While Australia may be a nation of entrepreneurs, new research from Deloitte shows that chances of success are not so high.
In its report, Silicon Beach: A study of the Australian Startup Ecosystem, Deloitte found that only 4.8% of Australian technology startups grow into successful, global companies.
While that may sound a little disheartening, bear this in mind. If you’re in Silicon Valley, you’ve got an 8% chance, or a 6.7% chance if you’re in Silicon Alley (New York).
Australian startup hubs
The report also identifies the main startup hubs across Australia. It’s no surprise that Sydney is the largest, followed by Melbourne, Brisbane and Perth. Silicon Valley, of course, is the largest hub of startup activity in the world.
But, again, here are some comparisons to give some context. The startup scene in Sydney is about the same size as those in Paris, Tel Aviv and Singapore. That’s not shabby company by any means.
And we have different motivations
There has been other research that has shown that male entrepreneurs want to change the world, where as female entrepreneurs want to change their life.
But, the Deloitte research has shown that Australian entrepreneurs have different motivations from our Silicon Valley counterparts. Compared to Valley based entrepreneurs, Sydney entrepreneurs are 86% less likely to want to get rich, 45% less likely to want to change the world, and are 37% more likely to want to build a great product.
So, our motivations are quite noble. It’s not all about driving a Porsche at 25.
What’s more, of the companies surveyed, only 4.3% of the companies were founded by women. So, the gender differences on entrepreneurship may not apply so soundly to Australia.
Compared to U.S. based companies, Australian startups are more likely to be Integrators or Automators.
An Integrator business has high-certainty and is product centric. These companies tend to be SME-focused businesses that move consumer innovations to an enterprise level. These types of businesses require less funding, with an average of $700,000 being raised by the startups surveyed.
Automators are consumer-focused businesses that automate a process that was once a manual task.
In the U.S., more startups play in the Challenger space. These are companies have repeatable enterprise sales in complex markets and require significant funding. Atlassian is the Australian stand-out in this space. These require, on average, a minimum of $1.5 million to get started.
And, we already know how hard it is to get funding in Australia.
There is a funding chasm
This also isn’t news. We have a funding chasm in Australia, especially when compared to the U.S. There are many reasons for this. We’ve discussed many times what can and should be done to help Australian startups, and the investors who want to be involved thrive.
In the U.S., comparable companies raise 4.8 times more capital in early stage investments than Australian based startups. Then, once the companies are ready to scale, U.S. companies raise 100 times more capital.
The report did identify that few startups are using the available grants. Only 39% of startups in the research group accessed grants. It also found that Commercialisation Australia (CA) is under utilised by startups that are seeking to grow — only 21% of startups that accessed grants were using CA for support.
The success of the R&D tax concession has, however, been widely utilised with 79% of startups that have applied for grants have also accessed the R&D tax concession.
It’s an obvious correlation but U.S. based startups create 2.6 times more jobs than Australian ones. If you’re cashed up, you can find talent. These companies need people to deliver on the strategy that secured the funding in the first place. So, yes, these companies are going to create more jobs.
Locally, early stage startups in Sydney and Melbourne create more jobs than their counterparts in Brisbane and Perth.
But, another well-known stumbling block for Australian startups is difficultly providing employees with shares. Whereas this is common place in the U.S., in Australia, due to our tax system, this is extremely difficult.
While 57% of Australian startups do offer employee share option plans (ESOPs), they can actually be a major tax liability for employees. This is because employees are taxed on the share options up front, long before the shares have proven to have hold any value. There’s nothing like being hit for a tax bill on something that’s paper value, at the time, is zero.
Again, it’s no surprise that Australian startup employees don’t seek options, where it is often a standard inclusion in U.S. based companies. The goal being for startup staff to have some ‘skin in the game’, plus the offer of potentially valuable options means that good startups are likely to attract the best and brightest talent. This, of course, enhances the likelihood that the startup will succeed.
So, a good idea that gets funding leads to good talent getting involved, which means the startup is more likely to succeed. It’s not rocket science!
The Catch 22
While Australia has produced some stunning technology startup success stories, it seems these companies have achieved that despite the environment that our tax and regulatory system has created.
If a startup can’t get early stage funding, it can’t deliver on its vision. Nor can it get the talent that it requires to get the company to a level where larger investors may be willing to take a stake. Investors don’t want to invest in the current regulatory environment.
Life isn’t a beach
Contrary to the name of the report, working in an Australian startup isn’t a beach party. Sydney entrepreneurs are working long days, about 9.2 hours each day. In Silicon Valley, people are working around 9.95 hours a day.
Entrepreneurship isn’t a lifestyle choice; it’s damned hard work.
What can be done?
Hopefully, the insights from this research will attract yet more attention for the changes needed in Australia to help our startup ecosystem thrive. Silicon Valley didn’t appear over night. It took around 40 years for it to become a technology and startup powerhouse. Frederick Terman‘s work in the 1940s set the groundwork for what is happening there today.
There are at least five things the government could do now, to help our fledgling startup community.
The report,Silicon Beach: A study of the Australian Startup Ecosystem, is the first time Australian tech startups have been compared to those in other markets. Deloitte Private partnered with Pollenizer, Australian startup publication From Little Things and the global Startup Genome Project to compare more than 1,000 Australian tech startup companies to more than 50,000 companies being tracked worldwide. The research project aims to help startup founders, investors, policy makers and industry leaders understand what factors contribute to creating a healthy startup ecosystem.