crossroads 2015

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

April 2015

Contents

Foreword ................................................................................................................................................. i What is StartupAUS? ............................................................................................................................... 1 Introduction ............................................................................................................................................ 2 State of the Australian startup ecosystem in 2015 ................................................................................. 4 What are startups? ............................................................................................................................ 10 Startups are not small businesses ........................................................................................................ 10 Why are startups important? ............................................................................................................... 11 Disrupt or be disrupted ......................................................................................................................... 13 Unicorns matter .................................................................................................................................... 14 Australian startups on a global stage .................................................................................................... 16 The case for an Australian Economy 2.0 ............................................................................................... 18 The case for government intervention ................................................................................................. 21 International entrepreneurship policy frameworks ............................................................................. 23 Conditions for a vibrant startup ecosystem in Australia ...................................................................... 28 Action plan summary ............................................................................................................................ 29 Action #1 Create a national innovation agency ................................................................................. 32 Action #2 Increase the number of entrepreneurs ............................................................................. 33 Action #3 Improve the quality and quantity of entrepreneurship education .................................... 41 Action #4 Increase the number of people with ICT skills ................................................................... 46 Action #5 Improve access to startup expertise .................................................................................. 52 Action #6 Increase availability of early stage capital to startups ....................................................... 59 Action #7 Address legal and regulatory impediments ....................................................................... 70 Action #8 Increase collaboration and international connectedness .................................................. 75 Author and contributors ....................................................................................................................... 78

Page i

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 Australias 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 its 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. Its not enough, and its 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 weve 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 markets value as measured by market capitalization.1 There arent 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

Page ii

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 countrys 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 arent 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. Its 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.

Im 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. Lets 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 Australias Next Billion Dollar Industries

April 2015

Page iii

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 Australias 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 Australias 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

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 Australias 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 Australias 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 Australias Next Billion Dollar Industries, 5 Australian entrepreneur Adrian Turner observes that Australias 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.

Australias 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

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 Australias 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/

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 companys 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 and Index Ventures) and one Australian fund (Blackbird Ventures)

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 Australias 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 Australias 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, Australias 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 conducted

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 governments 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.

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 Australias 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 governments 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 governments 2014 budget, despite having been the governments 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 governments 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.

Review of Australias Innovation System

In March 2014 the government commenced a review of Australias 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 Australias 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 Australias 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 governments understanding of what tech startups are, how the government could support them, and the impact that they could have on Australias 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

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 Investments Sirius Program11,12, Enterprise Irelands International Startups Fund13 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 Australias 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/

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 Australias 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.

19 ABS, bit.ly/1nKFfW0

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 24 http://www.ncp-incontact.eu/nkswiki/images/6/66/OECD_Innovation.pdf

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 worlds 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 27 http://techcrunch.com/2015/02/04/crunchbase-and-compass-partner-to-rank-global-startup-ecosystems/

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 arent 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/ 29 https://medium.com/the-boundlss-blog/australia-needs-13-billion-to-fend-off-vikings-cd53866e83c6

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.

It is worth noting that among many of Australias most promising technology companies a significant part of their operations and staff are offshore, most of their capital is sourced offshore and the investor returns from those investments are offshore, most of their taxes are paid offshore, and in some cases the business has been domiciled offshore.

Even in the case of very early stage startups a trend is emerging for Australian tech entrepreneurs to form a US Delaware C-Corp at the outset instead of an Australian Pty Limited company on the basis that the future of their business will lie largely outside of Australia.

If Australia is to grow a world class startup ecosystem it is essential that we create an environment that is conducive to the creation of unicorns, and to retention of those companies for long enough that we can benefit from their economic impact.

StartupAUS believes that implementing the recommendations in this report will help the Australian startup ecosystem to mature to a point where Australian tech companies are much less likely to need to move offshore.

The UK government has recognised the importance of unicorns with the Future Fifty program35 which matches fifty of the most promising high-growth companies with publicly funded schemes and incentives relevant to their stage of growth and specific needs. A dedicated team provides a concierge-style service connecting companies with support and advice to facilitate continued growth.

