Peter Lilley and Doug Stuart, co-founders of Canberra-based data startup Instaclustr, outline why startups need guidance from experienced entrepreneurs.
Peter Lilley and Doug Stuart MAICD are keen to bust two myths. First, the tech startup scene isnât just a young personâs game. Secondly, the Silicon Valley model is not what itâs all about. âWeâre not all twenty-somethings,â says Stuart. âItâs not all about unicorns and disruptors.â
âA startup doesnât have to be a unicorn to be successful or interesting to investors,â adds Lilley. âThe hypercharged valuations of Silicon Valley are not normal. There are still good investors out there, including in the US, who really value experience.â
Stuart and Lilley were in their early thirties when they bootstrapped their first startup in 2003 â the ethical hacking firm Stratsec.
Kool-Aid acid test
Lilley stops short of admitting they set out to âdisruptâ the cybersecurity industry with Stratsec, but with a decade of experience managing large IT projects for the likes of the Department of Defence, they wanted to loosen the grip of big technology vendors. âThe motivations of a big commercialisation vendor are to get you dependent on their products and proprietary features,â explains Lilley. âOnce youâre at the mercy of technology lock-in, they come at you with aggressive pricing at renewal time. Youâve made the investment, so thereâs a lot of inertia to change.â
Stuart reckons inertia was the main reason it took Stratsec a few years to gain momentum, because corporations in Australia were âdrinking the Kool-Aidâ of the big technology vendors in North America. âThe big banks kept on buying safe until one of them had an issue their vendors couldnât fix,â he recalls. âThey came to us saying, âIt isnât working, we have to do something different,â and once we got our foot in the door at one bank, we started to grow. Within 18 months, we were providing services for all the banks.â
Stratsecâs growth was fairly organic, according to Lilley, because most of its business was won through laborious tender processes and referrals from regular customers. He sometimes wonders if they should have taken funding to grow more aggressively. Could they have opened in the US? Still, in 2010, the firmâs steady expansion across Australia and into Malaysia saw it win the Telstra Australian Business of the Year Award and attracted a $24m buyout by BAE Systems (with an agreement the pair would stay on a few years). âWe probably could have run even harder,â he says, âBut then weâd probably still be doing it today. Now we have a venture-backed business with Instaclustr. Itâs heavily growth-driven, and we run very hard.â
Donât call it a pivot
In 2013, when Lilley and Stuartâs exit term from Stratsec was complete, they could easily have settled into a comfortable midlife investing in other peopleâs startups. That was almost the plan. âWe were honestly just going to be hands-off investors when we met a couple of clever young lads [Ben Bromhead and Adam Zegelin],â recalls Stuart. âThey had this idea for a data marketplace,â adds Lilley. âWe thought if we gave them money, something good would happen.â
What happened wasnât good, at first. They couldnât find any customers for the data marketplace. But the work theyâd begun on the back end to make big data easier to access and manage was worth something.
Instaclustr got its name from the act of spinning up data clusters almost instantly for cloud-based solutions that need enormous scale. Plenty of organisations would like that ability, but donât have the tools, knowledge or budgets.
âThe guys were looking for a storage solution when they came across the open-source database, Apache Cassandra,â says Stuart.
âThey said, âWeâve done some tooling around this database and there seems to be real demand for it,â so they put a credit card payment on the front and we had customers before we knew it.â
Coping with rapid growth
Instaclustrâs first five customers were worth US$5000 in monthly revenue which, as Lilley points out, isnât bad for a fresh startup. âTech startups should pop the minimum viable product out there and see if you get traction. Off the back of that, we attracted AdStage in the US, our first big customer and a heavy user of Cassandra.
