Matt Barrie on the evolution of the startup ecosystem from a unique vantage point
As CEO of Freelance Limited, Matt Barrie overseas the management of both freelancer.com, a service through which 54 million freelancers offer every type of service you can possibly imagine, as well as escrow.com, a global payment system that’s done 5 billion US dollars in payment volume. Freelancer Limited opened on the Australian Securities Exchanged at an incredible 1.03 billion US dollars market capitalisation, making it one of the biggest openings ever on the exchange. In this episode Matt tells the story of the growth of the Australian startup ecosystem as he has seen it from his unique vantage point, and why he believes aspiring startup founders would be best to first work for a company they admire for a year or two before starting their own venture.
Matt Barrie: My name’s Matt Barrie, I’m the chief executive of Freelance Limited. We’re an ASX listed company that owns freelancer.com, which is the world’s largest crowdsourcing marketplace by number of users, we’ve got 54 million freelancers that can do any job you can possibly think of through the internet and also escrow.com, which is a global payment system that’s done 5 billion US dollars in payment volume.
Adam Spencer: So when would you say, what year and what was the catalyst for you jumping into this space?
Matt Barrie: Let me tell you, when you went through university in the, actually go back to school years, right? So, you know, I went to high school from 85 to 1990, and the concept of even working in technology was completely foreign. We’ve got this whole system in Australia, it’s a gamified leaderboard for your final mark from high school.
And that gamified leaderboard says medicine and laws at the top. And if not, maybe go start a business of some sort, but it’s not technology. And so, you know, when I was in my final few weeks of the high school system I didn’t even know what the word engineer meant.
Someone’s dad came in and just talked in the chat session in careers day, not as a formal talk, but just said, I’d talk about engineering here. Let me do what engineers do and solve the world’s problems using technology. That was the first time I really heard the concept of the technology space at all. And then, I sometimes go to career fairs, and the kids still think engineers have something to do with driving trains and don’t really know how to, they can’t piece together the curriculum that they’d been taught, which is 18th century, 19th century.
So broadly, I don’t think that much has changed although kids are using technology a lot. But you know, when you went through university in the early nineties, you know, I was there from 91 to 96, no one was talking about starting their own company. I did start my own company, it’s really a product company, just for a bit of extra pocket money.
I started the company printing mouse pads of all things, you know, and it really came out because I had a few friends in a room. He said, gee, you can make money doing anything, you can make money picking up garbage, and I just said, pointed randomly around the room, we can make this. And I just pointed, randomly at the table and it was a mouse pad and I said, why don’t we print them?
But no one was talking about that. The pinnacle career for technology back then was go and do advanced study, getting a PhD and then becoming a professor. And that was basically the career track of technology, whatever I was doing, however, was contracted.
So everyone in the 94, 95, 96s was contracting, which is effectively freelancing for other people’s companies. And people were talking about, making a hundred dollars an hour or $200 an hour or whatever it may be. But that’s what everyone was doing, and you’re working on someone else’s business doing some sort of software.
But it wasn’t really, the concept of startups was still very foreign. I went to Stanford in 97 to do a master’s in electric engineering. And let me tell you, that was when people were just starting to talk about these sort of things. I remember opening, I think, Wired Magazine, it was talking about the concept of a venture capitalist, and these are people that fund people who’ve got crazy ideas to go and start technology driven businesses. And I thought this was just incredible.
And then when I got to Stanford, that was really the start of the big.com boom, where obviously there’s a history before that with Hewlett Packard and Sun Microsystems and so forth, but, or some actually was probably around contemporary the time, but it was just starting to get going.
Yahoo had started Excite had started and I walked into the first class I did, which is called technology entrepreneurship, IE273 and 40 people in the class, 10 teams of four people, CEO, CTO, head of sales and marketing and a CFO. And you have to basically come up with an idea, working on a business plan for the class and pitch it.
And I cut a very very long story short because I know we’re gonna talk about the Australian ecosystem, but, at the end I ended up pitching a product, which ironically in 1997 was Google Maps effectively on the Apple iPhone showing you where you are and context specific information.
So for example, if nighttime, it’d say here’s a local bar, so it’s advertising basically on Google Maps. Back then there was no Google Maps, there was no GPS chip that would actually fit in the phone. There was no Apple iPhone, and there was no wireless network that could actually carry the data.
So we had to design all of that, but that was really, that time was really the genesis. And it turns out that of the 40 people in that class that have subsequently gone on to start businesses. The market capitalization from my class alone, the 40 people in my specific year only, now probably about $500 billion US.
Ken Harry came to me and said, hey, I’ve got an idea for designing, for beaming money to your friends on the palm pilot through the infrared port. Can you look at the security? And I said okay. I was doing a security subject on the danvinay, and I looked at the software and I said, there’s no securities whatsoever, aren’t you worried about people ripping you off?
And he says, for sharing money with your friends, if they’re going to rip you off, that probably shouldn’t be your friend. I said, this idea is retarded, it’s not gonna go any where. And he got Peter Thiel to be CEO, merged with Elon Musk, x.com and became PayPal.
Right? So all these people in that class were sprouting sorts of businesses. Now that wasn’t happening in Australia at that time. And I stayed in the Valley 97, 98, 99 came back 99, 2000 and you know, Sydney was taking off cause you had the Olympics. And so it was exciting, we’re finally becoming a world city.
And really the guys who really got everyone excited about startups I think the first guys who really got them excited, there were some VC funds that were trying to get going and at this point in time, there were no real successes, not like it is now. But the guys who really got everyone excited, I think were the TiNSHED guys, so Janusz Hooker, who’s actually now the CEO of LJ Hooker, it’s his grandfather company he’s bought back. He started, I think called TiNSHED and TiNSHED was like a clone or compatriot of garage.com, which was, you know, Guy Kawasaki’s business. It was basically a startup incubator sort of thing, early stage investor.
