The role of government in supporting start-ups
5.1
The Committee considered the differences between the Australian start-up ecosystems and those of other developed nations. The Office of the Chief Economist noted that Australia has some of the highest rates of entrepreneurship and start-up activity among developed economies in the world. It observed that while Australia has the skills, education and economic freedom, Australian entrepreneurs ‘seem to have difficulty in taking advantage of these favourable conditions to generate commercially viable innovative outputs’.
5.2
It is interesting to note that the Global Innovation Index ranks Australia at just 30th among OECD countries for innovation efficiency (despite its world ranking of 17th overall for innovation).
5.3
The Chief Economist’s 2015, Australian Innovation System Report, found two major barriers to innovation entrepreneurship:
an underdeveloped innovation entrepreneurial culture; and,
limited access to finance.
5.4
The Committee considered each of these briefly.
Underdeveloped entrepreneurial culture
5.5
Ms Katie Hynes, Chief Legal Officer of successful start-up, Halfbrick Pty Ltd, observed that entrepreneurialism is not currently part of Australian culture:
…we should be teaching our students to embrace the culture of entrepreneurialism. It is a cultural issue. It goes to the heart of being Australian, which is sticking it to the man, not getting too big for your boots because that is un-Australian and all these things. We should be really encouraging a mind shift in this next generation of children.
5.6
Putting it in starker terms Mr Tony Wheeler, Dircetor Imagine Consulting Group stated that:
We are an incredibly creative nation. We have had to be because of our remoteness—for survival and everything else. But we absolutely suck at commercialisation. This is why all our big ideas went offshore—Sarich and all the good stories we have come up with. We still have that culture, but now we are dressing it up with a whole lot of national statements and rhetoric. We have been living in the shadow of the resources boom for way too long and we are still very complacent and comfortable.
5.7
The Queensland University of Technology (QUT) said that it is trying to nurture a culture of entrepreneurship from the top down. QUT is considering shifting the key performance criteria it uses to assess its commercialisation outcomes from revenue generated by intellectual property licences to the number of start-up founders the university is producing.
5.8
The Transit Australia Group said Australians must also learn to view failure differently if they are going to create a culture conducive to entrepreneurship:
[Australians] will never say 'my business failed' because it would be a stigma; you are bankrupt. In the US, [venture capitalists] really will not even look at you until they have said: 'Have you had a start-up fail? Yes, you have. You understand. Good. Now you are ready to actually learn.' Again, it is a different culture and mindset.
5.9
Mr Phillip Butler, Chairman of Textor Technologies, warned that while failure can result in personal growth and may inform the success of subsequent businesses, it can also be damaging and have mental health implications. He cautioned against creating a culture which encourages young people to take big financial risks before they have developed the business skills to succeed.
I am considered an entrepreneur and a very successful businessman, but I have to be honest with you: I made all my mistakes with someone else's money when I was working for multinationals. It does worry me that the current fashion is to encourage kids to go out and do these things. At 23 years of age you, really, do not know. Business is complex. You have exchange rates, you have banks, you have covenants, you have relationships, you have to eyeball people to make sure that you trust them when you are going into a transaction.
I do not think that at that young age you have those sorts of social skills. It takes time to develop those skills. There is no better way to increase the damage to mental health than to have a monumental failure. It is okay if it is with someone else's money, but if it is your own so that you can lose everything you own, that is quite traumatic.
5.10
In relation to this cultural resistance Mr Tony Wheeler. Director Imagine Consulting Group stated in relation to Australian resistance to issues that international innovative companies accept, that:
…there are various phases they go through. Their ideation phase is incredibly destructive, creative and everything else, but when they start going through all the gates about decision making and what actually gets money invested in there are demonstrators and living labs. There are significant models that are happening throughout America, particularly Europe, Tel Aviv and so on. Australia has been incredibly slow and resistant to actually take that up.
5.11
Perhaps not part of the culture, but Ai Group, quoting rankings provided by Ernst and Young Australia, stated that:
Australia has one of the top five entrepreneurial ecosystems and is ranked third in the world for entrepreneurship attitude by the Global Entrepreneurship and Development Institute. Education and training is one of the key elements of this index.