According to the UK innovation agency NESTA, the 6 per cent of UK businesses with the highest growth rates generated half of the new jobs in the UK between 2002 and 2008. Based on this and similar research in other countries, the UK government has increasingly taken an economic policy approach of focusing support on the relatively small number of companies with the highest growth potential, rather than broad support programs for new businesses and SMEs.36 According to NESTAs Chief Executive Jonathan Kestenbaum, Backing excellence and innovation is not an elitist policy: rather, it is the best way of generating employment and opportunity.

More recently, the UKs Centre for Economics and Business Research 37 found that high growth companies (those with more than 20% growth per year) generated 256,000 new jobs 2012-13, or 68% of the total new jobs created in that period, whilst only accounting for 1% of all UK businesses.

Unicorns also have the ability to create positive impact outside the tech sector. One example is the Pledge 1% commitment made by a growing number of tech companies around the world, under which they pledge 1% of the companys value (equity, time and product) to charities and philanthropic ventures.

The Pledge 1% program was instigated by US tech company Salesforce in 2014, and already it has donated 800,000 hours of staff time, A$100 million in funding for community projects and provided its software at no cost to 25,000 non-profit organisations.38 Atlassian was the first Australian tech company to adopt the 1% pledge, and in Australia the program has a long term goal of having at least half of all ASX 100 companies commit to pledge 1%.

35 http://www.futurefifty.com 36 http://www.nesta.org.uk/publications/vital-6 37 http://highgrowthsmallbusiness.co.uk 38 http://www.businessinsider.com.au/atlassians-1-rule-has-raised-40-million-for-charity-and-now-they-want-another-500-companies-to-join-in-2015-2

Australian startups on a global stage Australia has produced a number of startups that have achieved significant scale. Some examples are listed below.

Company Founded in Year founded

Market capitalisation (A$)

No. of employees

Annual revenues (A$)

Revenue (A$) per employee

Domiciled in the UK since January 2014

Sydney 2002 $3.5 billion 1,300 $275 million $212,000

Sydney 2004 Est. $1 billion+ 117 NA NA

Melbourne 2008 NA 160 $38 million $238,000

ASX: FLN

Sydney 2009 $344 million 390 $26 million $67,000

ASX: ACX

Melbourne 2000 $324 million 400 $85 million $213,000

ASX: OFX

Sydney 1998 $562 million 200 $77 million $385,000

ASX: SEK

Melbourne 1997 $6.3 billion 500 $756 million $1.51 million

ASX: REA

Melbourne 1995 $6.3 billion 700 $438 million $625,000

ASX: CRZ

Melbourne 1997 $2.5 billion 400 $236 million $590,000

Melbourne 2006 N/A 600 $350 million $583,000

Melbourne 2006 Est. $400 million 200 $300 million $1.5 million

ASX: WTF. Acquired by Expedia, Nov 2014

Brisbane 2000 $703 million 620 $150 million $242,000

Acquired by Global Payments Inc, Oct 2014

Brisbane 1998 $305 million 130 NA NA

Despite the presence of some very successful Australian technology companies such as those listed above, care needs to be taken not to succumb to an availability bias in which we incorrectly assume that successful startups are common in Australia because we are readily able to bring several examples to mind.

There are currently around 2,400 companies listed on the ASX with a combined value of A$1.65 trillion, of which software companies comprise 4% by number and 1.4% by value.39

In contrast, the top 150 companies in Silicon Valley are all technology-based and have a combined market capitalisation of A$2.4 trillion, exceeding that of the entire ASX.40 These 150 companies have annual combined sales of A$900 billion and employ 1.3 million people41 many of these in high-skill, high-value jobs.

It should be clearly stated that this action plan is not about replicating Silicon Valley. It is increasingly accepted that any notion of creating another Silicon Valley is fundamentally flawed. However, StartupAUS believes that the success of regions such as Silicon Valley underscores the scale of opportunity that now exists to create globally meaningful technology companies that can start in Australia and compete globally from day one.

