Australia is sleepwalking on our tech sector, and it’s a disaster for the economy

As we inevitably transition away from a coal-driven economy, the booming global technology sector is the economic gold we’re looking for. It would be disastrous to settle for silver, and yet Australia is sleepwalking into doing just that.

Late last year, the IMF released its report into slowing productivity growth in Australia. It calls out weak levels of investments into ICT and R&D, which have fallen below the OECD average, as key culprits.

The government — despite its bluster — has done little to help, particularly in terms of fixing the broken R&D Tax Incentive. But blaming the government is a diversion: the tech sector will attract more investment when it does a better job of building great businesses.

There have been impressive advances in the maturity and size of the local tech startup scene in Australia, with a vibrant community of incubators, accelerators, and well-run venture capital firms investing significant amounts of capital. While this is worth celebrating, it is important to note that Sydney and Melbourne still don’t rate a mention in lists of globally significant tech cities.

As a long-time Google engineer, tech executive, now tech founder, investor, and advisor working with many Australian technology companies, the reasons for this are clear. The local startup scene is afflicted by structural weaknesses and a dangerous complacency that hamper it from breaking into the top echelon globally.

Simply put: many founders, investors, and boards lack fundamental skills and experience in areas that are key to creating the world’s best tech businesses.

Technology startups are businesses, and in the long term their goal is the same as any business: to make large profits. But their path is very different.

Tech startups are characterised by long periods of losses as they make massive investments in creating excellent and differentiated software. The payoff — for those that succeed — is a globally dominant product that can generate outsized profits.

It took Amazon nine years to register its first annual profit.

Forming an organisation with the knowledge and culture to consistently create excellent technology products is core to the long-term success of any tech company. It is no coincidence that Atlassian and Canva, arguably Australia’s two biggest tech success stories, had technical and product co-founders. Most Australian startups have non-technical founding teams who create solid business models but lack the background to ensure technical and product excellence.

In Silicon Valley, many technical and product founders are drawn from the ranks of early employees at companies such as Google and Facebook, whose large equity gains gave them the financial confidence as well as the experience to start excellent technology companies. This is not yet the case in Australia. As an industry, we must be active in wooing “boomerangs”: Aussies who have gone to Silicon Valley and beyond and are now keen to come home. These individuals have priceless experience but are scared off by what they see as poor opportunities in the local startup scene.

The famous “hockey stick” growth curve illustrates an initial period of modest growth followed by a sudden, explosive upward trajectory. To be able to handle the pressure of that growth and sustain it for a long period, tech companies need to have built a strong technical and product foundation. It is founders with a technical and product background who are best placed to put this foundation in place.

Alongside the technical and product challenges are the organisational stresses. Once a startup achieves a certain level of success, it enters the “scale-up” stage, characterised by massive hiring and new business development. The growing pains are intense, and it takes excellent senior management to lead the organisation through them. Many Australian tech companies at the scale-up level do not have leadership teams that are equal to the task. They consist either of talented employees with minimal executive experience, or else experienced executives coming from sectors with very different growth dynamics to tech. In either case, it is problematic.

While a shortage of experienced talent to fill roles at this level plays a part, just as significant is a lack of rigorous governance at the board and investor level. When building their executive teams, inexperienced founders are left to their own devices or given poor advice by their boards.

The fish rots from the head, and it is essential that our technology innovators receive rigorous governance and wise advice from boards that understand the nature of the tech business. Corporate governance in Australia is notably insular, and for the health of the tech sector it is important that this change.

What of our “unicorns”?

When a company achieves a one billion dollar valuation, it might seem churlish to criticize it for not being worth ten billion dollars instead. But where the potential existed, it represents a massive missed opportunity. Venture capital firms depend on rare outsized returns for their business model, so the fewer globally significant companies we generate here, the less opportunity to fund all startups.

Our Australian tech poppies may seem tall, but compared to their potential, many are mere shrinking violets. Much as we celebrate our local successes, complacency at this point of the technology revolution will ensure Australia remains an also-ran, old-world economy.