Children of the revolution
It's midnight in San Francisco and i'm out on the tiles with one of the most successful Australian entrepreneurs you've never heard of. Most of the city is shutting down on this cold and dreary Tuesday, but Gower Smith is determined to kick on. And so here we are at the Penthouse strip club and steakhouse, a palace of sleaze where New York strip comes with a side of lap dance.
Smith, the founder of ZoomSystems, has a shiny bald head, porn-star moustache and the cheeky, confident smile of someone living the dream. He cashed out of four successful companies in Australia and moved to the heart of the tech world 10 years ago to launch Zoom, raising $100 million from investors soon after arriving. His fully automated Zoom shops - don't call them vending machines - dispense the latest high-end gadgets from the likes of Apple and HP in almost every major US airport and in department stores like Macy's. Now the company is going global and Smith is leading the charge into Asia.
Moving on … Nikki Durkin, founder of 99dresses, says Australia suffers from tall-poppy syndrome.
Smith is one of about 17,000 Australians spread across the San Francisco Bay area, according to the Aussie expat network Advance. Many are earning a motser working for booming tech companies such as Facebook, Twitter and Zynga, and at last count there were at least 65 start-ups in and around Silicon Valley that were either created in Australia or have Australian co-founders.
Finding them takes digging, since Australians are typically reluctant to broadcast their success. But in three weeks, I have travelled halfway across the US to meet dozens of Aussie technology entrepreneurs, most with a plan to change the world, and some who are on their way to doing just that.
The Australian entrepreneur community in Silicon Valley is tight-knit; to get to know them you need to be willing to drink. A lot. "We have events, we get drunk; all the relationships I've built with the Aussies here have usually been on embarrassing nights out, drinking and making mischief," Elias Bizannes, 28, tells me at dinner at a family-style Italian restaurant, some hours before my arrival at Penthouse.
Tech it out … ZoomSystems' Gower Smith raised $100 million from investors shortly after relocating to the US.
Another Australian entrepreneur at the dinner voices his agreement: "It's what we do best ... Most real relationships develop over a lot of beers."
Bizannes, an Australian with Greek heritage, is the creator of StartupBus - part week-long US boot camp for geeks, part start-up competition - and StartupHouse, a hostel-like environment in San Francisco offering cheap rooms to skint entrepreneurs. I ask him whether it is a good thing that our best techies and entrepreneurial minds are moving en masse to the US. He says most will return home eventually.
"We all want to go back [to Australia]," Bizannes says. "The weather here sucks, they don't get our jokes, they don't get sarcasm, the politics suck. Americans are cool, but there's a reason that we [Aussies] all hang around with each other."
Number cruncher … Anthony Goldbloom's company, Kaggle, attracted $11 million from US investors.
Australians are punching so far above their weight in Silicon Valley that they have become known as the "Aussie mafia", which is also the name of the Facebook group that is a social hub for Australian start-up founders, including Gower Smith.
Later at Penthouse, Smith tells me he would have loved to have kept his headquarters in Australia but he couldn't raise the capital he needed from risk-averse local investors. Will he ever move back to Australia to spread his knowledge and invest in the next generation of start-ups, as our government officials and ministers hope? "It's in my heart; my wife's Australian, my sons are Australian, so definitely my plan is to spend more time in Australia," he says, adding he hopes to set up Zoom shops here next year.
Is your wife okay with you going to strip clubs? I pose this question hesitantly as we walk out in a post-lap-dance haze. "I took my wife here," he responds. "She's okay with it ... I think."
Thousands of Australians travelled to California in the years after James W. Marshall found gold there in 1848. Today, the gold rush is on again, but the riches the Aussie entrepreneurs seek are at the venture-capital firms on Sand Hill Road in Menlo Park and University Avenue in Palo Alto. There have been several big tech booms here since the 1970s, when silicon semiconductor chip companies and electronics makers like Hewlett-Packard gave Silicon Valley its name but, right now, three huge trends - social web, mobile and data - have converged to create a new hotbed of activity.
And Americans, it seems, can't get enough of Australian entrepreneurs, from our accents to our no-nonsense style. "If you're trying to get a meeting with anybody, just drop the word 'Australian' in the first sentence and the probability of getting the meeting triples," says Stuart Argue, co-founder of mobile retail start-up Grabble, which began in a Wollongong living room but was acquired last November by US giant Walmart. "They think we're funny. We don't have to try to be funny; we just are funny. It's very cool."
Australians are doing better in the valley than anyone dreamt of in the '90s, when a handful of Australians moved there to start medical-device companies. Peter Farrell, who pioneered the treatment of sleep apnoea with ResMed and is still chairman and CEO of the company, was one of the first. So was Larry Marshall, a Macquarie University physics PhD who founded six successful companies, including one that developed medical lasers which cured blindness in diabetics and infants with abnormal retinas.
