Crossroads 2015 An action plan to develop a vibrant tech startup ecosystem in Australia

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Crossroads 2015

An action plan to develop a vibrant

tech startup ecosystem in Australia

April 2015

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Foreword

It is hard to over-‐emphasize how important this moment in time is for Australia. Accelerating technological disruption is coming hard, fast, and mercilessly to every industry with no regard for societal consequences. Industries that today account for almost a third of Australia’s GDP are in the line of fire. Challenges are coming from companies using technology for offense not defense, leveraging their global scale and access to new datasets to re-‐imagine industry boundaries and entire industries.

Without action, these shifts have potential to stall Australian economic growth, render whole industries uncompetitive and lead to climbing long term unemployment across the nation. It sounds alarmist, but it’s not. It is reality. The choices we make right now will affect our generation and the ones to come. They will define our prosperity and place in the world.

Public and private sector understanding of this has evolved positively over the last 12 months, reflected in public policy changes and anecdotal evidence of Australian industry allocating new funds for high risk technology based investments. Australian technology startups have also made huge strides, taking the best learnings and methodologies from overseas and applying them domestically. All of this is good news, but the progress is relative. It’s not enough, and it’s not fast enough.

I constantly meet talented Australian entrepreneurs here in Silicon Valley who made the gut wrenching decision to leave family and friends. They do it because the environment in Australia is still not conducive to building large new technology based companies. Of course there are exceptions with some world-‐class technology based businesses being spawned domestically, but as this report shows there are not enough of them and their success cannot be easily replicated.

Compounding the challenge for Australia, their world-‐class progress was mostly recognized by offshore investors, and as a result there will be forces at work to have them shift their center of gravity to other parts of the world. These talented entrepreneurs, and their equally talented domestic counterparts represent the future of Australia as every industry and every business evolves to become a technology and data-‐driven business in our lifetime.

The new economic structures underpinning data-‐driven businesses are unlike anything we’ve seen before with the most progressive thinkers labeling them Platform Economics. Platform economics fuels growth for Apple, Google, Uber, GE, Monsanto and others. One primary implication is that value in every industry will migrate to the owner of platforms over time.

These new business are global, scale driven and have winner-‐take-‐all dynamics. They recognize that value is a function of the structured data that the platform produces and the insights gained from these datasets. Often they have inherent monopolistic characteristics because of data feedback loops within the platforms. A recent report published in the US highlighted the fact that the leader in these new sectors typically captures more than 70% of that market’s value as measured by market capitalization.1_{There aren’t any second chances.}

Developing countries throughout the world are responding with speed and conviction by implementing policies and programs to stimulate and support high-‐growth technology-‐based businesses, and to retool their workforce by developing entrepreneurial skills. China for example just announced an A$8 billion fund for new technology-‐based ventures. Obama has announced a decade long initiative to map activity in the brain to help with treating medical conditions, but also to accelerate development of Artificial Intelligence technologies, which will touch every industry in the US in coming years.2_{Australia needs to do the same and prioritize the creation of conditions that will}

spawn new billion dollar technology based industries and businesses.

1_{http://playbigger.com/files/PlayBiggerTTMCReport.pdf} 2_{http://www.whitehouse.gov/share/brain-initiative}

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Australia is unique in wonderful ways. As this paper suggests, rather than trying to replicate any other region in the world, it needs to take the best ideas and apply them domestically taking into account this uniqueness and the country’s many strengths. The solution for Australia requires strong, coordinated leadership that cuts across industries and political ideologies.

While the industry disruptions faced by Australia are global and not specific to us, what we choose to do about it is entirely in our hands. The consequences of action or inaction will be undisputable and because of the exponential nature of technology-‐driven change, Australia has the potential to pass a point of no return and be permanently relegated to a derivative economy if the right actions aren’t taken now.

There is no reason for this to happen. Australia is full of incredibly talented people with the conviction and tenacity to seize the moment and create the future we all want. We have world-‐class academic, applied research and enterprise institutions. As a nation we have a will to succeed, we just need to be clearly and objectively told the good and bad of the current situation so that we can take action and all pull in the same direction to resolve it.

This paper is a credible, action-‐oriented plan that sets out structured programs that will help ensure we get to where we need to be. It’s a combination of original thought and adapting the best initiatives that have been proven to work elsewhere in the world. For individuals this paper is also a call to arms to get involved and be part of the solution by engaging in constructive conversations, debates and by holding stakeholders across all sectors accountable for concrete action.

