Is California the new promised land for Aussie tech start ups?

California dreaming

Australian technology start-ups continue to set up shop in and around San Francisco in search of more lucrative markets, a deeper talent pool and a dynamic investment culture. But as expenses escalate, is the area losing its lustre?

Fresh from a recent funding boost of US$15 million pitched in by American venture capital firm Battery Ventures, software company Nitro is one of Australia’s most celebrated start-up success stories. Conceived in Melbourne and now based in San Francisco, the business started in 2005 by offering an alternative to the ubiquitous Adobe PDFs. In the 10 years since, it has developed into a provider of real-time document collaboration.

Nitro’s global headquarters is home to more than 100 staff or “Nitronauts”, as they like to call themselves. With the company securely embedded in San Francisco, founder and CEO Sam Chandler is well placed to discuss Australian start-ups conducting business in his patch. And the view is anything but Californian blue skies and butterflies.

“Most Australians fail to grasp how significant the change has been here,” Chandler says.

“It’s an extremely expensive environment, best illustrated by the price of real estate. When we first rented office space back in 2009, we were paying about US$20 per square foot, a fairly normal downtown city rent for that time. Today the average rent in the same area would be US$70 to $80 per square foot.”

Due in part to soaring expenses, the Tasmanian native believes that today there is no longer a pressing need for Australian entrepreneurs to relocate a tech company to the Bay Area.

“In fact, there are many reasons why it may not be a good idea. Average media technology pay in the area has climbed 15 per cent every single year since 2009. In other words, the cost of employing talent in just six years has pretty much doubled,” says Chandler.

Brain drains and skills magnets

San Francisco, and more broadly Silicon Valley, has long been the geographic anchor for technological innovation – and a magnet for financiers looking to cash in. Many Australians may lament the “brain drain” to the US, but complaining that talented local entrepreneurs are heading for California is like being peeved that promising Australian actors base themselves in Hollywood. The ambitious will always want to work with the best, and be rewarded for the privilege.

According to Joe Ward, former director of the Australian American Chamber of Commerce, 8000 Australian entrepreneurs are operating in the San Francisco Greater Bay Area, but precise numbers are difficult to pin down. Viki Forrest, the chief executive of ANZA Technology Network, a business accelerator targeting Australian entrepreneurs in San Francisco, claims that 22,000 Australians live in the area (a figure supported by Ed Husic, an Australian federal MP with a very public passion for tech).

"Who wouldn't want to take double the money you were going to get from somewhere else?" Nicholas Gruen, Kaggle Investor

Major deals are being inked. Australian bright sparks including online foreign exchange merchants OzForex, invoicing innovators Invoice2Go, software giant Atlassian, and design crowdsourcer 99designs have secured sizeable Silicon Valley investments. They recently raised a combined total of US$165 million from Accel Partners (an early Facebook investor). Last year, Sydney-based software company Campaign Monitor scooped up a staggering US$250 million from venture capital (VC) firm Insight Venture Partners.

All this “Aussie Mafia” presence has ramped up networking opportunities. Some pave the way for others through mentoring or personal introductions to local VCs; others may simply offer new arrivals a space to work in or a couch to surf. Organisations such as global connectors Advance, ANZA Technology Network and office space?/?crash pad provider Startup

House target Australian entrepreneurs wanting to make it stateside.

ANZA’s Forrest has lived in San Francisco’s Bay Area for 15 years and says the main reason our entrepreneurs come to her part of the world hasn’t changed in that time.

“The nature of innovation in Australia per capita may be world-class, but there is no market. If you’re going to commercialise you need to go to where the markets are, and the US, in my opinion, is the best first market to go to in terms of expansion,” she says.

This may be the case, but Stuart Marburg, the Melbourne-based chief executive of MessageMedia, echoes a lot of Chandler’s concerns. MessageMedia, an international text messaging service that delivers more than 40 million messages a month, runs a San Francisco office of 10. Despite this, Marburg admits, “if we were opening up in the US today, I’d suspect we wouldn’t go to San Francisco.”

His voice is a considerable one to add to the conversation. An internet service pioneer, Marburg co-founded Netspace as a teenager, then sold it to iiNet for A$40 million nearly two decades later.

Marburg can rattle off a number of gripes to add to Chandler’s list. MessageMedia has been frustrated by recruitment agency costs, the high price and frequency of local tax and legal advice, the number of prospective employees expecting equity in the company (even junior staff), and the lack of a direct flight from San Francisco to Melbourne.

