Getting into the big league

A brilliant concept may come easy. Transforming it into a successful business is the hard part.

Sandra Jobson examines a program which helps start-up technology ventures come to market.

One of the significant lessons to emerge from the dust of the April dotcom shakeout is how ill-prepared many, or even most, Australian IT start-ups were for the grown-up world of corporate reality. A recent joint study by the Australian Stock Exchange and the ASIC of 20 listed Australian IT companies revealed a woeful ignorance of the basics of good company disclosure, and – worse – many young IT companies appear to be completely unaware of even the existence of such basics. The ASX-ASIC report expressed concern that some directors did not know that they had to keep the market informed should the business not go as well as anticipated. Other failings noted included shortfalls in profits predicted in prospectuses, and, in some cases, failure by directors to meet regularly and to keep proper financial records (one listed company prepared its figures on the back of an envelope). Yet nobody should be surprised at this. It is of the very nature of the heady entrepreneurial environment of IT and the new economy. (It isn't just an Australian phenomenon. A recent report from Wall Street indicates that 80 percent of US IT listed companies are still, post April, burning more cash than they earn.)

The typical scenario goes something like this: some 23-year-old techie comes up with a truly "new new thing". It's a brilliant concept and venture capitalists love it. The techie's company structure is minimal. His board consists of him, his dad and mum, and a family friend who's been in marketing for a plastics company. They don't get together for a board meeting too often. Mostly they e-mail each other, or chat on the phone. Our young techie is usually working through the night on his programming and sleeping half the day, so there's little chance of seeing him in person. He has graduated from university with honours in computing science, but has had no training in how to run and grow a company or how to manage its finances. But things are moving fast. A venture capitalist has latched onto him and found some initial funding, the techie moves out of his room in an inner city terrace, rents an office, takes on some programming staff, buys a laptop or two, gets a car, hires a receptionist, and starts writing a business plan. The blue sky is seductive, and the business climate is hot. In the company's initial public offering (IPO) the shares are oversubscribed, the techie is worth millions. Come April and it all goes down the gurgler. It's an all-too familiar story.

But although many were singed in the IT meltdown the start-up phenomenon is still out there, with a recent Yellow Pages survey indicating 8 percent of the Australian population is now involved in new business start-ups. So what is to be done to create a more dependable and responsible IT sector? ASIC director of markets Claire Grose says: "Inexperienced directors may need to obtain advice to ensure they are meeting their obligations. It is essential that we continue to raise levels of awareness in order that all listed companies meet the high disclosure standards set by the ASX." Quite so, but many corporate experts believe that Australia will need to do a great deal more, starting at school and then university level, to educate young people in how to run a successful start-up company. Fund managers, too, need to look more carefully into the management structure and techniques of the new breed of start-ups. One expert in the training field is Carmel Timmins whose company, Opportunity Coaching, acts as a "personal trainer" to SMEs. Timmins, who spent eight years as a consultant to small business in Queensland followed by two-and-a-half years with AusIndustry with a portfolio of 20 Tasmanian SMEs (with turnovers ranging from $150,000 to $2,000,000) is adamant that a professional board of directors is essential.

"Too often young companies have boards made up of family members, and it doesn't work," she says. "Dad may be a successful, semi-retired businessman, but he comes from the old economy. He may urge his son to go out and knock on doors and sell, sell, sell – but the new economy is different from the old, and old sales techniques don't necessarily work in that very new economy." She also sees many companies making the error of appointing their lawyers and accountants to their boards. "The danger here is that these family advisers will continue to see the company only from their own narrow perspectives. Timmins believes it is better for a board to be made up of representatives with experience in the five areas she believes are essential for a successful business: financial, human resources, operations, marketing and publics (shareholders and suppliers). She stresses the need for these five areas to be properly addressed by the CEO. "Too many IT start-ups concentrate on the short-term grab for funding instead of building a stable management structure," she says. "Too many business plans are going for the fast buck."

The choice of a balanced board is one of the many requirements encountered on the road to IPO, says Andrew Randall, former vice president in charge of setting up a mezzanine equity division at Citicorp in Melbourne. He is now managing director of technology investment advisory group/bank, Obelisk Capital, currently involved with 18 IT start-ups, five of whom have now been IPOed or back-doored into a public venture. He believes Australian technological start-ups have a far tougher time than their US counterparts because large companies here do not have the same interest in taking up new technology companies and nurturing them. He also believes that a high-profile chairman, preferably with previous public company experience, is essential if a start-up is to develop into a responsible and efficient public company. "The chairman must be someone who can coach the CEO, as many young executives have little managerial experience," he says. A strong company secretary or chief financial officer or maybe one-and-the-same, is also essential, Randall says. He also stresses the trauma which a start-up company must endure while getting ready for IPO. To IPO or not to IPO is a question he thinks all start-ups should ask themselves. "An IPO is a huge and time-consuming effort, and going for an IPO often takes the young executive's eye off the ball, causing the company's core business to languish."

He also thinks that IPO often makes it tougher to manage the growth of a young company – everything must be attributable to the shareholders, which means that the directors cannot make decisions as quickly as they did before going public. An additional stress factor is the constant threat of corporate take-over, which, he says, can cause a state of continuous mild panic at the management level of a young IT company. There is also often a problem with the CEOs of start-ups. They may be introverted entrepreneurs with a skill in a technical area, but without a broad vision of how to run a company. In other cases they are colourful characters who want to run the whole show. Very few such extroverts take a role out of the limelight allowing a more competent manager to take over, he says. Some may learn enough about management to continue to control the company they started, but most do not. And if they don't learn and are forced into appointing a strong general manager, they risk losing control of the company they started.