I’m hopeful that the Australian private and public sectors realize the severity of the current situation we face despite the progress of the last 12 months and affect the necessary structural, societal and cultural changes. We are a country with incredible creativity, resilience and fight, but our economic future is in jeopardy. This is a very special moment in time. Let’s choose to not accept the status quo, but instead take the lead in creating a brighter future for ourselves, our country and for the next generations.

Adrian Turner

Founder, Mocana Corporation and Borondi Group

Author, Blue Sky Mining: Creating Australia’s Next Billion Dollar Industries April 2015

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What is StartupAUS?

StartupAUS is a not-‐for-‐profit organisation formed in 2013 by fifty leaders in the national startup community. It exists because the startup sector in Australia faces several profound challenges that are hampering its growth and limiting Australia’s ability to benefit from the economic impact of successful startups.

The mission of StartupAUS is to transform Australia through technology entrepreneurship. StartupAUS seeks to do this by catalysing a major shift in attitudes in Australia from being consumers of technology to being creators of technology and using technology as the basis for economic growth. StartupAUS also actively engages with all levels of government to help shape economic policy discussions with the objective of better supporting the creation and growth of technology startups to become globally significant companies as part of Australia’s much needed transformation to a knowledge-‐intensive economy.

StartupAUS is supported by volunteers from the startup community around Australia who are responsible for organising grassroots efforts and coordinating community activities. It gratefully acknowledges the support of its community members and sponsors Xero, Salesforce, River City Labs and Google Australia.

www.startupaus.org

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Introduction

StartupAUS released the Crossroads report in April 2014. Crossroads is the most detailed review ever undertaken of the Australian startup ecosystem, and includes a comprehensive analysis of the environment that affects startups both in Australia and overseas. It provides a concrete and thoroughly researched action plan that, if implemented, could be the basis for development of a vibrant startup ecosystem in Australia that would contribute over $100 billion to GDP and create over half a million new jobs by 2033.

Crossroads 2015 has been fully updated to reflect changes in the Australian startup ecosystem over the last twelve months, and to note significant developments in the rapidly evolving startup landscape internationally. The recommended actions have been updated to reflect the current challenges facing Australia as it seeks to support the growth of high-‐value technology-‐based businesses, and incorporate input from many of the key figures in Australia’s startup community. This report makes the case that Australia has an unprecedented opportunity to transition from an economy based on resources, primary industries and domestically focused businesses to one based on high-‐growth knowledge-‐intensive businesses that can compete globally.

The recent Startup Economy study3 undertaken by PwC and commissioned by Google Australia projected that high-‐growth technology companies could contribute 4% of GDP (or $109 billion) and add 540,000 jobs to the Australian economy by 2033 from a base of approximately 0.2% of GDP today – but only if action is taken to address several areas of market failure relating to culture, skills, markets, funding and regulation.

Over the last two decades many countries have recognised that high-‐growth, technology-‐based businesses are important drivers of economic growth, and a growing number of governments have responded by launching programs to systematically invest in the creation and support of high-‐growth companies.

Australia has not kept pace, and has under-‐invested in catalysing and supporting its high-‐tech industries, as evidenced by the fact that we now have one of the lowest rates of startup formation in the world, and one of the lowest rates of venture capital investment.

According to a recent World Economic Forum report,4_{Australia’s startup ecosystem is lagging behind}

those of many other developed nations due to a lack of emphasis on entrepreneurship education, limited engagement with universities and poor cultural support for entrepreneurs.

In his book Blue Sky Mining: Creating Australia’s Next Billion Dollar Industries,5_Australian entrepreneur Adrian Turner observes that Australia’s startup ecosystem is maturing, but at a slower rate than those of many other nations, and largely in the absence of direct government support. He argues that unless innovation and entrepreneurship become a national priority, Australia will find it increasingly difficult to compete on a global stage.

Australia’s fledgling startup sector has experienced a groundswell of activity over the last few years. There is much enthusiasm, strong growth in the number of incubator and accelerator programs, increased media interest and increased awareness of startups. We have also seen continued growth in the number of Australian technology companies achieving global success.

However we have also witnessed a concerning trend for our fastest growing technology companies to leave Australia in search of talent, capital and more favourable regulatory environments.

