Australia needs $13 billion to fight off foreign tech vikings.

Uber has captured nearly 10% of the Australian taxi market in under 2 years. Based on the best available data, Australia needs a $13 billion commitment to digital tech over the next 10 years. Otherwise we’ll be left behind while foreign vikings use digital battle-axes to take a quarter of Australia’s GDP.
Viking longboat funeral. Image from the Good Funeral Guide.

Technology, especially digital and internet connected technology such as smartphones, AI, big data, sensors, wearables, robots and fancy drones like the one that filmed this cool video, are rapidly transforming our lives and the global economy. Within Australia the local software and internet technology sector, and more specifically that portion of the sector that is building Australian businesses around intellectual property (rather than those delivering consulting, resale or support services), is still relatively youthful compared with the grand old citadels of Silicon Valley and Boston. However as the mobile internet, and all that comes with it, is increasingly deployed across the world and throughout all industries this sector will rapidly explode. The question is, will this wave of economic and social disruption be driven by companies imagined and built on Australian soil, or will it be driven by foreign technology companies that are able to swiftly sweep in like the vikings of the medieval period?

With this in mind we thought we’d make a rough guess at the impact of digital technology on Australia over the next 10 years - from 2015 to 2025. We wanted to look at the estimated size of economic impact over these next 10 years, number of local digital tech companies now and the number that could be created (given the right support); current funding and future funding required to build a strong technology sector; and compare some of this data with international tech hubs.

As a base for these estimates we used data from a report on the ‘startup’ tech sector in Queensland (QLD) that we completed in mid-2014 for the Queensland Department of Science, Information Technology, Innovation and the Arts. And data from a similar report we completed for the City of Perth in Western Australia (WA) in mid-2013. In both reports we tried to identify all the people, groups and startups within the community; tracked fund flows since January 2009; benchmarked it against other tech ecosystems; and in QLD we estimated what would be required to build a vibrant sector by 2025. The reports gave us a great opportunity to scope the breadth and depth of the two locations. Using some of the numbers and models we developed for these projects we thought it would be interesting to have a rough go at estimating the numbers for Australia as a whole.

􏰅􏰧􏰇􏰒Both of the reports focused on companies developing innovative digital or information technology, with a high leverage on labour, an innovative scalable business model, capable of rapid scalable growth and under five years in age. By digital or information technology we mean companies primarily developing computing, software or internet based products or services, and electronic hardware products and services such as drones, sensors, autonomous vehicle technology, Internet of Things (IoT) technology, and wearables.

“One-third of the Australian economy faces imminent and substantial disruption by digital technologies and business models.” Deloitte.

Economic Impact of Technology in 2025

In order to understand the potential impact of information technology on the Australian economy in 2025 we looked at a range of estimates. Two reports particularly informed our thinking: McKinsey’s 2013 report Disruptive Technologies: Advances That Will Transform Life, Business, And The Global Economy􏰃, and Deloitte’s 2012 report Digital disruption Short fuse, big bang?

12 Disruptive Technologies
The McKinsey report identified􏰃􏰗􏰊􏰇􏰉􏰍􏰗􏰌􏰇􏰊􏰃􏰍􏰙􏰇􏰃􏰍􏰐􏰑􏰃􏰟􏰝􏰃􏰊􏰗􏰈􏰔􏰕􏰑􏰍􏰗􏰎the top 12􏰇􏰃 disruptive technologies that have the greatest potential for economic impact by 2025. They estimated the potential economic impact that each technology would have by 2025 and concluded that these 12 technologies alone had:

“the potential to drive direct economic impact on the order of $14 trillion to $33 trillion per year in 2025.” McKinsey
McKinsey’s Top 12 Disruptive Technologies. Blue band illustrates the range from lower to upper estimate.

Assuming the world GDP is $153.5 trillion in 2025, that is approximately 11% to 26% (or a mid range of 19%) of total world GDP that is potentially impacted by these 12 technologies.

Applying McKinsey’s thinking to Australia and assuming GDP is $2,096 billion in 2025, we estimate that these 12 technologies could drive approximately $527 billion to $436 billion of economic impact per year in 2025, or roughly 24% to 20% of the Australian GDP disrupted in 2025 (McKinsey foresees these technologies impacting developing and developed worlds differently — hence the difference between world and Australian percentages).

