Startup Governance

The recent debacle involving LaunchVic and 500 Startups comes at a time when startups and entrepreneurs are facing increased public scrutiny over their ethical behaviour. Having a great idea, building an innovative or disruptive business, and attracting investors is not carte blanche to disregard corporate governance and social responsibility obligations. So how do we instil a better “moral compass” among startups and their founders?

The TV sitcom, “Silicon Valley”, is drawn from experience of the software industry, but it also reveals much that ails the startup economy. As funny as it is, the series also highlights some painful truths. Scenes where founders “trade” equity in their non-existent companies are just one aspect of how startups can develop an over-inflated sense of their own worth. These interactions also reveal how startups can reward inappropriate behaviour – if sweat equity is the only way founders can “pay” their team, it can lead to distorted thinking and impaired judgement, because the incentive to go along with poor decision-making is greater than the threat of any immediate sanction.

A key challenge for any startup is knowing when to seek external advice – not just legal, tax or accounting services, but an independent viewpoint. Many startups don’t bother (or need) to establish a board of directors – and if they do, they normally consist of only the founders and key shareholders. The role of independent, non-executive directors is probably under-valued by startups. But even an advisory board (including mentors who may already be guiding the business) would allow for some more formal and impartial debate.

Another challenge for startups is that in needing to attract funding, they can find themselves swimming with the sharks, so doing due diligence on potential investors is a critical task in building a sustainable cap table that will benefit the longer term aims of the business.

Equally, if startup founders are motivated to “do their own thing”, because they are driven by purpose or a higher cause, or they simply want to make a difference, they can risk having to compromise their values in order to engage with bigger, more-established companies. So they may end up emulating the very behaviours they sought to change or challenge. Neither startups nor big corporations have a monopoly on unethical behaviour, but if founders stray from their original founding principles, they will soon alienate their stakeholders.

Finally, nurturing the “conscience” of a startup is not something that should be left to the founder(s) alone. The vision has to be shared with, and owned by everyone involved, especially as the business scales. Everything should be measured or tested against this criteria – “does it stay true to or enhance our reason for being here?” Without a clear sense of what is important to a startup, it will also struggle to convey its core value proposition.

Next week: Digital Richmond

 

Talking Innovation with Dr Kate Cornick, CEO of LaunchVic

As a nice segue to last week’s blog on Techstars, I was fortunate to hear Dr Kate Cornick speak, just before the latest LaunchVic grants were announced. Organised by Innovation Bay, hosted by Deloitte, and facilitated by Ian Gardiner, the fireside chat plus Q&A was a useful insight on a key part of the Victorian Government’s innovation strategy.

launchviclogo innovationbay-feat-800x500At the outset, Dr Cornick stressed that LaunchVic is not an investment vehicle, and it doesn’t fund individual startups. Rather it seeks to support initiatives that help grow the local startup eco-system. (See also my blog on the consultation process that informed LaunchVic’s formation.)

Commenting on why Victoria (and Australia) has the potential to become a world-class centre for innovation, Dr Cornick pointed to a number of factors:

  • A collaborative culture
  • Positive economic conditions (comparatively speaking)
  • Governments (mostly) open to innovation
  • Strong research base

However, a few of the obstacles in our way include:

  • The notorious tall poppy syndrome, whereby Australians are suspicious, sceptical and even scathing of local success – except when it comes to sport and entertainment!
  • An inability to scale or capitalise on academic research
  • Insufficient entrepreneurial skills and experience to “get scrappy”
  • Lack of exposure for highly successful startups (c.$20m market cap) that can help attract more investment

From a startup perspective, Australia also has the wrong type of risk capital: institutional investors are more attuned to placing large bets on speculative mining assets, typically funded through public listings, and with very different financial profiles. (Or they prefer to invest in things they can see and touch – property, utilities, infrastructure, banks.)

So there is still a huge gap in investor education on startups and their requirements for early-stage funding. Part of LaunchVic’s remit is to market the local startup community, promote the success stories, and foster the right conditions to connect capital with ideas and innovation. After all, Australia does have one of the largest pool of pension fund assets in the world, and that money has to be put to work in creating economic growth opportunities.

