Battles and triumphs of Australian start-ups

Five Aussie businesses take us behind the scenes during the early set-up phase of their tech companies.

What's the current climate for companies wanting to start up in the IT market? Well, it depends on who you talk to. Mike Malone, managing director of QMSoftware will tell you: "It's as lousy as it ever is. Nobody ever looks forward to spending money on software." But, he adds, with a little bit of work the situation can be bettered -- showing people how much your software can help them will have a lot more impact on returns than the state of the economy.

Smartyhost managing director Anoosh Manzoori says the current climate is alot better than it was in the late 1990s. Although there is less money around, he says the technology sector can now draw upon various business and revenue models that are known to work. "It's gone back to the basic business principles."

There is little doubt that funding is crucial for people trying to create a business. Several of the executives we interviewed spoke highly of the AusIndustry commercialising emerging technologies (COMET) grant (AusIndustry provides a variety of grants and venture capital to around 10,000 businesses every year).

The COMET grant helped Sydney company SpamMatters, which started in 2003 offering antispam litigation support server and client software, get off its feet in its very early stages. CEO David Jones says his company is now applying for a Commercial Ready grant (the successor to R&D Start and certain other programs).

But Jones says that while the Commercial Ready is suitable for his company now, it is a bit more challenging to set up than the COMET grant, which is designed for early-stage companies. "It's not something you can do in 40 man hours . . . we spent up to 300 man hours on the application," he says.

Jones' comments highlights one of the biggest hurdles start ups face when gaining funding -- the efforts required to secure funding can often be greater than the return. QMSoftware's Malone agrees that government funding can be too complicated to obtain. He says that and when your focus is on writing software you don't always have the capacity to deal with the application process for funding that sits before you -- which means you need a specialist to do it. But a professional advisor can take too big a cut of the grant, he says.

With so many funding options on the platter, simply researching the various funding programs can be a distraction from getting a product out the door.

"It's a bit of a minefield," Banes says, adding that for startups, paying a consultant AU$20,000 to AU$30,000 can be out of the question. Instead, he would like to see a Centrelink-style approach: a one-stop shop for startups that could direct entrepreneurs to the most appropriate public and private bodies for their situation, whether that involves grants, incubators, or advice -- this could be most beneficial when tied into the assistance offered by grants such as the COMET one, which helps with the initial legal and financial work.

Banes also speaks highly of events such as the VC Connect ones organised by Slattery IT which bring together fund managers, venture capitalists, and startups and Malone points any new startups to their government bodies for events and help. The New South Wales government, for example, organises events such as the Australian Technology Showcase. These offer great opportunities for networking -- a great avenue for startups to find partnership leads. QMSoftware has benefited greatly from its partnership with Intersystems, for example. "It is the best partner in software you will come across," according to Malone.

Other sources of assistance include small business advisory centres. Webit CEO Felix La Spina says these offer much more help than the likes of banks beyond the credit card or real estate mortgage. He says while banks may offer a few good angles for business, startups must be cautious, because they will expect a bigger slice of the company for the cash they put in.

There are a "minefield" of options out there for startups in need of assistance, and obtaining funding is just one, albeit difficult, part. Following are five key startup examples from local companies that had the guts to start, and the success required to keep going.

SecureWrap
Established in 2003, SecureWrap provides a complete service for developers that want to protect their software through product activation but would prefer not to (or cannot afford to) build and manage the necessary infrastructure.

While other vendors offer development kits to add product activation, SecureWrap takes a client's application and adds a security wrapper. The result is returned to the client for distribution on physical media or via the Internet. The software won't run until it has been activated with a security code from SecureWrap's servers, which are replicated with full disaster recovery facilities to provide high availability, managing director Saul Midler says.

The other part of the service is a business intelligence facility that collects information about attempts to reinstall the software (legitimate or fraudulent). Most clients suffer inappropriate sharing not as a result of commercial piracy, but a lack of understanding by "common citizens who don't understand what software licensing means".

SecureWrap also collects information about the user's software and hardware environment. This is important for developers, as it provides valuable insights into the minimum level of hardware that they need to support.

"As far as we understand, no one else is doing that as a service," Midler says.

The company is targeting the hundreds of thousands of smaller developers with "very cheap" pricing -- "about the cost of a cup of coffee per copy," according to Midler.

The idea started when Midler realised he could offer product activation as a service after he met a developer who was concerned about copying. That developer's program was used in a 10-month trial, resulting in a robust, strong, simple, and well working product, Midler says. After some further research, a decision was made in January 2003 to patent and commercialise it.

