Sydney Startup Ecosystem Needs Money And Knowledge To Thrive

Today I attended the Tech Startup Action Plan Roundtable organised by the City of Sydney and with representatives from the Labor party at Sydney Town Hall. I was invited to attend and took the opportunity because I believed it could help influence public policy towards startups. I do not have a particular preference towards any political party. As a founder, I am biased towards entrepreneurs – lets make that clear 🙂

I started my company in Sydney and I reside in Sydney. So I want to see the best for the city & country that I grew up in to prosper and be successful.

Here is my take on what was discussed in the meeting and what is needed to make Sydney startup ecosystem successful. There is a global race for innovation and Sydney needs to be a part of it. We need to move away from being consumers to being creators.

Dean McEvoy discussing what the Sydney Startup Ecosystem needs to be successful
To frame the discussion, I would like to make the following points.

We should not try to copy Silicon Valley

Silicon Valley is a unique ecosystem. It was built over decades on the back of military R&D, early semi conductor firms in 1950’s and personal computers in the 1970’s. The first venture capital investment was made in 1957 to Digital Equipment Corporation for $70,000. Due to its history, Sydney cannot be Silicon Valley and should not try to emulate it.

I was recently in Silicon Valley for 3 months. I bumped into more Australian startup founders and Australian employees of startups in Silicon Valley than in Australia. It is estimated that there are 20,000 Australians living in Silicon Valley.

I understand why they are there. Because there is more opportunity in Silicon Valley. The funding, the networks and the ecosystem. Your luck to surface area is significantly larger. The density of startups and the funding you can get over there is incredible compared to Australia.

When we look at statistics of startup investment raised in 2015, this is a telling story:

1. US: $30 billion
2. Israel: $5 billion
3. Australia: $150 million

Having said that, we should not try to be Silicon Valley. We have to look elsewhere and learn from what they have done.

We should learn from Singapore, Israel and Chicago

We should look at other ecosystems that have developed that did not have decades of technology and scientific histories, do not have large capital populations, and are distant from Silicon Valley and New York. These thriving startup ecosystems include Singapore, Israel (Tel Aviv), and Chicago which we can learn much from.

These ideas have been garnered from those ecosystems which were developed via government intervention and public-private partnerships. In addition, the population of these places are as follows:

Singapore: 6 million
Israel: 8 million
Chicago: 2 million
Sydney: 4 million (Australia 23 million)

The Israeli startup ecosystem was started in 1991, so it wasn’t that long ago. They now have the highest VC investment per capita and startups per capita.VC investment per capita. Sydney startup ecosystem lags behind

What Sydney needs to become a world class startup ecosystem

We should focus on a simple lens on what the City of Sydney needs. We need “money and knowledge”. The holy grail is the combination of money and knowledge together.

In order of priority, this is what I believe we need to be a successful startup ecosystem.

1. Encourage people who have done it before to share their wealth & knowledge

There is a lack of tax and financial incentives for people to invest in startups. Instead, startups and startup investors are treated as if they are Christopher Skase – the famous business man that took investors money and left the country. It appears that the laws were made to outlaw this kind of behaviour. This was also made clear when the Shadow Treasurer said that the treasury viewed tax and financial incentives given to startups as a tax rort. This view needs to change in the Treasury.

If an entrepreneur raises money in Australia they typically get two calls. One is from the press congratulating them and seeking a news story. The second call is from the ATO (Australian Taxation Office), equivalent to IRS wanting to do an audit. There needs to be a cultural shift in Australia towards supporting entrepreneurs and spreading smart money towards startups, not hindering them.

In addition, startup founders who have successfully sold businesses find it difficult to re-invest money into startups due to taxation laws. If a founder has proceeds from the sale of a business, they are not able to get Capital Gains Tax rollover to invest into other startups. They have to invest into other asset classes such as Sydney’s over priced real estate market to obtain CGT relief.

So the startup ecosystem loses out on money + knowledge. These are the best people to invest into startups because they have the holy grail. They have valuable advice, experience, networks and know what it takes to build a company.

London has some tax incentives for startups and investors which we can adopt:

a. The Entrepreneurs’ Relief program – which provides a reduced capital gains tax rate of 10% for startup founders who sell their businesses

b. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which stimulate early-stage investment by providing upfront income tax relief and capital gains tax exemptions for angel investors.