GDP and population figures for Australia, by state, in FY2014 and projections for FY2025. Sources: For the 2025 population we used the United Nations report ‘The sex and age distribution of the world populations: the 1994 revision’ which estimates a total population of 24,667 million in 2025. By way of comparison the ABS Population Projections’ mid range estimate for June 2026 is 27.237 million. With this in mind the 2025 population figures look a little low (~1.5M) but the only figure in this article a population increase would effect is the per capita funding rate for 2025 (maybe we’ll fix it when we have more time). The GDP projections for 2025 are based on the IMF number for 2024 ($2,035M) x 3% growth to get to 2025.

7 Disruptive Digital Technologies
Seven of the twelve disruptive technologies McKinsey’s identified fall within our definition of a digital technology: Mobile Internet, Automation of Knowledge Work, The Internet of things, Cloud Technology, Advanced Robotics, Autonomous Vehicles and 3D Printing.

Just looking at these 7 digital technologies we estimate that these 7 could drive approximately $477 billion to $394 billion of economic impact per year in 2025, or roughly 21% to 18% of the Australian GDP disrupted in 2025.

Estimated economic impact of McKinsey Top 12 Disruptive Technologies (7 digital technologies only) on Australian GDP in 2025. AUD$ billions.

Deloitte’s Digital disruption report analyses the impact of digital technology on Australian industries and estimates 33% of the economy facing disruption from all digital technologies. Approximately $732 billion of economic impact in 2025:

“One-third of the Australian economy faces imminent and substantial disruption by digital technologies and business models — what we call a ‘short fuse, big bang’ 􏰈􏰃opportunities, for both business and government.” Deloitte

Our Best Guess
Using these two reports as a guide we estimate an upper and lower range for the impact of digital technology on the Australian economy in 2025 of between 33% to 15% of GDP, or $692 billion to $314 billion AUD per year of ‘disrupted GDP’. Or, if you want one simple number:

Our mid range estimate is that 25% of the Australian economy is impacted by information technology in 2025. Equating to ~$524 billion of GDP.

But seeing into the future is a notoriously difficult it not impossible art form. If anything we agree with the consulting folks at McKinsey and hazard a guess that if the past ten years are anything to go by, the impact of technology over the the next ten years will be greater (and faster) than what we can envisage now.

“It is impossible to predict all the ways in which technologies will be applied; the value created in 2025 could be far larger than what we estimate here.” McKinsey

How Does this get Spread Around?
With a rough figure in mind for the impact of tech in 2025 the next thing we considered was how much of this ‘value’ could be directly captured by technology companies. To consider this we looked at the normal distribution of value.

When McKinsey refers to economic disruption, this economic potential should not be equated with market sizes for these technologies; it could be captured as consumer surplus as well as in new revenue and GDP growth. The sharp suits at McKinsey also mention that in the case of Internet-based technologies, value has tended to shift to consumers. They state that as much as two-thirds (66%) of the value created by internet offerings is captured as consumer surplus.

As a complimentary thought, Deloitte looks at the impact of digital technology on the economy across the 18 major industries within the Australian economy. They estimate the potential usage of digital technology within each industry.

Source: Digital disruption. Short fuse, big bang? by Deloitte Australia

It’s also worth considering the work of Enrico Moretti, Professor of Economics at the University of California who has found that technology companies have a five fold impact on the economy. He states:􏰌􏰂􏰁􏰤􏰊􏰄􏰃􏰀􏰉􏰐􏰆􏰅􏰏􏰒􏰈􏰉􏰄􏰇􏰉􏰈􏰋􏰁􏰉􏰁􏰒􏰄􏰇􏰄􏰆􏰡􏰑􏰉􏰋􏰁􏰉􏰎􏰈􏰏􏰈􏰁􏰎􏰽

“Innovative industries bring good jobs and high salaries to communities where they cluster and their impact on the local economy is much deeper than their direct effect. Attracting a scientist or software engineer triggers a multiplier effect, increasing employment and salaries for those that provide local services. In essence, a high tech job is more than a job… research shows for each high tech job, five additional jobs are created outside the high tech sector.”
Enrico Moretti, 2012, The New Geography of Jobs

With these concepts in mind we thought a reasonable rule of thumb would be to assume between 30% to 13% of the ‘disrupted GDP’ in 2025 could be directly captured by digital or information technology companies — $220 billion to $42 billion respectively. This equates to between 10% to 2% of the total projected Australian GDP of $2,096 billion in 2025.

A breakdown of both the estimated Australian GDP impacted by digital technology in 2025, and the portion of GDP that could be captured by technology companies, by state, in millions AUD.

