Financial advisers, and mergers and acquisitions experts are predicting a mini dotcom boom in 2014 as low returns on cash holdings and unstable equity markets force venture capitalists and wealthy individuals to consider alternative high-growth sectors.
“There’s a lot of cash chasing quality assets at the moment,” said Deloitte’s new Asia Pacific head of M&A Ian Thatcher. It coincides with “increased earning pressure on corporations for future growth”, Deloitte global head of M&A, Tim Mahapatra said.
“More established businesses need access to technology to digitise their business,” Mahapatra said.
He believes this will drive a higher level of investment in tech start-ups by corporations in specialist niches, rather than big public floats.
“It’s a sellers’ market,” said Carl Hartmann, co-founder and chief executive of online logistics company Temando, which has grown from zero to 100 staff globally in the last five years.
“Money’s actually pretty easy to find. It’s about finding smart money,” he said.
While VCs look for management with a proven track record, start-ups are increasingly picky about who they accept capital from.
The right VC partner can facilitate introductions, give a start-up credibility and attract higher-quality board members and advisors.
“There’s an ecosystem that comes with an investor. That’s what really catapults a company like ours,” said Hartmann.
Dean Kelly, who quit running his Zanui online furniture business last week to launch a new social media mobile app, agrees.
The new “HeyLets” app launches later this week, but already Kelly’s had two offers, both over $100,000, from wealthy friends keen to get in at the ground level and ride the growth.
“These were just coffee conversations, I wasn’t looking for cash from these guys, I just showed them the app. Their confidence in technology is high,” said Kelly. HeyLets is looking to raise Series A capital of about $2 million in the next three months. In all likelihood, it will come from the United States.
Although Kelly is in discussions with two Aussie investors, he’s taken calls from another five US VCs. The Americans are offering between $1.5 million and $2 million, and applying superior valuations to the start-up.
Kelly said Australia has developed a reputation for successful technology start-ups, and valuations are quite high in the US, so investors are looking elsewhere, in Australia and Europe.
The pending mini dotcom boom will be substantially different from that of 2000, experts say, with less money squandered in unproven “vapourware”. “Investors are looking for real business models, real revenue and [concepts that are] scalable,” said Hartmann.
There are exceptions – such as the ambitious values being applied to Instagram and Snapchat – but they are not the rule, said Kelly.
He believes the current availability of capital, searching for high-growth tech investments, dovetails with a new breed of entrepreneurs, who are abandoning solid jobs in established industries for more rewarding careers in digital enterprises.
This presents a challenge for the Abbott government and its shrinking tax base because unlike mining, farming and tourism, this highly valuable asset is mobile, and benefits from being closer to large capital markets with a bigger population.
As a case in point, HeyLets is the brainchild of Aussie entrepreneur Justin Parfitt, who lives in Silicon Valley, San Francisco.
While the new app will launch in Australia first, the bulk of the tax benefit will flow to the US, where the company is domiciled.
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