Now Marshall is the managing director of Southern Cross Venture Partners, a venture-capital firm that invests in Australian start-ups and helps them move to the valley. A blokey guy with a rat's tail, he lives in Los Altos, in a 104-year-old stately house with a marble pool and orange and lemon trees in the garden. Marshall has seen the exodus of Australian tech talent to the US first hand, and says that today, unlike in the '90s, Aussie engineers tend to focus on web and software start-ups rather than hardware and devices.
"There are more Aussie start-ups here than at any other time I can remember," Marshall says. "When I first came to the valley, there were none; probably 10 years ago there would be less than 10; and there are over 65 today."
What's changed? For starters, no longer do entrepreneurs need millions of dollars in capital to buy offices, equipment and factories and to employ an army of sales staff. With $20,000, you can put a small group of geeks in a room, feed them noodles for six months, and throw up a website that can instantly reach up to two billion people.
The tech start-up scene in Sydney and Melbourne is booming with several big deals (such as the sale early last year of group-buying site Spreets to Yahoo!7 for $40 million) and global success stories such as Atlassian - headquartered in Sydney but generating $100 million a year in sales in 130 countries - providing much-needed fuel. Start-up "incubators" such as Startmate, Pollenizer, AngelCube and PushStart are popping up everywhere. Essentially, the incubators are funded by successful entrepreneurs; for an equity stake in the start-ups, they invest minimal amounts - $10,000 to $25,000 - but, more importantly, provide them with mentoring and the advice they need to succeed. But the problem is that once the companies need to raise their next round of capital - known as a series A and typically between $100,000 and $10 million - they encounter huge funding problems in Australia. The people with money in this country are more inclined to invest in known quantities like property and mining than risky high-tech ventures.
"It is very, very hard in Australia to get early-stage funding, especially for high-risk opportunities," says Antony McGregor Dey, the San Francisco-based founder of link.me, a start-up created in Melbourne that helps (mainly US) brands connect with their retail customers. "The venture capital community in Australia is a joke."
The official figures from the venture capital industry body seem to back that harsh assessment. Last year, the entire venture-capital industry in Australia raised just $120 million - which represents a fourth consecutive year of decline to the lowest point since the dotcom crash of 2002.
To put that in perspective, during the past few years one of the big US venture-capital firms, Accel, invested more than $160 million in just three Australian tech start-ups: 99designs ($35 million), Atlassian ($60 million) and OzForex (about $70 million). Another US venture-capital firm, General Catalyst, invested $15 million in Australian e-commerce company BigCommerce. All four of those start-ups were well established by the time they received the investments and kept a base in Australia while opening US offices. Increasingly, however, Australian start-ups are being shifted entirely to the US from a very early stage.
One of the most exciting start-ups to leave our shores is Kaggle, created by former Reserve Bank of Australia and federal Treasury economist Anthony Goldbloom in a Bondi flat. Kaggle is a difficult concept to explain, but if 99designs is crowd-sourcing for logos, business cards and website design, Kaggle is crowd-sourcing for geniuses. "We offer people with problems the opportunity to tap a liquid market of talent," Goldbloom, 28, tells me from his apartment in the heart of San Francisco, where he has lived since a PayPal founder, Max Levchin, and a clutch of major US venture capitalists pumped $11 million into Kaggle last year when it was still just a three-person start-up.
Companies, government organisations and universities who have difficult data-related problems put them on Kaggle and the site's 33,000 mainly PhD-level scientists compete to find the most effective solution, with anywhere from $5000 to $3 million as an incentive. A key to its success is that it attracts scientists from different disciplines who often take just weeks to solve problems that have stumped specialists in the area for years.
The reason Kaggle is so valuable is that the solutions to the problems it is solving are potentially worth millions to companies, which are increasingly trying to unlock the value of the data they collect. A bank used Kaggle to come up with a more effective way to determine who would default on loans, a US health-care provider ran a competition to come up with an algorithm to predict which of its patients would get sick (allowing early intervention), while a used-car dealer used the site to find a formula to work out which cars were worth buying and which were lemons.
Goldbloom, who believes the best data scientists will soon be able to earn as much as professional tennis players, became an entrepreneur by accident. He found working in government monotonous and entered and won an essay competition in The Economist. The prize was a three-month internship at the magazine, and Goldbloom's first assignment was an article about big data. He came up with the idea for Kaggle when he interviewed CEOs and realised they were keen to take advantage of the data trend but didn't know how. "What data allows you to do in effect is to make decisions more precisely," he says.
