To the outside observer, the recent growth of incubators, co-operative workspaces and angel investor funds could make Australia appear like a tech start-up’s dream.
And indeed, the Australian government has recently shared ambitious plans to make Australia a “start-up nation”. But really, how close is Australia to becoming the start-up nation that our politicians aspire to?
Sorry to say, the dream is still a long way from becoming reality.
Compass Group’s 2015 Global Startup Ecosystem Report says that Sydney’s seed investment activity grew just 33% over the past three years. Sounds OK? Only until you compare it to other cities like Bangalore, who grew by 53%. This slow growth helps to explain why Sydney fell from 12th to 16th in the global rankings and Melbourne dropped off altogether.
So what’s going wrong? And what needs to be done to make our cities real hot-houses for tech innovation?
Obstacle 1: A lack of private investment
Private sector investment in Australian start-up companies is woefully behind the rest of the world. Consider the percentage of our GDP derived from venture-capital-backed companies: 0.2%, compared with the US and Israel, at over 10%.
When you consider the statistic from Crossroads 2015 that Australians bet more on the Melbourne Cup ($200M, $9 per capita) than the entire venture capital industry invests in start-ups in a year ($100M, $4.55 per capita): it sure puts things into perspective.
Encourage new sources of private funding, teach skills in technology assessment and maintain the focus on the legislation around crowd-sourced funding.
Obstacle 2: Punitive share schemes
Employee share schemes in Australia are anything but appealing. Current legislation means that start-up employees are liable for the tax on shares when they vest, even though the value of those shares can’t in most cases be realised yet. This means that employees have to pay taxes without the income to cover them. Sure, you can get around these tax liabilities – but it costs a fortune in time and money: and what start-up employee can manage that?
Tax reforms that protect and encourage shareholding employees of start-ups.
Obstacle 3: shortage of tax breaks and grants for start-ups
Tax breaks are vital to helping start-ups get through the first few years of little to no cash flow. With the exception of a few grants like R&D offset and export market development grants, there are few incentives to grow businesses within Australia, or help scale the business.
Grants & tax breaks that actually align with the help a business needs in order to grow. For instance, in Singapore, incorporated start-ups can claim their first $100k of income completely tax-free for 3 years. Add to that the 50% deduction on taxes related to angel investing, and it’s no wonder Singapore is leading the current start-up boom.
Obstacle 4: the yawning gap between research and industry
It’s not that we’re short of ideas, as a nation. But there is a distinct lack of funding for turning concepts and research outcomes into proven, marketable technologies. In fact, when it comes to business feasibility studies with precisely this aim, the Australian government spends just 10% of the amount the US government invests, as a percentage of GDP.
Grants and development contracts which are designed specifically to support the turning of research outcomes into proven technologies.
Obstacle 5: attracting and keeping the right brains for the job
We have plenty of homegrown talent here in Australia. But there’s an undeniable talent drain from Australia towards more start-up friendly environments like the US. What’s more, many Australian tech start-ups shift to other countries such as New Zealand, India, China and Britain to take advantage of the more start-up friendly environment: providing a double blow to the Australian economy. As if that’s not enough, we also have trouble enticing brains away from academia and towards industry, and there’s remarkably little movement and collaboration between the two.
Incentives and initiatives that reward collaboration between universities and industry and incentivise research staff’s involvement in industry. Along with the creation of a more start-up friendly environment.
Obstacle 6: lack of government funding for start-ups
The Australian government introduced a range of tax cuts for small businesses earlier this year, along with funding for a crowd-sourcing regulatory framework. But these measures are still woefully inadequate and aimed more at small business than start-ups. The end result is that many of Australia’s tech start-ups are now funded from outside Australia: Atlassian being one notable example.
Proper, substantial, sustained investment in innovation and tech start-ups: comparable with China’s $8.3 billion seed-stage National Venture Capital Fund or South Korea’s $4billion Creative Economy initiative.
According to our new prime minister, his will be a 21st-century government. He also said in his victory speech that disruption is Australia’s friend. We agree, and we’re looking forward to seeing the policy changes that will make ours a true start-up nation.