There is an unreasonable fixation in the startup ecosystem, which is exacerbated by the media, with unicorns.
This puts undue pressure on founders to pitch blue sky visions and hockey stick growth. It distracts from focusing on solving real problems, viable business models and sustainable growth.
This extreme fixation on unicorns is particularly unhelpful in Australia, a country with a population of only 26 million people. Australia’s landmass is 80% the size of the USA while our population is 8% that of the USA.
According to CBInsights, there are 8 unicorns from Australia while there are 644 born in the USA.
Further only 18 Australian listed technology companies have a market cap of over A$1bn (and if we reference US$1bn, that number is 11). The median market cap of the S&P/ASX All Technology Index is A$619m.
Moreover, referencing publicly listed companies, the 300th largest ASX-listed company is Equity Trustees, a company founded in 1888, which has made countless acquisitions and has over 350 FTEs. It has a market cap of under A$700m (with debt, an enterprise value of c.A$700m). In the US, the 300th largest S&P constituent is Lennar Corporation, a company founded in 1954, which has over 10,000 employees and has a market cap of over US$24bn.
I do believe technology companies can scale faster than “traditional” businesses and the infrastructure supporting the establishment and scaling of tech businesses has never been cheaper or better. However, I don’t believe it is reasonable to expect founders to target a billion dollar valuation in ten years, starting in Australia, as many VCs do.
So why do VCs hunt unicorns?
Data shows that 50%-90% of start-ups fail (depending on which statistics you believe) and that a small number of companies will generate the majority of a fund’s return (the Power Law - a good article here).
VCs need these outsized outcomes to return the fund (or a substantial proportion of it) to compensate for the failed startups they invest in.
As fund size increases, the outsized return needs to get larger to make a substantial difference to the return of the fund.
Why is it hard to berth a unicorn in Australia?
In most sectors, the market is simply not big enough in Australia for a company to gain enough market share to generate the financials / traction worthy of a unicorn valuation.
As a result of point 1, Australian companies need to sell overseas
Most businesses and consumers have a home grown bias, especially when buying unknown brands
There are differences in selling a product (or service) in a foreign market vs. the Australian market.
Given business’ bias for home grown brands, it’s important to have a local salesforce to give the brand a more local feel
Hiring a local salesforce is difficult for an Australian company (or any company taking on a new market) and generally it takes time and money to iterate and find the right people.
Founders generally need to move overseas to show commitment to the foreign market and some are unwilling or unable to do this.
This assists in hiring a local sales team.
It also assists in attracting local capital.
While the VC ecosystem is growing in Australia, there is isn’t a large number of of VC firms that can invest more than $50m into a single company.
It’s easier to upsell an existing VC (if you’re performing well) vs. getting a new VC to invest.
Most foreign VC firms require traction outside of Australia before investing and thus many start-ups face a chicken and egg problem - not enough capital to invest in operations in a foreign market while needing foreign capital to expand into a foreign market.
Conclusion
First and foremost, I’m not saying founders shouldn’t have big visions or aspirations of foreign operations. They absolutely should. However, founders need to understand that the road to berth a unicorn from Australia is tough and takes time (usually longer than 5-7 years)…and that’s ok.
Australian investors need to be more realistic about what a great outcome is for an Australian start-up in the timeframe of a typical VC fund (10 years). I believe a $150m+ exit is a great outcome for an Australian company that has received funding.
Really enjoyed reading this from a founder's perspective. On your point about "home grown bias", do you feel that founders who immigrate to Australia from larger markets are better positioned to be able to take advantage of this? While their business might not have started in their home country, they still have the deep networks and cultural familiarity needed to hire a team and grow quickly. Some of the best founders I've met immigrated to Australia.