Venture capital There is nothing inevitable about Australia being relegated to a branch office economy. Believing otherwise is a self-fulfilling prophecy.
There is a school of thought that says it is inevitable for Australia's high-growth technology companies to move offshore. The argument goes like this: Australia is a small country and successful start-ups will grow up and move to bigger markets, so we should stop griping and celebrate their success. Yet there is nothing inevitable about Australia being relegated to a branch office economy. Believing otherwise is a self-fulfilling prophecy. Of course, successful Australian companies will export to the world but there are plenty of global leaders headquartered in small countries; Denmark, Sweden, Finland, Switzerland and Israel all have much smaller populations, for example. The truth is that growth entrepreneurs leave Australia for specific reasons, many of which can be fixed with sustained focus and effort. 
One of the key reasons is access to capital. The other two - access to customers and access to talent - will be explored in the next article in the series. Start-ups have access to a vibrant early funding scene, with seed funds, angel investors and early-stage venture capital, but as companies enter the growth phase, it becomes more difficult to meet their funding needs in Australia. Starfish Ventures investment director Tony Glenning points out the entire venture capital industry invested $100 million in Australia in 2014 - a figure dwarfed by the $320 million a single company, Campaign Monitor, raised from US funds the same year. "The greatest need in terms of funding is at that growth stage," Glenning says. "If you're looking to raise $5 million to $15 million there are very few companies to go to." Fortunately for entrepreneurs who need the investment, there are plenty of US venture capital funds interested. The problem for Australia is that accessing US funds makes companies more likely to move their headquarters offshore, even if they secure the investment while still in Australia. As the StartupAUS Crossroads 2015 report puts it, offshore investment in Australian businesses means "there will be forces at work to have them shift their centre of gravity to other parts of the world". Bigcommerce and Shoes of Prey are two recent examples of companies that moved to the US after taking US investment, though the founders of both companies pin their respective moves to other causes. Other observers say there's a very clear progression from entrepreneurs taking US VC money to becoming a US company. "There's a predisposition to want to be close to your companies when you're an investor and having them operate under rules you understand," says Jana Matthews, the ANZ Chair in Business Growth and director of the Centre for Business Growth at the University of South Australia. "I had a [US-based] friend who said he'd never invest internationally again because he got totally hosed in France when he tried to let some people go who weren't performing." Freelancer.com chief executive Matt Barrie says it is "absolutely" the progression for US venture-backed startups to move to the US and he has seen "the same story over and over again".
A tech company will get started, secure angel funding in Australia, then need growth funding. The entrepreneurs will approach US investors who suggest the founders move to the US to address the bigger market. Next the investors will suggest a US CEO who will build out the US executive team and raise a ton of money. "Then the company flips up into a US holding company and you have a US company with a US CEO, US management and US shareholders," Barrie says. "If the CEO likes surfing they'll come to Australia once or twice a year, otherwise they'll decide it doesn't make a lot of sense to have a small offshore development team in Australia when the Aussie dollar is high and it's cheaper in the Philippines, Vietnam or Bangalore. "The Australian entity is left to wither on the vine and next thing you know the whole company has migrated, the company is an American company that will ultimately list in the US. We lose all our companies at the most important time we should be keeping them, which is in the hyper-growth phase." Barrie has long advocated for technology entrepreneurs to use the Australian Securities Exchange rather than relying on venture capital investment. He says there is no shortage of capital for growth companies in Australia, pointing out that Freelancer recently filled a $45 million placement in two days.
Sam Chandler, the founder and chief executive of Nitro, says there are two reasons why it's not in Australia's interest to leave US venture capital funds to back Australian companies. Firstly, he agrees that it tends to lead to the companies moving to the US and loss of skilled workers. Secondly, it means the big financial returns occur outside Australia and the tax revenue from a big event like an exit or initial public offering is collected elsewhere.
Chandler suggests that the Australian government could consider an incentive structure that attracts US funds to invest in Australia but in a way that would ensure the return accrues in Australia.
He is also supportive of the idea of opening up superannuation funds to invest in startups and growth companies. Chandler points out there is $2 trillion in super funds and if you took just one tenth of 1 per cent for start-up and growth-stage investment you'd have $2 billion - 20 times the amount allocated by venture capital in Australia last year.
"The whole idea of the superannuation scheme was to create an investment pool of funds for the good of the nation, and the good of its citizens, and really none of it is being applied to venture," Chandler says. However, there is little appetite for this among policy makers and even other technology entrepreneurs are sceptical. "It's a terrible idea," says Atlassian co-founder Scott Farquhar. "Superannuation is your own money, people should be free to invest it however they choose, and it's dangerous if you force people to put it into something highly volatile." There is some hope that equity crowdfunding could be part of the solution. Currently it's restricted by law to wholesale investors, but even this has proven promising. The federal government has made encouraging noises about opening up equity crowdfunding platforms to retail investors, though the plans are less advanced than the industry hoped.
We have a growth-stage funding gap, the stakes are high for the Australian economy, and the answer is probably a combination of all the above.
This is part of a series on growth companies. Read more on brw.com.au