask for upfront annual payments or grossly underprice their products.

It’s also worth considering using venture debt to extend your runway during this phase. This is a very common practice in the US and Europe (I reckon 20 to 30 per cent of the series A/B companies I worked with used it) and is becoming increasingly common in Australia.

Avoid a one-size-fits-all market strategy

A lot of Australia’s biggest global success stories have come from companies selling self-service SaaS with high-volume, high-velocity sales models.

Atlassian really showed the world how this was done, and companies like Campaign Monitor and BigCommerce have built big businesses around the same model.

With examples like these, I can understand why a lot of other Aussie software companies try to emulate the model.

But it now seems that many Aussie founders (and some VCs) see this as the only sales model worth having – and will run a mile from anything that isn’t self-service.

Unfortunately, self-service just doesn’t work for everyone. Without a first mover advantage or some sort of inherent network effect (think Slack or Atlassian), it’s pretty difficult to build long-term competitive differentiation if you’re selling self-service software at low price points.

And if you’re selling to enterprises or at high price points, then you will usually need at least some specialist salespeople.

Great CEOs shouldn’t be afraid of hiring sales reps – they have unique skill sets and can transform your company.

Of course, building a sales team comes with unique challenges. If your customers are overseas, you’ll need to start building an international presence faster.

This may mean adopting the “Israeli” model – building a local R&D team but moving the go-to-market team overseas as soon as you have initial signs of product/market fit. It also means you’re going to need to hire a sales team – and eventually a VP sales.

In my experience this is one of the hardest hires to get right (anecdotally I’d say the success rate is one in three). This is an area where you should really lean on investors for help.

Levelling up – hiring the right VPs

When you’re starting up, you’ve only really got three jobs; build a great team, build a great product and don’t run out of money.

When you start to scale, new functional roles emerge like marketing, sales, support and product management.

I’ve seen many founders get to $1 million in revenue with ease but then hit the wall at $3-5 million – and often it’s because they haven’t hired strong enough VPs to support them in these areas.

But hiring great marketing, sales, support and product VPs in Australia is still tough. We have phenomenal technical talent, but building a deep bench of these specialist roles in Australia will take time.

The great CEOs I’ve worked with overseas often spend 20 to 30 per cent of their time recruiting for VPs, and will generally interview at least 30 candidates for each VP role.

As an Aussie founder, you’ll need to look harder and further for great talent so expect to spend more than 30 per cent of your time recruiting. And don’t be afraid to look outside Australia.

Even with the worrying new changes to visa rules, finding the right talent overseas may still be your best option.

Just say no: avoiding crappy investor terms

To get to real scale, you’ll likely need to attract later stage investors at some stage.

This may seem a long way off – but you should already be thinking about how to set yourself up for success in these later rounds. This means being very careful about the investor terms you accept early on.

Unfortunately, there seem to be a lot of crappy terms floating around in Australian seed-stage term sheets – and some can do a lot of damage to a company when it tries to scale.

I’ve only been back a short time, but I’ve already seen some terms that I thought had died out long ago.

Things like giant super pro rata rights (a right to invest a very large portion of the next round), full ratchet anti-dilution provisions, tranched investments and valuation ratchets that are tied to long range forecasts.

These sorts of terms can cause big problems for follow on investors since it can impact the future value of their own stake if they were to invest in the company.

In some cases, these terms might even scare later stage investors off before they’ve done any detailed diligence on your business.

We think it’s important to do everything we can to eliminate these sorts of terms from the fundraising landscape, which is why we published an open source version of our own Silicon Valley style term sheet.

Breaking through the wilderness

Despite some of these challenges, the fact is that we’re seeing more great Aussie founders than ever before starting companies and getting to genuine global scale.

Each new scale-up helps build Australia’s network of talent, capital and knowledge – which in turn makes it a little bit easier for other founders to break through the wilderness.

It’s an exciting time to scale a global business out of Australia, and I’m looking forward to working with more of them.

James Cameron is a partner at AirTree Ventures.

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