The Israeli government allows angel investors to recognise startup investments as losses in the year of the investment. This effectively provides a tax break for those who have capital gains in other businesses or startups. The government also provides tax incentives for foreign investment in new venture capital funds, and generous tax breaks for startups.

2. Employee Share Schemes Needs To Be Uncapped

Getting equity in a startup is an incentive for people to join them. They participate in the upside of the startup’s success. This is known as the Employee Share Scheme (ESS). For a long time, options were taxed on grant not exercise. This is ridiculous given that you are taxing someone on something that may never happen. It should happen on realisation of the value when it is exercised.

There were recent changes made which were a step towards improving this. You can read about it here and here. These companies will be given further financial concessions if they are defined as a startup. The definition of a startup according to ESS laws are:

a. Aggregate turnover of less than $50 million
b. Unlisted
c. Incorporated for less than 10 years

However this misses the mark. As companies like Freelancer and Atlassian cannot use ESS. Freelancer is a listed company. Atlassian is more than 10 years and has turnover greater than $50mil also misses out. We need to change employee share option plans so that they are uncapped. These companies which have billion dollar valuations known as unicorns, need ESS even more so. As they can attract talent from around the world to work in Sydney. They have the budget to bring them here to share their knowledge and upskill the local startup ecosystem. We need to be able to attract the best and brightest to join our fastest growing startups to accelerate their growth.

In addition, when there is an exit event when the company IPO’s or if the employee realise their shares through a sale, this money can flow back into the local startup ecosystem. This is via investing into startups, starting companies and the local economy. Instead the current ESS rules still hinder these companies from attracting the best people to join them.

In Singapore, there is also the ability for startup employees to defer capital gains tax payments for up to four years under an Employee Stock Option Scheme. This is an additional incentive for getting equity in a startup versus joining a corporate company. The job creators are startups not corporates.

3. Encourage multi-national corporations to setup R&D centres

In Israel, they kickstarted the ecosystem through a variety of measures. Two of the ones that stand out is that the Israeli government:

1. Created the first VC fund to invest into startups.
2. Attracted multi national corporations (MNC’s) to setup R&D centres.

Eitan Bienstock discussing Israeli startup ecosystem and what Sydney Startup ecosystem can do

Eitan Bienstock discussing Israeli startup ecosystem

One of the critical things Israel did was encourage MNC’s to setup shop there. Not just a marketing & sales office, but R&D. They gave them financial and tax incentives to base their R&D in Israel. This brought knowledge to the local economy and upskilled its citizens.

One of the companies attracted to come to Israel was intel. Intel also setup a VC fund to invest into Israeli startups. Eitan Bienstock who spoke at the event helped setup Intel’s startup fund. Intel has a $600million fund for startups. This brings money and knowledge into the ecosystem.

4. Density of startups

The Sydney startup ecosystem is scattered. We have small pockets of density. The largest groups as you see below are:

1. Australian Technology Park (Redfern)
2. Fishburners (Ultimo)
3. iCentral (Townhall)
4. Tank Stream Labs (Circular Quay)
Map of Sydney startup ecosystem density

In Singapore, the startups are highly concentrated in an area known as Block 71 which will house 750 startups by 2017. You can read about it here. In Israel, there are many dedicated business parks for tech startups located on the fringes of the city as the rent is cheaper. In Sydney, we’re pretty much everywhere.

We do have one location which has a strong historical presence and the space. This is ATP. However, ATP is in the process of being sold. The future is up in the air as to what the park will become. I feel very strongly about this issue, that is should be retain its status as a technology hub. It needs more investment and a higher concentration of tech startups to be based there. It is important to have geographic density and also talent density. This will allow exchange of ideas, partnerships and collaboration between tech firms.

I created a petition to support saving ATP as a technology Hub. As of today, we have 2,300 signatures. You can sign it here. It saddens me that an area that was dedicated for innovation for 25 years could be sold to property developers who do not have a technology vision for the park. ATP could become the catalyst of the city’s revival for innovation and growth. To quote Alex North who I spoke to: “Losing ATP would be horrible. Making it better would be amazing.”
ATP not just real estate. Vital significance for Sydney Startup EcosystemI brought this up in the Roundtable and there was acknowledgement by the Labor party that this was an important issue.