As I have blogged before, we still see the “expensive boomerang”: Australian asset managers investing in Silicon Valley VCs, who then invest in Australian startups. Although when I raised a question about the investment preferences of our fund managers, Ian Gardiner did point out that a few enlightened institutions have invested in Australian VC funds such as SquarePeg Capital, H2 Ventures and Reinventure.

Dr Cornick also provided a reality check on startups, and added a note of caution to would-be founders:

First, it tends to be an over-glamourised sector. For one thing, founders under-estimate the relentless grind in making their business a success. And while eating pizza and pot noodles might sound like a lifestyle choice, it’s more of an economic necessity. Thus, it’s not for everyone (and not everyone should or needs to build a startup…), so aspiring entrepreneurs would be well-advised to do their homework.

Second, the success of any startup community will be reflected by industry demand. “Build it and they will come” is not a viable strategy. And I know from talking to those within the Victorian Government that unlike their inter-state counterparts, they are not willing (or able) to fund or invest in specific startups, nor in specific ventures such as a FinTech hub. Their position is that industry needs to put its money where its mouth is, and as and when that happens, the Government will look to see what support it can provide to foster and nurture such initiatives – particularly when it comes to facilitating between parties or filling in any gaps.

Third, don’t expect too many more unicorns, and don’t bank on coming up with simple but unique ideas that will conquer the world – meaning, new businesses like Facebook, Uber and Pinterest will be few and far between. Instead, drawing on her earlier comments about research, Dr Cornick predicts that it will be “back to the 90’s”, where innovation will come from “research-based, deep-tech solutions”.

If that’s the case, then the LaunchVic agenda (for the remaining 3 years of its current 4 year lifespan) will include:

  • Getting Victoria on the map, and positioning it as a global innovation hub
  • Raising the bar by educating startups and investors
  • Bringing more diversity to the startup sector, by providing greater access, striking better gender balance, and building a stronger entrepreneurial culture
  • Introducing a more transparent and interactive consultation process
  • Continuing to support the best accelerator programs that focus on startups
  • Making more frequent and smaller funding rounds, each with a specific focus

Asked what areas of innovation Victoria will be famous for, Dr Cornick’s number one pick was Healthcare, pointing to the strong research base coming out of both the Monash and Melbourne University medical precincts. Also in the running were Agriculture, and possibly Cyber-security. (Separately, there is a list of priority industries where the Government sees growth, employment and investment opportunities.)

If one of the biggest hurdles is commercializing research, Dr Cornick suggested that Universities have to re-think current IP practices, including ownership and licensing models, developing better career options in research, and doing more to re-calibrate the effort/reward equation in building research assets compared to building companies and commercial assets.

Finally, Dr Cornick offered an interesting metaphor to describe the current state of Victoria’s innovation potential:

“We have everything we need for baking a cake, but the missing ingredient is the baking powder to make it rise.”

Next week: Gigster is coming to town….

 

 

 

 

 

 

 

Summing up the #FinTech summit

Coinciding with the launch of the inaugural EY FinTech Australia Census 2016*, FinTech Australia’s first industry summit Collab/Collide was a major beneficiary of the initial round of funding from the Victorian government’s LaunchVic program. The summit provided a useful opportunity to survey the global landscape, to compare notes and of course, to network. But did we learn anything new?

6278fd_bc2f12c8b40744a281f9afbb37ba1a3emv2The summit was programmed around key FinTech themes of payment services, alternative funding, robo-advice, Blockchain, data and regulation. Participation by some key industry figures from Asia, Europe and the USA (both founders and investors) also provided some international perspective.

While Australia appears to be maintaining a top 5 position in the global FinTech rankings, our focus on things like P2P lending, payments and robo-advice risks losing sight of bigger opportunities in Blockchain assets, enterprise solutions and institutional services.

