Startup gatherX forced overseas for funding
SYDNEY-based social messaging tool gatherX is partnering with New Zealand equity crowdfunding platform Equitise to raise $1 million for further technological development and marketing growth.
Equity crowdfunding provides an alternative method for private companies to raise funds through an online portal. In Australia, equity crowdfunding is restricted by law to sophisticated and wholesale investors.
Accordingly, gatherX will not be able to take its offer to the wider Australian public in this round of financing. However, the offer is available to anyone over the age of 18 in New Zealand.
Last year, the tech start up raised $500,000 in its first round of seed funding.
However, CEO David Price (pictured) says that this milestone was not without its obstacles. The company struggled to find interested Australian investors at the outset despite achieving growth rates only seen by 1 in 1,000 early stage Australian tech start ups.
"We had no choice but to opt for overseas investors rather than keep Gather's successes in our own backyard," Price says.
"We did initially approach a lot of Australian venture capital firms trying to find Australian investors and we found that the Australian investment community was very risk adverse, whereas in places like the US, there is an established culture where investors will take the 'big gamble' with higher risk investments.
"Australians don't invest in that way, they hedge, particularly in tech start-ups. The American model is more correct because most start ups fail, so these have to be balanced by a few astronomical successes to get good overall returns."
Price says that Australian investors generally need to see at least 50,000 users before investing and that at this point, any investment is already largely de-risked.
Price recollects one Australian investor saying to him "I am the only game in town that will invest in this, so you will have to give me what I ask for."
"With this sort of attitude, in the very early stages before the seed round, the business raised less funds than necessary in order to minimise the percentage of the company they had to give away.
"We know that our business has great prospects, so we were not going to give a huge chunk of it away for less than it's worth," explains Price.
In the end, the $500,000 raised from the first round of seed funding was thanks to nine international high net worth individuals. Price says that the company was able to attract capital from foreign investors at five times the valuation compared to what Australian investors were willing to offer.
Price believes that it is this kind of investment culture which is one of the main reasons for the high failure rate of Australian tech start ups. He urges for a major overhaul of Australian investment culture to ensure that home grown start ups are able to share a major portion of its business success with local investors.
"(Start ups) cannot raise early-stage funding at reasonable valuations, so founders often opt rather to have less of a funding cushion instead of giving up too much equity, " he says.
"More often than not, this kills the company because technology development almost always goes over time and over budget - just like property renovations.
"And the high failure rate makes investors more reluctant to play in this space, which creates a vicious cycle."
Nevertheless, Price says that he has seen investment interest in gatherX from places such as the Philippines, Singapore, Canada, UK and the US and he also expects a very strong response from New Zealand through the Equitise crowdfunding campaign.