And so, you know, Viv Stewart, Janusz Hooker, and a bunch of other guys, they ran a massive conference. I remember it being run, it was about 2000 people and you had, it just got, everyone’s super excited. It was like this brand new thing to Australia where, wow, there’s all these guys starting tech companies and these people will fund your ideas.
I remember Bill Bartee came on stage, who’s obviously one of the gray head guys in venture capital. He came on stage and he said, get your mission statement. Cisco’s mission statement was, we network networks. It’s got a really clear, concise elevator pitch, going for your business.
And that was, I think those guys really lit the flame in Australia, that conference was in Sydney. It was around two thousands and that was the thing that really got people super excited. And from there, that’s when people start doing regular meetups you had the first Tuesday came along, which is out of the UK, which is a regular meetup where people would go and talk about startup ideas.
But that was really the first time in Australia that people really were thinking and talking about startups. And, at that point in time, there were a couple of venture capitalists around, in fact, it wasn’t until, none of the Australian venture capitalists ever, the Australian venture capitalists missed every single major Australian technology company until it would have been, I don’t know, I might be corrected here, but I would say the late two thousands in the first decade of the two thousands.
Looksmart was invested in by Macquarie. But at the time the VCs were very small in terms of their fund size, maybe a 30, $40 million fund would be about the size. Most of the funds were captured, so they were part of an investment bank. So Macquarie Bank would have their own venture arm and this at the other.
You had CHAMP, Council Holland Aussie Mezzanine Partners which is Bill Ferris. So I said Bill Ferris had pioneered venture capital in Australia and he had his own fund, but really up until the.com crash, every single major technology company that started in Australia had been missed.
Looksmart was invested in by Macquarie and it listed in the US then unfortunately what happened was, CHAMP sold out their holding because they said, our mandate says that when we get an exit we have to sell, which is the role of the VC, take it from private to public or an exit.
Macquarie had their capital markets team pitching Looksmart for other work to do, placements and the other, and as a result there was a lockup period that was extended on the Macquarie Bank holding and when the.com crash hit Macquarie were caught up in that. So that’s when all the venture funds started getting spun out of all the major investment banks.
They said, gee, we can’t actually, this model doesn’t work because the minute the company goes public, if we haven’t sold out completely of our holding, which is not always logistically possible we can be put into blackout periods where we can actually exit up our position and the stock could move to the downside and we won’t be able to exit up position.
So that’s when the funds all started to spring up that were, that spun out of the banks and rebadged, renamed and so forth. But even through the two thousands, I remember, my last company before this was Sensory Networks, I raised traditional series a financing to that business in 2001, it was your traditional raise $4 million in a series a, it was tranched, you know, I had multiple Australian investors in there, I had Deutsche Bank and Technology Venture Partners early on. But then eventually I collected the whole set of Australian venture capitalists.
I had anyone who had any money left, I’d taken a little bit from them. had a little bit from Allen & Buckeridge, they were another early VC that were pioneers. Roger Allen and Roger Buckeridge and David Landis, who’s a phenomenal guy backed me from the very beginning even though he didn’t have a lot of money left in his fund.
And Jeff Co out of Asia who had the remit of Asia that everything except Japan and China. And so all the non-interesting bits at the time, which included Australia and so forth. But through the two thousands, you know, you got to remember it wasn’t, it was before the whole Y Combinator phenomenon.
And so, it was very much, your series a was $4 million, $5 million. When you raise your series a, you hire a lot of people, before AWS or anything like that, you know what you want using platforms as a service, software as a service, you’ve got your own servers running in a facility somewhere, and it’s very expensive to get going and so forth.
The real renaissance, and then the whole startup thing kind of died off for a period of time, the .com crashed, a lot of people’s companies had failed and let me tell you, through the two thousands and until really the rise of sort of Atlassian and their sort of compatriots, there were a lot of startup founders who had their companies blow up.
And let me tell you, when I left Sensory in 2006, later on it exited to Intel and sold, and I was atoned for all my sins. But you know, when I left it hadn’t really set the world on fire and I hadn’t exited and trust me in Australia, when you walk in, for the next two years, just like I said to the interviewer, I don’t want to be asked about how do I start freelance because it’s been 13 years of this.
For the first two years of walking out of the startup that hadn’t set the world on fire and had a successful exit, the first question you get asked in every business setting is what happened to Sensory?
And let me tell you off the two years of that, you know, this is a dark moment in an entrepreneur’s journey where maybe you left the company that hasn’t really set the world on fire. You hired a lot of really great people, you’ve really tried, reality distortion you feel it running in terms of trying to make the business really to work, even though maybe the model was wrong.
And trust me, your first company, you get everything wrong. You get product market fit wrong, you get the wrong investors, you get the wrong business model. Like just everything goes wrong because typically the first time around you’re kind of in love with the technology. I want to do something in blockchain, or I want to do something in FinTech. I want to do something in semiconductors in my case and security.
So you’re trying to engineer, what’s a product that hits intersection of security and chips. Let’s build a security chip. And it’s, you are a solution looking for a problem. Not a problem looking for a solution, right?
So you’re always going to muck up your first couple of companies, second, third time before you really understand to get it right unless you’re incredibly lucky. But yeah, around the two thousands, tech kind of died off in a big way. Cause you had the .com crash, you know, everyone was making fun of startups. You had the dot bomb and all that.