Limited access to finance
5.12
Limited access to finance is not a situation unique to innovation entrepreneurship, however, in addition to the Chief Economist’s 2015 Australian Innovation System Report mentioned above, it was an issue raised by many witnesses appearing before the Committee.
5.13
The Transit Australia Group claimed start-ups and entrepreneurs in other nations rely on venture capitalist funding to scale up their businesses. It argued that Australian start-ups find it difficult to access funding because the venture capitalist market here is smaller scale than other countries such as the US:
Our [venture capitalist] market is 23rd in the world for size. We are behind New Zealand, for goodness sake, and Austria. If you then go and look just at the US, which is always big in the [venture capitalist] space, and get Australia's GDP, we invest seven times less capital than America adjusting for the GDP. What is going wrong?
5.14
The Transit Australia Group’s claims are supported by a 2013 Australian Private Equity and Venture Capital Association report showing that at the time around just 500 companies in Australia had been funded by venture capitalists, compared with 24,000 such companies in the US.
5.15
Mr Steve Fanale, CEO of Sydney-based start-up Drive Yello asserted that the Australian Government must support start-ups in the absence of sufficient venture capital (VC) funding, or they will seek it overseas and Australia will lose the benefits of these businesses:
We have plenty of major software developers who have gone overseas—particularly going to Silicon Valley, for example. The reason they go there is because that is where all the VC funding is. We do not have a VC ecosystem in Australia. We just do not have it; we do not have the size and we do not have the amount of money in Australia and, therefore, we need government support. We need it much more than the Americans do.
From that perspective, if you want to have an entrepreneurial ecosystem—and I will go beyond an ecosystem: if you want to have an economy that is going to grow and grow at a fast rate here in Australia—you need to support, in my case, tech start-ups, because they are the things that will grow that economy. And the only way it is going to happen to the degree that it does in the States is by government support.
5.16
Ms Grace Wong, Co-Founder of Melbourne-based start-up, Liven explained that lack of investment in start-up is a cultural issue:
…it is cultural, yes. A lot of property business here is good. They are always looking for revenue. They are so used to buying a business that is four times more than the revenue. If you are buying a restaurant, how much is the revenue and then you multiply that for the valuation. When you are faced with a start-up that makes nothing much—that is what Twitter was like for six years; they did not make any money—they cannot understand the idea of putting money into a company that does not make any money. That is the cultural difference.
America and Silicon Valley know that you have to grow quick to get the audience and then each member, even though they are not paying, know it is actually valuable. So they contribute to that valuation and then that is why they invest. There is a difference. A lot of our start-up friends were able to succeed in getting funding when they went to Los Angeles and America but were not successful here. It is very hard to get funding in Australia.
5.17
Ms Fong also explained one of the difficulties with the Government Tax Offsets for Early Stage Investors to encourage them to fund start-ups. The initiative provides a 20 per cent non-refundable tax offset to investors based on the amount of their investment, as well as a capital gains tax exemption. However, it can only be applied to investments in businesses less than three years old.
5.18
Ms Fong argued that most start-ups take longer than three years to develop and the time limit on the offset should be abolished.
5.19
In their submission the Interactive Games and Entertainment Association pointed to the ‘non-competitive’ tax structures for interactive games development and production’ and, noted the following recommendation from the Senate Standing Committee on Environment and Communications References Committee report Future of Australia's video game development industry:
A successor to the Australian Interactive Games Fund and extension of the producer tax offset
5.13. The primary recommendation made by the committee is that the Australian Government introduces a scheme similar to the previous AIGF. The AIGF is the most effective means to address the access to finance issues that small studios face and to help those studios grow into mature, stable businesses. The economic return from funds provided as grants and loans during the AIGF's short life presents a compelling argument for the Australian Government to return funding to Screen Australia for such a program.
Recommendation 1
5.14. The committee recommends that the Australian Government introduce a funding scheme based on the former Australian Interactive Games Fund.
