Difficulty ahead for tech startups: Ignition CEO

Investing

It’s going to get harder for tech startups to secure bank funding, CEO of professional services software startup Ignition and angel investor Guy Pearson tells Forbes Australia.
Guy Pearson, co-founder Ignition. Image source: Supplied

Pearson co-founded Ignition more than a decade ago after experiencing first-hand the manual processing problems in the accounting industry. Today, Ignition is claiming to build the “Shopify for services”, having raised US$75 million to date to scale its client engagement platform and integrated payments solution to other professional services firms like consulting and marketing.

But Pearson is also a self-proclaimed “occasional angel investor”, with notable exits from Hubdoc (sold to Xero), Selfweath (IPO) and was early on in other success stories like BuildKite, Hokodo, Firstbase and Storylane. As someone straddling both the founder and investor side of the venture capital industry, Pearson has a unique perspective on where valuations are headed this calendar year.

“With rising interest rates, many investors are putting their money into safer investment options with higher returns, like interest bearing cash vehicles,” Pearson says.

“In a challenging economic climate, it’s likely this trend could continue, which may result in a decrease in tech stock valuations. Additionally, it may continue to be harder for tech startups, particularly those in the second stage of funding, to raise money.”

Australia has sold off Wifi, Google maps and many other innovations; we should be working to create, build and scale more at home.

– Guy Pearson, co-founder Ignition

This is largely in line with Cut Through Ventures’ quarterly update on Australian start-up funding, which surveyed 141 participants from angel syndicate leads, venture capital firms and family offices and found Australian startup funding experienced its slowest start since 2019. According to that report, just 26% of investors reporting the funding environment favourable.

In 2021, Pearson’s Ignition completed a US$50 million Series C round led by US venture capital firm JMI Equity with participation from previous backer, US firm Tiger Global. In 2022, Ignition processed over US$1 billion in client payments, with half of that volume coming from America. And since 2020, the firm has also seen over 200% growth in client revenue under management in America.

He says seeking funding outside of Australia may help startups scale successfully.

“Once a company reaches a certain stage of Annual Recurring Revenue (around A$20 million), they may need more than A$50 million in funding if they are growing at a rate of over 50% to continue to scale at the same pace,” he says.

“However, there are only a few Australian funds that can provide this level of funding, typically requiring a lead investment of at least $30 million. Therefore, companies often need to look overseas to find larger investment opportunities.

“It’s telling that there are currently only a small number of software companies in Australia that have reached a market cap of A$100 million or more.”

Another reason start-ups may want to look to overseas funding is market size. “Texas has more than 30 million people versus 26 million people in the whole of Australia,” Pearson says. “That’s why many Australian tech startups like Ignition are global-first.”

Supporting ‘soonicorns’

Ignition, which claims to be a “soonicorn” (a company that will become a unicorn, which means it’s reached US$1 billion in market value), says Australia needs to look at how it incentivises and recycles investment in order to help other startups become the next billion-dollar business.

“From a policy perspective, research and development grants and early stage venture capital limited partnership rebates are key to accelerating investments into early stage companies, but much more can be done to help these companies get off the ground,” he says.

“One potential area for reform is tax incentives to encourage more investment in early stage innovation companies. While current ESIC tax incentives are a great notion, the current application process isn’t easy or automatic for the early-stage companies looking to register.

Pearson also suggests the government could extend the capital gains tax rollover for small businesses to entrepreneurs who exit their business or sell a small stake to allow for increased investment back into the research and development sector.

“More interesting opportunities exist at later stages as a company scales for an excited entrepreneur to reinvest back into the future success of early stage companies and to help create a thriving tech ecosystem,” he says.

“This recycling of investment has been impactful in other parts of the world for decades, including Silicon Valley.

“If we can incentivise it, we will continue to build up our ability to build and scale high IP businesses. That way we can help innovation stay and grow here. Australia has sold off Wifi, Google Maps and many other innovations; we should be working to create, build and scale more at home.” 

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