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Aussie startups are flourishing amidst record capital despite tech-phobic climate and talent shortages, says the latest StartupAUS Crossroads report

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Alex McCauley, CEO StartupAUS

Five years after the formation of StartupAUS in 2013, Australia has the fundamentals in place to support a flourishing startup ecosystem, yet significant challenges remain including talent shortages, constrained research and development support, and a cooling attitude toward technology among voters and politicians.

Releasing Crossroads 2018, the comprehensive review of the nation’s startup ecosystem, StartupAUS CEO and lead author Alex McCauley highlighted the milestones that have defined our maturing ecosystem.

“We have seen powerful organic growth over the past half decade – startup formation rates have exploded and new precincts, hubs and programs have emerged to support this.  We have also seen our next generation of world-class, global technology leaders emerge including Aconex, Wisetech Global, Envato and Atlassian along with growth companies Canva, Culture Amp, Airwallex and Afterpay. Venture capital has risen dramatically, providing unprecedented growth opportunities for Australia’s best and brightest startups.  And at least two billion dollars of extra funding has been directed towards startups and innovation through the National Innovation and Science Agenda and state government innovation funds.

“These successful tech brands have generated thousands of jobs and are producing billions of dollars in new value for our economy.  Despite this unambiguous success, our startup sector faces unprecedented global competition and has started to lose its lustre politically. We need to address those challenges if we want to continue to grow quickly,” Mr McCauley said.

A challenging political climate

Mr McCauley said the innovation portfolio has been affected by numerous leadership changes in recent years and “innovation” no longer had a Federal portfolio minister (whereas it had two in 2016).

Mr McCauley said an apparent tightening of the R&D Tax Incentive scheme for software claimants, combined with a promised ‘crackdown’ on the scheme, had the potential to cripple Australia’s emerging tech sector if left unchecked.

“This is the single most important program any government in the country delivers for startups. It has been a core part of the success we’ve seen in the tech sector over much of the last decade. This is a program that was introduced in 2011 specifically to help software development get the same support as other forms of R&D. It would be hugely damaging to have that slip away.

“Looking to the future, as much as 25 per cent of the Australian economy could be directly impacted by software by 2025. That’s A$524 billion of GDP. This is a watershed moment for Australia. We have a chance to set ourselves up for the economic change that we all know is coming, but right now our R&D spending is below the OECD average and falling. At a time when we really need to be thinking ambitiously about R&D we are tightening the belt. That’s something we urgently need to address.”

Need for talent

The 2018 Crossroads foreword, contributed by Melanie Perkins CEO and Co-founder of Canva, which became a unicorn this year, reiterates the need for Australia to lure top talent, which goes hand-in-hand with one of the report’s key recommendations to improve Australia’s entrepreneur visa.

“The current political and visa climate in the US puts us in a position to be able to attract the world’s best talent. We should be latching onto this opportunity, seeing it as a great chance to win talent and figuring out what we can possibly do to help attract more. That also means we need to be open to migration as a way to upskill our own local talent through mentoring and exposure to the best and brightest in every field,” Ms Perkins stated.

University of Technology Sydney (UTS) Deputy Vice-Chancellor for Innovation and Enterprise, Professor Glenn Wightwick, said there had been significant growth in both the number and success of student startup founders, demonstrating the university’s commitment to fuelling the ecosystem’s talent pipeline.

“We believe that equipping the Australian startup ecosystem with high-quality entrepreneurial talent is key to maintaining the exciting momentum we’re seeing today,” said Professor Wightwick.

“For example, our UTS Startups program is now home to over 130 startups since its launch in July this year, highlighting the student appetite and enthusiasm for this space. As part of the founder journey, we’ve also made a commitment to reaching 50 per cent of our students with entrepreneurial experiences in the next five years, which includes boosting activity such as bootcamps, startup internships, workshops and competitions.

