In 1974, my father decided to embark on a new commercial venture on Exhibition Street in Melbourne’s CBD.
He saw an opportunity to ‘disrupt’ the dining industry by offering a new and exotic choice for Melburnians – yum cha.
Yum cha is now commonplace. But in the early 1970s, it was a rare and risky proposition. Capital was required for premises, staff, stock and advertising. Consumers needed educating.
The only investors available at that time were family – true angel investors who obsessed more about business growth than exit and who had no second thoughts about reinvesting revenues back into the business.
Fast forward four decades, and capital to fund start-ups in Australia is now abundant. Google ‘angel investors Australia’ and you get pages of results. Log into your LinkedIn account and see how many people in your network have ‘angel’ or ‘start-up investor’ in their title.
Shouldn’t that abundance mean that promising start-ups in Australia today have plentiful access to patient capital? Not necessarily.
How many angel investors focus almost solely on exit strategy in their first meeting with an entrepreneur? How many spend more time on negotiating valuation instead of trying to understand the fundamentals of the company they’re seeking to invest in?
MODERN-DAY ARMS RACE
In many ways, fintech is the modern day arms race, with hubs emerging around the world centred on building the best, most innovative and disruptive platforms.
Governments have jumped on the bandwagon, recognising the political currency in being seen to support emerging fintech enterprises and emphasising the long-term economic importance of fostering new industry.
Indeed, tax incentives for investors in Australian start-ups (namely, the 20 per cent tax offset and 10-year capital gains tax exemption for investments held for three years) are as generous as any concessions we have seen in recent times.
However, policy can only go so far in shaping behaviour. What Australia needs is a more pronounced cultural shift in investor attitude.
COULD WORLDREMIT HAVE STARTED UP IN AUSTRALIA?
In 2010, Ismail Ahmed, a Somaliland-born remittance expert, founded the digital money transfer service WorldRemit. He used a year’s salary payout from a former employer to seed fund the business in the UK. At the time, it was clear to him that he needed patient capital.
A remittances firm, whether traditional or disruptive, lives and dies by its compliance systems. Ismail was steadfast in his commitment to spend as much time as required to build those systems before accepting a single dollar from customers.
UK angels were sought, but only on the basis that the company would not be rushed into its first transaction until it was ready. Patience was not just a virtue, it was paramount.
The company processed its first transaction a year later but, importantly, only when it was well-equipped to do so.
WorldRemit’s platform is expected to process more than five million transactions this year and is now backed by well-known investment firms Accel Partners and Technology Crossover Ventures, which are also investors in Facebook, Spotify, Netflix and Slack.
Australia is currently WorldRemit’s second largest send market, not far behind the UK. But could WorldRemit have been set up in Australia in the same way? Probably not in 2010, and it is questionable whether it would happen this year.
The expectations of Australian start-up investors typically differ to those in countries where the pool of early-stage investors is deeper and more established.
Whereas in the US or UK this specialised class of investors are prepared to deploy ‘patient’ capital, their equivalents in Australia demand more rapid returns.
There are many reasons why Australian start-ups might want to move overseas – international expansion, access to talent or favourable tax treatment for example – but access to capital need not be one of them.
Yet a recent report by Google-backed surveyor StartUp Muster found exactly that. While 20 per cent of Australian start-ups were planning to raise capital in Australia beyond 2015, 25 per cent planned to raise capital overseas.
We like to celebrate successful relocation stories such as Atlassian and Flogg Inc, but wouldn’t we be better applauding start-ups that monetise and globalise with support from local capital?
PATIENCE REAPS REWARDS
WorldRemit’s own experience is instructive. The company delayed its Series A round of funding for four years, which is hard to imagine in such a competitive fintech landscape.
But WorldRemit’s patient angel investors were able to crystallise significant returns when Accel Partners invested $US40 million in 2014 and again when Technology Crossover Ventures invested US$100 million in 2015.
And my father’s enterprise? He exited the yum cha business in 2000. Not quite the unicorn, but after 26 years of ownership, his original investors were satisfied and their patience appropriately rewarded.
Michael Liu is Regional Director for APAC at WorldRemit.