Our estimates are reasonably more optimistic than those stated in PWC/Google’s 2013 report The Startup Economy: How to support tech startups and accelerate Australian innovation:

“The Australian tech startup sector has the potential to contribute $109 billion or 4% of GDP to the Australian economy and 540,000 jobs by 2033 with a concerted effort from entrepreneurs, educators, the government and corporate Australia.” PWC

However their report purely looks at the value to be captured by tech startups under $5M in revenue per year, while this article examines those along the entire lifecycle.

And again, if you want one simple statement:

Our mid range estimate is that 5.5% of the Australian economy could be directly captured by information technology companies in 2025. Equating to over $115 billion in direct revenue to technology companies.
Estimated Australian GDP in 2025. AUD$ billions.

What is Disruptive Tech & Why Does it Matter?

The total quantity of ‘disrupted GDP’ (~25%) in 2025 might seem like a large portion of the economy, but when we consider what technology is, and how it enables, redistributes, disrupts and mediates an ever increasing portion of our economic and personal lives, it seems fairly reasonable to envisage that roughly 25% of the economy will be directly ‘impacted’ by digital technology. Importantly the line between a technology company and normal or traditional business (especially in specific information intensive industries) will become increasingly blurred as new businesses are increasingly built around technology as a core aspect of the product or service delivery.

From Industrialisation to the Information Age
The largest companies of the last century were industrial corporations, born of the industrial revolution in the 1800s: mass-production companies such as Ford, Volkswagen, Toyota, GE, Bayer; and the suppliers of raw materials such as Exxon, Shell, BP and BHP.

But over the recent decades computer, software and now internet companies such as Apple, Google, IBM, Microsoft and Facebook have been vying with more traditional corporations to lead the pack. PWC’s 2014 report on the Global Top 100 Companies by Market Capitalisation showed that Technology and Financials are the leading sectors to have grown market cap in the Top 100 (+149% and +136% respectively) — driven by innovation and recovery from the financial crisis. Apple — the largest by market cap — having almost quadrupled in value during the past five years.􏰪􏰖􏰏􏰀􏰍􏰖􏰅􏰃􏰁􏰀􏰉􏰐􏰇􏰉􏰂􏰏􏰃􏰖􏰁􏰉􏰀􏰖􏰍􏰐􏰇􏰗􏰉􏰈􏰋􏰁􏰉􏰅􏰏􏰎􏰈􏰉􏰌􏰂􏰁􏰉􏰡􏰁􏰏􏰍􏰎􏰓􏰉􏰉

And this is just the beginning. In the coming decades virtually every industry can expect to face disruptions rivalling those of the industrial revolution. Some industries will face extinction; new sectors will be created; and others are being transformed beyond recognition. It’s likely that information intensive industries like healthcare, financial services and education will be some of the first mega-industries to be substantially impacted by information technology.

In 2013, in reference to the long-term economic potential of information technology, Federal Reserve chairman Ben Bernanke stated:

“Some would say that we are still in the early days of the IT revolution… even as the basic technologies improve, the commercial applications of these technologies have arguably thus far only scratched the surface.”
2013 Speech, Economic Prospects for the Long Run

Technology Revolutions & the Deployment Phase
Carlota Perez outlines a useful model for considering our current place in this wave of new technology. In Technological Revolutions and Financial Capital she looks at the past five technology revolutions — industrial, steam. steel & electricity, oil & mass production, and the current information and telecommunications revolution. She shows that all technology revolutions have two main phases, the installation phase and the deployment phase — a long period of productive growth.

It seems that we are just at the beginning of this deployment phase and we will increasingly see technology move from building core infrastructure to higher level applications. As Chris Dixon outlines in this post:

“In the transition from installation to deployment, the bulk of the entrepreneurial activity moves “up the stack”. For example, in the installation phase of the automobile revolution, the action was in building cars. In the deployment phase, the action shifted to the app layer: the highway system, shipping, suburbanisation, big box retail, etc.
This pattern is repeating itself in the computing/internet revolution. Most of the successful startups in the 90s built core infrastructure (e.g. optical switching) whereas most of the successful startups since then built applications on top of that infrastructure (e.g. search). The next phase should see startups higher in the stack. According to historical patterns, these would be ones that require deeper cultural change or deeper integration into existing industries.” Chris Dixon

Full Stack Technology Companies
Increasingly people starting new- or developing existing- businesses will re-imagine existing industries from the ground up, formed around the best technology we have today. As part of this deployment phase we’re already seeing more “full stack” startups. Again to quote Chris Dixon:

“The old approach startups took was to sell or license their new technology to incumbents. The new, “full stack” approach is to build a complete, end-to-end product or service that bypasses incumbents and other competitors.” Chris Dixon

Good examples of this “full stack” approach are riding sharing or taxi services such as Uber and Lyft, health insurers such as Oscar, car manufacturers like Tesla (and probably in the not too distant future Google too), labour hire companies such as Task Rabbit, banks (sorry I mean peer-to-peer lenders) like Lending Club or accommodation services such as Airbnb.