"There are definite challenges in getting a company up and running," Midler says. The five people who invested in and worked on the project support themselves through other business ventures -- their spare capacity was used to develop SecureWrap.

So far SecureWrap has relied on organic growth, but limited cash flow restricts the time the partners can afford to devote to the business, which in turn restricts growth. Their expertise is in the core technology, not deal making or sales and marketing. This seems to be a common problem for startups; it's rare for a business to start with a balanced spread of expertise.

SecureWrap has been told by some that venture capital is the only way to go, others have told the company it is the worst thing it could do. The company received a COMET grant during its first year, which went on legal fees, market research, and a strategic and marketing plan.

The company is investigating other government grants but that would probably involve matching the amount awarded, so some sort of capital injection would be required to boot. "At the end of the day, it still requires us to have cash flow -- which is OK," Midler says.

SecureWrap is also exploring the sweat equity route, with another organisation showing interest in providing certain things in return for a share in the company. The problem, Midler says, is establishing exactly what it will do for SecureWrap.

Consultants have also told the company to prove itself locally before moving offshore, but there aren't that many developers in Australia. "That's one of the contributing reasons for why we're still so small," Midler says.

But internationally there is definitely an issue with software protection, Midler adds, pointing to figures that show worldwide losses of around AU$34 billion a year. "The market for us is still very strong, [and] it's very big," he says.

An endorsement for the company came from winning the 2005 AIIA iAward in the security category -- where SecureWrap's technology, marketing, and business plans were all put up to scrutiny. Now the company is hoping for assistance from Multimedia Victoria to attend a related international award event.

Webit
Webit is an established business, rather than a startup, but it has undergone a radical change of direction. Originally an event management firm, it now develops software for that industry.

The core product it produces is Webit Central, which provides fundamental event management functionality, and also includes a registration Web site builder, an online seminar system, and e-learning to assist new clients (and new employees of established customers) get up to speed. Webit has received four grants -- including an Austrade marketing development grant the company discovered while running an event for Austrade.

Webit CEO Felix La Spina says there is a lot of options available to startups now in terms of support from governments and other bodies. He says there are probably five or six others grants it could land at present, but the same story runs with time inefficiencies: "you've got to go out and get the business."

Business Solutions International helped Webit secure grants and investors, while Australian Distributed Incubators provided some funding on the basis of a presentation.

Like many startups, Webit is looking overseas for more opportunities but this poses yet more logistical problems for the company. Some of the company's old event management clients who tried out the product are now out of business and Webit's New Zealand event management operation has been losing money -- the legal fees alone exceed their revenue -- so it is now up to the local manager to look into this.

La Spina advocates a "cornerstone customer" strategy for international expansion: a substantial customer in a new market can provide enough business to justify a new office, which can then bring in more clients. This has worked in the US and Singapore, and Webit will soon expand into the UK. The alternative is to sink lots of money into a new office, and risk seeing little or no return. This is the voice of experience: Webit once spent AU$60,000 on an overseas office that generated just AU$5000 revenue.

"Try to get your business going in this country," he advises. The next step it to look for an international customer that could provide business in other countries.

"AusIndustry is probably the best place to start," La Spina says. "They're excellent if you're going to export."

And in terms of providing small businesses with support, La Spina points to the Australian Government -- "[It] is one of the best we've seen."

Also recommended is the "follow-the-sun" model -- this allows businesses to handle technical support, sales enquiries, and so on around the clock.

But Webit learnt the hard way of the importance of intellectual property (IP) protection when a former employee of Webit tried to appropriate the company's IP. "Our lawyers are very wealthy thanks to us," La Spina says.

Cleartext
In April 2005, Cleartext was re-established by managing director David Banes and his partners with a broad focus on messaging security. The company was originally formed in 1999 to develop secure instant messaging systems, but things dried up when Microsoft announced a future product in that space.

The new approach is a "'consultative sell"', Banes says, assembling world-class components for SMEs that don't have an IT security department. The initial strategy is to partner with various suppliers, but once the market has been validated and the profits start to flow, Cleartext plans to develop its own information security system.

Market validation in different sectors is important for feedback from potential customers, according to Banes. Market validation revealed that two aspects of Cleartext's proposed offering would be better sold as one because prospects didn't expect to be able to buy one without the other. In their minds, it was like offering a car and an engine separately, Banes says.

This time the company has avoided the need for major startup investment and will avoid "'traipsing around the whole [investor] community"', according to Banes. It will instead offer investors an opportunity rather than go out and asking for funding. "'We know we can produce something nobody else is doing at the moment,"' Banes says.