3_{http://www.digitalpulse.pwc.com.au/australian-tech-startup-ecosystem/}

4_{http://www3.weforum.org/docs/WEF_EntrepreneurialEcosystems_Report_2013.pdf} 5_{http://www.blueskyminingbook.com}

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According to Sam Chandler, founder of Australian startup Nitro (now based in San Francisco), inaction on startup issues in Australia “has potential to turn into a national tragedy” and is likely to lead to a continued exodus of Australian startups to other countries.6

This paper makes the case that as a nation we need to take immediate and far-‐reaching steps to address market failures that are impeding the maturation and growth of our startup ecosystem. It sets out an action plan based on analysis of the local startup ecosystem and of government policies and programs that have been effective in growing vibrant startup ecosystems in other countries. The plan proposed by StartupAUS contains eight actions:

1. Create a national innovation agency 2. Increase the number of entrepreneurs

3. Improve the quality and quantity of entrepreneurship education 4. Increase the number of people with ICT skills

5. Improve access to startup expertise

6. Increase availability of early stage capital to startups 7. Address legal and regulatory impediments

8. Increase collaboration and international connectedness

Implementing the plan set out in this document will form an important part of the economic reform upon which Australia needs to embark if we are to successfully transition to a knowledge-‐intensive economy and continue our current economic prosperity well beyond the resources boom.

StartupAUS is committed to working closely with all parts of the Australian startup ecosystem, including entrepreneurs, corporates, universities and all levels of government, to develop and implement policies and programs to systematically grow Australia’s technology sector so that it can drive economic prosperity for future generations.

The StartupAUS board, April 2015. Alan Noble Director Engineering, Google Australia Peter Bradd Founding Director, Fishburners Bill Bartee

Managing Director, Blackbird Ventures

Steve Baxter

Founder & Managing Director, River City Labs

Dr Jana Matthews

ANZ Chair in Business Growth Professor and Director, Centre for Business Growth University of South Australia

Glenn Smith

Founder and Managing Director, ATW Capital Andrew Larsen Director, HealthEngine

6 http://www.computerworld.com.au/article/558803/govt-competitiveness-agenda-excludes-mature-startups-nitro-ceo/

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State of the Australian startup ecosystem in 2015

The Australian startup ecosystem has had a big year since the Crossroads report was first released a year ago. We have witnessed continued growth in the number of startups, incubators, accelerators, angel investors and venture funds, as well as more corporates getting involved in the sector. We have also seen several important changes in government policy and programs relating to startups. Some of the key developments in the Australian startup landscape over the last year are summarised below:

Company milestones

• Wotif (ASX-‐listed travel booking) was acquired by US-‐based Expedia for A$703 million • Ezidebit (payments software) was acquired by US-‐based Global Payments for A$305 million • Campaign Monitor (email marketing software) raised the largest single funding round by an

Australian tech company (A$320 million from US VC funds led by Insight Venture Partners)

• Atlassian (collaboration tools for software developers) raised A$192 million from several US

funds in preparation for an anticipated US public listing, valuing the company at A$4.2 billion. Atlassian also announced in Jan 2014 that it would domicile in the United Kingdom due to a combination of more favourable regulatory structures and greater access to investment.

• Aconex (construction software) listed on the ASX, raising A$140 million and valuing the

company at A$312 million

• BigCommerce (e-‐commerce storefront software) raised a A$65 million funding round from

US investors including SoftBank Capital and also Telstra Ventures, bringing the company’s total VC funding to A$162 million. BigCommerce is now headquartered in Austin, Texas.

• Temando (e-‐commerce fulfilment software) received a A$50 million strategic investment

from European mail and shipping solutions company Neopost, giving Neopost a majority stake in the company

• Invoice2Go (mobile invoicing software) raised A$45m from US VC funds led by Accel Partners

and Ribbit Capital

• DesignCrowd (design crowdsourcing) raised a A$6 million funding round led by Australian VC

fund AirTree Ventures

• Nitro (cloud-‐based document editing) raised A$19 million from US VC fund Battery Ventures.

Nitro moved from Melbourne to San Francisco in 2008 where it now employs 150 people.

• LIFX (WiFi-‐connected LED light bulbs) raised A$15.6 million from US VC funds led by Sequoia

Capital following a successful Kickstarter crowdfunding campaign in which it raised A$1.7 million in six days

• Canva (design software) recruited Guy Kawasaki (chief evangelist and investor at Apple

during late nineties)

• SafetyCulture (workplace safety software) raised A$2.1 million in a round led by Atlassian co-‐

founder Scott Farquhar and Blackbird Ventures

• ingogo (taxi and mobile payments app) raised a A$9.1 million funding round, including $1.2

million from sophisticated investors through crowd equity platform VentureCrowd

• Culture Amp (employee analytics) raised A$8 million from two US VC funds (Felicis Ventures

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Ecosystem milestones

• Several new VC funds were created, including Reinventure (with $50 million committed by

Westpac) and AirTree Ventures ($60m)

• OneVentures (VC fund) closed $60 million of its $100 million target for its second fund • Blackbird Ventures (VC fund) made its eleventh investment, making it one of Australia’s most

active VC funds, and one of a small handful backed by successful Australian startup founders