Computing technologies are being deployed across all industries and permeate all aspects of our society. The normal borders between industries are being eroded making it increasingly difficult to say whether a new company like Uber is a transport company, software company, or a labour hire company. The reality is that an increasing proportion of organisations have information technology as a core component of their business — and soon we’ll consider the application of meaningful technology as vital to starting a new business as hiring people.

With these trends in mind it seems reasonable to think that ~25% of the economy will be enabled, driven or mediated by technology within ten years. And, it seems reasonable to think that ~22% of this ‘disrupted GDP’ will be directly captured by information technology companies — over $115B in direct revenue to technology companies — and roughly 5.5% of the total projected Australian GDP of $2,096 billion in 2025.

So What Does this Mean for Australian Tech Companies?

The Australian Technology Sector Now

With these rough estimates in mind we wanted to examine what the digital technology sector looks like now (or at least based on our latest data from 2014) and what could it look like in the future (assuming that all this ‘disrupted GDP was captured solely by local tech companies)?

# Technology Companies
Our reports for Queensland and Western Australia identified 226+ and 100+ early stage (<5 year old) digital technology companies respectively in each state. Using the average startup per capita ratio between these two states as a guide we estimate the total number of early stage (startups) across Australia is currently approximately 1,019.

Given these reports were focussed on early stage companies we think there would be a large number of later stage companies that we have not captured. Using standard failure rates for tech companies we estimate another ~566 companies across Australia in early, growth, mature or a gazelle/unicorn stage. So roughly 1,600 digital technology companies in total across Australia as of 2014.

Our categorisation of company stage was purely based on revenue and doesn’t reflect valuation or total investment raised. The revenue brackets in our model are:

Estimated # digital tech companies in Australia in 2014, based on Boundlss research of QLD & WA sectors (blue), and ABS population data (blue). Under Seed, Early, Growth, Mature and Unicorns you can see our assumed revenue bands for each state. Highlighted numbers in the lower right are estimated failure rates from previous stage.

To get a sense of how this compares with top level numbers on the software sector we looked at the number of active Australian companies by ANZIC codes: 518 — Data Processing, Hosting, and Related Services; 51913 — Internet Publishing and Broadcasting and Web Search Portals; and 5415 — Computer Systems Design and Related Services. Total active companies = 21,000. Given the lion share of these businesses would be consulting firms, tech support, resellers or fee-for-service developers, it would not be unreasonable to think that ~1,600 (< 7.6%) of these companies are developing their own IP and fit under our definition of a digital technology company.

It is also worth comparing our rough guesstimate for the number of digital companies in Early to Unicorn stages (~566 in total) with the Australian Venture Capital Association Ltd’s (AVCAL) numbers on ‘high-tech’ companies held in Venture Capital (VC) and Private Equity (PE) portfolios in 2014. What AVCAL calls ‘High-tech’ is probably the closest category to digital or information technology by our definition. In the AVCAL 2014 Yearbook: 2014 they define high-tech as:

“A company with exclusive ownership of certain intellectual property rights such as design rights, patents, copyrights, etc. which are critical elements in adding value to the products and business of a company and which are being developed in- house by the company’s permanent staff. Although companies possessing these attributes are not limited to specific industries, they are most frequently found in telecommunications hardware, internet technology, computer products and services, electronics, biotechnology, medical instruments and devices.” AVCAL
Source: AVCAL 2014 Yearbook: 2014 Australian PE & VC Activity Report — November 2014. Number of investee companies in VC and PE portfolios as of 30 June 2014

While not synonymous with our definition of digital, as it includes bio-tech and medical devices, it does gives us an upper limit. As of June 2014 ‘high-tech’ was 213 in total — 38% of our guess at the total number of companies across Australia. If we say perhaps half to two-thirds are digital companies that gives us ~100 to ~140 early to mature stage companies (18% to 25% of our guess at total numbers). It seems unlikely (purely gut instinct as we couldn’t find a data point for this ratio) that 18% to 25% of digital tech companies with $1M+ in revenue are venture backed, but its probably not that far off and if anything it would suggest that the sector is in fact larger than our estimate.

