Denham Sadler
November 29, 2017

The Crossroads state of play

StartupAus

The Crossroads state of play

Solid ground: The Australian startup ecosystem needs a policy focus from the Commonwealth

The Australian startup ecosystem has enjoyed rapid growth and development in the last year, but is still “young and relatively immature” on the world stage, according to the StartupAus Crossroads 2017 report.

The annual report into the local startup ecosystem is produced by StartupAus with the financial backing of corporate and community sponsors, including Google and the UTS.

It outlines how the startup ecosystem has grown in the past year, and details what needs to be done to improve its development through a series of policy recommendations to government.

This year’s report places an emphasis on explaining why startups and tech companies are important for the economy and everyday Australians, and justifying an ask for increased political interest and spending.

StartupAus chief executive Alex McCauley said he hoped this is the main takeaway from the Crossroads report.

“That’s the biggest message of this report – why this matters to every single Australian and to their kids and the prospects that they’ll see in the future,” Mr McCauley told InnovationAus.com.

“There’s no point going into the detail unless people understand this is about the whole economy, not just a few people in inner cities around the country building apps that won’t make any difference to anyone’s live.”

“These are people transforming whole industries and changing for the better the way Australians work. In order to be a successful economy in the years ahead Australia needs to be a country that understands and uses technology really well,” he said.

“We need a workforce that knows that, companies that build on it and politicians that understand it.”

The report found that startups were “booming” in Australia, with the last year seeing significant growth in venture capital, a growing role for tertiary institutions, government support at all levels, and increased interest from the corporate sector.

But StartupAus said this growth needed to be taken with a bit of perspective, with startup ecosystems around the world also growing at a rapid rate, and a number of barriers in place that risk restricting its growth in Australia and leaving local companies behind in the worldwide race.

Despite the growth in the last year, the startup sector is still an emerging industry that required a large amount of support to develop, according to the report.

“If Australia’s young and relatively immature startup ecosystem is to be truly globally competitive there remains a lot of work to be done,” Mr McCauley said.

“This is an international race and we’ve got to understand that everybody wants to try to grab a slice of the pie here. There’s a huge amount of opportunity here for companies to benefit from this big wave of technology,” he said.

“If we want to be competitive we’ve got to be moving as fast or faster than the other countries who are looking to grab these benefits.”

The most significant area of growth for the startup sector across the last year was in venture capital, which enjoyed its second consecutive record year. More than $1.3 billion in venture capital has been raised since July 2016, up from $568 million in the previous year.

Significant venture fund raises in the last year include the $500 million Biomedical Translation Fund, AirTree Ventures’ $250 million fund and the $234 million Square Peg Capital fund.

This has been thanks largely to increased participation from Australia’s large superannuation funds, along with the government’s tax incentives which came into force last year.

The report found that the total number of registered VC firms has more than doubled since these tax breaks came into effect.

“That’s a lot of dry powder sitting there waiting to be invested in Australian startups. We’ve turned a corner in capital availability,” Mr McCauley said.

The Crossroads report found that while the total VC investment in Australian startups has remained relatively consistent across the last three years, much more of this capital has come from local funds.

The drop in funding of local startups by international VCs shouldn’t be viewed as a bad thing, he said.

“That negative trend line correlates pretty specifically with the positive trend line of the number of dollars raised from Australian VCs.”

“You could read that as a bad thing but I think that’s not how it should be seen. What it shows is that Australian startups are having to look overseas less frequently than they used to for funding,” he said.

But this growth needs be seen with perspective, Australian Private Equity and Venture Capital Association Limited (AVCAL) head of policy Christian Gergis said, with the Australian VC sector still “boxing below its weight”.

“While the recent growth in local venture has been significant, it must be acknowledged that it is coming off a very low base. The Australian venture capital sector remains small, both in absolute terms and relative to its international peers,” Mr Gergis said.

Australia’s investment in venture capital as a percentage of its GDP is just 0.023 percent, less than half of the average for OECD nations.

Despite the government also introducing a series of tax incentives for angel investors to chip cash into startups, the “limited quantitative data” collected shows that angel investment in local startups has fallen by up to 50 percent since last year.

According to StartupAUS, it is “notoriously difficult to collect data on investments”, and the ATO refused to hand over its own data on the matter.

It also said that this reduction in angel investment is likely a “natural consequence” of the rapid increase in venture capital funds on offer.

The Crossroads report also found that while federal government support for the sector has been lacking since the National Innovation and Science Agenda in late 2015, state governments are picking up the slack with some big real estate plays.

In the report, StartupAUS said that the federal government had previously promised a “wave” of startup and innovation policies, but there is “little evidence” that more measures are coming, while next year’s planned Digital Economy Strategy “will need to clearly articulate policy initiatives with short implementation timeframes which can address some of the lingering gaps identified here”.

The report also criticised the federal government for broadening its innovation policies to include SMEs, large enterprise and other economic stakeholders.

While federal support has been lacking, the report found increased support and funding from state governments around the country, especially in terms of real estate and hubs.

The largest in the last year has been the NSW government’s $35 million Sydney Startup Hub, which is a “global-scale precinct”, along with the planned FinTech hub in Victoria and two smaller hubs in Brisbane.

While these moves have been positive for the ecosystem, again, more work is needed to continue this growth, Mr McCauley sad.

“It’s really positive that state governments have stepped up. It’s important that they play a role, but there are big levers that federal government can pull, and they’re the only ones that can pull them.”

“No matter how interested state governments are they can’t do those things. We need a united push across country and need to make sure that we are continuing this momentum. It can’t be left to any one state government,” he said.

While this growth is significant and positive, Australia is still lagging behind on the world stage, and a lot of work and support is needed to help it remain globally competitive.

According to the Startup Genome report, Sydney is the 17th top startup ecosystem in the world, the only Australian city to make the top 20.

Despite the growth described in the Crossroads report, Australia’s ranking in several different reports has remained static or fallen due to other governments’ investments in their startups.

“If Australia is to grow a world-class startup ecosystem it is essential that we create an environment that is conducive not just to the creation of successful technology companies, but also to the retention of those companies for long enough that we can harness their economic impact. Australia has not yet firmly established itself as a leading location from which to grow a global technology company,” the report said.

The underlying message from the StartupAUS Crossroads report section on the state-of-play of the Australian startup ecosystem is that while there has been significant growth, this needs to be measured against the rest of the world.

This may paint a less positive picture of how the local startup community is evolving, and should be used to push for further action and policies to make Australian tech companies more competitive on the world stage.

“There’s a deep hunger around the world for generating new drivers of growth. If we don’t have that hunger then we’re going to be left behind,” Mr McCauley said.

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