Even if the commodities boom lasts decades, Australia is in trouble. In Silicon Valley it took 60 years to create the structural, cultural and financial infrastructure to repeatedly create new

billion dollar technology based industries. We massively underestimate the long term impact of current technology trends and market shifts impacted by the technology.

Adrian Turner Director, Mocana Corporation; Author of Blue Sky Mining: Creating Australias Next Billion Dollar Industries

39 http://markets.businessday.com.au/apps/mkt/industrylisting.ac?code=4510&next=all 40 http://www.siliconvalley.com/sv150/ci_23055045/sv150-searchable-database-silicon-valley-top-150-companies-2013 41 http://www.siliconvalley.com/www.siliconvalley.com/ci_25548370/sv-150-searchable-database-silicon-valleys-top-150

The case for an Australian Economy 2.0 The Australian economy is dominated by service-based businesses, constituting around 70% of GDP. Exports are heavily skewed towards the resources sector, with primary products such as minerals, metals and coal constituting 64% of all Australias exports.42

According to Klaus Schwab, executive chairman of the World Economic Forum, The extent to which an economy can develop higher value-added products, processes and business models through innovation is a major determinant of long-term, sustained prosperity.43

Schwab notes the importance of a strong scientific and technological base, investment from public and private sectors, links between businesses and research centers, a high-quality education system, political transparency, and a culture that encourages entrepreneurship and risk-taking.

The economic complexity index (ECI) is a holistic measure of the production characteristics of countries. It was developed by economists at Harvard and MIT to explain an economic system as a whole and to identify the knowledge accumulated in a country's population and expressed in the country's industrial output.

The ECI is a measure of the degree to which a nation is able to produce a range of goods varying in complexity from extracting and selling unprocessed natural resources to building and selling complex industrial products. Research has shown that 73% of a nations future wealth can be predicted from its ECI.44

According to Harvard Economist Professor Ricardo Hausmann,45 Australia has an amazingly primitive export basket which he predicts will lead to Australia becoming one of the worst performers in the region in terms of GDP growth.

As can be seen in the chart below, Australias ECI has declined over the last 20 years to a value of -0.04 in 2012, ranking us 74th out of 144 countries (down 22 places from 52nd in 2011).

Figure 3: Economic Complexity Index - Australia vs selected countries46

42 DFAT, 2011 43 http://www.nytimes.com/2013/12/16/opinion/on-the-innovation-of-nations.html 44 http://www.econnow.com/wp/?p=300 45 http://www.abc.net.au/worldtoday/content/2011/s3349175.htm 46 http://atlas.media.mit.edu/rankings/country/

By way of comparison, Australias economic complexity map (below) differs markedly from that of Sweden (ranked 4th by ECI).

Figure 4: Economic Complexity Map for Australia (ranked 74th by ECI)47

Figure 5: Economic Complexity Map for Sweden (ranked 4th by ECI) 48

47 http://atlas.media.mit.edu/explore/tree_map/hs/export/aus/all/show/2012/ 48 http://atlas.media.mit.edu/explore/tree_map/hs/export/swe/all/show/2012/

It has long been recognised that Australias economic dependence on its resources sector has hampered the development of other sectors. This phenomenon, named Dutch Disease by The Economist (after the collapse of Hollands manufacturing sector following the discovery of natural gas) is characterised by neglect and atrophy of high-value export industries whilst enjoying the benefits of exporting natural, unimproved (and finite) commodities.49

One of Australias challenges is to shift away from being a derivative economy and to create high labour productivity jobs that are not susceptible to being usurped by lower cost-of-labour locations, as has been seen in the case of car manufacturing, and at the same time to avoid the fate of resource-rich Argentina which has suffered massive economic downturn as a consequence of government failure to alter the composition of its economy.

As the Australian dollar approaches a six-year low of US75c and commodity export prices are dropping, the need to refocus the Australian economy could not be more urgent.

