A glimpse of the Australian startup ecosystem.

I was recently asked to describe the Australia Startup ecosystem and assume the person asking was living outside of Australia. At first, when thinking about the startup environment my mind rushed to questions such as; where is the key hub or hubs, how big is the market, what are the significant industries that Australians have an advantage in?

This question and the request from the person asking has led me to write this article. The aim is to hopefully construct an overview of the environment to help give an outsider a quick glimpse of the Australian innovation and technology ecosystem.

From a glance:

Initially, I would say that Australia has a diverse crowd of entrepreneurs looking to build products that very in industry and target audience. We have a range of great new companies in Australia looking to focus local and globally however due to location, I would suggest a global focus should be key. The likes of Atlassian and Catapult are great examples of mature startups engaging in creating a global brand and it is with these successes that will hopefully spur the next generation of entrepreneurs to dream big. The ecosystem has also been given a drive of excitement with the help of the national government wishing to make ‘Innovation’ a hype word and the key pillar to propel the economy.

Meet-up groups are in abundance in each city and new ideas are being hailed with the support of each state governments own initiatives to help build ‘entrepreneurism’ in society. The Australian ‘pro government’ approach is also a large driving force that has helped to make the profession title of ‘entrepreneur’ a non-dirty word. Australia is well supported by the industry as well by the many different and always increasing society bodies such as ‘Tech Sydney’, ‘LaunchVic’ and ‘Fintech Australia’ as well as the entrepreneurs that have had their successes and wish to give back to the group.

New minds and talent:

Australia has always been known to be geographically isolated with the technology industry said to be both secluded and young in comparison to global peers. As a region, we have talented people coming out of our universities as high quality junior engineers, designers and driven entrepreneurs. Both national and state governments around the country are more focused on ‘STEM’ curriculum and have even begun to involve the teaching of ‘coding’ in schools with initiatives such as CodeClub to help drive a pipeline of talent. The only issue with Australia’s talent is the drain of our gifted who are lured oversees with the idea of working for the next Uber, the current Uber or starting the Uber for X. As a region, we have a lack of senior talent which is echoed by Scott Farquhar, co-founder and co-CEO of Atlassian. It is also estimated that there is 20,000 Australians currently in Silicon Valley working in the technology industry or trying to build their own startup business.

The Government and the ‘ideas boom’:

The government has created several new initiatives to help lure talent back as well as attract new talent with the startup entrepreneurial visa. The visa will be provided annually to 2,000 global entrepreneurs with $200,000 or more in capital who want to set up in Australia. The visa lasts for a maximum of three years, but may be extended for another year or converted to permanent residence after two years. This single initiative is part of the bigger ‘ideas boom’ to help make Australia an option for those wishing to start a new disruptive or new industry business. As a result, the government has begun to implement a raft of new initiatives to make our country more attractive internationally. The current Liberal government has also focused domestically with the call of the ‘ideas boom’ with roughly a $1 Billion dedicated to building ‘innovation’ within Australia.

The main aim for the government’s interest in ‘innovation’ and the push of the ‘ideas boom’ is definitely in part due to the decline in the mining industry. Similar to New Zealand, Australia is trying to deleverage itself from the reliance of a single industry and aims to build an economy of multiple industries and services that can be sold internationally.

The key initiatives:

The initial changes are very favorable for investors and it is great to see the recent taxation changes having taken effect on July, 1st 2016. In brief, the government has provided a 20 per cent non-refundable carry-forward tax offset on investment, capped at $200,000 per investor, per year as well as a 10 year capital gains tax exemption for qualifying investments held for at least twelve months. This incentive is focused towards helping the funding of the 4,500 startups that are missing out on financing each year. A key point to note is that the initiative is only available to sophisticated investors financing startups that meet the eligible criteria rules.

For the entrepreneurs, the government allows for a lower company tax of 28.5% for entities with less than $2 million of annual revenue. Businesses also have access to a R&D tax offset allowance that helps with the write-down of R&D costs per year. 2016 has also seen changes made to the share and option offerings for staff to defer the taxation of equity where previously the equity offering would have been taxed in the year granted. The governments ‘ideas boom’ and tax exemption is definitely favorable to both the investors and entrepreneurs. I would see the VC and Angel Investing landscape growing significantly as a trigger from these initiatives as ‘LP’ money begins to move into early stage startup financing.

Another key point is that the current government acknowledges that changes are needed to the current insolvency laws to encourage innovation which in my opinion, will be a great boost to the ecosystem. Hopefully we will see more risk takers in Australia with the reduction of the current default bankruptcy period from three years to one year.  The government also plans on implementing a ‘safe harbour’ for directors from personal liability. Obviously there will be a great deal of thought required in to how this policy will be structured as the Government needs to ensure that Investors are not fleeced by miss-guided persons acting inappropriately. At this stage, it is expected for the new policy and proposed changes would not become law until mid 2017.

