Australia’s new dot com boom – and why it’s different

It’s the sort of spending spree that’s bought back memories of the dot com boom. In the last six months, a host of local and overseas investors have poured more than $300 million into 18 of Australia’s leading web start-ups.

But there is one very important difference between this spending binge and that which preceded the dotcom bust in 2000 – most of the companies are already making money.

The frenzy kicked off when Australian wiki software maker Atlassian attracted US$60 million from tier-one US investor Accel Partners in July last year.

Since then, the Melbourne-based website RetailMeNot has been snapped up by US company WhaleShark Media for close to US$90 million, and local deal-of-the-day site Spreets was purchased by Yahoo!7 for $40 million.

The members-only online shopping club OzSale received $14.5 million from New York-based investors Insight Venture Partners in August 2010, and Accel Partners’ made a second investment of reportedly $70 million or more into the Australian online exchange payments service OzForex in November 2010.

All of these companies were turning over strong revenue at the time of acquisition – in the case of Spreets, its monthly revenue had grown from nothing to $4 million in one year.

The national leader of Deloitte’s technology, media and telecommunications team Damien Tampling says the Atlassian investment showed foreign investors that Australia had both talented entrepreneurs and a welcoming business environment.

“So when they look through their own criteria and look at things like stability, economic prosperity, and even just innovation, then there are probably a lot of boxes that get ticked,” Tampling says.

And with Australia’s ecommerce sector now accounting for around 7% of retail spending, ecommerce companies are large enough to attract the attention.

“They are now at a point where there are enough people in the databases and enough people going to the website that it’s meaningful,” Tampling says.

He believes the Australian ecommerce and media market will remain active for at least the next 12 months, with the potential for transactions relating to media rights, and also in the telecommunications sector as the National Broadband Network progresses.

Australian investors are also more active, with Melbourne-based investor Adrian Vanzyl and partner Stuart Richardson creating a $40 million fund using the federal government’s Early Stage Venture Capital Limited Partnership (ESVCLP) model.

The new fund will invest amounts of between $500,000 and $5 million. Their goal is to have identified and made initial investments in the bulk of the funds recipients in its first two years. Grollo Australia director Lorenz Grollo has signed on as cornerstone investor.

The fund has not yet closed, but has already made its first investment in mobile applications developer Mogeneration. Two more deals have been signed, and two more are awaiting approval.

Lower start-up costs

Vanzyl says activity in Australia is mirroring changes in the US tech scene, albeit with a two year delay. For starters, he says new companies are much cheaper and easier to launch.

“You’ve gone from fixed upfront hardware costs to variable, highly-scalable costs with Amazon’s cloud and others,” Vanzyl says. “This means not only are you capital efficient when you start, but you can scale if the business is one of those lucky ones that take off.”

The availability of robust open source software further reduces the cost of getting started.

Vanzyl’s partner Richardson was also responsible for raising a smaller fund for Sydney-based internet technology incubator Pollenizer. The fund has the backing of 17 angel investors and has invested in four companies, is working with two more, and intends to invest in another four before June 30.

Pollenizer cofounder Mick Liubinskas believes that recent activity is partly due to the hard work of people who have helped build the Australia start-up community.

“We’re just hitting out straps, and that is nicely combined with some other factors, including the Australia economy being strong,” Liubinskas.

“We’re seeing a lot more companies graduate from nice little ideas into good business, because these entrepreneurs who have done a couple of laps are putting in a bit of money and a lot of brains, and it makes a big difference.”

One of those is Niki Scevak who spent several years in New York before returning to Australia in 2009 and was instrumental in the formation in August 2010 of Start Mate, which is a group of start-up executives offering mentorship and seed funding to Australian internet and software businesses.

Scevak says that despite the recent flurry of activity, we are not heading for anything like the dotcom crash of 2000.

“There will always be bubbles,” Scevak says. “When innovation happens, people often get ahead of reality.

“Venture capital is still a fairly new industry. In terms of learning and adapting to the market it has certainly undergone a great change since the mistakes of the late 1990s. What’s happening now from an investment point of view is that the amounts are being matched with the risk profile in a much more appropriate way.”