Startup Muster, a comprehensive survey of the Australian startup ecosystem , has today released preliminary results that reveal the ecosystem’s perception of which state and federal MPs are most supportive of startups. One question that was asked in the 71-question survey was ‘Can you name a politician that’s been particularly supportive of the startup industry?’ A majority of those who were able to name a politician selected Malcolm Turnbull (9.9 percent), followed by Alex Greenwich MP (2.9 percent), Cr Glenn Tozer (1.4 percent), Bruce Billson MP (1.1 percent), and Senator Kate Lundy (0.9 percent).
Most of the participants, however, answered ‘None’ (45 percent), reinforcing the belief that the government cares very little about startups. Startup Daily reached out to a number of MPs in the past two weeks, most on multiple occasions, but was only able to interview Independent member for Sydney Alex Greenwich. Other MPs either didn’t call at specified times, cancelled interviews, denied comment or didn’t respond. As such, it’s all too easy to come to the conclusion that the startup sector is not important to the government. If members of the parliament aren’t efficient enough to speak to a journalist for five to 10 minutes about the work they’ve been doing behind the scenes to support startups, then how will they be efficient enough to effect change?
Politicians are busy people, so this might be an inaccurate conclusion. The reality is Australia is still a work in progress when it comes to building the infrastructure and having the right mechanisms in place to support the startup community. Members of the parliament are in fact trying to understand the startup sector and are working towards building a regulatory environment that will help the sector grow in the upcoming years.
Mr Greenwich, whom Startup Daily spoke with last week, said that immersing himself in Sydney’s startup scene helped him understand what he, as an MP, can do for startups from the ground up – like connecting startups with often inaccessible government departments – as well as what the government can do from the top down. Last year, Mr Greenwich spent two weeks working out of Fishburners, one of Sydney’s startup coworking spaces backed by News Corp and Google, and by interacting with founders, was able recognise what needs to be done on a policy level – like the formalisation of alternative funding mechanisms (e.g. equity crowdfunding, which is yet to be legalised in Australia) and the introduction of incentives for investors to pour more funds into startups.
Currently, Mr Greenwich said he is pushing the Federal government to get the Future Fund, Australia’s sovereign wealth fund, to invest in startups.
“I had spoken to a number of people associated with the startup sector who expressed to me that the Future Fund should be investing in startups and supporting innovative entrepreneurs of the future. So I’ve been [speaking] to the treasurer about allowing the Future Fund to invest in startups or creating some sort of fund [for startups],” said Mr Greenwich.
A government-backed VC fund?
In its 2015-16 pre-Budget submission, the Institute of Public Accountants (IPA) said the introduction of a government supported venture capital fund would improve Australia’s entrepreneurial environment. The IPA recommended specifically that the Federal government allocate a significant proportion of funds to help VC managers attract other institutional investors to publicly supported VC funds or become an institutional investor in a range of individual VC funds.
In a media release, IPA’s CEO, Andrew Conway, stated, “Many young firms face funding problems, particularly in uncertain technological or new knowledge environments because of their unattractiveness to bank lenders. Australia must recognise the fact that it is a lost opportunity to the economy when innovative firms with high commercial potential are constrained by the absence of external finance.”
“Any government with a strong commitment to economic growth via research and development and investment which facilitates greater enterprise and innovation activity must ensure that early-stage venture capital finance remains available to high potential, young firms. Otherwise, we risk a reduction in new commercialisation opportunities stemming from national investments in science and technology.”
The reality is bringing new products to unproven markets is inherently risky and costly. Capital is therefore the lifeblood of startups, particularly pre-revenue startups that need to address both operational costs and human capital. Unfortunately, traditional bank lending via business loans is ill-suited to the high-risk nature of startups. Startups rarely qualify for traditional financing via bank loans because such loans are generally physical asset-based. Mobile applications, algorithms and patents cannot be converted for a loan because their values are difficult to determine.
Although we’re seeing an increasing number of funding pools emerge in Australia – like angel investment, venture capital and crowdfunding – Australia still lags behind other developed nations. According to Katherine Woodthorpe, former CEO of AVCAL and former board member at Commercialisation Australia, funding is at an all-time low since 2008.