• Oxygen Ventures (VC fund) ran the first ever $5 million “Big Pitch” startup pitching

competition backed by Larry Kestelman (founder of ISP Dodo)

• Startmate announced its fifth intake of startups, making it the most mature of Australia’s

growing band of startup accelerators

• ATP Innovations (startup incubator based at the Australian Technology Park in Sydney) was

awarded the prestigious “Incubator of the Year” award at the International Conference on Business Incubation, from a field of more than 2,200 incubators worldwide

• Several new startup co-‐working spaces launched (including Tech Hub, Common Room,

Queens Collective, EngineRoom and Melbourne Bitcoin Technology Centre) in response to strong demand from startups, underscoring the importance such spaces play in the ecosystem as a means of generating local pockets of high startup density

• The inaugural Startup Catalyst program took 20 young computer science students and recent

graduates on a fully-‐funded immersion trip to San Francisco and Silicon Valley, backed by Steve Baxter (investor and StartupAUS board member), several universities and the Queensland Government

• The OzAPP Awards, Australia’s largest tech startup competition, was held in Perth as part of

the West Tech Fest conference. In 2014 the competition attracted over 200 applicants from Australia and the South East Asian region and a significant number of investors from Asia and the US. OzAPP has become a key annual event for the Australian startup ecosystem by helping to strengthen linkages between Australia and tech hubs in the US and Asia.

• The second annual Startup Spring was held, comprising over 170 startup-‐related events in

nine Australian cities, engaging 6,500 people and covered in over 100 media articles

• A total of 18 Startup Weekends (hackathons) were held across Australia in 2014, including for

the first time in Toowoomba, Cairns, Sunshine Coast, Joondalup and Geraldton, making a total of 41 since the first Startup Weekend was held in Australia in 2011

• Several new startup accelerators launched – including Jumpstart (supported by Slingshot and

NRMA – Sydney, Newcastle), AWI Ventures (Sydney), Griffin Accelerator (Canberra), Amcom Upstart (Perth – commencing June) and Unearthed (mining-‐focused – Perth)

• The Stone and Chalk fintech startup hub launched in Sydney with support from multiple

corporates and the NSW government

• The inaugural Startup Muster (the largest survey of the Australian startup community) was

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Government policy and program milestones

Over the last year there have been a number of important developments relating to government policies and programs affecting startups. Brief commentary on each is provided below.

Industry Innovation and Competitiveness Agenda (IICA)

The government released its Industry Innovation and Competitiveness Agenda in October 2014 with the stated objective of “providing the right economic incentives to enable businesses, big and small, to grow.” It commits to addressing several important issues that are relevant to the startup sector – notably the tax treatment of employee share schemes, enabling crowd-‐sourced equity funding, improving the 457 visa for skilled migrants, and improving STEM education.

StartupAUS acknowledges the significant potential for these initiatives to positively impact the national startup ecosystem and help Australia transition to a knowledge economy.

However, despite the IICA making positive statements about fostering innovation and entrepreneurship, StartupAUS believes that most of the proposed reforms are of little relevance to startups and seem to be focused on small businesses or companies in the “priority industry sectors” (advanced manufacturing; food and agribusiness; medical technologies and pharmaceuticals; mining equipment, technology and services; oil, gas and energy resources; enabling technologies and services).

StartupAUS believes that the IICA significantly misses the mark by

incorrectly assuming that startups (as defined in this paper) have the same needs as small businesses. Policymakers need to understand that tech startups have different needs from small businesses.

Furthermore the proposed sector bias, whilst supporting several important industries, is likely to exclude some of the most promising Australian startups from government support.

StartupAUS submits that a large proportion of Australian tech startups have internet-‐based business models and do not fall in one of the five “priority” sectors. The proposed sector bias would have the undesirable effect of excluding them from government support – even if they have the potential to be successful on the same scale as tech companies such as Amazon, Google, Facebook, Twitter and Uber. It is worth noting that these five companies have a combined market capitalisation of A$1.1 trillion, but had they been started in Australia they would be excluded from support under the Industry Innovation and Competitiveness Agenda simply because they did not fall within the government’s priority industry sectors.

Enabling Crowd-‐Sourced

Equity Funding (CSEF) In September 2013 the Corporations and Markets Advisory Committee (CAMAC) released a discussion paper on CSEF, and in June 2014 released a

report recommending that CSEF be enabled in Australia.

The government released a consultation paper on possible regulatory frameworks for CSEF in in December 2014.

A growing list of countries have already enabled CSEF, and StartupAUS encourages the government to move as quickly as possible to enact enabling legislation so that Australian startups are not disadvantaged.

