An Incubator For The Mites Of Innovation
Sydney Morning Herald
Wednesday June 16, 1999
It's a hothouse for business ideas that need to be nurtured. Sue Lowe reports on the progress of Sydney's technology start-ups.
They are expected to be the next generation of Australian technology multinationals but at the moment most are struggling to pay the rent.
"Nobody here would make more than $30,000 a year . . . look at the cars people drive," joked Nathan Gyaneshwar, the 25-year-old director of Simple Purchasing Networks.
Fourteen months ago Mr Gyaneshwar and co-founder, Joe Ward, moved their Internet-based hotel supplies purchasing business out of a bedroom and became one of 40 start-ups at the Australian Technology Park's incubator in Redfern.
The incubator is one of two centres in Australia dedicated to supporting and nurturing fledgling technology companies with little revenue, no profit, but great ideas.
The other is The Playford Centre in Adelaide.
The Australian Technology Park is a joint venture between the universities of Sydney and NSW, and the University of Technology, Sydney. It has been 10 years in development and is not expected to be completed until 2006.
The Playford Centre is a more recent venture between the South Australian State Government and computer company EDS. Microsoft and Oracle were also founding sponsors.
But neither centre has funding to a level that ensures cash-strapped tenants get an easier ride with the everyday reality of paying rent. And at $250 per week for 25 square metres - an intimate four-person office - Redfern incubator rents are higher than many CBD offices.
In Adelaide, even with markedly lower real estate prices, The Playford Centre recently changed direction and is no longer offering premises.
"We wanted to get out of the real estate business," said Robert Norton, director of the centre.
Instead the centre is concentrating on providing start-up consulting, business planning and seed funding, typically between $100,000 and $300,000.
It was a subject that came up quickly in an open discussion of the benefits of being incubated at the Redfern Technology Park.
Most tenants - all four the Herald spoke to - said the high rent was worth the benefits, particularly while companies were in the early development stage. Advantages, not available from most serviced CBD offices, hinge on the constant opportunities to network with other start-ups, sharing experience, expertise and resources.
"There wouldn't be anyone in the incubator that is not doing something with at least one other company," said Daniel Bone, director of Assessment Reporting Consultants, a developer of educational performance reporting software.
"If you want to get something done or get advice, there's usually someone that can do it, or has already done it," he said.
Co-tenants were also said to be highly reliable business partners. All have fought off strong competition to get space in the incubator and have already had to prove they can deliver.
Stan Jeffery, general manager of the incubator, has a purely practical viewpoint.
He argues that Technology Park and the incubator are both start-up businesses that have to prove themselves commercially viable.
Mr Jeffery pays exactly the same rent for the incubator space as more established companies within the park, he then sub-lets to the start-up tenants. "This is a business," he said.
Like most of the tenants, the partners in Simple Purchasing Networks paid the first year's rent by continuing with outside contracting work and doing evening and weekend bar shifts.
However, late last year that company's cash flow problems eased when it raised $120,000 from a private investor.
The match between investor and start-up was made through the Australian Stock Exchange's 14-month-old Enterprise Market scheme. The scheme is another innovative, but struggling, new business, designed to match small investors with start-ups trying to raise between $500,000 and $2 million - the point at which venture capitalists usually kick in.
Simple Purchasing is now in a second round of funding but said negotiations were at a sensitive stage and declined to give details. If successful, Mr Gyaneshwar predicts SPN will outgrow the incubator and they will move out.
The incubator's main link with the venture capital industry at this stage is through board member Richard Gregson, managing director of venture capital firm Equity Partners. But all tenants are watching Simple Purchasing's current activities with interest and it's an area in which all are keen to see closer relationships develop.
Mr Jeffery is cautious. "Venture capitalists tend to either starve or choke start-up companies . . . they want to give [the start-up] $2 million, when all they need is $100,000," he said.
He sees protecting his tenants from poor partners and venture capitalists that are more capitalist than venturers as being as much a part of his role as introducing them to potentially good partners.
Of the 13 companies that have so far left the incubator, the only one that failed was a company that picked a poor partner, according Mr Jeffery.
He predicts the most productive relationships will continue to come through organisations such as the Enterprise Market and its recent partner, Australian Business, which has been matching very early stage start-ups with "business angels" for many years.
Mr Jeffery is certain of the rich pickings available for investors, both now and in coming years.
He cited an academic survey that has put the value of commercially viable research projects now locked up within Australian universities at $40 billion. From that, he extrapolates the three Sydney universities the technology park works with would house about a quarter of that unrealised potential. "Our objective is to release that," he said.
More evidence of the wealth of ideas and entrepreneurial spirit comes from the number of approaches Mr Jeffery gets from would-be tenants. In an average month there are 10 to 20 inquiries. "Of those we'd take five to 10 to the interview stage. Five would probably be good candidates, but we can usually only take one of them," he said.
Again it comes back to real estate. There's only one three square metre desk space left in the incubator right now.
Demand is so much ahead of supply that from July 1 Mr Jeffery plans to up the bar slightly and in the process increase the incubator's long-term funding. From next month the incubator will expect an equity placement with each start-up. Just as the Playford Centre does, the Sydney incubator will ask for roughly a 2 per cent royalty percentage of incubator graduates' revenues.
"Many of the people wanting to get into the incubator are very happy to agree to that," he said.
Mr Jeffery argues that it will make the start-ups more attractive to other investors. "Most want to be co-investors, not the first investor," he said.
© 1999 Sydney Morning Herald
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