“In a world where we will no longer be able to rely on natural resources for our economic well-being, the need for smart companies with smart jobs to deliver our economic future becomes paramount. We need to nurture these companies, and Startup Muster has indicated that government funding is crucial in their success.”
Mr Greenwich, however, based on his interactions with founders, doesn’t feel that startups are expecting handouts from the government; they’re more interested in an improved and stable regulatory environment.
But when asked to name the most important thing government could do to support the startup sector, a majority of the responses on Startup Muster involved ‘increased funding/grants’ (38 percent), followed by ‘incentives for founders and investors to balance the financial risk’ (29 percent).
Limited access to capital has been a long-standing concern for startups, as well as the lack of tax incentives for investors to invest in startups. In 2012, the UK introduced its Seed Enterprise Investment Scheme, which offered a 50 percent tax break for those investing up to £100,000 in a startup, regardless of the investors’ normal tax rate. These kinds of legal measures would make high risk investments more attractive to Australian investors who are otherwise considered risk-averse.
Scaling businesses, scaling policies
The issue that ties all these concerns together is the slow pace of policy change in Australia. The government needs to act much faster to keep up to pace with startups that are, by definition, fast-paced.
In a 2013 hearing before the Committee on Small Business in Washington, CEO of Cont3nt.com, Anton Gelman, provided an example of how swift action on behalf of the government can benefit in the long run: “we work out of a startup accelerator about seven blocks away, and it was funded by $200,000 of D.C. government money. So $200,000, as you know, is a very, very small amount of money. That allowed them to set the baseline to seed that investment that they now have a $2.5 million run rate within four or five months. Two and a half million dollars run rate that they have collected on their own that funds his business. They have 170 companies working out of there. Over 300 jobs have been created off of this tiny, tiny investment. And the reason it was done was because the D.C. government went out and acted very quickly. They allowed the minimal amount of investment to be signed quickly and to be delivered.”
Many first-time startup founders overestimate sales, underestimate expenses, overestimate margins, and underestimate the time, effort and resources is takes to grow fast. Local organisations – like accelerators, incubators, and even co-working spaces – that interact with startups regularly are probably best equipped to understand the needs of startups and effectively distribute funds (for instance, in small increments or stages). Similar to educational scholarships, the government could provide resources to those who know their community best.
South Australian government has been very supportive of Majoran Distillery, Adelaide’s only coworking community, allocating allocate $400,000 worth of funds to industry-led skills programmes. Interestingly, though, South Australian premier Jay Weatherill didn’t rank high in the list of politicians startups believe are supportive of the startup sector. Earlier this year, Brand South Australia, a non-for-profit sponsored by the Government of South Australia, flew out media personnel from around the country to showcase the 95 support programmes for entrepreneurs available in the State, some which are funded by the government, and others by businesses and individual entrepreneurs. This suggests that the government isn’t simply interested in promoting its own initiatives, but also the efforts of the broader community.
The location of the top MPs could indicate that a majority of the survey participants were from Australia’s eastern states. Startup Muster founder Murray Hurps, who is also the General Manager of Fishburners, insisted that the survey was not promoted internally (in Fishburners). This was a deliberate choice to reduce collection bias. When the final report is out, it will be interesting to see how many startups in South Australia and Western Australia actually participated in the study, and whether sentiments regarding the government vary from state to state.
Sam Chandler, Founder and CEO of Nitro, suggested in an article last year that we tap into Australia’s superannuation funds – which tend to sit quietly on government shelves, gathering dust and cobwebs. If even a small portion of this was allocated to help entrepreneurs grow the economy, the long-term impact would be substantial.
However, Pauline Vamos, CEO of the Association of Superannuation Funds of Australia, told the Australian Financial Review that the industry would be concerned if legislation provided preferential treatment to a particular sector, and that VC funds will need to have stronger track record before super funds would consider allocating money for the startup sector.
“Experience has shown people running VC organisations earn more than those who have invested in it,” Vamos told the AFR. “Funds are very careful. If funds cannot see if they’re a good long-term investment they will not invest.”