Two other estimates of numbers in the tech sector are also worth noting, PWC and Rick Baker:

“The Australian tech sector comprises around 1,500 firms ranging from one or two person startups created in the last 12 months, to more established businesses which have been around for a decade. There are very few startups between 2001 to 2006 which still exist today but a significant increase of activity from 2007 onwards has created many of current startups… 1,000 new tech startups were founded in 2012.” PWC/Google 2013 Startup Economy Report

I’m pretty sure much of PWC’s data comes from scraping Linkedin and possibly some from Angel List. Rick Baker, from Blackbird Ventures, while initially sceptical of the PWC numbers comes around to something in that order after looking at Angel List entries in particular.

# AngelList entries for Australian tech companies as of 6 August 2014. Source Rick Baker.
“AngelList shows 2,321 Australian located startups listed since its founding in 2010. It is unclear how many of these companies are still active… I’m going to predict 1,000–1,200 new startups in Aus for 2014 — scaling out the AngelList number for the full year (and discounting December which I’m sure is quiet for new startups)… with… around 100 getting funded by external angels, seed and VC funds (it doesn’t include funding from founders, friends, family). This is almost double the Techcrunch 2013 number and I don’t feel comfortable going much higher than that. (Interestingly that’s a 1 in 12 chance of getting externally funded from the venture system, a much lower chance of getting funding than I previously thought.)” Rick Baker, VC at Blackbird Ventures

Both PWC and Rick’s estimates are roughly in accord with our figures, but neither gives us cause to amend our estimates.

So a simple summary of this section:

Our mid range estimate is that there are approximately 1,500 digital technology companies in Australia in total as of as of mid 2014. With roughly 1,000 seed stage digital technology companies; another 500 early stage companies; over 50 later stage companies; and a handful of mature companies. However, given the challenges in identifying and classifying these companies, and indicative data from AVCAL and Angel List we are reasonably confident actual numbers are almost certainly higher.

Distribution of investments in FY2014 by stage of investee company Note: this is not # companies held in portofolio. We can’t compare this with sector but its interesting to the stage distribution nevertheless. Source: AVCAL 2014 Yearbook.

Startup Formation Rates
We also wanted to benchmark the rate of startup formation within QLD and WA and compare it to technology hubs in the USA. In 2013 Queensland had a startup formation rate of 12 startups per million people per year in the region. The QLD average over the past 5 years was 6 startups per million people per year. In 2013 Western Australia’s startup formation rate was 8 startups per million people per year. The WA average over the past 5 years was 8 per million people. That’s roughly 30 new startups formed in QLD and 20 in WA a year. However, given the challenges involved in identifying small early stage companies that may have formed and been developed in the relative solitude of an individuals study, garage or local cafe, we think actual formation rates may in fact be much greater and at least double. So 20 to 30 startups per million seems reasonable (and Rick Baker’s estimate of 43–51/M/Yr is also not that much of a stretch).

By way of comparison US technology hubs such as Boulder, San Jose, Cambridge and San Francisco had yearly startup formation rates per million people ranging between 97 to 256 in 2010 (the last recorded data we could find on the US here and here). Given the age of US figures and the methodology the Kaufmann foundation used to come to these figures we think that actual formation rates in the US are higher.

Startup formation rates: top eight US tech hubs compared to Queensland. Source: the Kauffman Foundation and Boundlss.

Whether you think US or Australian formation rates are high or low it is also interesting to compare them with the average formation rate per million across all private sector companies — 1,342 companies formed per million people per year on average in the USA as of 2010. Given this and the increasingly central role technology plays in business, we think there is plenty of room for startup formation rates to approach the formation rates for traditional businesses.

A summary of our formation numbers:

In summary our data from QLD and WA gives an average startup formation rate per million people per year of 7, with the average of both for the most recent year being 10. However given the challenges involved in tracking new venture creation in this space and the rapid growth in participation we estimate that current (FY2015) formation rates could be in the order of 20 to 30 startups per million per year across Australia.

Digital Funding Levels Estimate #1
We also tracked funding (including angel, VC, PE and govt grants) across the two states and found the average funds raised over the past five years for all digital technology companies was $22.9 million and $14 million in Queensland and WA respectively. On a per capita basis that was $4.90 and $5.66 per capita. Applying the average per capita rate across Australia to roughly estimate totals funds raised in FY2014 gives us a figure of approximately $122 million, or around $5.28 per capita for digital / information technology companies in FY2014. However, as mentioned before regarding the challenges involved in quantifying early stage activity, similarly we think there could be double the amount of investment taking place across Australia ($244M). We this in mind it is worth comparing our data on QLD and WA with data from AVCAL.

