A Queensland music streaming startup’s ambitious $80 million IPO plan has reignited a debate among Australian tech investors over early-stage companies with minimum revenue attempting to list on the ASX.
Guvera announced plans last week to raise a maximum a $100 million through an IPO that would value the startup at over $1 billion. The company recorded revenue of only $1.2 million in the 2015 financial year and a net loss of more than $80 million. In the first half of this financial alone the company has recorded net losses of more than $50 million.
Atlassian co-founder and prominent tech investor Mike Cannon-Brookes says he was pitched as part of Guvera’s IPO and was “terrified” by the proposal.
“ASX shouldn’t allow this stuff,” Cannon-Brookes tweeted.
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Was pitched. Read Guvera prospectus. Terrified. $180m raised, <1m MAU? No revs? Little growth? Dodgy loans? ASX shouldn’t allow this stuff.
— Mike Cannon-Brookes (@mcannonbrookes) June 4, 2016
A scary prospect
The entire concept is scary for Australia investors and could damage the market, Blackbird Ventures co-founder Niki Scevak added.
“So horrifying and more money than entire credible Aussie VC industry,” Scavek tweeted.
The controversial IPO plays into a broader debate that is currently raging after the ASX proposed to increase restrictions in a move that would shut out many early-stage startups from the market.
The proposal paper suggested lifting the market capitalisation minimum to $20 million and the net tangible assets test to $5 million in order to maintain the ASX’s “quality and integrity”.
Of the 105 tech listings in the last two years, half of the companies had revenue of less than $140,000 and four of the six startups plotting an IPO at the moment have revenue of less than $140,000.
Fellow Blackbird Ventures co-founder Rick Baker says the huge difference in tech company valuations from the public and private market is very troubling.
“I’m worried that the public markets aren’t properly assessing the risk and valuation of early-stage tech companies,” Baker tells StartupSmart.
“We’re seeing valuations of hundreds of millions for companies that would be priced in the single or low double-digit millions by the venture capital markets.”
According to co-founder of Seek and Square Peg Ventures Paul Bassat, these early-stage listings are an “absolute disgrace”.
“The quality, readiness and valuation of some of the tech companies coming to market is an absolute disgrace,” Bassat tweeted.
“Some advisers and entrepreneurs will make a killing but it will be a zero sum game and retail investors will be the losers.
“We are building a larger, higher quality and more robust tech sector and would be a great shame if progress is set back by a few awful businesses.”
Bassat adds that Australia is one of the few markets in the world where young tech companies are deciding to go public instead of hunting for private funding.
“ASX and NZSX are about the only place in the world where companies are listing way too early and often without a real business model,” he says.
“Hopefully markets will be able to distinguish between the crap and the high quality tech companies but risk that whole sector will be harmed.”
Guvera CEO Darren Herft blames this negative commentary on the tall poppy syndrome, telling the Australian Financial Review that several successful companies had shaky beginnings.
“Successful companies like Google and Facebook and on the local scene carsales.com.au, seek.com.au and realestate.com.au all had shaky beginnings, lost money, pushed the envelope to change the norm with lots of doubters and non-believers and then went on to become successful multibillion-dollar businesses,” Herft told the AFR.
“Investing in these types of technology companies is always going to be ‘high risk’, but the returns if the company gets it right can be spectacular.”
Impact on the market
Other members of the Australian startup community have raised concerns over these early-stage listings putting the entire market in jeapordy, with angel investor Shelli Trung saying it is a “disaster waiting to happen”.
“Having a lot of listings is only good for headlines, and over the longer term is a poor return for investors and will negatively impact future entrepreneurs,” Trung told StartupSmart.
“You risk extinguishing the tech investment community before it has had a chance to take off.”
Stackla co-founder Pete Cassidy echoed these sentiments, saying he doesn’t want this recent activity to mean later stage companies can no longer utilise the funding route.
“There’s the potential to turn the Australian retail investor market a little bit sour on these tech companies in Australia which is a really sad thing,” Cassidy told StartupSmart.
“I think we run the risk of the public markets getting burnt too early with very premature early-stage listings which have the potential to turn away companies that are more later-stage and would look at an ASX-listing for strategic funding.”