We learned a lot about operating at scale as AdStage grew â and having an anchor tenant on our platform was a key to our successful growth.â
The two bootstrap investors realised more funding was needed to help the business handle rapid growth, so they showed the AdStage case study to venture capitalists and in September 2014, brought in seed funding of more than $2m. âWhen we were doing the deal, Peter and I said, âWeâll get this sorted then go off into the sunset,ââ recalls Stuart. âIâll never forget Nick [McNaughton, CEO of ANU Connect Ventures, which led the round] telling us, âNo, you guys have to be involved if you want this funding. Youâve got the experience from building Stratsec and youâre needed here.ââ
Second time is a charm
After a âlittle bit of resistanceâ, the second-time startup founders accepted. Both now recommend that every startup seeks experienced entrepreneurs to complement a first-time founderâs passion â and establishes a board of experienced advisers early to get the strategy and governance right.
Peter Nichol was hired as CEO in 2015, bringing extensive experience growing technology businesses in the US, including Platform Computing, bought by IBM in 2012. âWe needed that US presence to start to own some senior relationships, because thatâs where 95 per cent of our customer base was,â says Lilley. âHeâs the secret to our success,â adds Stuart. âWe gained proper process around sales and our growth trajectory ramped up. And each time weâve added new investors, weâve also gained new board members who help build our strong financial resilience.â
Instaclustrâs board now includes McNaugton, Jerry Stesel, founder of Our Innovation Fund, and Benjamin Levin, founder of Level Equity, as chair.
âWhen you run a business, you can feel like your challenges are unique,â says Lilley. âHaving access to investors and their portfolio companies means thereâs usually someone to advise you whoâs faced the same thing. Weâve gained effective strategies for dealing with complex compliance issues such as labour rules, and sales and use taxes, across 52 different jurisdictions, because we could lean on our boardâs network.â
Government incentives
In the early days of Instaclustr, the Australian governmentâs export market development program and R&D tax incentives were useful, says Lilley. That government support meant he and Stuart could continue to invest in improving Instaclustrâs managed technology platform and export market opportunities to grow the business. However, a big challenge when growing a technology business is attracting and keeping tech talent, which can quickly take the company over the state payroll tax threshold.
âState payroll tax can be anti-growth,â he explains. âApart from the admin burden and accountantsâ fees, when youâre investing everything into growth and not generating profits in favour of future returns, state payroll taxes can claim several engineering positions you could have hired earlier, and which would have delivered growth earlier. Something such as payroll tax offsets for early stage growth companies would be an interesting idea.â
Technology evangelism
Having championed open-source solutions at Stratsec, Lilley and Stuart are baffled that many technology leaders in large Australian organisations still prefer US proprietary software. âIt dumbfounds me we still have people in charge of choosing technology in Australia who are so enamoured by US vendors,â says Stuart. âYet weâre displacing those same vendors on their home soil throughout North America because our customers there understand open-source and cloud-native businesses like ours better.â
Advice for tech startup boards
Funding takes time
âThe funding process can be difficult and distracting, and always takes longer than you think,â says Stuart. âPlan fundraising as much as you would plan and review budgets and operations. Build a list of opportunities and run investors like a sales pipeline,â adds Lilley.
Culture needs constant care
âRemember cultural fit when hiring as it helps build a positive work environment,â says Stuart. âOutliers are useful when youâre looking for innovation, but everyone has to be on the same team. Thatâs hard when the team grows quickly. Hire HR people early to help recruit the right people and manage team dynamics.â
Govern for performance
âGovernance is wanted by most entrepreneurs,â notes Stuart. âIt brings stability to a hyperpaced environment. The board needs to be supportive and assertive. Itâs a fine balance of encouraging innovation, delivering on vision and building a strong company that meets its KPIs.â
Encourage sustainable growth
âFounders need to be reminded itâs not about the exit payout,â notes Stuart. âBoards can remind them to focus on their customers and people, not the final prize. A strong sustainable business with strong fundamentals and metrics will be worth more.â
Watch the cash
âThere is likely to be significant investment in developing the technology,â says Lilley. âToo many tech startups burn cash without considering liabilities building in the business, then try to raise new capital too late.â
Ensure sales and tax compliance
âBoards need to help entrepreneurs deal with the changing tax environments across countries and states,â says Lilley. âChanges to sales and use taxes on services sold by remote sellers into economies are often driven by the behaviour of large multinationals. The compliance burden for tech companies can be enormous and result in penalties or reduced returns at exit time.â
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