The future of Australia’s startup ecosystem: Perspectives from Queensland founders and politicians

- May 5, 2015 14 MIN READ

Earlier this year, Startup Muster, a comprehensive survey of the Australian startup ecosystem, released preliminary results that reveal the ecosystem’s perception of which politicians 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). Coming in third place was Councillor Glenn Tozer from the City of Gold Coast, but lacking in the list was Federal Member for Longman, Wyatt Roy MP. Startup Daily spoke with Roy and Tozer, and both demonstrated a nuanced understanding of the Australian startup ecosystem and communicated high hopes for the future of Queensland. Interestingly, people from Brisbane and the Gold Coast were slightly less enthusiastic about their hometowns.

If the first step towards creating a better regulatory environment for startups is to get politicians interested in the sector in the first place, then, contrary to popular belief, Australia has successfully gauged interest from government officials.

In an article earlier this year, Startup Daily outlined why startups need alternative policies. Independent member for Sydney, Alex Greenwich MP, was cognisant of all the policy issues that are hampering the growth of Australia’s startup sector, including tax and immigration policies. Tozer and Roy both agreed with many of the sentiments communicated by Greenwich, but also had additional ideas how about to improve the startup ecosystem.

Roy, for instance, spent time in Israel in December last year, on NAB’s Yachad Scholarship, to draw inspiration for policy ideas that would help create a strong, sustainable startup sector. Although he was tight lipped about the exact policies he proposed to Prime Minister Tony Abbott, he hopes that the Australian government will develop a standalone innovation and entrepreneurship policy in the same way it’s been done for Industry. At the moment, policies that affect startups are scattered across different government departments, which Roy believes is a problem.

“There are visa and immigration issues, issues in foreign affairs, issues in treasury and finance, there are issues in industry. These are all different government portfolios. I think we need a ‘whole of’ government approach. In Israel, it’s done through the Chief Scientist,” said Roy.

“And in terms of developing an ecosystem in Australia, we need collaboration between government, higher education, research, and other sectors in our economy.”

Tozer, who considers himself a ‘cheerleader’ for startups and the broader startup ecosystem, worked in sales and marketing for 15 years, which gave him practical experience in how to build and serve a customer base. His belief is we focus more on acquiring customers than raising external capital. After all, customers are the only investors that startups don’t have to pay back. And funny enough, that’s what Australian investors are looking for; they’d rather invest in a startup that doesn’t require investment.

“What an investor is chiefly looking for is a customer base, and validation that your idea is actually worth people reaching into their pockets and giving you money for it or taking their time to engage with your product. That’s what we’re trying to encourage in the Gold Coast,” said Tozer.

“We’ve got a city of half a million people but we’ve also got 12 million tourists every year. There’s plenty of people who come and go out of our city. We should find ways to serve our potential customer base and get validation for our product, rather than having an investment fund coming in saying ‘I’ll give you money for your idea’.

“Within a two-hour drive from the Gold Coast, there are four million people. There should be 12 to 15 million who visit that space as well, so let’s leverage that […] There’s no reason we can’t leverage off our strengths to deliver new industry sectors.”

Tozer makes no attempts to hide his city pride. He said if the City of Gold Coast was a company, it’s be one of the top 250 companies in Australia. It manages about $12 billion in assets; the council has a $1.2 billion operating budget; and its councillors represent a constituency of 35,000 residents and 22,000 voters. But more than that, Tozer believes Southeast Queensland has the potential to become a hub for startups because of its local lifestyle and culture.

“The single largest reason that a startup founder bases himself out of a particular city is because of the lifestyle it can offer for them and their family. There’s a perception that the Gold Coast is a bit of a party city, but the reality is that most of it is beautiful suburbia. We’re a collection of villages along 57 kilometres of beautiful white beaches and we have world heritage rainforests only 20 to 30 minutes drive from the beach. It’s a beautiful environment to live and work in and raise a family,” said Tozer.

“The idea that if I have a flexible working life, I want to be able to use that flexibility to pursue my recreational interests – whether it’s surfing on the beach or bushwalking – has been known to attract a more mature entrepreneur. So our entrepreneurial sector here tends to attract 30 to 45 year olds, rather than 20 to 30 year olds.

“We need to accentuate the lifestyle and recreational advantages of our city, but also make sure there’s a sense a momentum in the social space as well. I don’t mean social as in social media. By social, I mean, [Australians] love to share a beer! Local governments can play a really important role in bringing people together to share ideas, celebrate their wins and problem-solve their challenges. We actually don’t have to spend a lot of money to keep businesses afloat if we’re stimulating the sector in its infancy.”

However, fellow Gold Coaster and co-founder of WP Curve, Dan Norris, said that although his home city has made progress, especially in the last two years, the local startup scene still has a long way to go.