As noted by Australian businessman Andrew Liveris (Chairman and CEO of Dow Chemical Company), Australia needs a diversification strategy. We have the resources in the ground, but why should we allow ourselves to be the world's quarry? 50

In 2013 the Commonwealth Banks then CIO Michael Harte noted that Australia tended to use technology to prop up diminishing returns industries such as manufacturing, mining and agriculture. He called for government support for more blue sky science to drive inventions like the CSIROs wireless networking patent, which came from radioastronomy research.51

In February 2014 the Federal Treasurer Joe Hockey aptly noted We cannot longer rely on the land, through minerals and agriculture in particular, or the heavy lifting done by previous generations of manufacturing. We can no longer rely on that to sustain our quality of life in the future.52

In a recent report by PwC,53 Australias economy is predicted to drop 10 places in world rankings by 2050 from its current rank of 19, taking Australia out of the G20 and placing us behind countries such as Bangladesh, Egypt, Iran, Pakistan, Philippines and Thailand. PwCs predictions of an economic slump were based on an assessment that Australia has under-invested in non-resources parts of the economy, including in STEM education.

49 http://internationalspectator.com/2013/analysis-australias-problematic-dependence-on-primary-products/ 50 http://www.theaustralian.com.au/business/economics/obamas-aussie-tells-it-like-it-is/story-e6frg926-1226099320569 51 http://www.itnews.com.au/News/341763,commbank-wants-troublemakers-in-one-in-ten-jobs.aspx 52 http://www.afr.com/p/national/hockey_lays_ground_for_cuts_KF85IKpfopp7oyN79jDn5H 53 http://www.pwc.com.au/consulting/assets/publications/World-in-2050-Feb15.pdf

The case for government intervention StartupAUS believes that proactively fostering economic diversification is an important part of the governments role, and that this should include creating a suitable economic climate for startups, providing the right stimulus and support for the sector, and identifying and addressing market failures that are impeding economic growth.

The Australian government already has a number of existing programs that provide valuable support to high-growth companies, including the R&D tax incentive and grants from the Entrepreneurs Infrastructure Program. However very few government programs focus on supporting startups or boosting entrepreneurship, and those that do are sub-scale and highly fragmented.

Worldwide, startups have been shown to be a massive contributor to economic growth and high value job creation over several decades. Yet the Australian government's investment in supporting the startup ecosystem is extremely modest, particularly when compared with the governments direct support for diminishing returns industries such as the automotive industry (subsidies of $30 billion in the past 12 years, including $2.17 billion directly to General Motors Holden), 54,55 the mining industry (subsidies of $4.5 billion per year56 including $2 billion per year in fuel tax credits to mining companies),57 and assistance packages in the hundreds of millions of dollars a year to other sectors and individual businesses. In June 2013 the federal governments Department of Broadband, Communications and the Digital Economy released an update to the Digital Economy Strategy (Advancing Australia as a Digital Economy).58 That paper recognised the limited availability of capital for Australian startups and difficulties in attracting and retaining talent as impediments to growth in the startup sector.

Two actions were identified specifically to support digital startups, namely: [Action 7] Review the regulatory arrangements for employee share schemes; and [Action 8] Consult on an Australian crowd-sourced equity funding scheme.

StartupAUS endorses addressing these two areas as promptly as possible, and further commentary on both is provided in Section 7 of this document.

Disappointingly, the digital economy paper is heavily skewed toward technology adoption with little emphasis on technology creation and commercialisation as a driver of economic growth. The actions set out in the digital economy paper are mainly aimed at addressing regulatory barriers which is an important but narrow part of the required solution. There is little in the strategy to stimulate growth in the technology sector despite clear evidence of systemic market failures.