Venture Capital & Private Equity Investments in High Tech
When comparing our rough estimated total ($122M) with data on VC & PE (only) investments for the same period from the AVCAL 2014 Yearbook: 2014, our figure looks a little low.

Total VC & PE investments across all sectors was $2.5 billion, with $558 million (23% of all investments) from 84 high-tech companies (54% of all companies) . A large part of this increase is attributable to US-based Insight Venture Partners’ US$250M (AUD$266M) investment in Campaign Monitor, a Sydney-based email marketing SAAS company (the largest ever single VC investment in an Australian tech company). Excluding this gives us a figure of $292 million invested in high-tech companies by VC & PE firms for the FY2014 (11.8% of all investments).

Source: AVCAL 2014 Yearbook. Distribution of investments in FY 2014 by sector.

How does total FY2014 VC & PE funding compare to the previous fiscal year? Total high-tech investment across Australia in FY2013 was $112 million, 4% of all investments, across 56 companies (42% of all companies). So while the overall VC & PE pool has dipped a little, ‘high-tech’ is certainly growing, even with Campaign Monitor excluded.

Source: AVCAL 2013 Yearbook. Distribution of investments in FY 2013 by sector.
“the total dollar amount of PE and VC investment recorded a 13% drop to $2.5b from $2.9b the year before, with a smaller pool of investable local funds seen participating in deals compared to previous years.” AVCAL 2014 Yearbook.
Source: AVCAL 2014 Yearbook. Investments by fiscal year (in AUD millions).

What Proportion of high-tech investment is related to digital?
So given VC & PE investment in high-tech was $112M in FY2013 and $292M in FY 2014 (excluding Campaign Monitor), and assuming half to two-thirds (split the difference and call it 62%*) is for digital or information technology (recall high-tech includes biotech and medical devices), we could estimate that VC & PE digital funding was ~$69.4M in FY2013 and ~$181M in FY2014.

*We don’t have a data point to go on here so this is a pretty loose number. Biotech is expensive so you might find that digital is in fact much less 62% or even 50% of the high-tech investment but its a start.

What Proportion of total digital funding is VC and PE?
Looking at our own numbers for WA and QLD for the past five years we found that on average 42.48% of all digital funding in WA & QLD comes from VC & PE. 37% in WA, 47.8% in QLD (37%/$46.5M of which was for two investments from one PE firm).

Distribution of investments by fund type in the five years prior to June 2014 QLD and June 2013 WA. Source: Boundlss Startup Ecosystem reports.

If ~40% from VC & PE is the norm across all Australia it would mean the $112M and $292M AVCAL tracked for FY2013 and FY 2014 reflects $262M and $682M in total high-tech funding across all funding sources. Stripping this down to just digital ($69M and $181M) and using our VC & PE to all other funding type multiplier gets us two figures of $162M and $423M for the past two years, or an average of just under $300 million in total digital funding.

Calculations using AVCAL VC & PE investment data for high-tech and assuming 62% of high-tech goes to digital/software. All numbers exclude the Campaign Monitor deal.

Digital Funding Levels Estimate #2
Our initial estimate for the FY2014 based on our own data for WA & QLD was the lowest number at $122 million, but taking into account AVCAL numbers along with the distribution of investments by fund type (average 40% of all from VC & PE) we get an upper range of $423M for FY2014 and a low-mid range number for FY2013 at $162M, with a two year average (from AVCAL) of $292M. Based on these factors we think a reasonable figure for average digital funding for the last five years across Australia is in the order of $200M+ per year from all fund sources. Equal to per capita funding at $8.54 per person.

Venture Capital and Angel funding per capita. Note: per capita funding for Australia is taken from a different source than mentioned in the previous paragraph. Also not the bar for Silicon Valley should extend way beyond the edge of the page.

Again, a simple summary of our funding analysis:

Our mid-range figure for average digital funding for the last five years across Australia is in the order of $200M+ per year from all fund sources (incl angel, VC, PE, Govt). Equal to per capita funding of $8.54 per person.

Australian Technology Sector — 2025

The next few questions we wanted to consider were: Given the estimated economic impact, what could the size of the sector be in 2025? And how much funding do you need to address the opportunity?