The startup movie came out with ridiculous ideas, people ridiculing pets.com. So really died away for quite a number of years. Ironically, that’s the best time you could start a company is in the crash because your competitors are not getting financed to compete against you right.
So it’s actually a great time to start a company in that sort of environment. But it kind of died away for a long period of time. And really, the startup scene really only took off again around the global financial crisis and a few things were happening there in terms of the world.
You had an intersection of a financial crisis so people were being laid off and put out of work and stock market was crashing around the world and this and the other. So there’s three things happening there, you’ve got people looking for work, you’ve got companies looking to hire people cheaper, and you’ve also got people who are looking to bridge a period of time with a startup before they get back into a real job or before their company can function again.
So you had a lot of people, for example, out of work from the banks who were like, you know what, I will get back into banking, but I’m going to give that startup a go for a year or two, I’ll help my wife’s company or what have you, or work on a side project for a period of time before I get back in there.
But you had an intersection of the global financial crisis. You had the intersection of software as a service and AWS and so forth, just starting to come around. And you also had a very large labour pool in emerging markets come online. So for the very first time, cost effectively, you could hire a programmer in India to build a website for you for $50.
And work on that startup idea and so that the cost to fund these startups went from $5 million in series a to 20 or 40 grand. And all the stuff you needed to build an internet business was either open source or free or relatively cheap, right?
So, you know, your operating system to build a company was free being Linux. Your email was free. Your voice over IP was at a time cheap, not free, it’s free now, but it was cheap back then. Your payment system was cheap in the form of PayPal. Your advertising on Google ad words was, you know, ad words was really starting to really come of age and you can find customers relatively cheaply.
I wish I could have the economics that you’d have in the early days of these ad programs today. Now you’re kind of fighting tooth and nail. But you have this intersection with the cost of the startup was coming down. People were looking for work. People were going online for the first time, hiring people.
You had the genesis of platforms you could use very cost effectively and quickly to build your startup. And tech was starting to come back in Vogue again. And so that’s when things started to really happen. And the wave came along and in Australia, every time you go to a startup conference, they’re always like, how do I recreate?
Is this city, the next Silicon Valley? How do we recreate the next Silicon Valley? Here’s a leaderboard of cities, is Austin the new Silicon Valley? Is Miami the new Silicon Valley? All this crap here right? You need a few things to create a good environment for technology.
You need the people, critically, that go out there and take the risks that can hire to build the products and, in Australia back then you might have programmers, but you didn’t have product managers. You could have maybe designers but you wouldn’t have growth people or marketing people that really knew anything about marketing.
You need to have a good financing environment and back then it was pretty damn woeful. Nowadays, there’s some large amounts of money being raised by Australian funds and there’s a lot of investors and everyone wants to be a startup investor and put it on their Twitter profile or their Instagram bio, or what have you.
And, in my experience, great ideas, have never really had trouble finding money. It’s just that it can be sometimes a bit of effort. But back then it was just, it was a little bit harder to raise money. When I bought Freelancer I bought a website called get a freelancer to it into Freelancer.
And I was trying to raise, I think it was one, a half million US, keep forgetting if it was one and a half or two and a half million US. I think it was one and a half million US, two and a half million Australian. And, I can make the money back very quickly. I can make money back in a matter of months. And I just wanted to borrow the money in some way.
I actually sort of bus driving past and it said, Commonwealth Bank, now they’re in business loans. And I remember calling up the operator there and I said, listen, I just want to borrow a couple million bucks to buy this business. He goes, I’ve had to get a freelancer, I’ve used it. It’s great. I’ll tell my manager. And the manager goes, I know my junior guy was being enthusiastic, but we would never, ever lend you money to do this. If you want to start a news agent or a shoe store let us know we’ll lend you money. But we’ll never let you do it, never do it for a tech company.
The environment is pretty terrible. The terms from VC’s was extremely onerous. I’ve raised a lot of money from VCs. And with Freelancer I’ve decided not to do it that way. Although, never say never, there’s a few things that I have, times I have raised money, but I’ve done it very differently and the terms have got significantly better for startups than they were back then.
But back then, that was super onerous. You had every term and condition you could possibly have in that term sheet. I was getting term sheets with a liquidation preference of two, two and a half, three times, which meant that an investor puts in a dollar, they get paid back, say $2 on an exit and then they share.
The people in venture capital were not entrepreneurs. They were bankers and they were very risk adverse. And let me tell you, these terms still exist, but back then it was very onerous.
So the point I was trying to make was being a venture capitalist, if you’re not in there operating the company, and you’re a bit of a frustrated first time VC trying to operate the company and the CEO is telling you, look, I appreciate your help, but leave me alone to run the business. And I’ll come to you when I need the help.
And you’re not being beaten around the head by entrepreneurs the fact of the matter is it’s hard to say no, because you don’t want to be the person that said no to the billion dollar company so you drag them on drag them on a frustrate them right? So if you’re not doing those two activities, what are you doing? You’re building out your financial models, trying to figure out how you’re going to make your returns. How are you gonna rise your second fund, third fund, fourth fund.
And you’re just fiddling with Excel of all time, twiddling these parameters in your spreadsheet. And in the early days, cause they weren’t operators, you get phone calls, I get the phone calls from the VC saying, what exactly does Nick do? And Nick would be like the fourth founder of the business right?
And you can tell that they’re playing with a little Excel model going, I zero his shareholding, I’m gonna bump my internal rate of return by a little bit, et cetera. So I got these phone calls and so forth, but the world changed. So, you then had I think around the kind of late two thousands, you started having some Australian businesses that were of words, world scale in software.
Now, before that we had, ResMed in biotech, which was kind of interesting right? You got all these entrepreneurs running around Australia today with poor intellectual property. Let’s build an Uber for cats or pets.com for a iguanas or whatever.