“We made a decision to head on over and tackle the US market and settled on San Francisco. Why? Because it was a nice place to go to,” he says, somewhat incredulously.

“San Francisco gives you a little bit of kudos and we bought into the brand.”

Marburg is pleased with the quality of talent the company has been able to attract, although there have been those “cultural mismatch” moments.

“Americans can be very articulate and confident, but also a bit too polite. One of the things we have to say to our team is, ‘tell us if you don’t like something, don’t just nod your head.’”

Playing in the big league

Inevitably, the top talent moves on. Well-funded tech powerhouses such as Google, Twitter and Facebook attract the world’s best with the lure of substantial salaries, tempting stock options, and the most inviting workplace environments and perks.

Nitro’s Chandler deals with this every day. “There are companies on other floors of our building actively trying to recruit our talent every day of the week,” he says, before adding a warning.

“Come here with a big balance sheet or real revenues because that’s the only way you can compete.”

For entrepreneurs without capital, Chandler believes they may best be served staying in Australia.

“There’s so much knowledge online now. You have accelerator and incubator programs, internet forums, meet-ups and angel investors,” he says. “All this freely available information is why you can choose to start your company locally now and scale it at home.”

However, Australians do like to chance their arms. In 2011, Melbourne start-up Kaggle did the rounds of San Francisco’s VCs to gauge the reaction to their “data science with a crowdsourcing twist” idea.

"Have operations here that make sense to have here, but distribute your team globally in the most cost-effective way." Sam Chander, Nitro

“We didn’t really have to go offshore as we were happy to raise money at home, but after we decided to speak to some VCs, they started squabbling to get hold of us,” says economist Nicholas Gruen, Kaggle’s former chairman and first investor.

Squabbles settled, Kaggle raised US$11 million, with PayPal co-founder Max Levchin and Google’s chief economist, Hal Varian, among those attached to the start-up’s financing.

Perhaps more importantly, Kaggle’s Anthony Goldbloom, Jeremy Howard and Gruen held onto a majority stake in the company. “They ended up offering us a lot more money than we had valued ourselves at, or any Australian VC had valued us,” Gruen explains.

Four years down the track, Kaggle is headquartered in the Mission Bay neighbourhood of San Francisco, and its predictive modelling and analytics platform is used by “the world’s largest community of data scientists” (just under 300,000 at last count). Kaggle hosts lucrative data analysis competitions to solve consumer problems, and companies as varied as Ford, Amazon, MasterCard, Microsoft, Pfizer, GE, Facebook and NASA have used the service.

Gruen says that San Francisco is a natural fit for Kaggle. “The city is the heart of venture capital for IT. The density of the networks and the quality of the people in San Francisco are stunning. And who wouldn’t want to take double the money you were going to get from somewhere else?”

Chandler agrees. “It is easier to attract finance and a key reason why businesses choose to locate here,” he says.

“You are closer to all those billions of dollars looking for a home than anywhere else in the world.”

Opportunities beyond San Francisco

In comparison, access to VC in Australia has been limited to less than half a dozen players. But this is slowly changing. Sydney-based Blackbird Ventures took flight in 2012, with Atlassian’s Mike Cannon-Brookes and Scott Farquhar involved from its inception. More than a  dozen local start-ups in Australia have already received funding. In a similar space, Startmate has emerged as a popular mentorship and seed financing program.

Many rely on angel investors (who provide financial backing for small start-ups), but crowdfunding is another avenue for securing finance. Australian Phil Bosua’s 2013 Kickstarter campaign for his wireless lightbulb raised more than A$1.3 million. Last year he moved to the Bay Area and secured Series A funding of US$12 million from top-tier VC firm Sequoia Capital.

“My advice is to use the Bay Area strategically,” says Chandler. “Have operations here that make sense to have here, but distribute your team globally in the most cost-effective way and highest-leverage way possible.”

This is Nitro’s strategy, and its new Dublin office is expected to double in size this year. Emotiv, the Australian electroencephalography (EEG) technology start-up founded by Tan Le, has based most of its potentially expensive coding workforce in inexpensive Vietnam.

Other start-up hubs have been slowly incubating in cities as diverse as New York, Santiago, Tel Aviv, Austin, London, Dublin, Portland, Singapore and Beijing.

“If you’re a start-up looking for some funding, San Francisco may still be the place to go,” adds Marburg from MessageMedia.

“But if you’re an existing business who wants to grow a US operation, it’s going to cost you.”

This article is from the June issue of INTHEBLACK.

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