A little caveat here: this question about the size of the sector/# local tech companies is kind of misleading. Even assuming 25% of the economy is impacted by tech and 5.5% goes to tech company P&Ls, it doesn’t mean any of this will be captured by local tech companies. In fact its highly likely that this revenue will be captured by US firms — especially if we don’t get our sh*t together.

For example, take the taxi industry. It’s currently a $5B market. Assume it grows by an average ~1% per year, so its a $5.6B market in 2025. Then applying our thinking about the portion of GDP impacted by digital tech (25%) and the portion of GDP captured as revenue by tech companies (5.5%). We get $1.4B impacted/disrupted by tech, and ever so roughly, $300M in revenue to tech companies. Now an interesting thing to note here is that Uber’s market share as of December 2014 may already be around 8.8% of total taxi spending - at least $440M per year moving forward. Given Uber takes 20% commission that’s at least $88M in income to Uber Australia for the next year — at this rate our estimates will for GDP impacted will be blown out of the water by 2018.

So given that Uber is currently killing it, plus it has a massive $4.9B war chest to fight everyone, its going to be tough for local tech companies to pull this money from the jaws of Uber et al. Nevertheless, lets still try our best to estimate how many local tech companies we’d need to fight off the likes of Google and Uber, with their fancy autonomous cars and sexy taxi ordering iPhone apps.

# Technology Companies
To address these questions we built a rough model for the lifecycle of technology companies based on existing data we could find on the proportion of people that go from being interested in entrepreneurship to starting a company; key stages of development; norms for funding required at each stage; and approximate failure rates at each stage (for some numbers around failure and transition rates see here and here). We assumed several stages/states based around revenue brackets:

  • Interested or potential founders, a portion of whom (~20%) would actually form a startup. We took the number of people in startup related meetups as a proxy for this total number.
  • Seed or startup stage companies, <$1M in revenue,
  • Early stage, $1M to $10M
  • Growth stage, $10M to $100M
  • Mature stage, $100M to $1B, and
  • Unicorn or Gazelle stage, $1B+
Our state transition probabilities, including the probability that a company would progress to the next stage of revenue, the company would stay at the current revenue level for another year, or that it would die and return to startup heaven. On the far right you can see the distribution of companies at the end of 11 years (2025).
Source: PwC analysis of Global Entrepreneurship Monitor (2011 survey results).

We then input the existing numbers we had for 2014, applied a touch of growth to the number of interested parties per year (25%), and out popped some numbers for 2025 which look like they could be vaguely reasonable. Our rough numbers for the total number of companies at each stage in 2014 and 2025 were:

  • Interested or potential founders: 4,629 to 53,889 total people
  • Seed stage companies: 660 to 10,778 total companies
  • Early stage: 330 to 4,145
  • Growth stage: 100 to 662
  • Mature stage: 10 to 85
  • Unicorn or Gazelle stage: 4 to 16

Formation rates per year per million people on average across Australia increasing from 28 in 2014 to 87 in 2025. Still well below a US tech hub but enough to capture 5.5% of GDP for the purpose of this thought experiment.

A simplified model of the different states/stages technology companies move through, from Potential Founders who are interested in starting a company to Seed stage startups and then on to Mature companies and Unicorns. Each stage with an associated revenue bracket. The yellow areas represent the size of the tech sector now and the black or grey areas the possible size in 2025. The numbers below the title of each stage represent 2014 numbers and estimated numbers in 2025 (ie. #2014 to 2025). At the top you can see approximate state transition probabilities (we say ‘survival’ rates above but they don’t really mean death just transition to next stage).

Total Revenue of Technology Companies
To align the total revenue per year in 2025 from all technology companies (#Companies by stage x Revenue bracket) to roughly equal our estimate for the total potential direct revenue to technology companies in 2025 ($115B or 5.5% of the projected Australian GDP of $2,096 billion in 2025) we tweaked the level of growth a little to get $113 billion. Based on 25% growth in the number of interested parties per year our workings look like:

Year on year calculations for revenue by company stage.

