‘I don’t like the unicorn label’: For some start-ups, $1 billion is not as cool as it once was

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Benjamin Humphrey is pleased that his Sydney start-up Dovetail is not quite worth $1 billion. A recent $US63 million ($87 million) round of capital raising valued the company, which makes a platform for analysing and collating research data, at just over $US700 million, or about $26 million Australian dollars short of the storied nine-figure number.

“It’s intentional,” Humphrey says with a laugh. “I don’t like the unicorn label [applied to the once-rare tech companies worth more than $1 billion] that much.”

Benjamin Humphrey, a co-founder of Sydney start-up Dovetail, had the pick of VCs to invest in his company. It is far from a universal position for a startup to be in.

Benjamin Humphrey, a co-founder of Sydney start-up Dovetail, had the pick of VCs to invest in his company. It is far from a universal position for a startup to be in.Credit:Peter Rae

The company’s value, in Humphrey’s eyes, can be divided into all the boxes it ticks: happy customers, a good product, quick growth and two founders who have previously worked at Atlassian, Australia’s best known homegrown technology company.

But there’s also the frothiness of the venture capital market that has propelled the capital raising success of Dovetail and other local technology start-ups.

“At the moment, venture capital is in a very strange spot because there’s so much money around because of the way the economy is and interest rates and so on,” Humphrey tells The Sydney Morning Herald and The Age.

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In other words, money is cheap, returns on many traditional investments are relatively low and so investors, whether superannuation funds or the offices of wealthy families, have been flocking to technology companies long before they list on public markets to get a good return.

The interest in local start-ups has triggered a corresponding surge in the number of venture capital firms in Australia. Those VC firms exist to channel money into early investments in companies with the potential to generate spectacular returns if they become the next Facebook or Amazon. They also cover the costs of the sector’s many failures.

There’s Blackbird, founded in 2012; Square Peg, founded the same year; and AirTree, which began its first fund in 2014. A new wave of much smaller firms, such as Galileo Ventures and AfterWork Ventures, has sprung up in recent years to make even earlier investments than the bigger players. Then there are companies offering crowdsourced equity, such as Birchal, and financing for start-ups, such as Tractor Ventures.

Start-up founders who once had to beg for money to grow their nascent businesses are the beneficiary of this cornucopia of capital, with the top flight of founders being able to take their pick of investors in Australia and overseas.

Market tracking data, seen by this masthead, shows about 100 venture capital investments worth about $200 million into Australia-headquartered companies in 2015. By last year that had ballooned into more than 450 deals worth a combined total of more than $US5 billion.

“Capital is an absolute commodity in 2022,” says John Henderson, a partner at large local venture firm AirTree. “And the best founders have more choice locally and internationally than they’ve ever had before.”

Henderson remembers spending many months speaking to the co-founders of the Melbourne-based Linktree, a company that allows social media users to create simple landing pages with links to all their other work, before they let AirTree invest. Millions of users were already adding its “link in bio” to their social media pages and it was growing at breakneck speed.

“It’s a stunning business,” Henderson says.

Dovetail’s Humphrey was uncertain too about taking venture capital money, wary of an industry framed in the popular culture by TV shows like Dragon’s Den and Shark Tank and known for some high-profile but rare clashes with founders.

“I think that there are a lot of terrible VC firms,” Humphrey says.

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But he has come around to the industry as a whole. “Their reputation is kind of built in buckets, but lost in a drip.”

In the United States, the co-founder and former chief executive of Twitter, Jack Dorsey, has led a crusade claiming the investors have too much control of crypto-based companies, which present a sometimes utopian view of the world based on decentralisation.

Nothing so high profile, or plainly ideological, has happened in Australia.

But when another local start-up founder labelled venture capital investment house Blackbird “greedy” in a widely read social media post earlier this month, Humphrey stepped in to question the criticism, suggesting it was unwise for the other man to play out his complaint in public.

“I think I’ve gotten pretty good nowadays trying to pick who is actually interested in us as founders and the team and the culture of the company, and not just making a quick buck,” Humphrey says.

Accel, a major Silicon Valley venture capital firm, led the investment into Dovetail’s most recent round, with Blackbird and another American firm, Felicis, also contributing funds.

So why take the money?

Humphrey, who says his company is close to profitability, wants to expand Dovetail’s current offering of software to let organisations analyse their research data on customers (which already ranges from Australia Post examining users’ experience with parcels to the UK Ministry of Justice working to improve prisons by speaking to former inmates) into something much larger.

One day, he hopes, a company’s full suite of research data from social media feedback to surveys will flow into Dovetail.

Blackbird partner Nick Crocker says venture capital firms now have to offer founders more than money to win investments, with the firm leaning on the pipeline of talented potential hires it can offer start-ups to win them over.

“In today’s market, founders definitely hold the balance of power and that’s a wonderful thing because it’s founders who invent things, build companies, and wake up every day tackling the impossible to solve problems,” Crocker says.

Smaller funds wanting a piece of the action are being pushed too. AfterWork, which only launched last year, has made 13 investments since August, largely on the strength of the group of often young technology professionals who have invested through the fund and assist its companies.

“In oversubscribed rounds, several founders have taken a cheque from AfterWork because they value what our community can contribute to their business,” says Adrian Petersen, a partner at the firm.

But the industry is bifurcated. Founders that do not tick the same boxes as Dovetail, or who are seeking funding much earlier, must try much harder to get investment. For their start-ups, it can be an existential question because they need funding to hire staff and lure customers to get their businesses to a viable scale or beat rivals.

Betty Andrews, the founder of a marketplace for new age services such as mystics and tarot readers called Woo Woo that plans to launch its app in April, has sent hundreds of emails seeking investment and so far received about $250,000 in verbal commitments out of a goal of $1 million. Her pitch is not that investors should necessarily believe in energy healing, but that there is a huge market of people who do.

Venture firms have been wary, with some in the industry telling Andrews, who is closely involved in the Sydney start-up scene, that overseas funds in places such as the US are more willing to invest in the very early stages of a new company.

In the US though, Andrews says, the problem is getting in the door. “It turns out culturally, you’ve got to really know someone who knows someone to introduce you.”

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In some ways, relying on networks and previously successful founders is sensible for venture capital firms because, in a world of speculative investments, experience is at least one guide to a good investment. The big firms also argue that treating founders right is what will get them future deals.

But women, and especially women of colour, can have a particularly hard time convincing investors that they are worth supporting in the first instance, Andrews says.

Despite the challenges, and characteristic of an industry that venerates hustle and persistence, even in the face of blunt scepticism, Andrews is optimistic. VC funds, she says, are improving and her business will succeed regardless of their participation.

Justin Wastnage is the founder of a video crowdsourcing platform called Vloggi that has raised some capital but is in the market for more. His company does not have the recurring revenue to attract most venture capital firms and he agrees that other early stage Australian investors can be more cautious than their overseas counterparts. He attributes the wariness in part to regulation, but also disposition.

“Australia tends to be five or six years behind the US and Europe in most things,” he says. But Wastnage will not be deterred; he believes in his company based on the growing use of video across industries and is determined to make it work, no matter how many exhausting meetings, pitches and Zoom calls are required.

Some smaller funds are stepping into the breach. Galileo Ventures, which closed the first tranche of its first fund in 2020, makes a virtue of investing in non-traditional founders and being their first investor.

“Especially in Australia, if it’s an unproven team in building a tech company sense, then it’s very difficult to raise money here,” says Galileo partner James Alexander.

“We’re in the business of creating more entrepreneurs rather than funding only people who are really suitable right now.”

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