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Tax treatment of Employee Share Schemes (ESS)

A bizarre situation has existed in Australia since 2009 in which options are taxed in the hands of employees at the time of issue, rather than at the time they received the proceeds.

The government has recognised that this is out of step with the rest of the world and has been a barrier to Australian startups recruiting and retaining the best talent.

A Bill was recently introduced into Parliament to address the tax treatment of options issued to employees in startups. Although the proposed

legislation has several shortcomings, StartupAUS applauds the government for committing to removing this handbrake on the sector, and notes the amendments are expected to take effect for new shares and options issued from 1 July 2015.

Significant Investor Visa Austrade has held two rounds of stakeholder consultation in relation to

proposed reforms to the Significant Investor Visa program under which overseas investors would be required to allocate at least a $1 million investment into Australian venture capital in exchange for permanent residency after four years.

A new Premium Investor Visa has also been proposed that would provide a 12 month pathway to permanent residency for investors meeting a $15 million threshold.

StartupAUS strongly supports the proposed changes and believes they could have a positive effect on Australia’s flagging venture capital industry. Entrepreneurs

Infrastructure Program (EIP)

The government launched the Accelerating Commercialisation stream of the EIP after winding up the Commercialisation Australia program as part of the 2014 federal budget. The Commercialising Ideas stream of EIP is believed to have approximately half the total funding previously allocated to Commercialisation Australia.

StartupAUS made a submission on the EIP, noting that the government’s decision to reduce grant funding to startups would lead to a further reduction in the availability of early stage capital, and that this would accelerate the existing trend toward startups leaving Australia in search of more favourable funding environments.

Innovation Investment

Fund (IIF) The $300 million Innovation Investment Fund was abolished in the government’s 2014 budget, despite having been the government’s primary

means of stimulating the creation of venture capital funds in Australia. Whilst the program had some clear deficiencies, it was of grave concern that the government discontinued it without proposing any replacement program to drive the creation of a viable venture capital industry in Australia.

The government’s decision to scrap the IIF program was made after the Commission of Audit recommended it be abolished on the grounds that “skills and finance can be acquired from the private sector, and there is no clear reason for the Commonwealth to provide this assistance in

competition with private sector providers”. That the Commission should come to such a conclusion, or that the government should accept it, is beyond belief.

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Review of Australia’s

Innovation System In March 2014 the government commenced a review of Australia’s Innovation System – the first external review to be conducted since the

2008 review by a panel chaired by Dr Terry Cutler, culminating in the

Venturous Australia report.7

Venturous Australia made 72 recommendations spanning innovation

policy, education, research, capital markets, taxation and culture, within the overarching theme that Australia needed to place significantly greater emphasis on innovation and entrepreneurship as economic growth engines. Unfortunately most of the recommendations (including those relevant to startups) were not acted upon by the government.

StartupAUS made a submission to the Senate Standing Committee on Economics which is conducting the current review, and looks forward to seeing concrete actions taken when the review is completed in mid-‐2015. Funding for CSIRO and

NICTA

In the 2014 budget the government announced it would withdraw all funding for Australia’s premier ICT research agency, National ICT Australia (NICTA) from mid-‐2016 and cut funding for CSIRO by $111 million. These cuts represent a significant reduction in Australia’s ability to generate breakthrough technologies that could be the basis for economic impact – such as the WiFi technology developed by CSIRO that has generated $430 million in royalty income8 to Australia.

Dialogue with

government StartupAUS has had constructive dialogue with various ministers and senior policy advisors over the last 12 months, including with the

Departments of the Prime Minister and Cabinet, Industry, Small Business, Communications, as well as with several backbench MPs.

Whilst for the most part these discussions have been constructive (and in some cases very supportive), StartupAUS believes that overall there is a significant gap in the government’s understanding of what tech startups are, how the government could support them, and the impact that they could have on Australia’s economy.

Even the recently released Intergenerational Report9 acknowledges the impact that technology will have on society in the coming years, but sadly seems to assume that for the most part Australians will benefit from adopting or absorbing foreign technology, rather than by creating technology here that can be the basis of globally successful Australian technology companies.

7_{http://www.industry.gov.au/science/policy/Pages/ReviewoftheNationalInnovationSystem.aspx} 8 http://www.theaustralian.com.au/business/technology/csiros-wifi-windfall-comes-to-an-end/story-e6frgakx-1226768161114 9_{http://www.treasury.gov.au/PublicationsAndMedia/Publications/2015/2015-Intergenerational-Report}

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Clearly significant progress has been made over the last year by Australian startups and the various organisations involved in supporting the national startup ecosystem.