Total Funding Required 2015 to 2025?
So given we think there is a reasonably large opportunity for technology companies in 2025 (5.5%+ GDP) and we have a rough idea of the number of local tech companies we’d need to address that opportunity. How much funding is required over the next 10 to 11 years to capture that opportunity. To model this we included the previously mentioned failure rates, and we assumed companies required the following total levels of funding to reach a certain stage:

  • $50,000 funding to launch a startup.
  • $250,000 funding to achieve $1m in revenue.
  • $2m to achieve $10m in revenue.
  • $20m to achieve $100m, and
  • $110m funding to achieve $1b+.*
*Avg pre-IPO funding by US tech companies increased from $73M in 2007 to $110M in 2013. Median funding was $52M in 2007 and $78M in 2013, raised over a median of 4.5 rounds (excluding seed rounds <$US 1.5m). Avg time to IPO is 7 years in the USA and 9 years in Australia for VC backed companies.

The distribution of total funding over all 11 years, by company stage looks like this:

Total estimated funding per company stage over 11 years, from 2015 to 2025.*

By way of comparison the National Venture Capital Association’s (NVCA) 2013 and 2014 Yearbook show software investment in 2013 in the USA was $20B in total across Seed Stage — 3%, Early Stage — 34%, Expansion Stage — 33%, and Later Stage — 30%). NVCA does not include angel funding so if we incorporate data from the Centre for Venture Research’s report, The Angel Investor Market in 2013, on US software sector angel investment in 2013 ($5.7b total angel investment), we get a revised distribution of funding across stages in 2013 of: Seed Stage — 21%, Early Stage — 29%, 􏰪􏰫􏰇􏰑􏰋􏰃􏰂􏰈􏰋􏰄􏱆􏰉􏰑􏰐􏰆􏰄􏰱􏰄Expansion Stage — 27%, and Later Stage — 24%.􏰚􏰥􏰸􏰤􏰄􏰑􏰋􏰊􏰄􏱈􏰑􏰉􏰆􏰅􏰄􏱆􏰉􏰑 Something approximately similiar to our distribution in the above graph.􏰐􏰆􏰄􏰱􏰄􏰚􏰟􏰸􏰘􏰄􏰀􏰁􏰆􏰄􏰜􏰅􏰂􏰉􏰆􏰅􏰃􏰄􏰈􏰢􏰄􏰉􏰁􏰂􏰃􏰄􏰅􏰆􏰇􏰈􏰅􏰉􏰄􏰋􏰈􏰉􏰆􏰄􏰉􏰁􏰑􏰉􏰄􏰕􏰆􏰑􏰃􏰖􏰅􏰂􏰋􏰐􏰄􏰃􏰆􏰆􏰊􏰄􏰃

Based on this we estimate roughly $13 billion needs to be invested over the next eleven years across Australia. With current funding increasing from $120M-$423M per year in (past two year range) to $3B-$6B per year in 2025. Per capita funding rates of $5.12-$18/person increasing to $121–$243/person (remember Israel is currently at $183/person and Silicon Valley $4k+).

While $6 billion per year may seem like a large amount it is in fact a tiny amount when compared with a mature industry such the US tech industry as mentioned above, or our own mature and world leading resource industry. Total capital expenditure by the mining industry in Australia in 2013–14 was valued at $90 billion; 52% ($47B) of which went to just one state, Western Australia, which has a population of just 2.6 million. On average total business investment across all industries in Australia is in the 10% to 20% of GDP range, mining investment alone being 8% of GDP.


So if you got this far you deserve a quick summary of our best guesstimate at a possible/probable future in 2025 based on current activity levels:

Assuming the estimated economic impact of digital technology on the Australian economy in 2025 is approximately 25% of GDP; and 5.5%+ of GDP is captured by digital tech companies; and the growth of interest in the sector increases by an average 25% year on year. We think it is reasonable that the total number of companies from 2014 to 2025 could increase from 1,500+ to ~16,000 (assuming we fight off the foreign tech vikings).

By developmental stage this growth could look something like: 800 companies increasing to over 10,000 companies at the seed stage; 330+ to 4,000+ at early stage; ~100 to 600+ at later stage; and the number of unicorns at least doubling over the next eleven years from a half dozen to 15+.

Based on this we estimate approximately $13 billion needs to be invested over the next ten years in this sector to capture this value (and fight off the vikings). With current funding increasing from an average $200M+ per year to a total of $4.5B per year in 2025 — per capita funding rates of $8.54 per person increasing to $182 per person (roughly equal to Israel now).

Lastly, while these are our mid range estimates based on the best data to hand, given the challenges involved with quantifying the current size of the sector and in estimating the future (a dark art indeed), we think it is reasonably probable that the economic impact from digital technology in 2025 is in fact much greater.

Thanks to Zane Prickett, Brodie McCulloch, Hourann Bosci, Colin Kinner, Jasmin Walker and Zac Levay for feedback on the article.