Australia continues to build on the fundamentals to support a thriving homegrown startup ecosystem, with a rapidly growing cohort of $100 million+ companies and the average Series A (later stage funding round) almost doubling in size since 2015, according to Crossroads 2020, the comprehensive annual review of the startup ecosystem by peak industry advocacy body StartupAUS.
The report also points to global evidence that high-level development jobs typically remain where startups are founded, highlighting the value of creating technology businesses locally. Local job creation by venture-backed Australian startups was estimated at over 4,500 in 2018 alone.
Talent remains the leading constraint to startup growth, despite the addition of the Global Talent (Employer Sponsored) initiative, aimed specifically at helping startups get access to the best tech talent in the world. Other key challenges include the continuing decline in Research and Development expenditure, particularly in the form of the tightening R&DTI, the risk of collateral damage to startups from technology regulation aimed at global players and a decline in seed capital and dealflow.
Releasing Crossroads 2020, StartupAUS CEO and lead author Alex McCauley said, “Along with being known for our sunshine, sporting prowess and lifestyle, Australia is increasingly becoming known for having fostered a generation of remarkable economic success. Our latest Crossroads focuses on how we might be able to maintain that enviable economic record in the decades ahead. Global trends make it clear that technology must play a fundamental role in driving our future of prosperity.”
Professor Glenn Wightwick, UTS Deputy Vice Chancellor, Innovation and Enterprise said, “We are at a crossroad with startups and innovation in Australia. This year’s report is essential for our young entrepreneurs, our policy makers, and our leaders in industry, research and academia to understand the state of our startup ecosystem, and to get to grips with what is needed to grow the world-class businesses that will generate the jobs for Australia’s economic prosperity.”
Daniel Nadasi, Engineering Director at Google Australia said, “As Australia looks to increase digital technology investment, our startup community has a more important role than ever.”
Stephen Rue, Chief Executive Officer NBNCo and leading partner said, “Australian start-ups know instinctively that digital technology is the lifeblood of growth. So to is ensuring businesses have the right connectivity to support their needs. At nbn we believe fast, reliable and affordable broadband is foundation to helping lift Australia to the top 5 places globally to start and scale a tech company. Its why we’re delighted to partner with StartUpAus on the release of the 2019 Crossroads Report signposting that future.”
Below are the highlights of StartupAUS’ Crossroads 2020 Report:
New Wave of $100m+ Companies
Australia has gone from a solitary unicorn (private technology business valued at US$1b+) in 2018 (Canva) to three in 2019. March 2019 saw Airwallex join when the Melbourne-based fintech startup raised US$100m at a valuation over US$1 billion. Hot on their heels was Judo Bank, a Sydney-based neo bank which raised $400m in July 2019 at a valuation of just over US$1 billion.
Even better, some of Australia’s leading scale-ups have reached maturity and are on a trajectory to join the unicorn club very shortly. Set to enter the category are companies such as Melbourne startup Culture Amp (founded 2009), Envato (founded in Melbourne 2006), SafetyCulture (founded in Townsville 2004), Airtasker (founded in Sydney in 2012), and Deputy (founded in Sydney 2008).
Growth Capital Vs Early Capital
Venture capital has seen strong growth in Australia in the last five years. From 2015 to mid-2018, Australian venture capital firms raised more than $4 billion in new funds, with the yearly value of new funds closed roughly doubling each year over that period. This rapid increase has been combined with a rise in the availability of other sources of growth funding for Australian startups, including debt (particularly venture debt), crowdfunding, and access to public markets. Growing interest from top tier foreign investors has also helped provide a pathway to Australian companies raising larger rounds.
On the flipside, angel and seed investment in Australia has fallen for the last three years, both in terms of number of deals and aggregate value of early-stage investments. While this is broadly consistent with global trends toward fewer higher-value deals, the steep decline in Australian deal numbers is notable. In 2018-19 that decline continued, with only 138 deals totalling US$75m, which is a fall of 46% in volume terms and 29% in aggregate dollars invested. These numbers are down from US$180m invested in 2015-16 across 273 deals. This downward trend is particularly problematic when considered in the context of Australia’s low base for early stage funding. Without capital and support for early-stage businesses, we are not refilling the pipeline and risk limiting our ability to produce more high quality scaleups in years to come.
