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Tech Industry in Australia

April 3, 2016
Editor(s): Naren Rajan
Writer(s): Matthew Khoo, Arief Nugroho, Jessica Xu, Nathan Chin

Recent global headlines have been dominated by the emergence of tech industries and the jaw-dropping valuations of “unicorns”- startup companies with valuations of over $1 billion. The hype surrounding the startup and entrepreneurship scenes along with their economic value and potential to generate employment has prompted governments worldwide to launch a slew of initiatives to preserve their relevance in the increasingly sophisticated global economy. While the industry has largely taken off in countries such as the US, Singapore and Israel, one cannot help but ponder on questions such as: where has Australia gone wrong? And why is the industry not taking off? We attempt to answer those questions by exploring factors such as: (i) the size of the industry, (ii) the lack of supports for start-ups and (iii) the limited supply of local tech talents.

The inability for the industry to grow can be attributed primarily due to the limited scale of the industry in Australia. Information technology firms make up only 1% of the market capitalisation of the country’s top 500 largest companies. To put such numbers into perspective, tech companies contribute 19% to the total market capitalisation of the S&P500 Index in America and are significant drivers of the American economy. The sheer difference in size suggests that investment opportunities are much more limited in Australia which results in the inability of budding entrepreneurs to raise the funds necessary to build their businesses.

The problem above is further compounded by the lack of support for budding start-ups. Frank Farall of Deloitte Digital Technology asserts that the industry will be growing at a much faster rate had the business environment been more supportive towards these entrepreneurs (Commonwealth, 2014). The lack of flexibility in the Australian taxation system continues to haunt companies at early stages of development. Detrimental taxes such as the Capital Gains Tax (CGT) are still being levied on them. This rigidity in the tax system has prompted entrepreneurs to look offshore where tax systems are more permissive and access to funding is ample.

Another resonating issue faced by Australian tech firms is difficulty in recruiting local talent with the right skill sets and expertise to meet growing technological demands. The lack of labour supply is attributed to shortage of tech talent which has significantly encumbered the prospects of growing an online economy in Australia. Tracy Fellows, REA group chief describes it as the “biggest inhibitor” to technological growth (Sydney Morning Herald, 2015). Ms Fellow postulates that one of the primary factors for the lack of tech labour is that computer science and engineering are perceived as “unappealing” career options by local students. As a result, many of Australia’s leading tech firms look to import tech experts or potentially offshore tech services to emerging tech thriving nations such as India and China.

However, it’s not all bad news for Australian tech firms. John Dyson, co-founder of Melbourne-based capital fund Starfish Ventures, is convinced that despite the limitations, high-growth start-up companies are absolutely capable of flourishing in the Australian sector. What they need, he propositions, are customers. Compared to the ‘big corporates in the US’ who are ‘much more inclined to work with Silicon Valley companies’, Australian start-ups simply ‘don’t have the same kind of support’ (Daily Telegraph, 2015). Corporate Australia should therefore be encouraged to first look within our own shores for technology solutions, supporting Australian start-ups by ‘embracing, trialling and buying’ locally-designed products. In a similar vein, although Australian start-ups are currently able to secure $500,000 to $1 million through the angel funding market to prove business concepts (Australian Broadcasting Corporation, 2014), firms often struggle to obtain larger amounts of funding for further development and expansion. Rather than implementing tax breaks, the Australian government could potentially employ measures to bring the superannuation industry back into venture capital. If superannuation funds and wealthy individuals consistently invest larger amounts of money at once – for example, $2 million to $3 million – this would propel fledgling start-up companies into reaching the next stage of growth and accordingly begin creating new jobs. However, Mr Dyson explains that ‘we need to look at programs and policies that encourage that participation’ (Australian Financial Review, 2015). He proposes a certain period of support from the government to demonstrate that the industry can generate sustainable returns over time, with the supports removed after three to five years.

Despite the obstacles that may be apparent, we should remain optimistic about the future of Australian start-up companies. Not only is the average entrepreneur getting younger and younger – the ‘best and brightest coming out of universities’ (Commonwealth Bank of Australia, 2014) wanting to avoid the unpleasant reality of an uncertain graduate job market – Australian firms are actively involved in exciting innovations which have the potential to have significant impacts in the global sphere. The latest of these is Canberra-based Nexus eWater’s unique water and energy recycling system, which reduces residential water-related carbon emissions and water use by up to 40% (The Australian, 2016). The bright minds behind these start-ups evidently have the ability to change the world for the better, and as Mr Dyson reflects, ‘at the end of the day we are going to have a sustainable industry in Australia because we have got an investor base who are supportive.’

Australia’s tech scene is in a self-perpetuating cycle of deficiency; the lack of capital and innovation in our shores incentivises most of our talent to export themselves to the technological hotspots of the world. As seen in the startup hubs of Tel Aviv, Waterloo or The Valley, having an established community of bright entrepreneurs is often enough to propagate its own growth. China’s transition from a production driven economy, to a consumer driven one has signified the end of our mining boom, which begs the question; what’s next for Australia? Although our pharmaceutical or biotech industry is showing promise, it is still too soon to rule out our tech sector as a potential contender.

References

Australian Broadcasting Corporation. (2014). Extended interview with John Dyson – Inside Business – ABC. Retrieved 23 March, 2016, from http://www.abc.net.au/insidebusiness/content/2013/s3802704.htm

Australian Financial Review. (2015). Starfish founder says tax breaks are not needed in innovation policy | afrcom. Retrieved 23 March, 2016, from http://www.afr.com/news/policy/starfish-founder-says-tax-breaks-are-not-needed-in-innovation-policy-20151203-glejom

Commonwealth Bank of Australia. (2014). Can Australia’s tech industry take off? | MyWealth Commonwealth Bank. Retrieved 23 March, 2016, from https://www.mywealth.commbank.com.au/investing/can-australia-s-tech-industry-take-off–infocus201407

Daily Telegraph. (2015). Corporate Australia needs to invest in start-ups, says venture capitalist John Dyson from Starfish Ventures | DailyTelegraph. Retrieved 23 March, 2016, from http://www.dailytelegraph.com.au/business/corporate-australia-needs-to-invest-in-start-ups-says-venture-capitalist-john-dyson-from-starfish-ventures/story-fnkltfm0-1227519979451

The Sydney Morning Herald. (2015). Australia ‘tapped out’ of high-tech talent, says realestate.com.au boss Tracey Fellows. Retrieved 23 March, 2016, from

http://www.smh.com.au/business/media-and-marketing/australia-tapped-out-of-hightech-talent-says-realestatecomau-boss-20151109-gkufcs.html
The Australian. (2016). The Aussie start-ups tackling the global water crisis. Retrieved 23 March, 2016, from http://www.theaustralian.com.au/business/technology/opinion/the-aussie-startups-tackling-the-global-water-crisis/news-story/611fd5c5db5d9cef1dc2da6f8a34ab18

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Naren Rajan
Editor
Matthew Khoo
Writer
Arief Nugroho
Writer
Jessica Xu
Writer
Nathan Chin
Writer

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