A little more than a year ago, our freshly anointed Prime Minister, Malcolm Turnbull, announced he was ushering in the ‘ideas boom’. The startup community lauded the government’s innovation agenda as transformational. So was 2016 a big year for Australian startups? What changed, what can improve and where are we, as a tech startup community, headed in 2017?

As a founder of Australia’s fastest growing legal services business which focuses particularly on assisting startup clients, I’ve seen three key themes emerge:

1) the scaling of Australia’s VC Ecosystem
2) the partial commoditisation of the capital raising process, and
3) regulatory acknowledgement of the startup sector.

Scaling of the VC Ecosystem

Throughout 2016, we’ve seen VC firms raise significant funds including AirTree Ventures who raised $250 million – Australia’s largest fund yet. It’s fair to say that the Australian VC ecosystem is now big enough that startups with a strong founding team focused on a big market can raise capital in Australia. This was certainly not the case even two years ago.

It’s also worth noting that alternative forms of venture funding have emerged over the course of 2016 in Australia. Venture debt is a form of finance that bridges the gap between traditional bank lending and venture capital. Recently, US venture debt shop, Partners for Growth, set up an Australian office. I firmly believe there’s a huge opportunity for alternative debt finance in Australia. The fact our ecosystem is attracting such cutting edge US investors is really promising.

Partial Commoditisation of Capital Raising Process

LegalVision works on more Seed and Series A capital raising rounds than any other law firm in Australia, so we get how deals are negotiated and settled. Throughout 2016, we saw more and more investors and startups choose to use AVCAL’s open source seed financing documents. Using these documents as a starting point has significantly reduced the cost (in lawyers fees!) of closing a Seed or Series A round.

It’s also worth mentioning that we see more and more startups use SAFE (simple agreement for future equity) investment instruments rather than convertible notes when raising early rounds or bridge rounds. SAFEs are similar to convertible notes in that they allow a startup to delay setting a valuation, but are subject to less regulation, don’t create a threat of insolvency and generally ensure a cleaner cap table. It’s great to see the Australian ecosystem using innovative financing structures where appropriate.

Regulatory Acknowledgement

It’s fair to say that regulators don’t bother regulating insignificant industries. Over the course of 2016, we saw some regulatory activity in the startup sector but how it will affect the ecosystem remains unclear. Regulators, however, have acknowledged that tech startups are important enough to regulate.

A good example is the ACCC’s recent guidance on the sharing economy. Australia’s consumer watchdog decided to wade in and guide sharing economy businesses (i.e. online marketplaces) on their legal obligations as businesses. Essentially, the ACCC has indicated that sharing platforms must comply with the Australian Consumer Law, just like any other business. Although the guidance itself is uncontroversial, the interesting point is that the ACCC bothered investigating the issues and issuing some guidance. Startups have gone mainstream.

***

2016 was big for tech startups and set the scene for what we can expect this year. The ecosystem is maturing, and that can only be a good thing. In the medium term, for startups to become a significant contributor to the Australian economy we’re going to need to see some successful exits – the big funds raised by the likes of Blackbird in 2015 and AirTree in 2016 will need to generate a return for their investors. We need another Atlassian, and more founders in a position to give back to the startup ecosystem. Let’s hope we continue the great work in 2017!

Think we’ve missed something? What do you think will shape Australia’s startup scene in 2017? Let us know your thoughts on LegalVision’s Twitter page.

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Lachlan McKnight
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