He sees no evidence that venture-capital backed companies are doing better than those funded in other ways and says having a good product and customers to buy it are more important. "'You need to focus on what prospective clients really want, at a realistic price point,"' he says.

Banes argues that while there are hundreds of millions of Australian investment dollars looking for somewhere to go, local investors tend to have a conservative view of startups. Furthermore, an investment of AU$500,000 in a US company has a greater potential return because it is operating in a much larger market. The only way round this Banes sees, is to make sure that you have an international product, so Cleartext is planning a Web-based service. While it was difficult to get funding after the dot-com bubble burst, Banes says he has seen the re-emergence of seed capital this year. But then again, a business that brings in revenue before outside capital is needed can often provide investors with a safer option. "'Prove you've got a real business first,"' Banes counsels, conceding that may not be possible with capital-intensive activities.

QMSoftware
QMSoftware is another company that's undergone a significant change of direction since its inception. Originally in the contract programming business, managing director Mike Malone and his business partner decided to switch to developing their own products following the post-2000 slump in demand for their services.

The company is still essentially a two-person business and both partners actively develop the software, though QMSoftware shares a receptionist and other support structures with other family operations.

The product portfolio is unusually diverse, comprising a quoting/contract management/CRM system for freight forwarders, a novel backup system, and educational games.

The QuoteMaster package focuses on written quotations and rate management. The system is still under development due to recent industry changes imposed by the government, but it is already in use by some companies. For example, EDIFACT links between the software and the Australian Customs Service will be added once the specification is finalised. QMSoftware will also add integrations with other related packages used in the industry.

Other companies have tried and failed to meet the freight market's needs and Malone says this is because a deep understanding of the industry is required to cope with rules along the lines of "X is always true -- most of the time". QMSoftware takes time to do the necessary research and "it's all to do with communication," Malone says.

Replica Backup takes an unusual approach to backup in that it uses a database as the storage medium. Eighty percent of Australian businesses are SMEs, Malone points out, and "most backup systems cost an arm and a leg". Consequently most SMEs' data is unprotected, apart from copying some key data to CD.

Replica moves the files into an InterSystems Caché database, compressing and encrypting them in the process. That database can be stored locally or on a server. Either way, it can then be replicated to a remote server for security.

This approach has several advantages. Backup can occur as frequently as you like -- even every 10 minutes -- and only the changed data is transferred, so the process is quick and provides access to successive versions of the file without requiring huge amounts of disk space.

When used with a notebook computer, the user can check confidential files out of Replica as they are needed and then check them back in again when the task is complete. If the computer is lost or stolen, the data is protected from prying eyes and -- as long as it has been replicated to an external server -- it can be recovered quickly and easily.

What all of these products have in common is that they're all different to other products in the same market.

"They're definitely not 'me too' products," Malone says. "We looked for opportunities to have a significant point of difference," but he adds that's not easy if a company limits itself to a single industry.

"You couldn't afford to do it [with a larger development team] -- the risk would be too high."

SpamMatters
In 2003, SpamMatters CEO David Jones and a business partner realised that spam and Internet crime were merging -- so they developed a system that would help track down spammers by handling reports submitted by the public to the Australian Communications and Media Authority.

The software automatically collates reports and assigns them to existing cases, and provides ongoing management of that information. The company hopes to sell this system to enforcement agencies overseas.

Jones, who previously founded an e-mail filtering company that was eventually sold to SurfControl, says SpamMatters is also developing an appliance for the corporate market that will provide faster protection against mail-borne malware than is offered by the antivirus vendors. The initial target will be 500- to 5000-employee organisations, but Jones says the technology will ultimately have application right down to the home market.

Without giving too much away, he says the new system will collect information from honey pots and spam traps as well as human reports, using forensic processing to detect malicious code and sites, phishing, spam, and other e-mail-borne activity.

The flagship product is expected to ship by the end of 2005, with additional announcements through to September 2006.

"There's a vibrant venture capital market locally, and we have venture capital funding," Jones says. Although he adds that the local environment is "challenging", especially when you look at the amount of investment money available to US startups. "At some stage you have to have a US presence to attract customers and investment."

But it's a two-way street: the level of venture capital activity in the US brings in more competitors much faster than in Australia, which makes it harder to break though the market noise.

While exports may be an important part of growth Jones says the founders need to be very focussed on establishing a foothold with customers in Australia before looking overseas, as satisfied customers and proven products generate credibility, while domestic profits can be invested in the development of new products. Globalisation means people are making buying decisions largely on brands, so it can be hard for a new Australian company to break through.

Jones says starting a technology company "is very tough, it needs a lot of commitment, and you need good quality people."

This article was first published in Technology & Business magazine.
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