Whilst there has been encouraging progress made by the government on several fronts, it is widely accepted that the government has decreased its overall level of support for startups in recent years.

In contrast, other developed economies are making ever-‐greater investments in their national startup ecosystems, with China having just announced the creation of an A$8.3 billion seed-‐stage

National Venture Capital Fund, South Korea implementing its A$4 billion Creative Economy

initiative10, the UK continuing to deliver a multi-‐billion pound suite of pro-‐startup programs, and New Zealand further extending its network of government supported startup incubators, innovation precincts and funding programs for startups.

At the same time a growing number of countries are actively courting the most promising startups from around the world, adding to the brain drain that is afflicting the Australian tech sector. Many governments are now offering generous financial incentives for foreign startups to relocate, such as UK Trade and Investment’s Sirius Program11,12_{, Enterprise Ireland’s International Startups Fund}13_and

a raft of programs available to foreign entrepreneurs in Singapore.14_{Even New Zealand has launched}

a series of careers fairs in Australian cities with particular emphasis on attracting disenchanted talent from the Australian tech sector. 15,16,17,18

Despite extensive engagement with the government by StartupAUS and others, most of the proposed actions in this paper have not been progressed since its first release in April 2014, and indeed there is little evidence that the government has fully grasped many of the issues facing startups or is seeking to address them with any sense of urgency.

Notwithstanding the realities of the current fiscal climate, StartupAUS is concerned that Australia’s fledgling startup ecosystem is falling further behind in an international context, and that without urgent action from the government it will become increasingly difficult for Australia to transition to a knowledge economy in which startups play an important role.

10_{http://online.wsj.com/news/articles/SB10001424127887323393804578554681586293800} 11_{https://www.gov.uk/government/collections/sirius-programme-for-graduate-entrepreneurs} 12 http://www.oxygenaccelerator.com/blog/2014/05/ukti-sirius-programme-launches-search-for-next-round-talented-graduate-entreprenuers/ 13_{http://newsletter.enterprise-ireland.com/7hszra17zeu} 14 http://www.brw.com.au/p/entrepreneurs/australian_entrepreneurs_are_heading_8LHFuzCM8xZdRHcZEuvPYK 15 http://www.theage.com.au/it-pro/business-it/new-zealand-edges-ahead-of-australia-for-startup-friendliness-20140609-zrva8.html 16 http://www.theaustralian.com.au/business/technology/nz-attracts-aussie-start-ups-with-funding-opportunities/story-e6frgakx-1227293352090 17 http://www.growwellington.co.nz/document/6-22/PRESS_RELEASE_Wellington_pitched_as_top_choice_to_expat_talent.pdf 18_{http://www.nzjobfair.co.nz/}

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What are “startups”?

StartupAUS defines a tech startup (or startup for short) as an emerging high-‐growth company that is using technology and innovation to tackle a large and most often global market. Startups have two important defining characteristics:

1. Potential for high growth. Whilst not all startups will need to raise capital to grow, StartupAUS advocates an “investability test” as a proxy for high growth potential, in which the ability of companies to raise capital from professional, arms length investors is a good indicator of their growth potential. Professional investors recognise the high risk of failure in startups and therefore will only invest in opportunities capable of generating high returns to compensate for this risk.

2. Disruptive innovation. Startups are reshaping the way entire industries work by displacing established competitors through use of technology and business model innovation. The mere act of selling undifferentiated products or services online does not make a business a tech startup, and StartupAUS excludes such companies from its definition.

StartupAUS has a particular focus on the opportunities presented by the internet as an enabler of growth, but recognises that startups are not just web and mobile business, and can be based on cutting edge technology in any field including engineering, biotech, pharmaceuticals, energy, hardware and software. Many of the observations and recommendations in this document are relevant across all technology sectors, and StartupAUS strongly supports the notion of a diverse Australian economy that draws upon a wide range of skills and technologies.

Startups are not small businesses

Startups are very different to small businesses. The term “startup” is widely recognised to mean an emerging high growth technology-‐based businesses as defined above, whereas a “small business” is generally considered to be a business that is providing less differentiated products or services, is often trading in a confined geographical area, and even if it experiences growth will remain a small business.

Startups, on the other hand, start small but have the capacity to experience massive and sustained growth, often enabling them to become significant players in global industries within a small number of years.

Small businesses are important to any economy because they are numerous (there are around 2 million in Australia, of which two thirds have no employees) and they provide an income to a significant proportion of the workforce (they represent almost half Australia’s employment in the private non-‐financial sector)19_{. However, small businesses are not a source of significant economic}

growth in the same way that startups are.