Goldbloom describes Australia as a "backwater" compared to Silicon Valley, saying he couldn't imagine he would be professionally satisfied here. "I think the biggest problem is not an issue of policy, it's cultural," he says, explaining that in Australia we tend to shoot down big ideas, whereas everyone in Silicon Valley wants to change the world.
"I think it's a bit of tall-poppy syndrome happening," says Nikki Durkin, 20, who created her first start-up selling T-shirts online when she was 15 and is now trying to crack the US market with 99dresses, which allows women to trade unwanted clothes online. She had to shut down the site briefly to tweak her idea (known in start-up land as a "pivot"), but she's angry that she was pilloried in Australia for having "failed". The reality is that only a tiny percentage of start-ups are a runaway success, and most fail or have to pivot several times before they hit on a winning formula.
"If you look at start-ups in Silicon Valley, it happens all the time and it's not seen as a bad thing," she says.
Damien Tampling, lead technology analyst at Deloitte in Sydney, calls the exodus of Australian tech talent a "brain drain" and says while the federal government has done well in forging ahead with the national broadband network, it has not considered the other key ingredient. "At the federal level, I don't think there's enough focus on how to create that digital economy and that thriving ecosystem in the short-, medium- and long-term for this country."
Adrian Turner, the Australian founder of now US-based IT security start-up Mocana, believes the Australian government and the private sector are "asleep at the wheel" on this issue. Many other entrepreneurs expressed similar sentiments but Turner feels so strongly about it that he has recently published a book, Blue Sky Mining, which he hopes will serve as a wake-up call.
"Australia is the lucky country sitting on all these natural resources but it needs to invest aggressively to build technology-based industries while fully capitalising on the commodities boom," he says. "If it doesn't, it's going to be left behind globally in a way that's irreversible."
He says Australia needs to export more than just commodities and booze, a view echoed by Liberal MP Malcolm Turnbull, who has said figuring out why a smart country earns so little of its GDP from its own ideas and intellectual property is "the issue that keeps me up most at night". In an interview, Turnbull said he did not know the answer and invited people to contact his office with policy suggestions.
However, successful entrepreneurs tell me that simple changes could be made to make Australia more attractive to start-ups and other high-tech companies. One of the most commonly cited involves the way employee stock options are treated. The federal government has tightened the rules surrounding such options to crack down on tax-avoiding executives. This has, unintentionally, harmed start-ups, which rely on stock-option programs to attract talented staff in the early days when there is little to no revenue.
"If you want to issue an equity plan in Australia," says BigCommerce co-founder Eddie Machalaani in the company's office in Austin, Texas, "as soon as you issue stock to your employees, they have to pay tax. It's bullshit. How do you build a start-up without a proper equity plan?"
Machalaani, 33, and partner Mitch Harper, 29, have come a long way from the early days of the company, which they started in a spare room above a mate's mobile phone shop in Sydney's Rozelle. Now they have 110 staff, mostly in Austin, and plan to add up to 90 people by the end of the year. "[The government's] just not listening to us," says Machalaani. "We're all just jumping ship and going overseas and putting offices there, as opposed to trying to work within our own country."
The Federal Communications Minister, Stephen Conroy, declined to be interviewed for this story, but there are signs politicians are waking up to the importance of the tech sector and the success of our entrepreneurs. My trip to the US coincides with a federal government fact-finding mission and I am there when officials such as Doron Ben-Meir, head of Commercialisation Australia (which gives grants of up to $2 million to Australian start-ups), and Tricia Berman, general manager of innovation policy at the Department of Innovation, Industry, Science and Research, hold a roundtable discussion with Australian entrepreneurs in the valley. Both Berman and Ben-Meir say they will meet with start-ups, academics, venture capitalists and others in the US and report their findings to Innovation Minister Greg Combet. It's too early to say if it will result in new policy.
"We're doing what we can to stop the drain [and] to give people a chance to give it a real go at home," says Ben-Meir.
It's 2am and I've just arrived at the Super 8 motel in Van Horn, Texas, via StartupBus, an epic start-up competition on wheels that reaches its crescendo when 11 buses of entrepreneurs from all over the US converge on the SXSW Interactive festival in Austin. I am on the Las Vegas bus with a team of three Australians building YearInPrint, a start-up promising to preserve your digital memories by picking out your most important Facebook posts, photos and status updates and printing them in a glossy book. The start-ups form on the first day (about six start-ups on each bus) and all have just a few days to build something with enough traction and investment potential to secure a precious spot in the finals. The winning group usually receives funding to potentially turn its start-up model into a business.
