Turning Australia into a startup nation

There has beens some heated debate about Australia’s ability to create an ecosystem that will foster the next generation of startups in Australia.

Nitro CEO Sam Chandler argued in the Herald that there isn’t enough scale in Series A capital-raising in Australia, leading to a brain-drain to other markets, particularly Silicon Valley.

BlueChilli CEO Sebastian Eckersley-Maslin hit back, arguing that in the past five years there has been a huge development in local incubators and accelerators – his own incubator is soon to close out a $10 million venture capital fund, with many similar funds now up and running in Australia.

But, as I’m sure Seb and Sam would both acknowledge, the issue is actually much larger than merely shouting ‘show me the money’.

It’s important to note that there are many more issues when it comes to the startup ecosystem than the amount of capital available.

Equally important are the skills and experience associated with that capital. Silicon Valley’s VC funds now have many years of experience and, most importantly, are often run by or working with successful tech sector entrepeneurs who are using their gains from their own “big ideas” to finance equally big ideas from others and in doing so provide them with invaluable mentoring.

Its good to see in that regard some of our successful tech pioneers, like Mike Cannon Brookes of Atlassian, putting some of their time and capital into just that kind of VC investing.

I visited two local initiatives recently, which show how much the Australian market has developed in recent years.

Telstra’s Muru-D incubator recently opened in Paddington, offering a $40,000 investment and free office space for 10 startups.

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Perhaps the most important aspect of the venture is the business coaching and ability to share ideas and experiences in the co-operative work space.

The incubator is being run by Ann Parker, Charlotte Yarkoni and Mick Liubinskas – who have experience running incubators, such as Telefonica’s Wayra academy (Parker) and Pollenizer (Liubinskas).

Likewise, AWI Ventures last week launched a $1 million fund for 10 startups to design the next app or service in the financial services space.

The venture is similar to the model that has developed in the U.S. in recent years. For instance, Y Combinator in Silicon Valley has invested in more than 600 startups, which have created more than $US5 billion in market value.

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This is not to say that the problem is solved in Australia – but it points to three important trends, which will help define the startup ecosystem in coming years and how it can be fostered by Governments.

The first is that funding sources are becoming more diverse.  There are more incubators, more co-operative workspaces, more angel investor funds and more competitive capital raisings than have ever been the case.

The role for Government here is to foster a framework where investors are protected and yet startups can raise money without hiring teams of lawyers and financial advisers.

This is why we are investigating ways to simplify rules for crowd-funding, for instance, which is yet another source of funds for Series A capital raising.

Secondly, we need to do a better job of promoting our successes in the sector so that larger, institutional investors are more comfortable investing in tech startups.

As Matt Barrie said earlier this year, Australia has got one of the biggest savings pool in the world: “We actually do have a remarkable funding source for equity in Australia – it’s called the stock-exchange,” he said.  “More money was raised on the ASX in the past five years than on the NASDAQ, it’s just that it’s all been in mining and resources”.

In fact, according to Austrade,  Australia has the fourth largest funds investment fund assets pool in the world though in so far as that capital has found its way to high risk ventures, that has undoubtedly been in the mining sector.

It’s not always the case, as Sam Chandler claims, that “companies are leaving Australia, and the gigantic returns generated by late-stage startups when a ‘liquidity event’ happens”.  Matt Barrie’s own experience with the float of freelancer.com is a prime example of what can be raised on the local market.

And finally, the Government has a role in making life easier for startups to do business in Australia and stay here, as opposed to moving offshore.

One of the key priorities for the Government is changing employee share schemes so that employees are not taxed on receipt of shares and options.

This is in the interests of the company, the employee and the Government: If an employee stays at their company until it is in a position to raise more money that’s a win for the local industry. If the Government is able to tax a company that scales to the size of Matt Barrie’s Freelancer.com, that’s a win for the tax base. And of course if the company does well, the Government will get its share of the capital gain on the employee’s shares when they are sold.

Longer term, there are a range of other things the Government can do to make life easier for companies to raise funds and this will be a strong focus of our general deregulation agenda.

The debate on startups is now much deeper, much more sophisticated than we were having even five years ago – and the main beneficiary of that are those budding entrepreneurs who are still deciding whether it’s worth quitting their day job to try and commercialise their latest ideas.

This article originally appeared on Malcolm Turnbull’s blog.