“As a long-standing supporter and champion of the Australian startup ecosystem, we are also excited about the milestone initiatives this year such as the opening of the Sydney Startup Hub and the plans for a Tech and Innovation precinct in Central Sydney. We acknowledge these advances but also reinforce the calls by StartupAUS for greater consideration to be given to the Federal Innovation portfolio and associated policy initiatives at this critical time for our next generation of Australian companies.”

Sally-Ann Williams, Google’s Engineering Community & Outreach Manager, said startups are integral to boosting the prospects for Australia’s future prosperity. “For Australia to capture some of the enormous value technology will bring in the years ahead, we want to help develop an environment that encourages the creation of successful technology companies – tech startups are a critical part of this picture”, said Mrs Williams.

Venture fundraising

There is good news on the funding front for later-stage companies. Figures reveal the expanding availability of later-stage capital in recent years, with Series C rounds increasing.

The availability of venture debt has increased, broadening the types and sources of funds startup founders are able to access. Estimates show Australian venture firms held about $3.3 billion in unspent growth capital in mid-2018, suggesting this availability is likely to remain strong.

“The availability of venture capital is critical for startups to move beyond the fledgling stage and expand whether that be their products, national scope, or reaching out to lucrative international markets,” McCauley said.

South Australia: state in focus

This year’s Report includes a spotlight on South Australia, highlighting the South Australian government’s investment of more than $400m in Lot Fourteen – a creative and innovation neighbourhood spread over seven hectares in the Adelaide CBD.

Lot Fourteen,  already home to a cluster of companies from fast-growing industries, will blossom into an innovation, incubator, startup and growth hub to give aspiring entrepreneurs the opportunity to collaborate with startup founders, researchers, industry, business mentors, investors and other support services to bring their ideas to market.

“Adelaide has the potential to become a global hotspot and a hub for defence and space startups, and Lot Fourteen is a key factor in helping to attract that global interest,” said Mr McCauley.

Report recommendations

The 2018 Report makes ten key recommendations to address issues holding the industry back:

  • Amend the R&D Tax Incentive to more clearly support software claims
  • Introduce copyright safe harbour protections for technology companies
  • Improve speed and certainty for startups under the Export Market Development Grant
  • Make targeted amendments to legislation affecting Employee Share Schemes
  • Broaden the early stage tax innovation company tax incentives
  • Increase access to public data sets and fund strategically-coordinated, large-scale data collection efforts
  • Develop and fund a national Entrepreneurship Academy
  • Improve Australia’s entrepreneur visa to make it competitive
  • Introduce a collaboration incentive for corporates to invest in startup programs
  • Invest in an Innovation Ambassador tasked with attracting cutting-edge R&D projects from global tech firms

Key sector statistics and milestones

Australian venture capital firms raised more than $4 billion in new funds between 2015 to mid-2018. Using various sources of funding, many Australian startups achieved promising milestones in 2018, ranging from major public listings to closing funding rounds, achieving revenue growth targets, and expanding into international markets.

These include:

Canva raised $50.9m in January 2018 at a valuation of more than US$1 billion. According to CB Insights, it is the only privately-held tech company in Australia valued at over US$1 billion.

Gilmour Space Technologies, a rocket launch provider based in Pimpama, Queensland, raised $19m in September 2018 to push towards launching its first commercial hybrid rocket by 2020. The Series B round was led by Main Sequence Ventures and Blackbird Ventures. Blackbird also led the company’s $5m Series A round in May 2017.

Culture Amp, a Melbourne-based employee feedback and analytics platform, raised US$40m ($54.3m) in Series D funding in July 2018, following on from its Series C round of US$20m ($26.4m) in June 2017.

Havven, a blockchain startup specialising in decentralised payments, raised US$30m ($38.6m) in its 90-minute initial coin offering (ICO) on 1 March 2018.

The StartupAUS Crossroads Report 2018 is supported by a broad consensus of corporate and community partners, including StartupAUS’ Leadership Partners, Google and UTS, alongside leading investors, scale-ups, and established corporates.

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