“Two years ago, the only coworking option was me and three guys working in a shed at Southport. We got together to do that because there was nothing else available. Now we have at least five co-working spaces that I know of; we’ve just had the Council-funded SURF Incubator; and there’s regular startup events,” said Norris.

“The Gold Coast scene is in its infancy. There is good potential for the Gold Coast as a destination for startups, mainly for lifestyle […] For a startup ecosystem to be vibrant I’d want to be seeing incubators with equity, regular examples of companies being funded and achieving world wide impact – that is, real financial or user growth, employing people, executing to a world class level, etc,” said Norris.

“I still don’t see all that much of that on the Gold Coast compared with big cities.”

Aaron Birkby, co-founder of Gold Coast based incubator and coworking community Silicon Lakes, communicated a similar sentiment, saying that the city “lacks those big names with big exits who come back to build and lead the community”. He does, however, believe that the Gold Coast has a very high entrepreneurial culture.

“There are some super talented guys and girls here building some awesome stuff, but we don’t yet have the depth of talent that even Brisbane or elsewhere has,” Birkby said.

“All that said, I think we have all the ingredients to be an epicentre, but it does require some significant effort to get us there.”

Roy, on the other hand, believes Brisbane has one of the better ecosystems than anywhere in the country.

“If I had a choice as a young entrepreneur moving from Hong Kong, Singapore, Israel or the US, I’d probably want to live in Brisbane or Adelaide.”

Brisbane’s lifestyle is not its only selling point, according to Roy. He also said there’s something “really special” about individuals putting their own money into startups and the startup ecosystem. He was referring to Steve Baxter.

“That’s what happens in Silicon Valley. It’s not government investing in the Valley, it’s private individuals,” said Roy.

David Ryan, Brisbane-based founding editor of Tech Tidal and co-founder of Corilla, said Baxter is an inspiration to local startups on many levels.

“I transitioned out of a very comfortable corporate job to move into tech based on the view Steve holds, which is to create a company that would create jobs,” said Ryan.

“The idea that Steve gets across is that it’s about building jobs and building a community, not just about making our own projects be profitable and then taking off to the States.”

Baxter, who is the founder of River City Labs and a ‘Shark’ on Shark Tank Australia, told Startup Daily that he’s a proud Queenslander through and through, and that a majority of the businesses he backs are either based in or connected to Queensland. He also agreed that more high net worth individuals need to put money into startups if Australia is going to compete on a global scale. However, he made sure to point out that his activities in Brisbane doesn’t take away from what’s happening in other cities like Sydney and Melbourne. He suggested we focus less on which city is better, and more on creating a national imperative to foster more technology entrepreneurship.

“I think people in every state are taking pride in their home ecosystem – and it’s great to see that Queenslanders are getting behind what’s happening in the state when it comes to startups. But Australia is already a small market, so let’s not waste time focusing on which state is better than the other,” said Baxter.

“By nature, we Australians are a competitive lot, so we like to talk up the ecosystem in our own backyard. But when it comes down to it, we’re all behind Aussie startups no matter what city they’re in.

“We all celebrate the success of our home grown startups like Atlassian and Campaign Monitor. We need to look at creating more of these startups with global vision and ambition and the ability to deliver.”

Although Tozer admitted that, as a Gold Coast resident and Councillor, he is a big advocate for his district, he also acknowledged that finding a balance between the competitive tension that exists between cities and collaborating for a more collective good is important.

“My view is that we can find that balance. Part of it requires checking our egos at the door, sharing everyone’s success and finding ways to accentuate the advantages that each hub has,” said Tozer.

“I think [the Gold Coast] is an awesome place to live, and a great place to raise a family and startup a business. But I’m not so full of my own ego that I think that no other place has got its advantages, nor would I prevent anyone in our city from collaborating with a Toowoomba-based startup, or a Brisbane-based startup, or a Townsville, Sydney or Melbourne-based startup.”

Two entrepreneurs Tozer mentions to support his argument on the power of collaboration is Dan Norris and Alex McClafferty who up until very recently, never met. Norris is based in the Gold Coast and McClafferty is based in San Francisco; and from two different time zones they’ve managed to build a fast growing business WP Curve.

“That sort of collaboration is going to be critical for people in Australia to compete globally,” said Tozer.

“[Founders are] not actually supposed to relocate to Silicon Valley. In fact, what they should be looking at doing is spending significant time in cities outside of Australia, and talking about and celebrating how great it is to be in Australia. They also need to be finding contacts overseas. For us to be globally relevant, we need to look for consumers on multiple continents.”

Tozer also said that Australia shouldn’t strive to be ‘the next Silicon Valley’. Rather, we need to realise that in a global environment, it is impractical that we are going to be based solely in one city.

“You actually need to share resources, collaborate for the best possible outcome across and beyond borders.”

