The Economist has released a special report on tech startups called The Cambrian Moment, that’s a must-read for anyone in the startup industry, but also worth a look for those working in large corporations too. There is little mention of the Australian startup scene though, but for the appearance of Startmate in a graph of the top accelerators by region for follow-on funding. But despite the lack of global recognition, things aren’t all bad. There are some key points worth highlighting in an Australian context, as we openly try and jumpstart a viable ecosystem – Victoria only saw the launch of Startup Victoria last week with a mandate to do just that.
The report defines ecosystems as “exploded corporations.”
Finance departments have been replaced by venture- capital funds, legal ones by law firms, research by universities, communications by PR agencies, and so on. All are nodes in a loose-knit support network for startups that does what in-house product-development teams used to do.
Here are the reports key take-aways with respect to startup ecosystems and how this might relate to Australia.
VCs are no longer god-like
As the report notes, it’s becoming increasingly cheaper to launch a startup and founders are taking advantage of that, launching with little capital behind them. Raising angel rounds from family and friends has been pretty common place in the Australian startup scene for a long while now, but there are some changes in the US VC market that are worth noting. In the US funds have effectively moved out of this space and up the food-chain, so the scene is not very dissimilar to here at the early market stage.
Funding is also essentially being “democratized”, as the Economist report points out, the big VCs “are no longer god-like” (in fact it goes so far to suggest that they’ve never even been particularly good at what they do). It lists the creation of AngelList syndicates as a way for small investors to band together and make decisions based on some of the historically more successful ones. In Australia, the government is currently reviewing crowdfunding for equity, which will be a notable local game-changer in this arena.
The report notes that the US is also seeing the rise of “micro” funds which are smaller, charge lower fees and aim to generate better returns. This in part describes the current crowd of VC firms in Australia, who could never offer the backing (in both money and scale) that larger US “Sandhill Road” counterparts could. For some sobering thoughts on VC funding in Australia, Ian Maxwell had some interesting points in a recent article on Startup 88.
Accelerators are the new incubators
One thing that struck me in the report was the distinction between accelerators and incubators. The former seen as part of the new wave, and the latter as the way things were done pre-dotcom days. Incubators gave startups a home, offering support services, but accelerators are “less cozy” and push their startups towards performance results, essentially they act as a business school.
As the report notes they perform a key function in the startup supply chain by picking the ideas and teams that are most likely to succeed and “serving them up to investors”. Australia has seen the rise of a number of accelerators along similar models and the success of Startmate, recognised on a global scale, is proof that the approach is working in the local ecosystem. As a whole though, most Australian accelerators have had at least one success. When you consider the odds of failing in Australia are as high as 95%, accelerators play an increasingly vital role in nurturing early stage startups.
The importance of government support
The section in the report dedicated to startup ecosystems focusses on Singapore, where the government has created a number of incentives, matched investment, reduced rental prices for startups, and created large tax concessions. Takeaway – a government can effectively create an ecosystem where there is a strong desire to support an industry.
In Australia government support is limited in comparison to other countries, with R&D tax incentives being the key benefit companies have traditionally taken advantage of. But hope is on the way -as well as the discussion around the opening up investment to crowd funding – employment share option schemes are currently under review (submissions close February 7). At the recent launch of Muru-D, Malcolm Turnbull expressed his support of the initiative. He also recently wrote a blog post about it. Other government incentives include Commercialisation Australia, but tech startups have not always made the most of the benefits offered from this scheme.
It feels like the right intention and ingredients are there to take the startup scene to the next level.
We have all the parts, we just need to better plug them together (there are already some connections). Our disadvantages might be geographic and related to market-size, but there is nothing stopping us from creating a startup-facilitating community (that’s my definition of an ecosystem, at least). It will be interesting to watch the initiative of Startup Victoria (funded through private and public money) in creating a more viable proposition for Victorian startups, and whether that’s a model other states can reproduce, or be tackled on a national level.