Although it’s becoming easier for startups to raise capital in Australia, high-growth companies are hamstrung by a shallow pool of global talent, warned Alex McCauley, CEO of StartupAUS and lead author of the 2017 Crossroads Report.
The report, a comprehensive review of the nation’s startup ecosystem, features a state-by-state brief on the progress of local startup ecosystem, an analysis of the effect of innovation-boosting measures in place, and milestones for Australian startups.
According to McCauley, Australia’s startup community has enjoyed a blockbuster year, with a number of key milestones including a record of $1.32 billion raised in venture capital, significant State Government investment (especially on the East Coast) in innovation precincts, strong growth in the number of accelerators, incubators and co-working spaces, and the attraction of high-profile events and investors.
Inadequate access to global talent
However, McCauley told Dynamic Business the fourth annual Crossroads Reports shows that inadequate access to global talent “is, right now, the single biggest bottle neck to growth of tech startups” and that it’s “impeding the international competitiveness” of the local sector. He cited the Federal Government’s recent visa changes (including the abolishment of the 457 scheme) as a key contributing factor, adding that the report advocates for the expansion of the skilled worker visa to include digital skills and reflect startup needs.
“One of the troubles with current setup for skilled migration visas is that a number of key occupations startups are crying out for are not listed on the Medium and Long-term Strategic Skills List or the Short-term Skilled Occupation List,” he said. “The Department of Immigration and Border Protection uses ANZSCO codes, which the ABS put together, but roles like product manager and UX designer don’t yet have an ANZSCO code – they’re new jobs and haven’t filtered their way through the processes necessary to appear on either list.
“If the immigration regime is preventing high-growth companies from filling key hires, this not only stifles their growth, it also impacts the rate of job creation in the economy. If not being able to fill those key hires means the success or failure of their business, they’ll think about moving to where the talent is. This is not about businesses looking to replace Australian jobs with migrants, it’s about businesses looking to create Australian jobs through high-value immigration. We want people to be able to start world-class businesses in Australia and that means they’ve got to have access to world-class talent or else it won’t happen.”
Uncertainty around cash flow driver
McCauley said StartupAUS is also advocating, through the Crossroads report, for the Federal Government to pay the R&D Tax Incentive on a quarterly rather than annual basis.
“The R&D Tax Incentive is the single biggest program Government has delivered for startups in Australia,” he said. “However, it’s been through a period of serious uncertainty since April, last year, when the government undertook a review of the incentive. We haven’t had a response to that review yet.
For a long time, startups have told us that cash flow is a serious problem, especially when they rely on the R&D Tax Incentive. Up to 50% of a company’s expenditure can be eligible for the incentive but they don’t see any returns from that for a year. For this reason, we’ve been pushing strongly over the last two years for the R&D Tax Incentive to be paid quarterly. The feedback we’ve had from startups is that this change could be the single biggest driver of stability for their business. It’s directly in the governments hands.”
A growing understanding of network effects
McCauley said that by 2020, startups could contribute as much as $170 billion to the economy but this was “dependent on the right support ecosystems being in place”.
“Some of the statistics in the Crossroads Report highlight the ‘network’ effects that high-growth companies have, including the ecosystems that form around them,” he said. “In the report, we discuss the Facebook effect, the PayPal effect, the Apple effect. In Facebook’s case, they employ many people directly but a whole bunch of other jobs have been created for app developers, people building on Facebook’s API and people selling through Facebook Marketplace. Likewise, Apple have around 80,000 employees in the US but that’s only a fraction of the total jobs they’ve created – just look at their 450,000 suppliers and the 1.5 million app developers that have jobs through the App Store. Finally, in PayPal’s case, the founders and early employees have used the experience to launch other successful startups, including LinkedIn, YouTube, Tesla, SpaceX and Yelp.
“These kinds of multiplier effects, where a company’s economic impact extends beyond what they’re doing internally, are what is needed in Australia, so it’s been heartening to see increased support from State Governments, particularly those on the East Coast. They’re really starting to understand that state and city economies will receive a really big economic boost from some of these multiplier effects and that if you have a couple of big successes in an area, then things will snowball and that area could take off like Silicon Valley, Israel, Estonia or, these days, London.”
More startups raising capital in Australia
McCauley said a positive development in the startup sector was revealed when, for this year’s Crossroads Report, StartupAUS “took a deeper dive into the venture capital numbers including the VC funds raised in Australia”.
He explained, “We’ve had a couple of record years in row when it comes to venture capital raised in Australia, with $568 million raised in 2016 and $1.32 billion raised this year. Those headline numbers look really good but we went a bit deeper to determine whether those numbers translated to more Australian companies being retained in Australia. The answer was ‘yes’.
“Although total investment in Australian startups has remained static, at about $500 million over the last few years, the number of deals involving overseas investors – along with the size of those deals – has dropped very substantially. This tells us that, unlike in the past, Australian companies are able to raise those big rounds here and they don’t need to continually be looking overseas to top up investment. Also, while there are fewer deals involving foreign investors, the quality of those deals has gone up substantially which is a really good news story.”
Key recommendations from the report
The 2017 Crossroads Report makes nine key recommendations to address issues holding the startup sector:
- State Governments should continue to build and connect innovation precincts
- The Federal Government should pay the R&D Tax Incentive on a quarterly rather than annual basis
- The qualification criteria in the entrepreneur visa should be altered and simplified
- Options issued under Employee Share Schemes should be exempted from the 20/12 Rule
- The skilled worker visa should be expanded to include digital skills and reflect startup needs
- Federal and State Governments should work together to expand the school curriculum for digital skills, giving students more options in computer science and computational thinking
- A copyright safe harbour for all online content providers should be implemented
- Entrepreneurship programs should be implemented and expanded in high schools and universities
- Governments should establish dedicated policy teams focused on emerging technologies
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