The WA state government has decided to put up $20 million in funding to help the WA Startup Ecosystem. There are many opinions out there as to what the government should spend it on. We have a look at what the ecosystem actually needs.
The life of a startup can be broken down into phases, which look something like this:
Pre-Ideation phase: founder has the idea, reaches out to try and work out how to build it. Often they’re told a bunch of wrong information, sometimes they meet the right people, sometimes they’re ripped off or sold some mad scheme. Too many times they end up spending their life’s savings on a technical product that no-one wants to buy. If they’re lucky they meet the startup community, attend Startup Weekend and find some co-founders to start the journey with.
Ideation phase: Getting the idea and the team together, building an MVP, exploring the problem and trying to find customers. This culminates in “problem:solution fit” when the team has got a working solution to a problem that their customers have.
Build phase: Working out the marketing channel(s), the business model, optimising the product and solution to reduce churn, experimenting with optimisations to discover what works to bring down CAC and improve LTV. This phase culminates in “product:market fit” when 40% of the customer base would be disappointed if the product vanished.
Growth phase: scaling the product to its full market potential, expanding the team, developing new channels and new markets, continuing to optimise the product. This phase “ends” when the founders and early investors exit and the business stops being a startup: it starts working out how to cut costs rather than grow sales.
Exit: the company goes public or is acquired, and the founders and investors take their money and leave. Hopefully the founders then become angels, and help the next startups along.
In each phase the business has different needs:
Pre-ideation: founders in this phase need education, but it’s often hard to educate them because they are so sure they know what they’re doing because they’ve picked up a lot of bad education.Sometimes they’ve been fed this bad information by the sharks swimming in this particular pool. They can often look exactly like founders in the ideation phase, but really need to find a mentor they can trust and who will stop them making expensive mistakes. The real need here is for a strong community that will accept the new founders and educate them without turning them away.
Ideation: founders in this phase need networking events so they can start getting teams together, education so they can learn the basic skills they need, and some limited high-risk funding so they can work on the project full-time. This is the need that Accelerators and Incubators address; supporting and developing founders during the early stages.
Build: founders in this phase need funding and specialist skills more than anything else. Access to mentoring is also good, to help move the business through this phase as quick as possible. But the real need is access to funds and talent that will allow the team to focus on getting to product:market fit.
Growth: In this phase the company is growing as fast as possible, usually by spending investment money to acquire customers. The usual situation here is that each customer will return more money over their lifetime of using the product, so it’s really just a matter of onboarding as many customers as possible as fast as possible. To do this, the business needs access to funding, and a pool of talented people to hire as employees.
Exit: There needs to be the kind of Angel community that encourages recently-exited founders to join it. And the kind of investment environment that encourages them to spend their money on new startups.
So, from that, the things the community needs are:
Community and Events: we have a strong community, which is growing, and we are mostly getting the message across to people who find us. There are still too many people spending their life savings getting products developed without really knowing what they’re doing. And there’s a nasty lump of hard-sell operators taking advantage of people, so we have some more work to do. But on the whole the people we reach do convert into good founders.
Accelerators and Incubators: We have some functioning Accelerators, though sadly no Incubators at the moment. There are still too few places available for the number of founders, and some good teams are getting knocked back, so more would be good. The primary need that the accelerators fill is seed-stage funding plus mentorship, so providing that year-round for more people is a need.
Seed-stage Funding: we have a small Angel community who are doing what they can, but last year only invested in 5 businesses. Innovation Bay is helping, but again it’s very small numbers. There are other small investors around who will look at this, but nothing near the scale we need.
Growth Funding: Still too small, but growing. At the moment we’re losing founders to the Eastern States at this point because they just can’t get the funding they need here. The Backdoor Listing bubble did more harm than good, and has severely soured the reputation of tech startups with that audience. However, as there aren’t that many startups in this phase at the moment, it’s not a disaster. Yet.
Employee Pool: Perth is blessed with a lot of amazing techies, designers and marketers. As the mining bust continues we’ll see some of the commercial IT crowd start to get involved, so this is set to expand. Which is good, because finding a tech co-founder is the number one problem most startups have here (together with finding funding). Once we’ve solved the techie problem, then there’s a similar problem with good marketers waiting.
So my suggestions as to what the Government can do with $20million to help this are:
Education. A regular “attractor” event designed to reach out to pre-ideation founders and get them involved in the community. Something with a wide reach that will get to retrenched miners before they fork out their redundancy cash on developing an app that no-one wants. SWPerth does a good job of this for a small number of people each year but it’s the wrong format to attract the wider cross-section of people we need.
Obviously I would also suggest support for the existing media sources for the community, which would be great, and is needed *cough*. But reaching out to pre-ideation founders is the real key need here.
Seed Funding with Mentoring. A program like NEIS, but aimed at startup founders. It needs to last for at least a year, preferably two. It needs to pay a very basic salary ($500/week – enough for rent and food). It needs to be tied to a one-to-one mentorship and specific milestones that need to be achieved to continue (rather than the usual 2-year cashflow forecast which NEIS uses badly). It needs to be structured as a loan, repayable from future tax returns like student loans/HECS, so that it keeps founders focused (it’s their money they’re spending).
Don’t let the existing NEIS training providers provide it, because they’ll rort it. Pay the co-working spaces to administer it and find the mentors for it.
Startup Apprenticeships. We don’t need more graduates. We need a training program that teaches actual skills. Preferably on the job. So an apprenticeship scheme that will take people who are interested in startup and have basic skills (they can code, write, or design) and provides them with on-the-job training and support. The startup gets help paying their wages (they must cost something because we only value what we pay for), and if the startup folds then the apprentice is prioritised for another startup to hire.
Growth funding. It’d be nice to have at least one Perth VC who could actually invest in Perth startups. But I think this is going to happen naturally. Helping it happen by assisting with local office space or whatever would be good.
I know I’m dreaming, and the government will never actually do this because politics, but that’s my answer at the moment, and it will change as the community grows and improves. What’s yours?