Well-respected Silicon Valley based entrepreneur Steve Blank, in his article, Born Global or Die Local – Building a Regional Startup Playbook, reflects on the attitudes of Australian SportsTech entrepreneurs who, he found, were more focused on local dominance than achieving global scale. From his interactions with Melbourne-based founders, he realised that “most of the founders who said they wanted to grow big hadn’t given much thought about how they would go about building size and scale.”

“The biggest mistake for most of these startups was not understanding that optimizing their business model for the 24 million people in the Australian market would not prepare them for the size and scale they needed to get to big,” Blank writes.

“Instead of beginning with just a focus on Australia, these startups needed to use the business model canvas and articulate which of their hypotheses should be tested locally and what would require getting on an airplane to test by watching someone’s pupils dilate face-to-face.”

Roy communicated a similar sentiment, but with a slightly different focus.

“For us to have prosperity as a nation, the next generation of Australians, instead of applying for a high paid job in the mines or in traditional industries, need to start a business that a global outlook and large export potential,” said Roy, who comes from a farming family and has brothers who work in the coal mines.

“We’ve got lots of smart people, we’ve got a lifestyle that people want, yet we’re essentially driving people to the other side of the world to [pursue their business]. I think that needs to change.”

Whether or not we’ve been influenced by more developed tech hubs like Silicon Valley, one problem (arguably) is that our startup culture glamorises capital raising.

On one side of the spectrum, Australia has been criticised for having a risk-averse investment culture. But at the same time, we’re seeing founders getting sucked into a world that’s all about how much capital they can raise.

In a previous interview with Startup Daily, respected personality in Australia’s startup scene, muru-D’s Mick Liubinskas, said that we need to put more focus on sales and drop the focus on capital raising. He added that keeping more companies based in Australia while having global sales is “critical to building the compound interest for our ecosystem.”

“Most people with an idea are not going to get funding for it; they aren’t going to get into an incubator; and they aren’t going to be able to execute something to a world class level,” said Norris, keeping things real.

“I’ve never pitched an idea in my life – you don’t need to go on a pitch roadshow to start a business.”

Tozer, who, as established earlier, believes startups should shift their focus towards customer acquisition, communicated a sentiment that’s widely held in the startup scene: “At the moment, it’s quite a low barrier to entry to come up with an idea and start a startup.”

A point worth noting here is that to start a technology business, the founder, especially if they’re non-technical, will need to have accumulated a certain amount of wealth or have a some cash in their hip pocket to take their idea forward.

TechCrunch writer Danny Crichton wrote an article in February this year discussing how starting a startup is “a rich man’s game”. He points out that the greatest risk of building a company is financial, yet there’s far less discussion about financial inequality than, say, gender and racial inequality.

“In addition to the opportunity cost of lost wages working on a startup, there is the serious burden of fueling a company’s early expenses before an accelerator or venture capitalist comes in and drops some capital. It is a common form of founder braggadocio to talk about the $20,000 credit card debt that they are carrying to see their dream come to life,” Crichton wrote on TechCrunch.

Many startup stories, at least in Australia, start with ‘so I left my cushy corporate job to pursue a startup idea’ or something along those lines. Rarely, do we hear ‘I had debt collectors blowing up my phone and knocking at my door, so I decided to launch a startup’.

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. It’s understandable, then, that startups are on the lookout for financial support, especially as traditional bank lending via business loans is ill-suited to the high-risk nature of startups. This is why we’re seeing an increasing number of funding pools emerge in startup communities across the world – like angel investment, private equity, venture capital, crowdfunding, equity crowdfunding, etc.

As far as funding goes, Australia lags behind many other developed nations. In fact, Australia still has one of the lowest rates of venture capital investment. Many founders and key figures in the local startup ecosystem attribute this to a ‘risk-averse’ attitude and culture.

Although technology seems like a risky investment, in Australia, the tech sector is worth over $100 billion – about 5 percent of our GDP. There are 41 companies listed on the ASX with a market capitalisation of more than $100 million, and 54 companies exceed $50 million in market capitalisation. We have an opportunity now to double this number over the next five years. If we stick to investing in infrastructure, real-estate, and resources, but not emerging tech companies, we risk forfeiting over $100 billion in economic benefits.

Interestingly, as Roy pointed out, “we spend $200 million a year betting on the Melbourne Cup, yet VCs spend $100 million a year on startups.”

“We’ve got a long way to go.”

Although startups are calling for greater support from the government, both financially and policy-wise, most would agree that it’s not good policy to have government shovelling funds into the sector if we want to be self-sufficient.

Initiatives like ‘Silicon Pyramid’ in Egypt and ‘Tsukuba’, Japan’s Science City ended up failing. Pouring money into new buildings and technologies or simply implementing a light tax mode isn’t enough. Singapore-based consulting firm One Visa believes “Without a crowd of “cheque-writing” personalities that will back young companies and support them, building a self-supporting startup community is impossible.”