It is also important to note that the Australian government has produced or commissioned several other substantial reviews of aspects of the innovation ecosystem including the Innovation System Report (2011, 2012 and 2013)59 produced by the Department of Industry; the Review of Venture Capital and Entrepreneurial Skills (2012) prepared by The Treasury and the Department of Industry, Innovation, Science, Research and Tertiary Education;60 and an Independent Econometric Analysis of the Innovation Investment Fund (2010).61

54 http://www.smh.com.au/business/comment-and-analysis/the-end-of-uggboot-economics-why-the-consumer-is-now-in-charge-20140227-33k0d.html 55 http://www.abc.net.au/news/2013-04-02/holden-reveals-billions-in-subsidies/4604558 56 http://www.abc.net.au/news/2013-06-25/nrn-dist-mining-subsidies/4778042 57 http://www.theguardian.com/environment/southern-crossroads/2014/feb/02/fossil-fuel-subsidies-tony-abbott-spc-ardmona-corporate-welfare 58 http://www.archive.dbcde.gov.au/2013/september/national_digital_economy_strategy 59 http://www.innovation.gov.au/science/policy/AustralianInnovationSystemReport/AISR2013/wp-content/uploads/2013/11/AIS-Innovation-Systems-Report-2013-v3.pdf 60 http://www.avcal.com.au/documents/item/516 61 http://www.innovation.gov.au/industry/VentureCapital/Pages/IndependentEconometricAnalysisOfIIF.aspx

StartupAUS has reviewed the findings of the above reports pertaining to the startup sector and asserts that whilst many of the fundamental issues have been identified (and in some cases explored in some detail), there is as yet no coherent strategy to deliver Australias transition to a knowledge economy.

In 2014 StartupAUS made a submission to the governments Review of Australias Innovation System. That submission observed that it is highly conspicuous that the Australian governments support for the startup sector is decreasing at a time when the rest of the world is increasing its investment in this sector.

The case for government intervention to help drive more investment in our innovation system is very strong. Our economy is in the midst of deep structural change, and globalisation is accelerating the need for us to develop new markets and new growth opportunities to position ourselves to compete with the most advanced nations in the world. The government must play a role in guiding the transformation of our economy through support for startups, innovation and venture capital. Yasser El-Ansary - Chief Executive Officer, Australian Private Equity and Venture Capital Association Limited (AVCAL)

International entrepreneurship policy frameworks Many national governments have developed substantive policies and programs to stimulate entrepreneurship and support startups and high-tech industries. Some examples are provided below.

Singapore

The Singapore Government has committed over A$14 billion to the National Framework for Innovation and Enterprise over the five years to 2015.62 Its stated aims are to shift the countrys economy from labour-driven to productivity-driven industries, and to support the creation and growth of at least five local technology companies with annual revenue of more than $1 billion. 63,64

The program was launched shortly after Singapores President Tony Tan visited Tel Aviv in 2008. Like the Israeli approach, it focuses on achieving greater emphasis on entrepreneurship via education, and providing practical and financial support to high-growth, risk-taking ventures.

The Singapore governments suite of programs includes:65,66,67

Technology Incubation Scheme A network of 15 government-funded startup incubators

Early Stage Venture Fund invests on a 1:1 matching basis to catalyse formation of venture capital funds that invest in Singapore-based technology companies

Co-investment of up to A$440,000 in Singapore startups (to match private investors 85:15)

Startup Enterprise Development Scheme a startup co-investment program in which the government invests alongside VC funds matching dollar-for-dollar up to A$900,000

Business Angels Fund a startup co-investment program in which the government matches approved angel investors on a dollar-for-dollar basis up to A$1.3 million

Technopreneurship Investment Fund a A$1.1 billion venture fund that invests up to A$3 million in local startups and international startups prepared to relocate to Singapore.

