What does the 2014 Budget really mean for startups?

What does the 2014 Budget really mean for startups?

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The 2014 Budget presents a mixed bag for startups and entrepreneurs. Despite the recent Crossroad report that outlined how Australia’s startup ecosystem needed support and investment from both government and big business, few, if any of the items have been addressed in the budget.

Australia’s economy needs to diversify to remain viable. Investment into high-growth, knowledge businesses is needed to complement our heritage industries in resources and primary industries. Plus, we need to generate more global focused businesses in order to have a robust economy into the future.

Commercialisation Australia is gone

One of the cost savings from the 2014 budget has been from scrapping Commercialisation Australia, the Innovation Investment Fund, Enterprise Connect and the Industry Innovation Precincts. The amount saved is a grand total of $845.6 million.

Elements of these programs will be rolled into a new industry assistance scheme call the Entrepreneurs’ Infrastructure Program. It will receive about half the funding of the previous schemes combined – $484 million.

Commercialisation Australia had played a vital lifeline between startups and support for angel investment. More than $200 million had been provided as grants to more than 500 companies including ingogo, Liquid State and 121cast.

“When you are trying to save government money, it’s easy to conclude that anything which isn’t a basic frontline service is unnecessary. But scrapping initiatives like CA and the IIF for short- term gain will be to our long-term detriment. Although these initiatives are not perfect, they provide stepping stones for the budding entrepreneurs Australia needs,” said Philip Andrews, Director of Liquid State.

“The startup ecosystem in Australia is enthusiastic, but small. The current generation of Australian entrepreneurs has the potential to change this, if they stay in the country. A vibrant startup ecosystems overseas that government support, if given judiciously, can really jump-start a startup community,” he continued.

Will the Entrepreneurs’ Infrastructure Program help?

Will the Entrepreneurs’ Infrastructure Program be enough to grow our fledging startup industry and encourage entrepreneurial collaboration between business and researchers? Most believe not.

The reality is, that prior to last night’s budget, Australia ranked last out of the 23 countries in the OECD for business and researcher collaboration. So, one thing is for sure, Australia can’t rank any lower in that list than it already did. As depressing as that reality is.

So, while the funding has not been cut completely, it has been halved and Commercialisation Australia, which had supported around 500 startup companies is gone.

StartupAUS hopes that the budget does not signal an end to government support for Australia’s venture capital industry. It would like to see the government fund the development of a world-class cohort of VC fund managers by allocating capital to the most deserving funds and, support the creation of a transparent decision making process that stimulates the VC industry.

Currently, there’s not enough information available about how the new Entrepreneurs’ Infrastructure Program will work and, if it will be relevant to tech startups. The current wording seems to focus more on SMEs rather than high-growth technology businesses.

There’s not enough information on the new Entrepreneurs’ Infrastructure Program to form a view about its usefulness, or relevance to tech startups, at this stage. The initial wording suggests a concerning focus on SMEs rather than high-growth tech businesses.

Steven Baxter, board member, StartupAUS and managing director River City Labs said, “The reality is there’s nothing in this budget that indicates the government wants to support tech startups in Australia. The concerning top-level conclusion is that a “saving” of $845.6 million over five years is another way of saying the government will reduce its support for innovation by nearly $170 million a year.”

“Commercialisation Australia and the IIFs were not handouts, they were valuable early stage funding mechanisms that enabled great ideas to be commercialised and startups to get their product to market. Their loss pulls the rug out from under a large number of startups. This will have an immediate effect on the Australian startup ecosystem,” he continued.

Employee Share Schemes

There remains an opportunity to take action on Employee Share Schemes. There has been much discussion about how the current ESOP (Employee Share Option Program) has had a detrimental affect on attracting and retaining Australia’s best and brightest.

Currently, only 57 per cent of Australian startups have an ESOP scheme, according to the CrossRoads report. This is despite share options being a crucial way to incentivise early employees to work in a startup.

By comparison, in the U.S. which has a vastly different approach to employee share schemes, ESOPs have driven the growth in the country’s economy over several decades. It’s estimated that 28 million U.S. employees participate in an ESOP, that’s about one fifth of the entire private sector.

The Budget does recognise that the current ESOP system is an issue.

It states: “Removing unnecessary obstacles to business formation and investment by start-up companies is a critical part of establishing an effective innovation system. High costs of entry and exit have the potential to discourage the type of start-up companies that often pioneer new technologies and work practices, and may also shield incumbent firms that may be less efficient from new competitors.”

“The federal government needs to act immediately to free up the abilities of organisations to invest in their staff, offer tangible equity to their key talent and unlock emerging trends in crowdsourced investment channels,” said David Ryan, who is the Founder, Tech Tidal and also a Co-founder at Metaset.

StartupAUS is calling on the government to make three major changes to Australian ESOPs.

  1. Impose the tax upon and at the time of sale of the employee shares. That is, tax should be imposed only during or after a liquidity event.
  2. Define Startup clearly and broadly with appropriate metrics to achieve certainty of the ESS, and with sufficient flexibility to be beneficial to the appropriately eligible startups.
  3. Deploy clear, simply drafted and standardised Employee Share Option Programs and Employee Share Schemes, and a reporting system for startups.

Peter Bradd, board member, StartupAUS and entrepreneur-in-residence, Fusion Labs said “Budget 2014 has left us with more questions than answers. Focusing on savings is just one side of the coin, we also have to look at how Australia can increase its revenue. PwC has said that the startups can contribute as much as $109Bn and 540,000 jobs to our economy by 2033 and it would be a shame if we miss this opportunity.”

“It isn’t a question of asking the government to do everything for the startup sector, our entrepreneurs can and will continue to innovate. However, we need companies that have global aspirations, and if our leaders don’t bring Australia in line with the rest of the world when it comes to fostering tech startups we will continue to see many of our most successful startups have no choice but to move overseas,” he explained.

The loss of Commercialisation Australia and the IIFs is not good for out startup ecosystem. Until the detail around the Entrepreneurs’ Infrastructure Program is released, no real judgment can be made on how that will help (or otherwise) local startups.

For now, the last hope for the startup industry is, that in the near future, the government will adopt the recommended changes to the ESOPs in Australia.

(Image source: Bigstock)

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