And then you’ve got, all this intellectual property that’s been funded by the federal government in research institutions like universities, et cetera which don’t see the light of day because academics are terrified about losing tenure and leaving to start a startup. So at Stanford, all the guys that taught me had gone and built a billion dollar business and come back.
Mike Horowitz, who taught me design did Rambus. John Hennessy did MIPS, silicon graphics and so forth. So you had, all your lecturers have gone and built companies, and the professors in Australia that doesn’t happen, they are paranoid about losing tenure.
There’s a professor I know, he’s a genius. He’s figured out how to make effectively, ammonia, you know, just from air which is a completely innovative process. He is terrified about giving up tenure and going starting up at business that would, you know, I could help him raise the money, it’d be a billion dollar company in no time and revolutionize the production of things in this country elaborately transforming the raw materials we produce into something that’s a higher margin, higher value, I mean, but just terrified.
But you know, we had companies like ResMed where literally someone stumbled into one of the universities and said, oh, there’s some IP there that I think could be useful and went out there and built a multi-billion dollar world leader in sleep apnea but in biotech. But around the late two thousands, you started having some tech companies starting to pop up.
Atlassian started getting to be a certain scale, they’re obviously our flagship technology company in terms of size. But you had other guys kind of pop up here or there over the years. And so then the thinking started happening, hey, we can actually start building companies that are large in scale that are global.
You got your Campaign Monitors and your Kogans and your 99Designs and your Freelances and so forth. But you started having a bunch of tech companies appearing that was software in nature that would kind of, your startups of today that were of scale. And then I, and then what happened was we started having entrepreneurs start to start funds. And I remember when Niki came to me and he pitched me Blackbird, I’ve never invested in Blackbird. And I was traumatized by my experience in venture capital.
And you know, my advice to him was broadly along the lines of, don’t get involved in venture capital, it’s a terrible business. It’s a lifelong commitment. My friends that left Stanford and joined venture funds, you get carry in the fund which is your return in the fund but to see that carry, you’ve got to stay there to the exits. So in fund one, it might be a seven to 10 year horizon before you start getting the carry kicking in and by then fund two is up and running and got more carry in fund two.
When you make the decision to be a venture capitalist, you’re a lifer like lifer, lifer. And I said, don’t get venture capital. You know, you’ve got your one investment that has to stay out of the park in terms of the power law of portfolio investing in order to make a great return. Otherwise, you’ve got all these companies you are trying to manage out, which is zombie companies.
And the worst type of investing is early stage investing because in the early stage investing, your fund is small. You’re spraying a whole lot of small investments around. And the problem is you don’t have the firepower to do follow on investing. The carbon rule of venture capital is don’t run out dry powder.
If you’re investing, if you’ve managed to hit Canva or, Atlassian or what have you, you want to keep doubling down your investment. The last thing you want to do is run out of money, right? Because someone else will come in and trump you, and there’s all these nasty things that happened in the venture space, such as pay-to-play where if you don’t participate in the next round, you convert to common stock and they set the other, and kick you off the board.
There’s always stuff that, you can lose your participation rights and your dilution rights, you know, it’s the golden rule again, who has the gold rules. People coming in, you know, it can come along and really screw you over. And certainly during the first decade of the two thousands, this is what was happening consistently with Australian VCs.
The consistent model for an Australian tech company was this, starts off with Australian founders, Australian tech company based somewhere in Australia, Aussie VC will come in, give them the first 2, 3, 4, maybe 5 million of investments series A, they go to the US they raised their series B led by US investor. They flip up or otherwise known as top hat, the corporate structure to a US holding company.
The US investor invests in the company plays nicely in the first round. And then they say this company is really under capitalized. Because it is, because Australian funds didn’t have a lot of money and couldn’t put a lot of money You know, Australia, it’s a long way away, when you’re a US CEO in a US market with a US management team, right?
So the US CEO gets hired, Aussie guys go okay. You’ve been told with all the Silicon Valley mythology, go hire a CEO in, do the stuff you’re good at. You’re good at product. You’re not good at being the CEO. I think that’s complete horseshit. I think no one would be as passionate about the business other than the founders of the business.
And any hired in CEO has a different psychological payoff matrix in his head in terms of, or her head, in terms of how they get remunerated in the long-term. So what will happen is the Aussie company goes on to get the US investor in, US investor puts a little bit money in place, nicely in the series B, hires a US CEO, all the Aussie guys are behind it in terms of the Aussie VCs.
The US CEO hires a US management team, flies to Australia few times, and then decides, do I like surfing? Because most Americans haven’t ventured outside their borders. There’s a long way to come to Australia and if the CEO doesn’t like surfing and doesn’t like Australian beaches, then, you know, why would he do the trip to Australia two or three times a year?
And look back in 97, the exchange rate was, you know, got down to 47 cents or something, 48 cents. I remember because everything suddenly costed twice as much at Stanford. And then I graduated, my salary was twice as as I thought it would be. But what happened was you have the US CEO, US management team, US investors they’ve got this under-capitalized, they’ll do a big raising at that point in the series C, the Aussie guys will get completely diluted out.
And then you have a US company with a US management team, with the US prime investors, an Australian offshore development subsidiary, if the CEO doesn’t want to visit there, then that basically gets capped in terms of its growth. And then ultimately it just comes a US company and it’s often not even known it had Australian founders.
And the Australian founders can get completely diluted through you know, successive waves of liquidation preference. And that was kind of what was happening in that first decade of the two thousands. When Blackbird started, that was the beginning of a bit of a new trend.
