Don't raise cash just because you need more office ping-pong tables. Pic: Getty Images
Aussie start-ups should be discouraged from raising capital, says TechnologyOne founder
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Australian start-ups should stop diluting their equity through excessive capital raising or risk making a mess of their businesses, says the founder of one of Australia’s most successful technology groups.
Adrian Di Marco said continuously raising capital was doing more harm than good, and young entrepreneurs did not need the extra pressure to deploy the money and answer to multiple investors.
Mr Di Marco on Sunday was a recipient of an Order of Australia medal in the Australia Day honours list for services to information technology.
“Raising more capital isn’t really sensible … It’s very dilutive. The more capital you raise the more problems you actually create for yourself because you end up trying to scale too quickly,” he said.
“Unfortunately, a lot of start-ups that have a good idea are encouraged to raise and to raise regularly and to raise a lot of money.
“It almost becomes this thing, ‘I’ve raised $100m, look at me’. I don’t think that’s really the way to do it at all. I think raise frugally and don’t dilute yourself too much … It’s a marathon, not a sprint.”
An avid backer of start-ups, Mr Di Marco said he often encouraged entrepreneurs to take a step back. “Slowing them down sometimes is part of the process,” he said.
During the pandemic in 2021 scores of start-ups raised multimillion-dollar sums, and this was a good indicator of how fast things could go south, he said, describing the capital raised during that period as “absolutely crazy”.
“Personally I have seen first-hand when people raise a lot of capital very quickly and they don’t actually move the dial any more than they would have … not significantly,” he said.
“Typically what happens is they’ve got to fix up the mess they’ve created because they’ve raised too much capital and they’ve put on too many people and they don’t have the systems, the processes, the culture or the management structure to manage it.”
Mr Di Marco was critical of the government’s $US125m ($198.5m) investment in US quantum computing start-up PsiQuantum.
“If you talked to the industry they would have said to put that across many companies, not one company – and back Australian companies,’ he said.
“Why would you back a quantum computing company based in California? That’s a good example of the quality of the decisions we see from our leaders when it comes to tech.”
The government had failed to understand the difference between backing multinationals with Australian offices, and Australian companies which were headquartered in Australia and conducted the majority of business locally.
“An Australian company is embedded in the community and is there long term,” he said. “The deals are done in the local community and they create an ecosystem, whereas with a multinational, wherever their head office, that’s where they really are committed to and that’s where all of their deals happen and I don’t think the government really understands that.”
But Mr Di Marco was “excited” overall about Australia’s tech sector, which had shown its ability to thrive with little government support.
The federal government was too focused on minerals and had neglected the tech sector, he said.
“I think we’ve not supported the IT industry well for the last 40 years and it has survived and thrived despite government policy,” he said.
Many Australian start-ups learned the painful lessons of operational downscaling during the Reserve Bank’s monetary tightening cycle.
In late 2022, following several months of enormous capital raisings, many Australian start-ups began to lay off staff, and many acknowledged publicly that they had hired too many workers.
Among Australian start-ups to cut staff was Mr Yum (now me&u), which shed 20 per cent of its staff, Linktree which cut 17 per cent of staff initially and later 27 per cent, and Till Payments, which slashed 120 roles.
Major tech companies including Amazon and Salesforce also announced lay-offs.
Start-ups that wanted success in 2025 needed to find a niche and stick to it, rather than try to become the next Google or Canva, Mr Di Marco said.
“What you need to do is find a particular niche, a particular market, something very narrow and build very deep functionality for that market so you become the clear leader,” he said.
The advice was similar to that of Blackbird’s Tom Humphrey who this month told The Australian his fund was keen to back “vertical software-as-a-service” companies which concentrated on singular industries.
Start-ups didn’t always need to follow the trends and Sydney wasn’t always the best place to do business, Mr Di Marco said. The number of Australians who moved to Brisbane and the Gold Coast during Covid-19 was case in point.
“People really like the idea of coming to work in Brisbane because (there’s less) traffic, there’s just that really easy lifestyle, it’s very affordable and it’s a great place to bring up kids,” he said.
“We’ve had offers in the past to relocate to other places and we decided we’d stay in Brisbane.”
This content first appeared on The Australian.
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