Technology Enterprise Commercialization Scheme a grants program in which the government provides funding of up to A$440,000 to support development of proprietary ideas at conceptualization stage

iSTART Accelerate a grants scheme to support startups in developing technologies by funding up to 50% of salaries of five technical staff for one year up to A$220,000

Young Entrepreneurs Scheme a national program to develop entrepreneurship education in schools

NUS Overseas Colleges - an overseas immersion program that places 150 students per annum as interns in startup hubs such as Silicon Valley, Beijing, Stockholm and Tel Aviv

Revision of bankruptcy laws to protect entrepreneurs who take normal business risks and fail Tax deductions for investors in startups Concessional tax rates for startups corporate tax rate of 0% on the first A$90,000 of taxable

income, 8.5% on the next A$180,000 and 17% above A$270,000 Relaxation of criteria for startups to list on the stock exchange

Deferral of capital gains tax by startup employees for up to four years under an Employee Stock Option Scheme

62 http://www.nrf.gov.sg/innovation-enterprise/national-framework-for-research-innovation-and-enterprise 63 http://www.techinasia.com/singapore-government-iterating-on-its-entrepreneurial-policies-and-how-you-can-help/ 64 http://technopreneurial.com/articles/technopreneurship_singapore.asp 65 http://www.guidemesingapore.com/doing-business/finances/singapore-government-schemes-for-startups 66 http://business.asiaone.com/news/growing-band-tech-start-millionaires 67 http://www.wsj.com/articles/SB10001424052702304071004579406393779804868

UK

Over the last decade the UK government has implemented a raft of policies and programs aimed explicitly at supporting high-growth, globally focused businesses. These include:

UK Angel CoFund a A$185 million early stage matching fund to support the growth of an angel investment sector

Start-Up Loan Scheme a A$285 million program to provide seed capital and mentoring to early stage businesses

Enterprise Capital Fund program68 a A$440m program to support the creation of new early stage venture capital funds

Future Fifty program to identify and directly support fifty of the most promising high-growth companies with bespoke assistance and incentives

Aggressive inward investment attraction programs, including actively encouraging startups from other countries to relocate to Tech City in London

Entrepreneur Visa to encourage the best entrepreneurs from around the world to establish their business in the UK

Global Entrepreneur Programme 69 to attract high-calibre, early-stage companies and entrepreneurs to set up in the UK by offering bespoke advice and capital raising assistance from a team of experienced entrepreneurs

Entrepreneurs Relief program to provide a reduced capital gains tax rate of 10% for startup founders who sell their business

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) to stimulate early stage investment by providing upfront income tax relief and capital gains tax exemption for angel investors

UK Innovation Investment Fund a A$300 million fund that co-invests with private sector investors in high growth, knowledge-based businesses

Business Finance Partnership a A$2.2 billion program to improve access to finance by growing businesses by providing matching funds alongside private investors

Changes to IPO regulations to catalyse higher rates of technology company listings Entrepreneurship promotion in schools via business immersion programs, guest talks by

entrepreneurs Competitions with A$28 million in prize money to encourage digital entrepreneurship Establishment of a Technology Strategy Board as the UK's innovation agency, with oversight

of a range of innovation programs and input to government innovation and economic development policy.

The world of business is changing rapidly and one of the most promising opportunities for new jobs and growth lies within a new wave of high growth, highly innovative digital businesses. We are competing in a global race and I am absolutely determined to make Britain the best place in the world in which to start and grow a business. Prime Minister David Cameron

68 http://www.capitalforenterprise.gov.uk/ecfp 69 http://www.ukti.gov.uk/investintheuk/globalentrepreneursprogramme.html

New Zealand

New Zealand has embarked on a deliberate effort to transition its economy from its historical reliance on tourism and primary industries to one based on high-growth knowledge-based businesses. A range of government programs have been launched over the last ten years, including:

Entrepreneur Visa to attract foreign entrepreneurs to establish high growth businesses in New Zealand

Visiting Entrepreneur initiative to engage experienced US entrepreneurs and angel investors to help accelerate the growth of a vibrant startup ecosystem

Incubator Support Program a national network of eleven government-funded startup incubators70

Grant funding of up to A$430,000 per company for startups supported by the government-funded incubators

Opened the first stage of GRID AKL, a 48,000m2 innovation precinct on the waterfront in Auckland to house and support technology-based businesses, venture capital firms and angel investors, and act as a hub for entrepreneurship in New Zealand in the same was as Tech City in London