And although it was good to see a team from the Treasury Corporation of Victoria in the audience, as well some of their colleagues from DEDJTR, it was surprising that there was hardly any representation from among institutional investors (superannuation funds, asset managers, insurance industry), major financial institutions, or the traditional financial markets (exchanges, intermediaries, brokers, vendors)**.

Some of the best sessions were the comparative panels on Blockchain, regulation and funding. In particular, there was an interesting discussion on whether Australia should be worried or concerned about UK opportunities post-Brexit, or focus more on Asian markets. But with the development of reciprocal financial licensing arrangements between Australia and the UK, and Australia and Singapore (and between the UK and Singapore), ASIC is clearly trying to engage with both markets.

The Federal Treasurer, Scott Morrison also took time out of his busy schedule to address the audience on the topic of Open Banking Standards, following on from the Productivity Commission’s Draft Report on Data Availability and Use. The overall goal is to have a system of FinTech data and operating standards that is “regulatory match fit”, that delivers frictionless inter-party transactions and enhanced industry participation and collaboration. For example: once the New Payment Platform launches in 2017, we should have more open access to transaction data; the ATO is implementing a “single-touch” payroll process; and ASIC is due to publish recommendations for the financial services Regulatory Sandbox by the end of 2016.

Unfortunately, given the changes in venue and content, the program struggled to stretch to a second full day, as audience numbers dwindled. Something for the organisers to think about next time? I would also advocate organising specific sessions, e.g., for B2B and B2C, or for vendors and institutions.

Finally, speaking to a member of the DEDJTR team, there is a clear desire on the part of the State government that the FinTech community will come together along with other market participants to figure out how to scale this emerging sector. In other words, how to turn the growing number of FinTech startups (often with directly competing products and services), hubs, incubators, accelerators and VC funds into a sustainable industry?

* For a handy summary of the EY survey, check out Lucinda de Jong’s blog for Timelio

** In the interests of full disclosure, a FinTech startup I work with, Brave New Coin (a market data vendor for Blockchain assets) was a Strategic Partner for the Summit

Next week: The Startup of Me v2.0

A Tale of Two #FinTech Cities – Part 2

It feels like the inter-city #FinTech and startup rivalry between Melbourne and Sydney is starting to get personal. The blow-up between Victorian Small Business Minister, Philip Dalidakis and Freelancer CEO, Matt Barrie over StartCon is perhaps the most strident example, but other discontent is bubbling underneath the service.

screen-shot-2016-10-05-at-10-51-49-amLet’s take a look at what’s actually been happening around #FinTech in Melbourne, and try to understand what might be the cause of this apparent disquiet:

First, the recently announced LaunchVic grants have been met with a mix of gratitude, bewilderment and some sour grapes, based on the people I have talked to in the start-up community. There was a sense of “jobs for the boys”, “usual suspects”, “who?”, and “yeah, good on ya”. Nothing new there, then, when public money is being handed out. High-profile beneficiaries of the initial A$6.5m of grants include FinTech Australia (as part of a major FinTech Conference to be held in Melbourne), FinTech Melbourne (which is now the largest group of its kind outside the US and UK), inspire9, Startup Victoria and Collective Campus.

Second, Stripe‘s CEO, John Collison was in town to celebrate their 2nd birthday in Melbourne. (This is the 3rd time in 2 years Collison has been in Australia – he must love what we are doing here? Or maybe it’s the Victorian government incentives that attracted Stripe to set up in Melbourne: see below.) This time around, there were some major announcements among the celebrations, including:

  • 25% of Australians have paid for something online using Stripe
  • Stripe is launching “Connect” in Australia – making it easier for local businesses to roll out payment solutions in multiple markets overseas
  • Stripe continues to keep its APIs as simple and streamlined as possible – they even support Amazon’s Alexa voice recognition system

There was also a panel discussion with some of Stripe’s local clients, and a Q&A with Collison himself:

  • Andre Eikmeier from Vinomofo commented that payment solutions (like all technology) should be invisible, and just work in the background
  • Ben Styles from Xero explained that integration with Xero’s own APIs is critical, and that they have co-developed some products
  • Nicole Brolan from SEEK said that thanks to Stripe, her business is finally allowing clients to pay invoices on-line