StartupBus participants are either hackers (software developers/coders), hipsters (designers) or hustlers (business-development gurus), and only 290 of the 850 people who applied were selected for this particular week-long boot camp. This is the best of the best, and it is quickly apparent that I am in way over my head.
Throughout my time on the bus, I watch in awe as these mostly young whiz-kids build businesses in just a few days, running off less than two hours of sleep a night and fuelled by little more than energy drinks and the desire to make it big. They do this in conditions that would break most people. The internet on the bus is down for long stretches when we are out of mobile reception, and every day the teams are forced out of their comfort zones and made to pitch their ideas to strangers, peers and investors.
On a bus or not, the start-up life is tough, even for those who are successful. Ryan Junee grew up in Sydney's Sutherland Shire, studied engineering at the University of Sydney, but moved to Silicon Valley in 2003 to attend Stanford University. After selling his first online video start-up, Omnisio, to Google in 2008, he spent about 15 months at the search giant before he got the itch again and started brainstorming his next idea. At the end of 2010 he launched Inporia, a fashion start-up that aims to build a "taste" profile of you and recommend clothes you may like.
"If there is anything else you can see yourself doing that you'll be happy doing for the rest of your life, then you should just do that, because entrepreneurship is really a pretty challenging path to take," says Junee, 32. "You're always worrying about what's going to go wrong next, how's my company going to get over this next challenge, how are we gonna get customers, how are we gonna raise money."
I find it hard to sympathise as we sit in Junee's swish apartment on the 43rd floor of one of the tallest buildings in San Francisco. The Google payday allowed him to splash out on the apartment, spend a year travelling and relaxing, buy a black Porsche Boxster and get his pilot's licence.
"Everything in the air around here is all about entrepreneurship - at a coffee shop all you hear is people talking about starting companies; it's what people do here," Junee says.
As I am leaving Junee's apartment I notice that one of the only framed pictures he has is of the 10,000-year clock created by a group of San Francisco intellectuals to foster long-term thinking. "If you start thinking about what am I going to do that's going to have an impact on people 10,000 years in the future, that makes you think in a totally different way," he explains. "So I keep it there to remind me to think big now and then."
When I think of Texas, I picture a conservative heartland of guns, Bibles and big trucks - and the documentary Super Size Me, from which I learnt that it's also one of the fattest states in America. But Austin is a liberal-minded oasis of hippies, college students, musicians and high-tech workers where generic mega-malls and high rises have yet to overrun quirky boutique stores and small funky bars.
During the interactive portion of SXSW, Austin comes alive with music, debauchery and all-round geek energy, an electric atmosphere the likes of which I've never before encountered. There are talks on emerging technology, but most people are here to get pissed, party and network with the who's who of the tech world. The geeks are soon joined by the film buffs and the musos, and this year everyone from Jack Black to Bruce Springsteen to Kanye West appears. No one gets much rest.
"I've had no sleep at all for the last 30 hours," says Matt Barrie, the Australian CEO of the world's largest outsourcing marketplace, Freelancer.com, as we ride the escalator up to the green room at the Austin Convention Centre before he delivers his keynote speech on "The Next Big Thing".
Despite his lack of sleep, Barrie turns it on and has the confidence and intensity of someone who is crazy enough to think they can change the world - and he's doing just that. Barrie, who runs a global network of 3.2 million freelancers from a relatively small office in Sydney, has an enviable life. In the green room, he tells me about his adventures touring the conference circuit in places like Chile, the Bahamas, India and the Philippines, where he was greeted at the airport by a police escort that whisked him through oncoming traffic (he had footage on his iPhone to prove it).
Barrie says internet start-ups in Australia are "booming" and US venture capitalists are splashing the cash around, but our education system is still not churning out enough engineers (he says high school IT classes are a "joke" and focus on "flow charts and stuff we haven't used since the 1960s"). Another "big problem", he says, is that the engineers we do have are increasingly starting their companies in the US from day one.
Barrie is on the NSW government committee that is drawing up a 10-year blueprint for the digital economy, but he's tossing up quitting the day we meet. Worryingly, he says the committee is more focused on infrastructure and the film industry than on how to build a vibrant tech start-up scene in Australia.
"When I think about the digital economy, I'm thinking about what we can do to boost the technology industry in Australia," Barrie says. "When I see paperwork come across where it says there's an initiative in Parramatta to install smart traffic lights that we should roll out across the country, I'm like, 'What is this? What are we doing here?'
"I just don't think it's the right way to think about building a digital future for the country."
As 99dresses' Nikki Durkin puts it, she loves Australia but Silicon Valley is "buzzing with this start-up energy", the market is a lot bigger and it allows her access to mentors and connections.
The bottom line? "I want to build a billion-dollar company," she says, and that's not going to happen in Australia.
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