As a tech business, should I be looking overseas for finance rather than Australia?

This article first appeared on February 1st, 2011.

I’ve been told by several people that Australia is a very conservative market when it comes to start-up funding.

Is this true?

As a tech business, should I be looking overseas for finance rather than Australia?

The simple answer is yes, it does appear that start-up funding in Australia suffers from a “conservative” and risk-averse corporate and investing culture, especially compared to the US.

However, the situation is a little more complex than that.

Two of the major influences that result in Australian start-ups struggling to find quick funding are market size and geography – and both impact virtually every aspect of Australian business life.

Australia simply does not have many companies that are global leaders in many of the sectors that local start-ups target.

Without global leaders in the local landscape there is less access to experienced staff, less of an eco-system of angel and venture investors, and a smaller local market scale to grow start-ups into “world beaters”.

For example, if you started Groupon in Melbourne you would do well to have 2,000 businesses listing discount deals for 200,000 consumers within a year.

The same business in the US can target 20 times as many businesses and consumers with the same technology platform with similar first round start-up funding at the same speed or faster.

If you attend an angel, venture capital or high net worth forum in Australia you might find perhaps 20 investors who are interested in your sector and you may raise funds from one or two of them.

The same forum in San Francisco, New York or London might have 10 times the number of investors, many of who have worked for global market leaders and have more cash and experience to bring to your business.

It is very hard for start-ups to grow big and fast in Australia, or to grow outside Australia as there are no major markets within easy reach.

Unlike London or Berlin, which are three-hour drives from a market of 300 million people, Australia is an eight-hour flight into larger markets, all with different languages, cultures and economics.

So, should you look for funding overseas? No. Unless you have staff, customers or a business entity in the US, Asia or Europe, few international investors will be interested in your business.

Remember that you are competing for funding with businesses that will have stronger local presences than you. It will be time consuming and costly to attract funds from international sources in your first or second round of capital rising. 

As in many things in life, start with what you know. The common sources of early seed stage funds are friends, family and your own business network.

Your next round will probably come from angels and the good news is that Australia has many good and strong angel networks and associations – Sydney Angels, Capital Angels and so on.

Australian investors are not overly risk averse, but the smaller market and smaller “start-up eco-system” mean that new businesses must have very good people, plans and potential to attract early stage funding.

Remember that great passion, perseverance, planning and implementation is usually recognised and rewarded.