Startups — Are they good or bad for Australia?

Over recent times you can hear the drums beating… “Startups” are some sort of privileged class, adding little to the economy or society etc. etc.

I have to say, not so much….

The failed innovation agenda

Back in 2015 PM Turnbull pointed to the obvious, and suggested that Australia had to become a much more innovative nation if we were to maintain a high standard of living for more Australians.

The “Innovation Focus” did not last long because apparently the concept did not resonate with the average voter in the street.

Leading intellectuals like Tony Abbott were able to get away with denigrating innovation as a concept or a focus… kind of like suggesting oxygen takes up too much space in our atmosphere and should be replaced with CO2.

Of course, if you ask the average voter in the street to allocate medical research funding across diseases conditions, you probably end up with a pretty bad outcome — not because they aren’t smart, but because they don’t have the experience you need to make these types of decisions. The same logic applies if you’re trying to look 20 years out to decide which pivots the country needs to make — most people don’t have access to the data nor the experience to think this stuff through…

The challenge we’re facing is even greater in an environment where our company boards continue to be staffed by people whose most recent brush with innovation or technology was when their great-grandson showed them their new iPhone X, and they thought it was a prop from an upcoming Star Wars prequel.

Fortunately, the Turnbull Government brought into effect a range of measures that looked to promote the growth of more technology startups.

Changes to investment structures and employment share schemes helped grow a near moribund sector into something with a pulse.

However, this could all change…

Do startups actually matter?

Not so long ago Google was a startup, as was Apple, Facebook, Amazon, Netflix and then so was Alibaba, Tencent, and Baidu. If you just take the US market, and look at the largest companies from 2003 to 2018 (15 years) — you’ll see the impact of “startups” globally.

The chart above shows the impact (size) of “startups” vs normal companies (as indicated by the S&P index)

In Australia’s case we have had the amazing performance of Atlassian, WiseTech, Aconex, Envato, and Seek, who are all now global businesses employing thousands of Australians in well paid roles.

Even more recently we have Canva, Campaign Monitor, Culture Amp and Afterpay who did not exist 10 years ago, and are now all employing north of 300 people each, and are worth anywhere from $300m — $2bn.

Some of the Canva team outside their Sydney HQ

It is also important to dispel the myth that startups are all the function of a 22 year-old working out of their mum and dad’s garage, and it’s just millennials who stand to benefit — in Australia, a large proportion of first-time entrepreneurs are actually in their thirties and forties, 28% are over 45 and 15% over 50.

So moving forward, even if we ignore the fact that:

1. Technology will impact all things in society going forward; and
2. We need to transform our economy from one of bloated oligopolies, to one that is nimble, efficient and global…

We can still focus on something that is here, real and obvious to all… jobs.

Startups are critical for for future job creation in Australia

All available research in Australia, the US and the UK points to the significant impact the startup sector has on long term job creation.

Young, high growth businesses create more jobs than large businesses

“Australian startup firms less than 2 years old were responsible for driving the 1.6m net new jobs created between 2003–2014, while on a net basis, large firms made little contribution” - Dept of Industry, Innovation and Science, 2016

Say that again… startups contributed tons of new jobs… and existing large firms… zippo.

Looking globally:

• 1.5m new jobs are added to the US economy each year by new firms
• While over an extended period existing firms have been net job destroyers… losing a total of 1m jobs per year
• Furthermore, the 4% of companies with the highest growth rate are responsible for creating more than 70% of all new jobs in the US

In the UK:

• High growth companies (20%+ p.a.) made up only 1% of UK businesses in 2016, yet accounted for 3% of total UK jobs
• Between 2015 and 2016, high growth small companies created 158,000 new jobs — 20% of employment growth in that period

Jobs added > jobs lost

Startups that succeed are adding more jobs… than the jobs lost to the startups that have failed. In other words it is very clear that startups add a lot of net new jobs to the economy, and the impact is broader than many think.

For each new technology-based job, 5 additional jobs are created in other sectors.

The multiplier effect is 3x larger in the tech sector than in mining or manufacturing, and is one of the reasons that employment in the US technology sector has grown at 25x that of other parts of the economy.

Wages are also better. US data suggests that management, computer and mathematical professionals earn 20%+ more each year in the high tech sector than in other industry.