Asked about innovation, Collison argued that mobile phone technology was the spur for services like Uber. However, he’s not especially engaged with Blockchain, as he does not see the use case. He thinks the next major innovation will be in medtech (telemetrics & wearables), and machine learning (speech and image recognition). As he said, “driverless cars are not just about the sensors but what the data is telling you. We know more about the health of your car than your own body.” He also had some words of advice to aspiring local entrepreneurs and startup founders:

  • Having a global or international perspective is determined by your markets, your competition, and access to specific talent pools.
  • It’s probably wrong to aspire to be like Atlassian – you need to understand WHY Atlassian has been successful, not WHAT it did or HOW it did it – which means getting back to core values and core purpose.

Third, as the Stripe celebrations started to kick off, across town FinTech Melbourne hosted an event starring Alex Scandurra, from Sydney’s Stone & Chalk FinTech hub. This was billed as a “pre-launch” for Stone & Chalk’s planned foray into Melbourne, and was part information session, part FinTech love fest, and part fan-boy hangout. Scandurra’s presentation was quick to point out that the “plan is not to bring Stone & Chalk to Melbourne, but to create Melbourne’s own Stone & Chalk”. (Spot the subtle difference?)

To its credit, Stone & Chalk is home to 300 people and 75 startups, has helped start 21 companies and create 150 jobs, and participants have collectively raised $100m in funding, although Stone & Chalk does not take equity. Scandurra also commented that FinTech is not an industry in itself – it is a horizontal that serves all industries.

There seems to be a lot of local clamouring for a FinTech hub in Melbourne. However, unlike the NSW government which has directly partnered with Stone & Chalk, I understand that the Victorian government is not prepared or able to “invest” in such a project – and certainly not before there is some private sector funding on the table.

Meanwhile, the founder of a rival payment system expressed his frustration that the Victorian government “sponsored” Stripe to come to Australia, but won’t offer similar support to local startups. Another FinTech CEO I spoke to was irked that Stone & Chalk would appear to be breaching its own mandate if it set up shop outside NSW.

In fact, could be argued that Stone & Chalk was established in Sydney to directly compete with Melbourne’s startup ecosystem. In large part, this is thanks to the huge success that the Victorian government continues to have in luring major tech companies and global startups to come to Melbourne. Names such as Zendesk, Eventbrite, Slack, Square, Stripe and now Cognizant.

If the debate over Stone & Chalk coming to Melbourne is about creating a local FinTech hub (whether or not the Victorian government tips in some money), we have to examine the need for such a hub. For example, is it simply a question of real estate, so that all the FinTech startups can be co-located in one place? If so, I would have thought that was easy to resolve: there’s a lot of empty office space, and Melbourne rents are cheaper than Sydney; also, a growing number of office landlords recognise the mutual benefits and knock-on effects of hosting co-working venues in their buildings.

We also have to consider if Melbourne’s existing FinTech startup eco-system/infrastructure is willing to come together to underpin such a hub. If so, what is the hub going to do? What is its purpose? What is the missing piece that the hub is designed to fill? And who/what/where is best placed to fill that need/gap?

Looking back, Melbourne has been the home of a number of FinTech businesses, that are now global public enterprises – IRESS, Computershare, Touchcorp, Novatti, for example – so there is obviously something in the local water (or coffee). For me, however, a key barrier for FinTech specifically, and startups more generally, is the inability to connect to institutional funds and investors (Clover being a notable exception?). Other obstacles include the stodgy procurement processes used by the public sector and many large corporations, which make it more difficult for startups to compete for work, and the reluctance by enterprise clients to try a local product or service unless it has been tested and proven elsewhere.

Finally, on a more positive note, it was very interesting to see that founders from Atlassian and Vinomofo are backing Spaceship, a new superannuation fund appealing to a younger, tech-savvy audience.

Next week: Bridging the Digital Divide