When I spoke to representatives of ATP, they informed me the land had to be sold to fund the development of new buildings at ATP. They had asked the government for funding but did not receive it due to other priorities. In addition, ATP will start having to pay rent on the land which is owned by the government. I believe this is our highest priority to develop an innovation economy and to have an area that is densely populated with startups to enable knowledge sharing for the future of Australia. We need to set aside areas for our future. We need to think long term.

On this point, I would like to leave you with this final comment from Tom Forgan who signed the ATP petition.

“As the founder of the ATP I gave ten years of my life to create this world class Technology Park and I am at a loss to understand how this world recognised Technology Park can be dismantled when it was the envy of numerous countries around the world. With the Prime Minister repeatedly speaking about the need for top research as a financial driver for our country, it makes no sense whatsoever to close or water it down. Please feel free to contact me as I have a vast amount of information relating to this project.” 

5. Addressing short term & long term knowledge gaps

In Australia, we need to increase the knowledge in the startup ecosystem. We need to have skilled workers that are world class in development, design, UI, digital marketing. We need people that know how to start a company, get product market fit and can scale a startup. We do not have enough of the necessary skills & experience to do this.

In the short term, we need to bring in skilled migrants workers from US, Europe and wherever we can find them. The knowledge needs to be imported. We need their expertise and we must incentivise smart people to relocate here. We need to have visa laws that make it easier for them to come here. This will also positively impact the local skills and experience of startups by learning from them.

In the long term, we need to invest in our people. We need to build up our nation’s knowledge in STEM (Science, Technology, Engineering and Maths). We have a shortage of technical people in Australia.  We HAVE to make coding mandatory from a young age.

If you read the tea leaves and current trends, everything will become tech enabled. Software is eating the world. It is disrupting every industry. Hence, understanding how the internet works and understanding how to code is critical.

Final point

We have a lot of people starting companies. The problem isn’t at the top of the funnel (TOFU). The Australian economy needs to see more startup success. We need to push them through the funnel to make them more successful. The problem is in the middle and bottom of the funnel. We need to equip Australian startups with two things: money and knowledge.

There were a lot of initiatives discussed at the roundtable today and also in the Tech Startup Action Plan which is 70 pages long. At the end of the day, lets keep it simple. Give us money and knowledge, then get out of the way 🙂

Thanks to my buddy Jethro Batts for his “Sydney Startup Ecosystem Thesis” published in 2015 which gave me a crash course in overseas startup ecosystems.

I’m out like Roundtables,
Matt Ho

3 thoughts on “Sydney Startup Ecosystem Needs Money And Knowledge To Thrive

  1. To add to this great write up Matt, two attributes that e.g. Israel has:

    1) exceedingly strong ties and high mobility between Tel Aviv and the Valley, due to the Jewish diaspora. One can’t ignore natural networks created by history. And that’s where those in the Valley give back to their motherland via VC and entrepreneurial networks. Where are ours? Those 20k Aussie Mafias in the valley – there’s an instant transfer of knowledge / networks if we made it more economically attractive for them to move back here, beyond beaches and lifestyle for their families.

    2) Israel is great at R&D but as a market (a) defence is naturally very progressive in adopting new tech and (b) they focus on offshore commercialisation of hard tech (see point 1). Australia needs to move beyond a ‘state of origin’ rivalry between Syd-Melbs and start looking outward. Each city’s natural strength will emerge from that.

    You could look at other markets and take lessons based on each of their unique attributes. But rather than mimicking overseas markets (á la IIF) Australia also needs to start with our most natural attributes too and here are some easy wins that don’t require us to wait for a generation of skilled STEM to emerge:

    1) Our ties and mobility to Asia. Look at Chau-Chak Wing; he’s easily dropped $20M on a new business building for UTS thanks to his child choosing to studying in Australia. Yet while we have this amazing resource of Asian networks (plus STEM) as well as a natural geography/timezone advantage, we don’t harness it as evidenced by the largely domestically orientated tech startups.

    2) Sure we don’t have a defence budget. But we’re best practice in healthtech and agribusiness supply chain, which can fuel precision engineering and design. And in digital tech instead of aping US consumer apps in a land grab for the next Groupon, or marketplace in X, in digital tech we need to harness our creativity – as well has VC have an appetite for risk to fund unproven models rather than feedback “we haven’t seen it happen overseas”!

    Over and out

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