Insights

During this episode we met with Philip Camilleri and Julian Pace Ross who took us through the success stories of two start-ups they founded. Each of them managed to raise significant investment, leading to their original shareholders selling out.

Altaro, of which Julian was one of the founders, is a name that is well known in Malta, and beyond, for its data recovery and IT security systems. The four founders were Maltese – originally they were working separately in pairs until their common interests and views brought them together. In Julian’s words the chemistry between the four was evident from the very start.

Both Philip and Julian had scientific educational backgrounds having graduated from the University of Malta. Their fascination for technology and an entrepreneurial disposition runs like a common thread in their foundational blocks. The internet boom had a determining influence on their lives. As pointed out by Malcolm Gladwell in his book “Outliers”, the coincidence of one’s formative years with a technology boom and access to the technology, is one of those factors that has determined the success of great tech personalities such as Steve Jobs and Bill Gates.

Despite a number of parallels, Julian and Philip’s life journeys are however different. Whereas Julian remained in Malta, Philip’s job took him to London and eventually New York, and he remained living overseas ever since. Chance led him to meet his business partner in New York where the journey of their venture, SmartAsset took off.

The stark contrast between the Maltese and US start-up support ecosystem and the exposure to finance is evident in the depiction of Julian and Philip’s story. As many start-ups on this island are accustomed to, the growth of Altaro was driven through private finances of the founders, whereby they had to draw on their life savings to scale the business through and through. But as Julian states, and this is surely a distinguishing factor of Altaro’s success story, from the start the founder’s vision was always on the global market. Julian and his co-founder, Simon’s, decision to partner up with the two other founders was led by the fact that these two individuals had already gone global with a previous venture they had had. Positioning themselves as a global industry, rather than deciding to focus on the local market, gave Altaro, in Julian’s words, the critical mass (in terms of client base) to start growing. Through this experience, Julian strongly advocates against Maltese start-ups using the local industry as a test bed for their ideas, prior to launching globally. His experience leads him to conclude that the limitations of Malta’s market size do not allow for the desired growth and often lead start-ups to lose faith rather quickly.

The advantages of having access to a broad market and network of opportunities is equally evident, if not more pronounced, in Philip’s journey. The sheer amount of, and access to business incubators in the United States, when compared to Malta, is evident. After having failed to obtain buy-in from investors on three occasions, SmartAsset managed to get into an incubator program, named Y Combinator. This immediately opened the doors to further potential investors who were happy to take a chance on SmartAsset without demanding anything in return. This was the first of various investment levels the venture went through until it was able to raise a total of 160 million US dollars. In Philip’s US experience, once you are able to attract the first tranche of investors, others follow suit for the simple reason that there is comfort in numbers and mutual recognition and trust amongst the investment community.

This story brings out the shortcomings and limitations of Malta’s infrastructure where significant private investment in start-ups is limited, if not inexistent. Rather than being focused on attracting this network of investors to Malta by providing them with a package of creditor-friendly legislation, incentives and other solutions that they may be seeking, Malta’s strategy has largely focused on providing finance opportunities through Government grants and schemes. By doing so, apart from creating certain bureaucratic requirements that start-ups find difficult to cope with, such as, in Julian’s words, a three-year business plan which can never be maintained by a start-up, we are missing the opportunity of leading private investors, who in turn could drive the global start-up community to the jurisdiction, to our shores. Relying on banks and other traditional forms of raising capital is also a non-starter for tech start-ups. Due to their very nature and need to minimise risk, these institutions demand collateral security, which is not available to start-up founders at the very early stages of their working life. Neither has Malta adopted creditor-friendly measures that would allow for intellectual property to be used as an asset to be placed in security and which the lenders could seize in case of default. The legal and practical issues emanating from the intangible asset (intellectual property) are increased when AI is used in their development due to concerns of intellectual property, data and other breaches in the underlying software. Malta’s window of opportunity to be amongst the first to legislate for clarity on these matters is closing with other jurisdictions clearly focused on setting standards (and attracting the attention of the industry) amidst the lack of harmonisation on these legal issues.

A mix of luck, perseverance and self-belief is another clear ingredient of both the success stories. Being turned down a couple of times should not determine the fate of an entity. One needs to believe in the possibility of success. In Julian’s case, the goal from the very start was to grow the start-up to a scale where the founders could sell out. Again, from his experience, the need to establish oneself on the international market was key to a successful sell-out. For this reason, the entity structurally moved to the UK and the intellectual property was parked in this entity. This is due to the fact that purchasers who are interested in buying out the scaled-up start-up want to feel comfortable with the structure of the target and the framework in which it operates. When making such structural moves, legal due diligence, drafting of commercial agreements and managing intellectual property rights are key aspects.

In Philip’s case, the US-based trajectory towards selling out was, on the other hand, quite straight forward. The US being a mecca for tech start-ups, the structure of such entities is well-established from their very initial stages and investors know what to expect.

In summary, both Philip and Julian’s experiences highlighted the relevance of thinking global and adopting a model that would ultimately allow for investment and the sale of the venture with the least legal and bureaucratic issues possible.

To listen to the full episode, head to sportify and search ‘Ganado Meets’.