The young CEO of one of Andrew Randall's Obelisk crop of IT start-ups, David Peters of Emagine, is aware that when his company goes to IPO (in about 18 months) he might well not be the ideal CEO. He is prepared to take on another role in his company if his board decides he's not the man for the job. "Though I think I will be the right man for the job," he adds with confidence typical of a young IT entrepreneur. Coming from a telecoms marketing background, Peters has developed a software and training product to help telecoms cut down churn (the problem of customers moving from one company to another). He has already landed a contract with Australian telecom, Dingo Blue. Peters first met Randall on the basketball court at the Australian Technology Park (ATP) in Redfern, Sydney, where his fledgling Emagine is part of the ATP's Business Incubator Program, one of the longest-established business incubator programs in Australia. One of the benefits of being part of such a program is "serendipitous propinquity" which allows a young entrepreneur to rub shoulders with a consultant such as Randall. Peters and Randall hit it off from the start and Randall is now chairman of the company. Having raised $450,000 in the first round of fund raising, they are now planning to raise $3.5 million.

Peters says there's a big danger in a start-up getting its hands too early on much-coveted cash. There is a big temptation to go out and spend it rather than using the money wisely. "I've seen it too often, " he says. "One minute the company is struggling, the next it starts buying plush carpet and luxurious furniture." The ATP Incubator Program has helped him prepare for growth and to avoid the pitfalls into which many other start-ups have fallen. The program provides free financial and legal advice to the 40-odd incubatees in the program by Deloite Touche Tohmatsu and Freeehill Hollingdale & Page who are sponsors of the program. Regular talks and workshops are held where experts from outside the ATP and executives of more senior companies in the ATP share their experience with the incubator companies. Peer group mentoring is also an important ingredient says Stan Jeffery, general manager of the Incubator Program. "It's like a pod of dolphins. One dolphin is a nose ahead and the others learn from him."

From his experience of running the program, Jeffery feels it is better for start-ups not to have funding – at least in the early stages. "They should learn how to do it on their own," he said. "I know of one company that started out here which is now highly successful but in their early stages they had to sell the family car to survive. They learned from that experience." Building a network of contacts is a vital key to start-up success, Jeffery maintains. In pursuit of this aim, he has established links with Stanford University in California, step-off point to Silicon Valley. This year he accompanied one of the ATP incubator companies, Sydney Worldwide, to Stanford to compete in a global competition for the best student business plan. Competing against teams from 120 countries, the Sydney team won, with a prize worth $US150,000. They also made good use of their time at Stanford, building contacts with US firms. His link with Stanford has taught Jeffery a lot about the American business ethos. "The Americans have a different attitude to failure than we do," he says. "In America a business failure is not regarded as the end. A failure shows you've had some experience – and took the risk."

(Jeffery, who has been headhunted by the Malaysian group, Renong to become CEO of Optixlab, the group's Technology Incubator, will continue to act as a consultant to the ATP program and will commute to Sydney regularly.) Recent major changes at the ATP may affect its Incubator Program. The Carr Government, in the shape of the Sydney Harbour Foreshore Authority, has taken over from Australian Technology Park Sydney Limited as the chief landlord. ATP Sydney Limited, a not-for-profit company chaired by John Conde with a board consisting of representatives of the three participating universities (UNSW, University of Sydney, and UTS) and private sector interests, has now been disbanded and a new company, ATPU (the "U" standing for "universities", of which there is an addition, ANU) has been formed. It's main role is to run the Incubator Program. Some critics believe the universities are not the right people to run a business incubator program, pointing to some struggling university in-house business programs. Even in the USA, Stanford University failed to recognise the potential of a backyard start-up called Hewlett-Packard. "The role of the university is to teach and help foster ideas, not to run businesses," says one ATP Incubator company owner. "Academics don't have the first clue about how to run a business."

Steve Bakoos, acting CEO of ATPU, strongly disagrees with such criticism. "We regard the core business of our new company as incubation," he says, sitting in the boardroom of the newly-formed ATPU in the hi-tech National Innovation Centre at the ATP. He sees the universities possibly acting as benign venture capitalists, injecting funds into incubator companies. "We know the people far beyond the details a venture capitalist reads in a prospectus," he says. He also defends the right of universities to get something back from the investment in their students. "We nurture ideas but as soon as the student graduates, the idea goes out the window," he says. What he sees in the Incubator Program is a reversal of the brain drain the universities presently experience. He wants the program to expand in the next two years from 40-odd to about 120 start-up companies in an "incubator village" and he wants ATPU to take a small equity stake in the companies. He would like to encourage non-graduate start-up talent as well, and wants to encourage those companies that emerge from the Incubator Program to stay on at the ATP if they wish.

All this remains to be seen, but one thing is certain: the ATP program and other similar programs, if they are to do what the heads of Microsoft, Hewlett-Packard and GE are urging Australia to do, will need a lot of extra funding to provide a lot of education, and Australia's income tax system will need to be changed to encourage hi-tech talent to stay in the country. Otherwise, the wannabe IT IPO will wither on the vine.

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