Next Canva? Sydney AI company is tech's hottest start-up

The company’s tools work like other generative AI services that have come to prominence over the past 12 months, led by OpenAI’s ChatGPT. It generates images and 3D model textures from a brief prompt, and has rivals including OpenAI’s DALL-E, Midjourney, Scenario and Stable Diffusion.

The company, founded by chief executive JJ Fiasson and five others, has caught the imagination of local tech investors, who have watched as international peers threw huge amounts of money at generative AI start-ups this year.

Microsoft put $US10 billion into OpenAI in January, Inflection AI banked $US1.3 billion and Amazon has said it will put up to $US4 billion into Anthropic.

Talk of a bubble appeared in earnest in June when French start-up Mistral AI raised $US113 million ($175 million), despite being only four weeks old, and having no product to speak of.

Flying Fox Ventures partner Kylie Frazer said AI start-ups all over the world were growing rapidly. But, she said, “it will be interesting to see how they’re performing in 12 to 18 months”.

The Financial Review can confirm the country’s largest VC fund, Blackbird, has bought about 20 per cent of the company across multiple capital raising rounds, and compared it to Canva. The investments were made via a funding device called a SAFE note that does not immediately result in ownership being disclosed to the corporate regulator.

Blackbird Ventures co-founder and partner, Niki Scevak, is a board director at Leonardo. Natalie Boog

Niki Scevak, a founding partner at Blackbird, has taken a board seat at Leonardo. Blackbird refused to comment, but privately its staff and the rest of the industry have been talking about little else.

“They think it’s the best thing since sliced bread,” said one industry source, who requested anonymity to speak candidly. “It’s taking on a mythical stature,” a venture capitalist said.

Another source said Leonardo was all Blackbird wanted to talk about at its investor day earlier this month. “[Leonardo] were the belle of the ball,” the source said on condition of anonymity as the event was private.

If Leonardo grows in line with the potential Blackbird has claimed it could create a conflict for the firm, which made its name backing graphic design software giant Canva. In another awkward wrinkle, a Blackbird employee closely involved in the original Leonardo investment has left the firm. Both Blackbird and the employee declined to comment.

Leonardo’s early success is even more important for another local VC firm, Side Stage Ventures. It is trying to raise the second half of its planned $30 million first fund, and was an early investor in Leonardo. Industry sources said that gaining exposure to Leonardo is a key part of Side Stage Ventures’ pitch to prospective investors as it tries to raise in a depressed market.

A spokeswoman for Side Stage, which shares the same public relations firm Sling & Stone with Leonardo, also declined to comment.

A key unresolved challenge for Leonardo is how to retain users. Internal company statistics, seen by The Financial Review, show that of the 225,000 users who signed up in April 210,000 dropped off, with just 15,000 remaining 11 weeks later.

That drop off rate, which also manifests in about 50 per cent of subscribers leaving within four months of signing up, undermines Leonardo’s claims to have solid annual recurring revenue, which is the gold standard for software companies.

Annualised revenue is a metric often used by early stage start-ups to give an idea of how much it would make over a full year. Though Leonardo’s annualised revenue was recorded at $US5 million in August, its actual revenue to date is much smaller, at $US1.6 million.

It is early days, however, as Leonardo only opened access to its tools in December, and started charging in March, with rapid product innovation. It has 1.8 million people on its Discord chat forum, with lively discussions on how to use its products.

Leonardo users can select the model, which determines the visual style of illustrations generated, or use custom models that could reflect a company’s brand. Leonardo forbids pornographic imagery, making it more likely to attract corporate clients than some rivals.

Leonardo’s online community submit images on regular themes that showcase its abilities. Leonardo Ai

It can create textures for 3D graphics, which could make it appealing to fashion brands that want to experiment with different designs, architects imagining homes or game developers making virtual worlds. And it can work with other software, which could help Leonardo expand its business.

Users can select from several subscription tiers, which provide different numbers of tokens. More advanced image generations or customisation cost more tokens.

That is one mark of the distinction between Leonardo and Canva that has raised questions about its recurring revenue potential. Typically, software as a service firms charge a subscription for unlimited and ongoing access because additional software use costs essentially nothing.

However, generating imagery uses so much computing power that it is expensive, requiring the token limit.

Leonardo’s spokeswoman did not answer questions about how it handles issues of bias in its images, which have been a problem at other AI image generation firms. Their tools have a tendency to repeat biases seen in the images they are trained on. Leonardo’s staff is overwhelmingly male.