Niki came to me, I said don’t start a venture fund. If you don’t start a early stage venture fund. Anyway, he went and did it. And I said, this is tough because you put a small amount of money in then you just don’t have the capacity to follow and I mean if you don’t have the capacity to follow you get wiped out. You do all the hard work, all the really hard work at the beginning, and then someone else takes all the glory because they just trump you with the money.
And Ron Conway in Silicon Angels won the first venture fund that he had, invested in 400 companies, including Google. And he still lost money. He lost money, even though he was in Google cause the money got sprayed too much. So you’ve got to get a return. But what happened was, I’ve seen guys started making money, they started doing investing, et cetera, and so forth.
You start having this whole wave of Australian entrepreneurs, exiting their companies, you know, having been cashed up, wanting to invest in technology, you know, Simon Clausen, did the same thing, he started PC Tools, which was basically antivirus. And then he invested in my company, and he’s been a major shareholder for the last decade. But you had all these entrepreneurial led investors coming into the market and they know how tech companies are a roller coaster.
Simon always said to me, don’t get too excited if something good was happening and don’t get too upset if something bad was happening, just keep going, So, it is a roller coaster. But that really changed things. So a lot of money started coming into the market in terms of being able to invest another thing happened, which was with the Australian Securities Exchange.
So the ASX is the fourth largest equity capital market in the world. It’s the same size as NASDAQ for equity capital raisings, but it’s mainly in resources, right? Almost all of the resources. And around 2013, there were one or two companies out there in tech, Xero was listed on the ASX.
And that was out there. And I remember, we got an offer to sell freelancer through an acquisition back in 2013. And we said, no, and we IPO’d it instead. I was always saying at the time, we created this great environment for financing resource companies in Australia, you can literally get a dog in the back of a ute and just have a tenurement, you can raise millions of dollars in mining.
And Aussie mums and dads and super funds and investors, high net worths happy to punt on mining stocks, right? This is our ethos, right? But why couldn’t we do it in technology, right? So, you know, we IPO’d the company, it was up 520% in the first 10 minutes, et cetera. And the ASX basically said at that point, it was on a mission to list Australian tech companies. And so that really around that time, it was us, but also other things were happening.
Twitter was listing in the US and Marc Andreessen was saying softwares are the new world and things were happening. And there was Xero out there on the Australian market as well. There were about a 2 billion market cap at that point. But that kind of led to a flood of listings in Australia, on the ASX for financing.
And at that point, the Australian investors had to loosen up on the terms because when you list a company, you can write your own time. There’s no preferred stock structure. It’s one share one vote once you’re listed and you literally could write your own termsheet, right? So, because you you can write your own term sheet going the public route and you can list things fairly early.
Now there’s a lot of risks with listing early, if you list it too early and you don’t hit the milestones, you won’t be able to raise money to hire a number and you can get into this down situation which can be brutal. But the point is you get to write your own terms, right? And it becomes easier to raise the money in the public markets because people could sell in five minutes. With a venture investment, takes five years to sell your position.
Generally public market investors, they’re lovely to deal with because if they don’t like your business, they just sell and they’re out, so there’s never any conflict. With a VC, they’re trying to manage their investment, it can be quite terrifying quickly.
So you had competition in the financing markets, you had from both entrepreneurs coming back and exiting their businesses and showing the way. As money was coming into the market, you had the ASX as an alternative route for investment, tech was coming a big thing, everyone was getting super excited again. The energy that I felt in the two thousands when TiNSHED were running conferences, that was all coming back again. Everyone wants to do a startup, everyone at university now wants to do a startup where, you know, 91, 96, no one was doing a startup, zero.
And so that’s where we are today. And then of course, the fed from 2008 onwards, the financial crisis has been pumping the markets. So you’ve had massive inflation and asset prices in the US which has led to a massive asset pricing increases around the world, which has led to large, in some ways it’s led to large amounts of money being raised by American investors who have kept in many ways, companies private for longer and longer and longer. I mean, Microsoft and Amazon listed, they’ve listed a hundred billions of market cap and the average mom and dad could follow, invest in that business and follow it all the way around.
But these funds got larger and larger cause of the numbers that you could play around in these sort of markets. And huge amounts of money were being invested in companies, in software companies and at ridiculous valuations.
Now, a lot of it was financial engineering, which a lot of people don’t understand. The game plan roughly is, if you go to your Bloomberg terminal and you type in a bunch of tech companies and you plot on the X axis the revenue growth rate year on year, 10%, 20%, 30%, 40%, whatever, a hundred percent.
And on the right-hand side or the Y axis, you plot the enterprise value to sales, which is what multiple you get over the revenue on a forward basis. You get a rough scatterplot with a line. And it’s roughly linear for a period of time, when markets are normal, assuming X, Y, Z. So if you’re growing a business at 40% year on year, typically you will make about 10 times multiple on your enterprise value to sales in public markets.
Which means that it’s, let’s say you’re doing a business doing 20 million in revenue, you know, in public markets, if that’s listed and it’s growing at 40% year on year you can get about $200 million valuation, right? Now what was happening was the VCs in Silicon Valley figured out a bit of a trick, right? And the trick was, let’s go find the business doing about 20 million a year in revenue, growing at 40% year on year. And we’ll say to them, we’ll give you a hundred million dollars at a billion dollar valuation and you’ll be a unicorn. And you’ll be lit up in stars and you will be written out in the history books, right?