Where are we now?

It’s hard to say exactly where Australian startup employment sits today, as the data simply isn’t explicitly captured.

This is challenging and unhelpful for the industry as job figures capture government policy makers attention (and appropriately so)..

However, if we try to unpack some of the statistics out there:

• In 2017, LaunchVic identified 1,600+ startup firms in Victoria alone
• In 2018, Startup Muster reported that Victoria accounts for 14.4% of Australian startups
• This implies total startups in Australia of ~11,000
• If we assume an average of 5 jobs per startup (to include founders and part-time employees) — the startup sector employment in Australia is already 50,000+ jobs…
• … more than the entire coal mining industry!

The promise of employment in Australian startups — looking out a few years

Since the early 1970s approximately $456bn of venture capital has backed 27,000 US companies. In 2008, those companies:

• Employed more than 12m people — 11% of private sector employment
• They also generated $2.9tr in revenues — a staggering 21% of US GDP

According to PwC, the Australian tech startup sector (companies with <$5m in annual revenue) has the potential to:

• Contribute $109bn (4% of GDP) to the Australian economy; and
• Generate 540,000 jobs by 2033

At this level, startup employment would exceed employment across both the agriculture and mining industries combined.

Further it seems highly likely that the number of startups will continue to grow and more of these “startups” will become the Atlassians, Canvas, WisTechs, Seeks of the future…

So… the startup job machine is bigger than many other industries… and it’s growing faster?

Further, applying the Moretti job multiplier of startups creating 5 more jobs in other sectors… this implies up to 300,000 jobs have been created either directly or indirectly through startup activity in Australia.

By comparison, the entire mining sector employs ~220,000.

What’s helping and what’s needed?

So everything is going well? Yes and no.

There are more and more entrepreneurial people taking the leap into starting (or working in) a startup company. They are for the most part, giving up 50–75% of their salary for the dream of creating something global and brilliant.

It’s true that most startups will fail, so these true pioneers are taking the hard road.

While we can see the results of this activity overseas and early green shoots in Australia, it would seem our Government is doing all that it can to blow up Australia’s best chance at creating a sustainable future for all Australians…

… the Australian tech industry is at a crossroads.

The R&D tax credit

As an investor, I’ve witnessed dozens of startups benefit directly from the R&D tax credit scheme, allowing them to bring on resources and to fund development that drives revenue and bring in talent (that DOES NOT exist) into Australia to fuel their company’s growth.

However, recent misapplication of the R&D scheme is undermining the sector as a whole and with it the long-term job creation potential that startups promise.

Skilled immigration

And at the same time, in Government we are having a completely ill-informed debate about immigration and the need for global skills when we know that 35% of all startup founders are immigrants to Australia.

To the so what, what now…?

I believe we, as Australians, need to understand that:

1. Whether we like it or not technology is underpinning ever role in every organisation in every industry in Australia
2. Global competitors are now able to provide services to Australians without establishing much of a footprint In Australia, and this trend is only going one way
3. Most of our large companies are shedding, not adding employees
4. Many of our large companies are wedded to business models that are ripe for disruption (we’ve seen it already in the Media and Retail sectors, and expect to see more in the Financial Services, Health and Education sectors as well) and their chances of turning around their fortunes are low
5. “Startups” — technology focused organisations that have at their core deep engineering and science skills — are the future of our country and they need to be supported

The support needs to come in 3 easy ways:

1. We need to invest more (as a % of GDP) in core research. Australia is one of a very small number of OECD countries that is investing LESS in research, when research is the basis of all breakthroughs in engineering and science.
2. We need to continue to provide the R&D tax refunds for startups, and not undermine this very productive support mechanism.
3. We need to allow high skilled immigrants to easily enter Australia. There is a global shortage of high technology skills. At a time that the US is foolishly closing its border we should be opening ours to the best and brightest the world has to offer. Allowing these global best in class people to come to Australia will allow us to build more companies that hire more Australians and pay more taxes.

Quite simple really.

All sources and assumptions outlined in this document — listed here. And if you have any comments on my post — daniel@airtree.vc or dpetre. Would love to discuss further!

A full list of AirTree’s Open Source VC resources can be accessed here.