Other barriers to start-ups
5.20
The Committee heard that Australia’s disparate population presents a challenge to building thriving innovation and entrepreneurial ecosystems outside of major cities.
5.21
Stakeholders noted the benefits of providing a physical hub where start-ups can share ideas and common infrastructure. The Committee visited one such hub run by River City Labs in Brisbane.
5.22
Evidence received by the Committee suggests that many start-ups face challenges recruiting appropriately skilled employees, particularly employees with relevant ICT expertise and experience.
5.23
Ms Wong said that, generally speaking, universities are not equipping ICT graduates with the practical skills required by technology-focussed companies:
We got two interns from Swinburne University last year and they had received high distinctions, so we thought they could be very valuable to our business, but what we found was that they really knew nothing. We had to teach them everything, and even then it was more slowing us down rather than adding [value].
5.24
Halfbrick Studios Pty Ltd made a similar point noting that it is required to ‘aggressively recruit employees from overseas’ because university courses are not keeping up with technological innovation or providing students with industry relevant experience.
5.25
Visas are also a barrier to start-ups. Under Australia’s current visa system, when you do have to look at people with the right talent(s) 457 visas are not helpful. Ms Hynes stated:
Immigration is a problem for us. We are not recognised as one of the relevant categories. The levels of experience that are required to be demonstrated to qualify for those visas often are longer than the industry itself or the expertise has existed. You need to have five to 10 years. If we are employing an expert and we need to demonstrate that they have five, at a minimum, to 10 years of experience in our area, which is less than 10 years old, it starts being very difficult. We are literally hiring these 29-year-old experts that just do not fit into what is traditionally considered an expert by Immigration. The other thing that is a problem is the time it takes to actually process these visas. If it is six to 12 months, by the time we actually get the expert in, often the opportunity has been missed.
Committee comment
5.26
The level of funding for start-ups in Australia is concerning. In the absence of a vibrant venture capital market such as in the United States the government must step in. The Committee is heartened by government funding for venture capital via initiatives such as the CSIRO Innovation Fund and the tax benefits for investing in start-ups via Venture Capital Limited Partnerships (VCLPs).
5.27
The Committee notes that support for a qualifying early stage innovation company (ESIC) cuts off after 12 months. This could create a ‘financial cliff’ that companies fall off at the end of this 12 month period. The Committee therefore recommends extending the period of time for which companies are eligible for early stage innovation company (ESIC) incentives.
5.28
The Committee recommends extending the period of time for which companies are eligible for early stage innovation company (ESIC) incentives.
5.29
The Committee also recommends that the Australian Government investigate extending eligibility for the Tax Offsets for Early Stage Investors rule from three years to five years.
5.30
The Committee recommends that the Australian Government investigate extending eligibility for the Tax Offsets for Early Stage Investors rule from three years to five years.
5.31
In relation to visas the Committee recommends that the Australian Government develop an improved access to talent through a more streamlined ‘start-up visa’.
5.32
The Committee recommends that the Australian Government drive improved access to talent through a more streamlined ‘start-up visa’.
5.33
The Committee supports the recommendation from the Senate Standing Committee on Environment and Communications References Committee report Future of Australia's video game development industry that the Australian Government introduce a funding scheme based on the former Australian Interactive Games Fund.
5.34
The Committee recommends that the Australian Government introduce a funding scheme based on the former Australian Interactive Games Fund.
5.35
Although the Committee did not receive evidence on the topic of extending the New Enterprise Incentive Scheme – or a similar scheme – to people working in start-ups makes a great deal of sense to the Committee. The Committee therefore recommends that the Australian Government Department of Employment either:
Start-ups are an eligible activity under the New Enterprise Incentive Scheme; or
A scheme similar to the existing New Enterprise Incentive Scheme for those jobseekers wishing to establish a start-up be created.
5.36
The Committee recommends that
Start-ups are an eligible activity under the New Enterprise Incentive Scheme; or
A scheme similar to the existing New Enterprise Incentive Scheme for those jobseekers wishing to establish a start-up be created.