But, we would like a two times liquidation preference. And what that means is I’ll give you a hundred million dollars now at a billion dollar valuation. So your dilution’s minimal, but if you sell the company, rather than IPO it, I get $200 million on top, and then I share, right? So in the early days of this whole unicorn phenomenon, these were ridiculous valuations were being handed out because the VC was effectively, if you think about the dynamics of this, if the business at 20 million doing 40% year on year, went to the public market and is worth 200 million, so in a disaster scenario, exiting and trade sale, you can get your money back and you’ll get to take all the money off the top, right before the founder gets anything.
But then you have upside because you got a hundred million dollars in a business to turbocharge and it could go anywhere. So in the early days it was a lot of financial engineering to create these unicorns. And then over time, because there’s been competition in investments and this, that the other blah, blah, blah.
And also some people were trying to follow the Silicon valley phenomenon have not really been understanding these valuations being financially engineered. People were just putting a hundred million dollars in sometimes now common stock, into common stock with no liquidation preference at a hundred billion dollar valuation.
And sometimes it works, sometimes it doesn’t work but effectively, these heavily engineered valuations, now the deal turns to become a lot looser in many regards. And so the amounts of money, some of these companies are raising, it’s just stupid, right? Now I talked to a FinTech advisor this week only a few days ago actually.
And he said, oh, I’ve just raised money. I won’t share the the company name, because many people will know it. But he goes, oh you know, this business is doing 10 million a year in revenue. It’s growing fast. It’s growing maybe close to a hundred percent year on year. It’s got 5 million in gross profit. It just raised money at 3.6 billion, free. It’s raised 300 million. What does a software business do with millions of money.
But the amount of the money that’s being thrown around now is just stupid. And the other thing is, in the last number of years, you’ve had the ICO phenomenon where people would raise them from crypto.
A lot of people made a hell of a lot of money on crypto they’re recycling the money. People paying, what, 18 million dollars for a GIF of a rock or monkey, right? Like, you know, NFTs right? So there’s just stupid money now being sloshed around in the tech space or adjacent space funding companies and cycles.
So you’re getting a lot of businesses getting turbocharged. And trust me, like in the olden days you had to fight tooth and nail, make sure that your business worked with the money you had and in Australia because the financing climate was so bad when Roslyn Kogan started and Michael Scott started and I started and a few other people started, we didn’t raise big amounts of money.
Basically tried to scrape it together off credit cards and friends and family and bootstrap it. And that’s why we we’ve produced I think such great operators of world-class businesses in Australia because the financing environment was so bad you had to make the business model work.
And you had to do it in a remote market that was so far away from everyone else that didn’t have the expertise that you need to build the business. So even today you want to find somebody in product management and web there’s basically no one. I’ve trained in my company, probably half the industry from first principles.
You know, the growth phenomenon is fairly new, trying to find people with growth marketing, understanding marketing properly, what have you. But we got a long away, small market, et cetera, and so forth. It’s very, very tough to do a business here and the people who have done so successfully, when they finally do take it to the US or take it global, they killing it.
Because they are so good at operating their business, they’re great operators. While in the Valley, you had a lot of people at raise a lot of money, and, if you put a hundred million dollars into any business, it’s going to move for a little bit before you’ve got reality kicking in.
So we’re in a pretty amazing time now in that, you know, you’ve got, Afterpay’s gone, was it 40 billion US valuation Squares comes to acquire, et cetera. You’ve got a few of these businesses now that have got many tens of billions of dollars market cap that has shown Australian entrepreneurs can build world leaders in their space, can exit or IPO, exit in terms of trade sale, or IPO their business, and get them into the high double digit billions market cap.
They can raise money now from VCs at a hundred million dollars plus at a time. And you know, really it’s created a lot of excitement and you know, it’s in a phenomenally different place than where it was a decade ago. Very, very different.
Adam Spencer: I want to ask you the, advice question. If you could tell a brand new founder that is coming to you, one thing that would help them what would you tell them?
Matt Barrie: Okay so I regret giving some advice to startup founders that I gave for many years. And I want to explain that, I taught at, I went to Stanford and then I taught at Sydney University just on Friday afternoons adjunct, I’ll do my tech company during the week and 4:00 PM to 6:00 PM I go teach and I taught cryptography for 14 years and hire the hackers. So that was my little secret pipeline to hire great software developers, was I just teach all the hackers and hire the best. And then I eventually started teaching entrepreneurship. And the advice I gave back then was, it was never a better time to start a company, right?
Go out there, you’re final year of university, you don’t have a girlfriend, you don’t have a boyfriend, you don’t have a house, you don’t have a marriage, a mortgage, a picket fence, a dog, mower, go out there and take a risk. It’s so easy and so cheap to do so. You can start a business now, 20 grand, 40 grand off a back of a credit card, hire freelancers to do it cheaply for you using my website, whatever it may –
Adam Spencer: Freelancer.com.
Matt Barrie: Whatever it may be. And you know, what’s the risk? The risk is you’d have two years of great experience. You blow up and you’re exactly where you are without a girlfriend or a boyfriend without a house, without a mortgage. Now’s the time of your life you can take a risk. It’s gonna get hot later on. Now that was a mistake because what ended up happening was I saw a lot of people go there and try and start companies.
Now, most companies fail. And the problem is that if you haven’t gone and had a job working at another company that someone else is leading, there’s all this stuff, you don’t know how to do. You don’t know how to hire someone. You don’t know how to fire someone. You don’t know how to manage their performance.
There’s always things that companies have figured out through years and years and years of experience and trial and error, AB testing, whatever you want to call it. There’s frameworks for doing things. There’s ways of doing things, right? And I saw way too many people leave uni go and do that 2-person startup, 3-person, 4-person startup, struggled year one, struggle year two, struggle year three. Year 4 they’re doing a different startup, two-person startup, year three, year four.