The ‘Startup’ geographic landscape:

Australia has five major capital cities with each fighting for the crown as Australia’s Startup hub. The main fight would definitely be between Sydney and Melbourne where each are almost equal in population. This being said, the three bigger cities; Sydney, Melbourne and Brisbane would be the biggest providers of entrepreneurs where Sydney is clearly Australia’s innovation hub. The Startup Muster is a great source for statistics on the ecosystem where the ranking of activity (2015 senses data) is in the order of Sydney (44%), Melbourne (17%), Brisbane and the Gold Coast (13%), Perth (9%) and Canberra (6%). It is no surprise that the hubs reflect the population spread but also further demonstrates the large geographic challenge that Australia has, especially when each city is separated by thousands of km’s. Mick Lubinskas recently expressed his thoughts of the proximity challenges on This Week in Startups Australia and how he believes a single ‘startup hub’ and region would help to drive the growth of the ecosystem.

The types of entrepreneurs:

Looking at the 2015 report from the Startup Muster, I am actually very surprised to see the rankings of the industries Australian entrepreneurs are focusing on.

In order the top 10 industries are:

Marketing – 12.9%
Content/Media – 12.7%
Retail – 12.3%
Big Data – 12.1%
IoT – 12.1%
Health – 11.7%
Education – 11.1%
Fintech – 10.7%
Travel – 7.5%
Gaming – 6.9%

Why am I surprised? Well, I would initially have said the breakdown should reflect the top 50 on the ASX with Banks and Financial Services (40%), Mining and Exploration(26%), Industrials and logistics (10%) and Consumer Staples and Utilities (10%) making up the majority of top 50.

It is interesting to note that the 2015 Startup Muster recorded the activities by entrepreneurs in Mining Logistics and Agriculture as 5.5%, 6.1% and 4.6% respectively.

This data suggests that the entrepreneurs are building businesses that are either focusing on areas where the biggest growth is expected or industries with the biggest areas for disruption. Another assumption is that the areas of higher focus are the industries with lower barriers of entry and lower startup costs which make sense when Mining, Logistics and Agriculture tend to have larger CAPEX spending in comparison to other industries.

The investors, hubs and incubators:

The investor universe spreads as vast as the geographic region of Australia, but generally include the standard market players such as Angels and Angel Syndicates (Sydney Angels), VC’s and company VC’s, Incubators and PE firms focused on later stage investments. The investor group has some key names that stand out, without mentioning each individually one can classify VC’s as the larger players in this space.

I would also mention that Australia has had an increase in the number of VC’s as well VC’s fund sizes due to the recent changes made by the government. There also seems to be a new hype of VC’s joining the ‘$200 Million funds size club’ with new funds being raised targeting the magic ‘$200 Million’ number. The main energy for this drive in VC numbers and fund sizes is due to the new tax incentives and the low interest rate environment. These two factors, as well as the growing Superannuation fund size as a national aggregate (Australian Super has the 4th largest amount of money under management by region globally and growing the fastest) has had a big part to play in having Superannuation’s look at Venture Capital as a form of investing.

The investor landscape also includes companies that have VC firms created internally, there is university spaces and incubators as well as incubators that are part of co-working hubs. A full list of some notable names has been released by the Start-Up Guide. Key names to mention for corporates are Telsta’s Muru-D and Nab Ventures.

The next level would fall in to smaller funds that are spread across Australia where some try to become more focused on specific industries or regions. H2 Ventures is a good example of a VC that only invests in Fintech and is based in the Sydney Fintech Stone & Chalk co-working space. A few names of co-working spaces around Australia are Fishburners (Sydney), York Butter Factory (Melbourne) and River City labs (Brisbane). A more detailed list of co-working spaces can be found via thefetch.

To recap:

The Australian ecosystem is a growing environment and there is a clear focus for both the investors and entrepreneurs, which is partially driven by the governments ‘ideas boom’ and the recent hype in innovation and entrepreneurism globally (Australia ranked third globally). The luring of our talent to Silicon Valley is still present, however I feel that Australia and more specifically Sydney, offer a few key advantages that cannot be found overseas. Sure, Silicon Valley has the hype; where your Uber driver is working on his or her own startup, the waitress at your local restaurant can help you decide how to pivot your idea or knowing that you could bump into the likes of Jason Calacanis on the hilly streets of San Fran. Sure all of these points are enticing but in retrospect,  Australia offers more than just the obvious; rule of law, well educated population and a safe investing environment. In addition, we also have:

1) A pro, innovations and investor government focus. Go the ‘ideas boom’,
2) A country where creating one’s own business is hailed as a success even if you fail,
3) Great education and support from the industry to help build the future,
4) Incentives for Investors to help drive funding locally,
5) The lifestyle, beaches and great outdoor living, and,
6) The access to the Asian markets.

I feel that I could definitely add a few more points however it’s clear that this country is the place to be for ambitious startups. The main aim for entrepreneurs will be to focus on developing locally and scaling product internationally where the product should focus on areas of expertise.

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