Farewell Pollenizer: what does this say about the start-up ecosystem?

In February 2017, Phil Morle the CEO of start-up incubator and consultancy Pollenizer, announced that the business was being wound-up in Australia. According to the Australian Financial Review the reason for this decision was “that it had failed to find a sustainable business model for its operations”.

Founded in 2007 by Phil Morle and Mick Liubinskas, Pollenizer acted as a support for a large number of local start-up ventures. The business promoted itself as offering “New Growth with Startup Science” and its website claimed that its “Startup Science®” was “a game-changer” that offered tracking metrics and “powerful tools” that reduced the need for “excessive planning” and encouraged “action with the testing of assumptions”.

As stated on the Pollenzier website:

“Our Startup Science® programs are the trigger for a new, entrepreneurial way of working. We combine the very best global thinking with the lessons we have learned from building hundreds of startups, and helping to transform many big companies across the Asia Pacific Region.”

However, despite these bold claims it seems that Pollenizer was unable to make sufficient money from its operations to justify its continuation. The original business model of incubating promising start-ups and then reaping a commercial return from their growth didn’t eventuate. It shifted towards a consultancy working with larger firms that were interested in applying entrepreneurial start-up techniques, but even this doesn’t seem to have worked. Based, on media reports Pollenizer will be wound up by the end of June 2017.

Some lessons from Pollenizer’s demise and the hunt for Unicorns

Pollenizer is just one of a relatively large number of start-up accelerator and incubator programs and consulting businesses that have emerged in Australia over the past ten years. For example, in 2012 it was estimated that there were around 28 start-up incubators and business accelerators in Australia.

The emphasis placed on innovation and start-up entrepreneurship by Australian Prime Minister Malcolm Turnbull in the 2016 federal election campaign, also helped to trigger a flurry of activity in the start-up space. This included the investment by the Government of New South Wales of $25 million to establish the Sydney School of Entrepreneurship (SSE).

This not-for-profit organisation will seek to recruit up to 1,000 “bright, energetic, creative and committed students” each year to enroll in the SSE and work on the launching of new business ventures. The SSE is modelled on Sweden’s Stockholm School, which is a collaboration of local universities and has had some success with two firm’s SoundCloud and Klarna. These have been touted as “Unicorns”, which are defined as a start-up business with a market valuation of over $1 billion.

While this may seem an exciting goal the reality of business is that Unicorns are – as their name suggests – very rare. A study by TechCrunch found that in the United States since 2003 only 39 companies have emerged that meet the Unicorn criteria. This is only 0.7 percent of all the venture capital backed software start-ups. The rate of Unicorn generation in the United States was therefore an average of four per year. Further, the average time taken before these firms reached break-even was seven years, making it “a long journey beyond vesting periods”.

It is this quest for Unicorns that motivates start-up accelerator and incubator projects like Pollenizer. Their role model has been the US Silicon Valley start-up accelerator Y Combinator that founded in 2005. It had early success with Airbnb and Dropbox. Part of the success of firms such as Y Combinator is their ability to source venture capital funds. However, a review of the success of companies that went through Y Combinator and other leading accelerators found that very few secured follow-on funding.

The low success rate of Unicorn hunting within the start-up support community has raised questions in recent years. For example, TechCrunch notes that Facebook (a super Unicorn) accounts for about half the total value of the US Unicorn sector. Further, the rise of Unicorns is generally associated with major jumps in technology that offer an opportunity for the few lucky entrepreneurs. However, such technology shifts are difficult to predict and even harder to manage.

This relative failure of Unicorns to survive has seen venture capital investors questioning if their money is well-placed within such firms. According to Redhawk, in 2015 59 percent of the $4.2 billion that was invested into Unicorns went to Airbnb, Spotify and Zenefits with the balance going into a further 39 firms. With a success rate of 1 in 15 start-ups, the venture financiers are seeking to find more sure-bets.

Starting up is easy, scaling up is hard – what happened to the Gazelles?

The harsh reality of business – regardless of the industry – is that fast growth based on innovation is high risk and generally requires a significant amount of working capital. This was the dilemma that seems to have faced Pollenizer, and continues to plague the Australian start-up sector.

This was highlighted in a report published this year by Innovation and Science Australia, that examined the performance of the Australian national innovation system. It noted that while Australia ranks well at a global level in the creation of knowledge, we under perform in terms of R&D expenditure as a percentage of GDP, and rate a “motherless last” when it comes to the creation of high-growth “Gazelle” firms.

A “Gazelle” business is one that is less than five years old but has been experiencing an average annual growth rate of more than 20 percent per annum over a consecutive three-year period. Such firms typically make up not more than 1 percent of all firms and are by nature high-risk.

The term “Gazelle” was coined by David Birch, who examined job creation statistics in the United States during the 1960s and 1970s. His analysis suggested that most net new job creation was due to smaller, young firms that were experiencing high rates of growth. However, he also noted that finding and supporting such firms was a challenge as they are small, independent and volatile.

Later research by the US Small Business Administration found that high-impact high-growth firms were on average 25 years old and comprised not more than 2 to 3 percent of all firms. They were also found across all industry sectors, not just high-tech ones. Similar data has been found in Australia that suggests “Gazelles” comprise not more than 3 percent of all start-ups despite contributing significantly to job generation.

As the Innovation and Science Australia report makes clear, Australia performs well above the average in its ability to create new knowledge. However, we have a long way to go to reach global best practice in the application of this knowledge. There is a gap in our ability to transfer research findings from our universities into industry, and a gap in the availability of funding to help high-growth ventures scale up.

Another key gap is our managerial skills base in relation to the up-scaling of such businesses. We have little problem starting new businesses, but a poor track record in sustainably growing them.

One of the key challenges to a country like Australia is that the size of the domestic market is tiny and so is the venture capital sector that might support such firms. The United States remains the world’s largest venture capital market with US $60 billion invested in 2015. This is 14 times the size of the entire European venture capital market and 85 percent of all such investment in the entire OECD group of developed economies.

By comparison Australia has around 210 active venture capital and late-stage private equity investment funds, managed by about 121 venture capital firms. Total venture capital investment in 2015 was around A$8.8 billion. Of this money, around 42 percent is sourced from superannuation funds, and the majority of all funding (68%) is sourced within the Australian community.

This combination of a small domestic market, tiny venture capital sector, and relatively few large firms that invest in R&D, makes it difficult for Australia to act as an incubator for “Gazelles” let alone “Unicorns”. It will be interesting to see how the Sydney School of Entrepreneurship and similar publicly funded initiatives fare over coming years. Given the odds of finding and scaling a Unicorn in Australia, and the history of Pollenizer, the SSE, and the many other similar initiatives that have spawned in recent years will need all the luck they can get.