In top startup hubs like Israel and Singapore (which adopted principles from Israel’s Yozma program), the government offers  incentives for the private sector to contribute to the startup ecosystem.

Under the Yozma policy, which was introduced over 20 years ago, the government allocated $80 million across 10 venture capital firms and another $20 million was used to directly fund promising high tech companies. Many reports suggest this policy triggered the creation of Israel’s now-flourishing VC industry.

Back in 2009, under the Technology Incubation Scheme the Singapore government said it would put in 85 percent of needed capital if an investor agrees to put up 15 percent (a 5-to-1 scheme). Better yet, the government’s share could be bought out at any time.

It’s this collaboration between the public and private sectors that Roy believes is key to moving the startup ecosystem forward in Australia.

“When you’re looking at government funds for commercialisation, there are two things that are really important: the first is that it has to be in conjunction with private funds. Wherever there has been successful commercialisation projects run by government, they’ve had the largest possible percentage of private funds contributing to it,” said Roy.

“There is a big step from four or five smart guys building something in a garage to a multibillion dollar company. In between is the Valley of Death. The government needs to provide an incentive to get through the Valley of Death; so it’s quite reasonable for them to put in a significant percentage of funds, say 80 percent, but the other 20 percent needs to come from the private sector.

“But when you’re looking at large scale commercialisation or funding more developed companies, then the government’s contribution as a percentage should be significantly less, but it would have greater nominal value – like 5, 10 or 20 percent, which might be $5 million instead of $500,000.”

Roy also believes public funding should not be provided through a grants-based system. This is because, typically, grants are handed out every six or 12 months, meaning that startups that need urgent funding might have to wait a certain period of time before they could apply for, and have access to, grants.

“[Funding] needs to be done on an ongoing basis, so if you come to government at any time, as long as you’ve got a business plan and you’ve got people developing a company, then you should be able to access government funding in conjunction with private funding at any point in time. It you’re building a company and you have to wait six months for the next round of grants, it’s probably too late,” said Roy.

We also need to keep in mind that most startups won’t make it to their tenth year, or even their fifth year. The reason why we need to invest in startups is because the few that do succeed will create new markets, increase Australia’s competitiveness, and attract valuable global partnerships. By creating innovative products, startups don’t just transform existing industries, but also build new industries. Not only do they create new jobs, they introduce new career paths. Startups can and will safeguard the nation’s economic prosperity, a message that the ecosystem has been communicating to the government.

Roy is in line with this view, saying, “We have to realise that if we are going to make investments in startups, many of them will fail. We will lose money in the process. But if some of those are very successful, then we will gain more money back to the taxpayer, because you would get a much bigger return on those investments than you would through income tax, GST, etc. The follow-on effects are enormous.”

Based solely on anecdotal evidence, it appears that Queenslanders are less fazed by government support.

Norris said it’s not governments that create great startup ecosystems.

“The other cities (outside of the Gold Coast) seem to have a significant active presence from someone who is a true credible startup person. Steve Baxter in Brisbane, the Atlassian guys and Niki Scevak in Sydney, Leni Mayo and Mark Harbottle in Melbourne,” Norris added.

“And they (cities) have investors that are prepared to put money into the best companies or a [provide a] path to achieving that overseas. These are guys who know how to start, execute and exit significant tech companies. They have a track record, they have contacts, they have international respect as being world class startup guys.

“On top of that, they are keen to be involved in the local ecosystem. These are the types of guys I think we need on the Gold Coast to produce entrepreneurs and startups of the same calibre.”

Birkby said he was actually “amazed by how much time Australian entrepreneurs are spending talking about the role of government”.

“As an American VC once said to a group I took to the Valley: ‘Why are you talking about government? You’re entrepreneurs! Shut the fuck up, build something, and sell it.’ I think that sums up my opinion on the role of government and the role of entrepreneurs,” Birkby added.

Despite his insinuation, Birkby didn’t shy away from praising Tozer and other politicians for their receptiveness towards, and support for, local startups.

“Glenn has been incredibly supportive – he shows up at events, engages in the conversations, actively advocates for the sector, makes introductions and genuinely recognises the importance of building a tech sector to diversify the economy. He personally funded his own way on one of our trade missions to Silicon Valley,” said Birkby.

“I’ve seen Ministers attend a lot of startup events recently, and I have to say that just attending is itself quite positive – taking the time to recognise and understand startups is important.”

We have the government’s interest. Politicians are working towards startup-friendly laws. These won’t come in effect over night. In the mean time, while we wait for a better regulatory environment and a stronger VC industry, startups should continue in the spirit of “getting shit done”.

Featured image: Custom Cartoon by Ghada Sleiman.