From an economic policy perspective it is vital to make a clear distinction between startups and small business because they have very different needs, as discussed below.

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Why are startups important?

As reported recently in The Economist,20_{the startup sector worldwide is undergoing a Cambrian}

explosion, with the low cost and ubiquity of building blocks for tech startups leading to more entrepreneurs tackling billion dollar markets than at any time in history.

According to Enrico Moretti, Professor of Economics at the University of California, Berkeley and an expert on the future of economic growth, technology-‐based jobs have a larger multiplier effect than jobs in any other sector. Moretti found that for each new technology-‐based job, five additional jobs are created in other sectors.21_{He notes that this multiplier effect is three times larger in the}

technology sector than in extractive industries or traditional manufacturing. This multiplier is one of the reasons that employment in the US technology sector has grown at 25 times that of other parts of the economy.

Moretti highlights a snowball effect in which regions that spawn a number of large technology companies generate their own attractive pull that makes that region more conducive to attracting further knowledge-‐intensive companies and workers.

By way of example, Facebook employs approximately 1,500 people in its Palo Alto headquarters, but in doing so has indirectly created an estimated 53,000 jobs for Facebook app creators and 130,000 jobs in related business services. Similarly, Apple employs 12,000 people in Cupertino and in doing so has indirectly created over 60,000 jobs supporting the company and its employees.22

A study by the Kauffman Foundation23_{found that 3 million new jobs are added to the US economy}

each year by new firms, while over an extended period existing firms have been net job destroyers, losing a total of 1 million jobs per year. The same study found that the 4% of companies with the highest growth are responsible for creation of over 70% of all new jobs.

Similar results were reported in the OECD Science, Technology and Industry Scoreboard 2013 which shows that over an extended period, including during the global financial crisis, new businesses have consistently been net job creators whilst existing business have been net job destroyers.

Figure 1: Net job growth: new versus established firms, 2001-‐11 (average over 15 countries)24

20_{http://techcrunch.com/2014/02/01/required-reading-the-economists-special-report-on-tech-startups/} 21_{Enrico Moretti, The New Geography of Jobs: Mariner Books}

22_Moretti,_ibid

23 http://www.kauffman.org/what-we-do/research/firm-formation-and-growth-series/the-importance-of-startups-in-job-creation-and-job-destruction

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Furthermore, technology-‐based companies are consistently able to generate jobs with much higher labour productivity (revenues per employee) than any other sector, as the following chart illustrates.

Figure 2: Revenue per employee – selected companies and industries25

Formation of startups is of course not an end-‐point, but a necessary step in creating large, globally significant and sustaining companies that drive economic growth and prosperity, and create large numbers of high-‐value jobs. These companies are, by definition, startups in their early years.

At the same time, it is well understood that technology is displacing jobs in many parts of the economy, and will continue to do so. According to research from the University of Oxford, software and automation will replace close to half of all low knowledge-‐intensity jobs over the next 20 years.26

Countries that do not support the growth of technology-‐based industries will increasingly find that their economy is dominated by low value, low knowledge-‐intensity jobs that service high value industries in other countries.

According to Bjoern Lasse Herrmann, author of the Global Startup Ecosystem Report, high impact entrepreneurship is more important than ever. Herrmann reports that “There is almost nothing more important to the global economy. As the Industrial Economy falls away with increasing speed and half the world’s current jobs will be replaced by software, it becomes critical to build thoughtful programs to nurture the entrepreneurial renaissance that will take its place.”27

25_{Sources: ABS, Mashable, gazelles.com, company annual reports} 26_{http://www.oxfordmartin.ox.ac.uk/publications/view/1314}

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Disrupt or be disrupted

Tech startups exist in any industry in which technology is an enabler of growth, including engineering, biotech, pharmaceuticals, energy, hardware and software. However, a particular focus of this paper is the opportunities presented by the internet as an enabler of disruptive innovation.28

Startups are now able to reach the 2.4 billion consumers connected to the internet, and do so with significantly lower levels of capital investment than at any time in history.

Many industries are in the process of being transformed by online business models, providing entrepreneurs with an unprecedented opportunity to create economic growth, wealth and jobs. Startups in all corners of the globe are aggressively competing to share in the massive redistribution of revenues enabled by the removal of geographic trade boundaries.

The internet has opened up new opportunities for companies in Australia which have historically been constrained by operating in a small domestic market. At the same time it has exposed startups to new competition from every corner of the globe instead of just a handful of domestic competitors. Examples of industries that have been reshaped by digital disruption:

Industry Disruptor Market capitalisation (A$)

Advertising Google $482 billion Books Amazon $227 billion Music Apple (iTunes) $984 billion Retail eBay $91 billion Movies Netflix $38 billion

As Netscape founder Marc Andreessen famously said, “software is eating the world”. Industries are increasingly reliant on software, with a growing number of products and services now being delivered online.