High-Level Jobs Stay Where Startups are Founded
Data and trends suggests that once startups go on to be global technology businesses and naturally expand outside the borders of their home country, high level jobs stay in the country where the business was founded. While servicing a large international market often means hiring teams on the ground around the world, the core of the business (designing and producing its tech products) tends to stays in the home country. This means that engineering and development jobs (the most highly qualified, highly paid jobs) stay local.
Our analysis of seven global technology firms showed at the top end, firms like Canva (Australia), Deliveroo (UK), and Waze (Israel) have retained 80-90% of their engineering talent in their home country. Some, like Spotify (Sweden) and Atlassian (Australia), also have a strong presence in their largest market (in each case, the US), but both companies have roughly 30% more engineers and developers in their home countries than in the US.
Strong Job Creation Across The Board
Funding for tech startups is a large-scale job creation driver. Startups are created in many different industries, and can have vastly different human capital requirements, yet analysing the relationship between job creation and investment shows a remarkable consistency in the correlation between funds raised and total employees of the business.
In median terms, Australian startups create a new job for every US$300,000 of investment. When applied to the sector as a whole, which raised roughly US$1.4 billion in 2018, we estimate over 4,500 jobs were directly created by venture-backed startups in that year alone, without including the indirect employment created by the economic activity.
Making Headway on Global Talent
With Australian founders now able to raise more growth capital than ever, access to talent has become the biggest systemic barrier to rapid growth for many companies. The formal acceptance of a previously pilot visa scheme aimed specifically at helping startups get access to the best tech talent in the world (the GTES) has helped, and a new initiative allocating 5,000 permanent migration places per year to highly skilled tech experts (the GTI) could help grow the pool further.
The impact of these programs has yet to be fully felt, but their introduction underscores a clear mindset shift towards recruiting the world’s best to help boost Australia’s tech sector.
Research and Development Tax Incentive
Across the economy, investment in research and development presents a significant risk. Australia already spends significantly less than the OECD average on R&D as a percentage of GDP. Both business expenditure on R&D and government expenditure on R&D has dropped consistently in Australia for a number of years. We are one of only a handful of OECD countries to see these numbers falling. In these circumstances it is particularly concerning that the main government support program for encouraging business R&D, the R&D Tax Incentive, has tightened its approach to software R&D in recent years. This could act as a jarring handbrake on the sector’s rapid growth.
Regulatory Risk
One of the most significant challenges facing Australia’s emerging tech sector is that local companies could get swept up in a shift to clamp down on how tech companies operate. Australia’s technology sector has grown rapidly in recent years, and looks set to continue that growth in the immediate term. But much of that growth has come relatively late in the digital technology boom, in a period where the successful foreign companies that led the start of the expansion are now entrenched global behemoths.
Now governments across the globe are faced with thorny regulatory questions on how to address concerns of the populace at large about the role of technology in society. Australia has chosen to place itself at the leading edge of policy in this regard, with a number of high profile pieces of legislation aimed at curtailing the activities and a widespread ACCC review of the power of technology platforms. There is a real risk that the resulting policy outcomes catch local businesses in the crossfire, causing significant disproportionate harm to Australian startups.
Recommendations:
- Amend the R&D Tax Incentive to more clearly support Software Claims.
- Broaden the Early Stage Innovation Company Tax Incentives.
- Make targeted amendments to legislation affecting employee share schemes.
- Amend the assistance and access legislation (tola) to reduce scope and increase safeguards.
- Introduce copyright safe harbour protections for technology companies.
- Improve speed and certainty for Startups under the export market development grant.
- Increase access to public data sets and fund strategically-coordinated, large-scale data collection efforts.
- Reduce payroll tax for fast-growing young companies.
- Improve Australia’s entrepreneur visa to make it competitive.
- Invest in innovation ambassadors tasked with attracting cutting-edge R&D projects from global tech firms.
The StartupAUS Crossroads Report 2020 is supported by a broad consensus of corporate and community partners, including StartupAUS’ Leadership Partners, Google, ACS & UTS, alongside leading investors, scale-ups, and established corporates.