Announced a similar innovation precinct to be built in Christchurch New Zealand Seed Co-Investment Fund a A$37m early stage direct investment fund to

stimulate greater levels of angel investment New Zealand Venture Investment Fund a A$150 million direct investment fund to stimulate

greater levels of venture capital investment Implemented regulatory changes enabling crowd-sourced equity funding from April 2014 Kiwi Landing Pad a startup support program in San Francisco to assist New Zealand startups

establishing a presence in the US Establishment of Callaghan Innovation as the countrys national innovation agency with a

focus on high growth technology-based businesses

Entrepreneurship is extremely important. If New Zealand is going to do well and be successful, we need good ideas and the brainpower and the enthusiasm of entrepreneurs in New Zealand to building a much stronger country. Prime Minister John Key, 2013

70 http://www.angelassociation.co.nz/news/press-releases/2014/07/company-incubator-network-expands

South Korea

In 2013 the South Korean government announced a Creative Economy initiative,71 a A$4 billion funding commitment to accelerate the growth of the countrys startup sector. The initiative is part of President Park Geun-hyes efforts to reduce the countrys dependence on low-value manufacturing and to stimulate creation of new high-growth businesses.

The Korean Creative Economy initiative includes:72

A national startup promotion program to encourage more people to become entrepreneurs

Free entrepreneurship education for primary, secondary, high school and university students and the general public

A$100 million startup co-investment fund to encourage greater levels of angel investment in startups73

Funding for a network of 300 startup incubators that together support 5,000 Korean startups

Conversion of 1,000 public libraries into new innovation centres to incubate startup ideas and engage the population in entrepreneurial thinking

Funding for international engagement such as hosting of the MIT Global Startup Workshop and multiple trade missions to Silicon Valley, London, Israel and Singapore

Tax incentives for investing in startups

Establishment of 25 App Creation Playgrounds in which aspiring entrepreneurs can access technical support to build new apps and tackle global markets

Funding for startup internships to place university students within growing startups

Funding for entrepreneurs who have had failed businesses (in recognition of the stigma attached to business failure)

Establishment of government-backed early stage investment funds Funding to universities specifically for commercialisation of research outcomes Mandated access to IP generated in the countrys universities for Korean startups

Korea is focusing on building an ecosystem where entrepreneurship can flourish. The government will increase funding for young entrepreneurs and create a new fund similar to Israels Yozma Fund, to help Korean startups. Unlike resources, creativity is non-depletable. Nor does it degrade the environment. It therefore unlocks opportunities for sustainable growth. President Park Geun-hye, 2013

71 http://online.wsj.com/news/articles/SB10001424127887323393804578554681586293800 72 http://www.kised.or.kr/new/english/index.html 73 http://antimeridiangroup.com/?p=332

US

Startup America Partnership74 - a White House initiative to accelerate high-growth entrepreneurship in the US. The government, in partnership with startup community leaders, has implemented a suite of entrepreneur-focused policy initiatives in the following areas:

Expand access to capital for high-growth startups by providing an extra A$2.2 billion in matching funds for VC and other private sector investors

Expand entrepreneurship education and mentorship programs Strengthen commercialisation of federally-funded R&D, which can generate innovative

startups and entirely new industries Provide tax relief and incentives for startups Remove unnecessary regulatory barriers to high-growth startups Impact Investment and Early Stage Innovation (A$2.2 billion)

Entrepreneurs embody the promise of America: the idea that if you have a good idea and are willing to work hard and see it through, you can succeed in this country. And in fulfilling this promise, entrepreneurs also play a critical role in expanding our economy and creating jobs." President Barack Obama, January 2011

European Union

The Entrepreneurship 2020 Action Plan75 is a comprehensive plan for EU member countries to better support high-growth businesses. It emphasises the need to stimulate a culture of entrepreneurship and change public perception through entrepreneurship education. It includes measure such as:

Technology and entrepreneurship education programs beginning in primary school Establishment of a Europe-wide entrepreneurship promotion campaign Funding for a European network of startup accelerators Review of regulatory environments to ensure they are startup-friendly Amending tax legislation to stimulate angel investment Establishment of a European crowdfunding network Funding for a young entrepreneurs development program including international exchanges Measures to stimulate venture capital investment in startups Reduced penalties and new support services for entrepreneurs who fail honestly Establishment of a Europe-wide startup mentors network

Australia needs to identify what economic levers work in other countries, decide which are applicable to Australia, and then shape these to accelerate Australias economy. We can change our destiny if we take action

now and focus our efforts on making the required changes in thinking, priorities, policies, and behaviour. Dr Jana Matthews ANZ Chair in Business Growth, Professor and Director, Centre for Business Growth,

University of South Australia and board member, StartupAUS

74 http://www.whitehouse.gov/startup-america-fact-sheet 75 http://ec.europa.eu/enterprise/policies/sme/entrepreneurship-2020/index_en.htm

Conditions for a vibrant startup ecosystem in Australia As a consequence of global interest in supporting startups as a driver of economic growth, a number of influential books76,77,78 have been written about the conditions that are required in order for startup ecosystems to flourish.

The general consensus is that successful startup ecosystems require the following conditions:

1. A pro-entrepreneurship culture 2. Guidance from experienced entrepreneurs 3. A supportive regulatory environment 4. A collaborative business culture 5. Visible successes and role models 6. Risk tolerance 7. Availability of capital 8. Technical skills (in particular computer programming)

Figure 6: Elements of a vibrant startup ecosystem

The following sections explore each of these conditions in detail, identifying Australias current performance with reference to other countries, and proposing steps that can be taken to improve the conditions for Australian startups.

76 Blue Sky Mining: Creating Australias Next Billion Dollar Industries, Adrian Turner 77 Startup Communities: Building an Entrepreneurial Ecosystem in Your City, Brad Feld 78 The Rainforest: The Secret to Building the Next Silicon Valley, Victor Hwang and Greg Horowitt

Action plan summary Australia does not currently have all of the required conditions for a successful startup ecosystem. Their establishment has been hampered to varying degrees by market failures spanning education, culture, expertise, access to capital and regulatory environments.

Below is a summary of the actions proposed to address those market failures. The majority of the actions are not new. They have been implemented in other countries in which similar market failures have been identified, and in many cases have been effective to the point that government intervention can be scaled back or withdrawn.

The impacts from some of the actions will be seen in the near term, although most will take several years to have a positive effect and will require a long term bipartisan commitment.

StartupAUS does not believe that the government should be required to make an open-ended commitment to supporting the startup sector, but rather it should develop an exit plan for scaling back and ending its support of each aspect of the sector. This will require the development of suitable metrics against which progress can be measured.

This paper does not prescribe a division of responsibility between federal, state and local governments, although clearly the best outcomes will be achieved if high-growth startups and entrepreneurship become a national priority, and if there is close alignment between efforts at each level of government, and between states.

Actions with near-term impact (1-2 years)

Action Rationale Reference

Create a national innovation agency

Australia does not have a coherent national innovation strategy. Establishing a central agency responsible for innovation and entrepreneurship programs would give much-needed focus to Australias efforts to transition to a knowledge economy.

Action 1

Create an Entrepreneur Visa

Australias startup sector needs diversity and new skills. An entrepreneur visa, like those in place in many other countries, would help to attract entrepreneurs and accelerate the growth of our startup ecosystem.

Action 2.4

Relax restrictions on 457 visas for startups

Australian tech startups are unable to recruit enough skilled Australian ICT workers. Relaxing restrictions to the 457 visa would enable Australian startups to employ sufficient skilled overseas ICT workers to meet the current shortfall.

Action 4.4

Ensure foreign workers in Australian startups can access the Living Away From Home Allowance

Australia has a relatively high cost of living that is acting as a disincentive for foreign ICT professionals to join Australian startups. Making the LAFHA program available to startups would help to ensure Australian startups are able to attract the highest calibre workers.

Action 4.5

Implement a national Visiting Entrepreneurs P

crossroads 2015

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