And they’re struggling because they don’t understand the basics of business, right? The basics of the technology industry. And they don’t understand how to hire someone, they don’t understand how to fire someone, they don’t understand to just do stuff.
And then the risk is, I saw a bunch of these people get 6, 7, 8, 10 years in, and all they’ve done is two person startups for their entire life. And the problem then is that their CV makes them become unemployable because they’re used to being CEO or VP of engineering or whatever at a two person startup.
And they don’t want to come and work at Canva or at Freelancer or Atlassian, unless they have a VP title, right? They don’t even know the technologies that big companies use because they’ve only had a website that’s had a hundred visitors a month going to it. So like, they don’t understand how things work.
So I regret that because I’ve actually seen a few people’s careers, they’ve really tried, there’s some names in the startup industry that have just really been out there. And, you see them on stage presenting all the time, pitching all the time, blah, blah, blah. But some of these people are in a really tough position because they’ve never, they’ve got this experience, they’re still struggling with some basic concepts.
And they’re constantly going from two person startup to two person startup. I’ve got friends of mine actually in Silicon Valley who have fallen victim to this. They’ve sold the business and an acquire to Google then went and got some funding from YouTube to do another startup and just startup, startup, startup.
And they just don’t have the experience of the growth stage of a business. And I think my advice would be spent two years at a fast growing tech company, following a great leader and just learn like a sponge and then go do your own thing because you’ll save so much time in trying to reinvent the wheel from first principles than if you just get some basic knowledge and basic frameworks.
And you know, it can be quite successful. I think from Sensory, I think it was about, I lost count, like 17 CEOs have come out of that business that worked for me. And product managers that come and work at Freelance, you know, they’re all out there doing all sorts of companies and cause they learn great things.
But I really do think if you jump out of university and or quit university, which I think is, you should never quit university to do a startup, I know Mark Zuckerberg did it and a few other people did it, but I think just get the degree, learn it, build your network of people who are great, who you can hire, spend two years working for someone because it’s probably the last time you ever worked for anyone ever again, or it could be.
And you want to have that basic training. And if you don’t have it, the one thing you don’t have the luxury of is time. And so you don’t want to spend the first 3, 4, 5, 6, 7 years of your startup career, trying to figure out stuff that everyone’s figured out decades ago. And you could pick it up in a matter of months if you went and worked somewhere and actually go, okay well, that’s how you run a business.
But you know, my advice is for first time entrepreneurs, by all means in the back of your mind, be thinking about your business, but go and follow someone to two years of your life, because it might be the last time you ever work anywhere ever again. And you just don’t want to stuff around for years and years without getting something under your belt.
And then the other thing is if you do your startup in 2, 3, 4 years and you’ve just started and it hasn’t worked, you can say well, I worked at Atlassian, or wherever Canva or wherever it might be Rocked or Prosper or whatever. And then I learned this and then I would do my own thing and it didn’t work and then I’m coming back.
Adam Spencer: Yeah like in a perfect world, where would you like to see the trajectory of the Australian startup ecosystem go? Or what impact would you like to see the Australian startup ecosystem make on the country?
Matt Barrie: I would like the Australian technology industry as distinct from the startup industry, be a meaningful contributor to the GDP of the country. We have a lot of disadvantages being in Australia. We have some advantages, but a lot of disadvantages, we have a highly educated population. We have a relatively good tertiary education system.
We have quite an entrepreneurial attitude in society, you know, risk taking. We’re a very small market, we’re very far away from the rest of the world. Sometimes that plays to our advantage. We think of ourselves as the underdog. We’re always trying to catch up. Sometimes we’re running so hard trying to catch up and thinking we’re so far behind and we’re actually a world leader and we don’t think we are. And we’re trying to be better.
But we need to be in a situation where we have a very small population that we’re producing businesses that are very big wealth and productivity multipliers. 26 million people trying to compete against America with 300 something million people and China with a billion and India, with a billion. You need businesses that can multiply the productivity of the people in that business. And I can’t think of a greater productivity multiplier than the technology industry.
And I mean that very broadly, I’m not talking about software and apps. I’m talking about, advanced manufacturing. I’m talking about transforming the goods that we produce out of the ground. The dirt we dig up and ship overseas to be turned into steel to make apartments or the, the dead trees would take out of the ground to be shipped overseas to burn to produce that steel, or to burn to produce that electricity, whatever it may be, but broadly technology-based businesses it could mean biotech, it could mean software, it could mean internet, it can mean, semiconductors and so forth.
It’s got to be a meaningful contributor to the economy and for that, it has to grow substantially. And we need to have the environment, to be able to do that, so what do you need? You need great people. Now we have some good people but not very many of them. We’re losing a lot of people because of COVID. A lot of people from overseas, every day I go onto Facebook and I see another friend leaving.
We will have a challenging environment moving forward if COVID’s endemic in society where you’re not gonna be able to get people in the office to work together that easily, they’re going to be working online and remote locations. So then people are like well, if I’m working remotely, do I want to work in Sydney or do I want to work in the country? Or do I want to work somewhere else? Or do I want to go home to Dubai or do I want to go home to Canada and work from there. And, I’m working from home. So there are a lot of challenges moving forward.
You’ve gotta have good people. We have some good universities, but I think that there’s a lot that can be done with universities. We made a big mistake from around, it’s really around the late nineties, early two thousands, where we basically started to think about universities as more as a industry.
And it’s the third biggest industry in the country, which is what they call education related travel services. It was a $30 billion a year industry before COVID, which is basically visas. We moved the universities from being less around training the domestic population in technology and more around how do we create a massive visa factory and sell visas so they can buy property.
