Having been told in January of this year that DLA Piper would be sending me on secondment to Australia, it was hard to contain my smile.
Like my adopted home of London, it is quite clear that Australia is quickly blossoming into a tech hub to be reckoned with. There are excellent traditions of engineering and computer science in the local universities, whose graduates are keen to get into tech, appreciating the pace, excitement and status it is taking worldwide.
Unfortunately, there is an exodus of Australian tech companies heading to Silicon Valley.
I need a dollar
Australia has no shortage of money to invest. Employers are required to make compulsory contributions to pension funds, or ‘superannuation’, on behalf of their employees. This represents 9.5% of the employee’s salary.
Cumulatively, this amounts to a significant pot of money (StartupAus puts Australian superannuation funds at $1.4 trillion) which is available to invest.
Unfortunately, the ‘supers’ are not eager to invest in tech, sticking to traditional, safe investments like mining and property. Therefore, with the later stage funding gap, it is still quite common for startups to head to Silicon Valley in search of capital and a bigger market.
That said, there are some very successful incubators and venture capital firms which are picking up the investment slack in Australia; VCs like Blackbird Ventures and incubators like Startmate and Incubate were of note.
Regardless, venture capital investment in startups for 2013 was pegged at a measly $79 million by StartupAus in their report, ‘Crossroads‘.
Clearly, there is a need to divert existing or attract new money, should Australia aim to have high growth tech companies contributing more than 0.2% of GDP.
Regulation regulation regulation
The regulatory framework of Australia is also in dire need of reform and there is definitely an argument that Australia should look to their British and American cousins for inspiration.
There is nothing analogous to the highly successful SEIS/EIS and Entrepreneurs’ Relief programs in the UK. Clearly these are great pieces of policy, with the UK Government making them permanent features of the fiscal landscape – Australia should look to do the same.
Secondly, one of the main ways in which a company can entice skilled employees to join in the early stages is by offering some type of equity incentive in lieu of being able to pay them a higher wage.
This enables companies to incentivise work with the prospect of a lucrative exit for an employee – which may find its way back in the ecosystem via a newly-made angel investor.
Interestingly, Australia’s tax rules are a major impediment to being able to grant equity to employees. Stock options are taxed at the time of issue, rather than upon their exercise. Coupled with the Government’s reduction of R&D tax benefit this year, innovation may well be stifled.
Following the crowd
Lastly, crowdfunding is now an important feature and resource in a healthy tech ecosystem. The issue which Australia is addressing is the need to put in a regulatory framework which encourages equity-based crowdfunding.
Australia’s Corporations and Markets Advisory Committee’s recent report on crowdfunding in Australia came to the conclusion that crowdsourced equity funding should be facilitated and regulatory impediments removed, as the current law ‘presents fundamental difficulties for the use of crowdsourced equity funding [for companies]’.
That said, they also appreciate the risky nature of the investment and like in other jurisdictions, will be seeking adequate protections for investors.
Not all bad
Although I have noted some structural impediments to the domestic growth of Australian tech companies, plenty of very promising companies are making it work as best as they can.
From my intensive introduction to Australian tech landscape, I have come across interesting and exciting companies at the forefront of their industry.
According to the StartupAus report, Australia’s economy lacks complexity, relying heavily on, ‘an amazingly primitive export basket’, (having ranked 52nd out of 124 countries in terms of economic diversity), a key indicator to long-term growth.
It would do Australia good for the Government to put eggs in more baskets, preferably some that do not contain coal.
To paraphrase the CEO of Dow Chemical Company, ‘…why should we [Australia] allow ourselves to be the world’s quarry?’ I would agree with him and suggest a trip down to Silicon Beach – just watch out for the sharks.
Update: It is often said, great minds think alike. Almost in tandem with the publishing of this article, the Abbott Government confirmed that changes were to be made to the way employee share options are taxed and are due to come into effect on July 1. Aussie start-ups rejoice!