How the government will provide funding support is uncertain at this stage. But what’s important for the government to understand and accept is that making funds available does not guarantee success. However, risk-taking (at least to a certain degree) is necessary for the ecosystem to grow. Government funding structures, whenever they are introduced, should be designed to meet the needs of Australia’s startup ecosystem today and change as the ecosystem evolves – for instance, through the introduction of late-stage capital (Series B, C, etc.). As mentioned earlier, providing funds to those who know their community best (e.g.. coworking spaces), to then distribute across startups, may reduce the risk but certainly won’t eliminate it.
There’s a strong indication that startups are not aware or taking advantage of the government grants already available. There are various grants the Australian government is offering to ‘small businesses’ that startups would qualify for. The easiest way to find those grants is by using the Grant Finder feature on Australian Government Grants website.
The following are some of programmes startups may qualify for:
Up to $100,000 in funding to develop high growth technology projects in New South Wales. Program AU109
Up to $20,000 in loan funding to support existing businesses and business startups. Program AU123
Matched funding grants of 50% up to a maximum of $15,000 for new and innovative technology projects. Program C129
to $5,000 over two years as a payroll tax rebate to NSW businesses that employ new workers in new eligible employment. Program C67
Financial support to eligible Australian Apprentices or their employers for skilled employment opportunities. Program C30
Advice and support for Young Australians on establishing and growing a business. Program C05-B
Tax incentive entitlement program to help businesses of all sizes in all sectors conduct eligible R&D. Program C48
Mr Greenwich told Startup Daily that larger companies have teams who search for and complete grant and tender applications, and so a majority of government funding ends up in the pockets of large companies, particularly those that operate in the manufacturing industry.
“Entrepreneurs, by their nature, are people who don’t like getting caught up in red tape and bureaucracy; and a lot of the time that’s what the government tender and grants process is all about,” said Mr Greenwich.
“I think it’s important to realise that large companies have teams of people who go out and source where the grants are and apply for those grants … I would like to see more of that funding go to startups, and indeed, [see] them have greater support in that process.”
Mr Greenwich chuckled as he suggested someone in the startup community develop an application containing information about grants which can be shared across the startup community, because at the moment, there’s a clear communication gap.
He added that there’s a role for the small business commissioner (i.e. Robyn Hobbs OAM, NSW Small Business Commissioner) to bridge the communication gap between government and startups, and ensure startups are aware of the support that’s available to them. If there are problems in the grant application process, Mr Greenwich suggested that startups get in touch with him, the small business commissioner and other relevant government officials, so they can improve the process where needed.
Perhaps what’s more important than grants and funding is legal reform in other areas. Mr Greenwich acknowledged the need for more entrepreneur-friendly immigration laws so that startups can recruit overseas talent and have them work for longer periods of time.
Co-Founder and CEO of LinkedIn Reid Hoffman once said, “Immigration is key to any entrepreneurial ecosystem”. Carlos Espinal, Partner at European investment fund and accelerator Seedcamp, also communicated this sentiment, saying “One quick way of bridging a shortage in staff in an area is to create immigration policies that allow for talented and capable individuals to enter the country and its labor force without major hurdles”.
Countries and states that adopt pro-growth immigration policies – which allow for freer movement of people – tend to create a more prosperous startup ecosystem. Various reports indicate that over half of Silicon Valley’s startups have one or more immigrants as a co-founder.
Asian countries with strong or fast-growing startup ecosystems offer visa programmes or other types of residency permits specifically to entrepreneurs – like South Korea’s startup visa, Singapore’s EntrePass, Hong Kong and Malaysia’s investment visa, and Japan’s visa extension for entrepreneurs. New Zealand, Canada, UK and US all have entrepreneur visas, meaning that Australia is the only developed nation yet to implement entrepreneur-friendly immigration laws.
Freelancer’s Matt Barrie suggested in an article that the Australian government introduce a programme similar to Startup Chile where work visas are provided to international entrepreneurs along with a $50,000 in grant funding for coming to Australia to build a startup for six months. Startup Chile, which was launched by the government as a pilot programme in 2010, has thus far supported over 1,000 startups from over 75 countries, according to its website.