According to big data analytics firm Boundlss,29_{25% of the Australian economy is likely to be directly}

impacted by software by 2025, which equates to A$524 billion of GDP. More importantly, 5.5% of the Australian economy, or A$115 billion in direct revenues, could be captured by software companies by 2025.

StartupAUS believes that the companies that will drive global economic growth over the next decade will all be technology companies, many of which do not exist today.

“During our lifetime, every industry and every business will evolve to become a technology and data-‐driven business. There aren’t any second chances and Australia is about to be shut out if it does not make immediate changes in its support of technology-‐based businesses.”

Dr Jana Matthews – ANZ Chair in Business Growth, Professor and Director, Centre for Business Growth, University of South Australia and board member, StartupAUS

As noted by Boundlss, the key question for Australia is whether these companies are home-‐grown (in which case Australia stands to benefit from their economic impact) or “international Vikings” that displace local businesses and take revenues offshore.

28_{http://www.claytonchristensen.com/key-concepts/}

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This trend is already well underway – as evidenced by the rapid growth of Uber, a US-‐based tech company that has captured nearly 10% of the Australian taxi market in under 2 years and is turning the global taxi industry on its head. Uber currently has a market capitalisation of A$52 billion, but its economic impact in Australia will be (at best) to create thousands of low-‐paid jobs for Australians as Uber drivers,30_{whilst in the US it is creating massive wealth and high-‐value jobs, and in time will}

spawn hundreds of new startup founders and investors.

The scale of economic impact being made by technology companies can be seen in many countries, including in the US, where over the last fifteen years just nine software companies31_{have grown to a}

point where they collectively contribute A$1.3 trillion to the US economy, or over 6% of US GDP. 32 The combined value of just three of these companies – Apple, Google and Facebook – now exceeds the value of the entire ASX.

The companies that capture the economic rent in the industries of the future will be those that are able to implement technology and business model innovation faster and more effectively than their competitors. The losers will be startups that are constrained by inexperience, lack of technical skills, lack of capital or uncompetitive regulatory environments.

Given the speed at which technology is pervading every industry, Australia has no choice but to embark on an economic transformation in which it actively develops an environment that is conducive to the creation and growth of technology-‐based business that are capable of competing on a world stage.

Unicorns matter

The term “unicorn” has become widely adopted worldwide as a label for tech startups that achieve significant scale before achieving a liquidity event (or exit) via IPO or acquisition with a market capitalisation of $1 billion or more. Companies that achieve this scale are relatively rare (hence the term), but are vital to the creation of a vibrant startup ecosystem. Their impact is to spawn hundreds (or thousands) of new entrepreneurs who have been employees of the unicorn, many of whom will go on to form their own startups and invest in others.

The effect of unicorns can be seen in cities such as San Francisco, in which the presence of companies such as Salesforce, Twitter and Yelp have increased the city's value as a location from which to launch and grow other tech startups. These companies act as an attractant for other entrepreneurs to locate their companies there, and for investors and service providers to locate alongside this valuable pipeline of opportunities.

The IPOs of Google, Facebook and Twitter together created close to 4,000 millionaires, many of whom will go on to start, invest in and mentor the next wave of companies and entrepreneurs. The impact of unicorns in helping to grow startup ecosystems can also be seen in Israel where, as a result of acquisitions of successful startups such as NDS (acquired by Cisco for $5 billion) there are thousands of serial entrepreneurs who have cycled back into the local startup ecosystem to become angel investors and advisors to the next generation of entrepreneurs.33

Similar examples can be seen in countries such as Sweden (eg. Skype, acquired by Microsoft for $8.5bn and Spotify with a current market capitalisation of $4bn) and the UK (eg. Betfair $2.4bn IPO and lastminute.com, acquired by Sabre for $1.1bn).34

30_{http://www.zdnet.com/article/hockey-pitches-uber-but-for-the-economy/}

31_{Amazon, Google, Salesforce, VMware, Facebook, Twitter, Groupon, Zynga and Apple} 32_{http://blog.startupcompass.co/the-startup-revolution-series-part-3-the-rise-of-the-startup} 33_{Start-up Nation: The Story of Israel's Economic Miracle, Dan Senor and Saul Singer}

34_{It is of course desirable to have a large number of smaller exits ($10-100m), but these generally do not} unlock capital or spawn a wave of new startups in the same way as a unicorn.