That has been very bad. And of course I wrote about all the problems being dependent on one export market being China in my essay, house of cards, and everything’s turning now in terms of, you know, iron ore had a big rally during COVID because China launched a trade war in Australia. And ironically, that backfired in terms of iron ore, but that’s now coming off in a big way.
Coal, which is on the nose and educate related travel services, which is basically zeroed. We’ve got to, I think create a mission in the country, we’ve got to create like a Manhattan project or an Apollo program where the whole nation is galvanized by it.
The startup nation that Israel did, let’s, you know, it’s happening organically, but we need the messaging to come from the top down, it needs to come from government. It needs to come from you know, the educators, it needs to come from schools, teachers, parents have to be on board with this and not trying to get the little Johnny to be a lawyer or a doctor, and not start a tech company. And be able to bridge the dots from K-10, because by year 12, year 11 you’re already on the path in HSC and you can’t change your subjects, right?
So you gotta fix it K-10, but you’ve got to get the whole country behind us. And at the moment it’s not. You go read the media, which are captured by the two real estate portals and, they hold up little Johnny, who’s a train driver who has 26 properties in his portfolio that he’s managing on a cashflow of $2,000 a week.
And if interest rates move the wrong direction and by quarter of a point, the whole thing blows up in his face, right? So, you know, we just, things are happening that are good regardless, you got the big tech companies out there showing the way, Afterpay is the latest there.
It’s showing we can build a world leader and sell it to $60 billion or whatever is in Aussie dollars and to a world leader in payments, right? It’s great and it gets everyone excited to go out there and do the next thing. And there’s like 35 buy-now-pay-later companies on the ASX, right, whatever the number is.
There’s things, things are happening anyway, but I think we just gotta get the whole country behind. We’re still in a pretty, I think about the language of, kind of what’s coming out of politicians is still archaic. Push is going to come to shove anyway soon enough.
But now we have a very challenging environment, I’m very disappointed that we haven’t followed the New Zealand model of trying to stop COVID coming into the country. You had the relatively simple task of just protecting the borders which they made a mess of a task by protecting 63 hotels in the CBD.
I could think of a worst place to put the hotels at the quarantine than in the CBD. And of course when delta came out, blindfolded you could tell that this could be an issue with the way things were with contact tracing. And now it’s all blown up and they’ve given up trying to drive a federal election saying open up. It’s going to create a really troubling environment for running a business in Australia. And there’s a lot of business creation has happened during COVID, but you know, moving forward, if you can’t get people into an office everyone’s working remotely, you’ve got this open up, closed down, open up, close down, which even the Dodi modeling said, what would happen with double vaccination, higher rates.
It’s a challenging environment to start businesses and grow businesses and actually prosper. And it’s a very challenging environments as well to bring people into the country. Before we let it become, you know, break out in New South Wales, Victoria, if you said there was a visa and that’s for $1 million and it’s just the fee, to come to Australia, you would have people lining up around the block to come to Australia, wealthy people who would come and fund businesses and so forth.
At the same time, we were doing really good work with the global talent visa. So there’s a visa that came out and said, rather than the main way they do the visas, which is stupid, which is here’s a list of skills that are important for the nation, which include dog kennel breeders, and gaming attendance and VIP poker machine rooms and migration agents and cooks for suburban curry houses and stuff like that.
You know, so the whole thing was just being raughted effectively. With the global talent visa, what they did was they said here’s some areas that we want to bring in world experts and we’ll give you a PR immediately before you even step on the ground.
It’s in the field of cybersecurity, it’s in the field of quantum computing, it’s in the fields, of a FinTech and so forth. That’s the sort of program you need to be running in parallel with a program that people can pay and you bring in a lot of money into the country to invest in things.
Anyway, my point is we need this industry to be a large. It’s not just software, it’s other forms of technology, which I think manufacturing is a big part of it, instead of job keeper and paying people to hang around in zombie companies, I’ll be paying people to go to university or TAFE and turn TAFE into a globally recognized institution in terms of leadership in the trades. Cause I think that’s probably gonna be a bigger public contributor than software in terms of GDP contribution over the long-term if you get it right. And certainly a lot more people can probably enter that into those trades than the programmers.
But we have our challenges ahead of us. We have a mission, things are happening anyway, but we could do a better job. And a simple thing we could do to create a lot more ResMeds is we could create a register of all intellectual property in any Commonwealth-funded institution in the country and make three lists.
List number one is this intellectual property, you can take for free if you’re an Australian company and maybe, Australian founders or whatever the criteria is. List number two is 2% of gross royalty on sales, stuff that is non-exclusive. And we think there’s some value there and we’re going to extract some value. And then list number three is maybe 5% gross royalty and maybe it’s exclusive or maybe if it’s exclusive, you’ve got to pay 7% or whatever the number is, I’m just making stuff up on the top of my head here.
But you match all the entrepreneurs you’ve got running around in Australia with deep technology that we’ve got sitting in our research institutions, which is on the shelf because we don’t have an environment whereby lecturers want to go and leave tenure. And then you maybe could go create another a hundred ResMed’s right? But you’d have to sit there and in a protective negotiation with the business liaison officer a decade to try to figure out how to get the IP out.
So there’s some good things happening in Australia. Certainly there’s been a good track record of companies and founders and so forth and things happening. And ASX is a bunch of tech companies now on it, et cetera. We’re at the best position where I think we’ve ever been, but we do have challenges and then COVID is going to create a lot of challenges moving forward.
But I’m pretty excited and you know, it’s always great to see successes and the good thing now is I can just constantly open the websites to read the news and I’m constantly reading about companies I never even heard of before that’s raised 70 million and they’re doing 70 million in revenue or sold for 200 million or whatever like that and I think that’s great.