The Australian government is not oblivious to the fact that it needs to create more dynamic labour markets to enable startup founders to attract underutilised talent from countries outside their own.
“Highly skilled migrants contribute to a strong and vibrant economy, bringing know-how, innovation and entrepreneurship and also helping to plug short-term skills gaps. As part of the Competitiveness Agenda, the Government is taking further action to facilitate skilled migration, through reforms to elements of both the temporary and permanent migration programmes, while maintaining protections to ensure that businesses do not bring in foreign workers where Australians are able to do the job.” (National Industry Innovation and Competitiveness Agenda 2014, p. xiii).
In October last year, the Federal government released the National Industry Innovation and Competitiveness Agenda which stated that the 457 visa programme will be undergoing amendments so that employers can more easily hire skilled overseas workers “while improving programme integrity, to ensure that sponsored workers on 457 visas are a supplement to, and not a substitute for, the local workforce.”
The government said it would streamline the processing of sponsorship and visa applications to reward low-risk applicants, increase the sponsorship approval period from 12 months to 18 months, and provide greater flexibility in English language testing to ensure the standards are appropriate for their industry. The government said it would cap the income of skilled overseas workers at $53,900, though this will undergo review within the next two years.
The problem with the view that overseas workers should be “a supplement to, and not a substitute for, the local workforce” is that it is overlooks the knowledge overseas talent can pass onto local workers and treats this type of recruitment as a ‘last resort’. Attracting overseas talent can support investment in the local workforce because highly skilled workers from overseas can train local employees.
A key component of the knowledge-based economy is a greater reliance on intellectual capabilities than on physical inputs or natural resources. The growth of this new economy is often seen a strategic response to low wage economies like China and India investing heavily in knowledge. The result can thus be seen as virtuous circle where all parties benefit from immigration.
Employee Share Scheme
Added to that, one of the most common challenges startup founders face is attracting and retaining talent, especially when restricted by budget. Startups often trade equity to employees as a non-cash incentive to compensate for lower salaries and high-intensity work environments.
This became an unfeasible option in 2009 when Labor introduced stringent tax laws to stop high-income executives (earning over $180,000 per annum) from minimising their tax. Inadvertently, these laws discouraged startups from providing employee share options to employees due to hefty upfront tax bills on shares.
In October last year, after much anticipation, the Liberal government announced that it would revoke Labor’s rules that required employees to face immediate tax costs on share options they receive from employers.
“Creating the right conditions to promote innovation and boost productivity is a priority for the Government. We are improving the regulatory conditions that enable startups and tech companies to thrive,” Minister Turnbull said in today’s Startup Muster media release.
“Part of this process has been unwinding changes to the tax treatment of Employee Share Schemes that were introduced by the former Government in 2009 and which effectively brought to a halt the use of such schemes for startup companies in Australia.”
The news was celebrated as a positive step towards creating employment opportunities within startups. In fact, finalising the proposed ESOP reforms was requested by 13 percent of startup founders who participated in the Startup Muster survey. However, Freelancer founder Matt Barrie dissected the policies around the new employee share option scheme and found a number of problems. He told BRW that instead of charging upfront tax, the government is “doubling the tax rate by charging income tax when the options vest”.
“It will [help early-stage startups] but that’s not where the bulk of the employment is – it’s when you can hire 200 or 300 staff that it really matters,” Barrie told BRW. “If you need to bring in a vice president or someone who’s really going to make a difference to the company, you just can’t compete with Silicon Valley if they’re going to get such a big tax bill.”
As such, the government is not alleviating tax burdens, it’s giving it a sneaky make-over. (Barrie explains exactly why the new scheme is problematic via YouTube). Sewing a hole in one hip pocket isn’t helpful when new policy burns a hole in the other.
Minister Turnbull does sound compelling when he says, “We must get out of the way of business and get the regulatory settings right to ensure that incentives exist to encourage our most promising tech entrepreneurs to turn that great idea into a truly transformative product.” However, these words merely state the obvious and don’t quite showcase what he and his government are doing to actually help the startup community.
The South Australian government and NSW MPs like Mr Greenwich have been active, rather than purely vocal, in its support for startups. Members of the Sydney startup community also put forth the names of Senator Bridget McKenzie and Wyatt Roy MP, but they weren’t available to comment or elaborate on the initiatives or projects they’ve been working on.
Unfortunately, this doesn’t disprove the idea that government officials, who should strive to be responsive to the people they represent, are difficult to get a hold of. This is something that startups have found frustrating.
As mentioned previously, Mr Greenwich said that, as an MP, this is where he can help – by connecting startups with government departments. An example of this, he explained, was when a local startup eClosure, which helps grieving families find and close online assets (e.g. social media accounts) of their deceased loved ones, wanted to have a discussion at the Attorney General’s office about the birth, marriage and deaths process, and he was able to successfully connect the startup and facilitate that discussion.
At a NSW State level, Mr Greenwich said he’d like to see a parliamentary inquiry that establishes what the state can do to support its startups. With the state election coming up this month, Mr Greenwich hopes that his call for government to support digital entrepreneurs and innovative industries of the future becomes a focus in the government’s next term.
“Rather than MPs saying this is what we’re doing, [we need to] actually go to the startup community and allow them to tell us what we need to be doing,” said Mr Greenwich.
“I know that startups have a frustration with government, but in my experience, it’s important to always work with government towards an outcome. I’m obviously happy to continue to do that and be a conduit between the two, as I’m starting to get a good understanding of how both sides operate.”
None of this is to suggest that government should interfere in the day-to-day running of startups. Jason Clare MP acknowledged in the Startup Muster media release that “governments don’t create successful startups”.
“People do that. Smart people. Innovative people. But Government does play a role. And it is more than just getting out of the way. We are a smart country. We have created everything from wifi to the black box. But we have lots of challenges. Our venture capital industry is small and not well developed. We still don’t have crowdfunding and we are off the pace in R&D. We are also not producing enough workers with STEM skills. We need to fix this and fix it fast.”
Indeed, the Australian government does have a role to play in creating a stable, predictable, and supportive regulatory environment for entrepreneurs and investors.
It’s worth noting that the Entrepreneurs’ Infrastructure Programme, which replaced Commercialisation Australia last year, does not cater to startups. Although ‘startup’ seems to be mentioned in many of the programme’s documents and descriptions, one quick glance at eligibility criteria sets off a number of red flags. To qualify for any of the services or grants offered by the EIP, startups must be at least three years old and be operating in: (a) advanced manufacturing; (b) food and agribusiness; (c) medical technologies and pharmaceuticals; (d) mining equipment, technology and services; (e) oil, gas and energy resources; or (f) enabling technologies and services of the sectors listed in (a) to (e).
More alarming is the annual revenue requirement. To be eligible, startups must have an annual turnover of between $1.5 million and $100 million or between $750,000 and $100 million for businesses operating in remote areas. Most startups would instantly disqualify based on this criteria.
Another way startups believe the government should support the ecosystem is through improving education for entrepreneurs and coding skills, which ranked sixth (6.9 percent) in the Startup Muster survey. The Abbott government announced last year that $12 million would be invested to improve science, technology, engineering and mathematics (STEM) subjects in primary and secondary schools. However, what’s being overlooked is the ‘re-skilling’ problem in Australia.
Perth entrepreneur Andy Dent, who’s been a coder for over 30 years, told Startup Daily in an interview last year that the Australian ecosystem is missing out on what he called ‘a second pool of potential coders’ for startups. He said that the core skills of programmers include the ability to spot patterns and small errors, and that once a programmer is skilled in a particular language, they can be re-skilled in a significantly shorter of period of time. As they also have a longer history in using various programmes, these programmers will also have the ability to identify and rectify bugs within systems at a much faster pace. But there is no robust system in place to facilitate the re-skilling process.
There are many more ways the government can support startups – for instance, by designing and running campaigns that promote entrepreneurs the same way it promotes good health. But today, urgency needs to be placed on tax and immigration policy and formalising alternative funding models.
Featured Image: Startup Daily custom cartoon. Credit: Ghada Sleiman.