Alex McCauley

CEO, StartupAUS

alexmccauley

Australia has an enviable reputation in many areas. Around the world we are recognised as a sporting powerhouse, a getaway destination, and a lifestyle superpower. We export first-class actors to Hollywood almost as prolifically as iron ore to China. Increasingly, we are also known for having fostered a generation of remarkable economic success.

Crossroads is a publication focused on how we might be able to maintain that enviable economic record in the decades ahead. Global trends make it clear that technology must play a fundamental role in driving that future prosperity.

A NEW WAVE OF BILLION-DOLLAR BUSINESSES

A large crop of highly successful Australian technology companies are beginning to reach maturity at around the same time. Heading into 2019, Canva was Australia’s only private tech company formally valued at more than US$1 billion (a widely-recognised milestone). Heading into 2020, Airwallex and Judo Bank have joined the club. There are also firms like Envato, which has stayed private and grown to a valuation likely in excess of US$1 billion but hasn’t sought funding. Together, these billion-dollar businesses are just the crest of the wave. A substantial swell of new tech firms is rising quickly behind them, as we discuss at p9.

At the same time, we have seen rapid growth of publicly-listed Australian tech firms (p11). Atlassian, Australia’s biggest tech company, is now worth around $45 billion, making it one of the top 10 largest Australian firms by market capitalisation. ASX- listed tech stocks have also begun to significantly outperform the market in recent years, with many of the most prominent young tech firms seeing meteoric share price rises.

CAPITAL IS ABUNDANT FOR COMPANIES LOOKING TO RAISE BIG ROUNDS

One of the strongest drivers for this success is that Australia now has abundant venture capital, as we explore at pp15- 18. High growth tech firms are now raising almost twice as much on average as they were in 2015, up to an average of almost US$19m. This hasn’t been monopolised by established companies -- firms under five years old have seen a growth in average deal size of 78% since 2015. This is partly a result of Australian VC funds raising unprecedented sums, driven strongly by the growing interest of superannuation funds in the sector. It is also partly a result of international venture firms playing a more active role in Australia, leading larger deals on an increasingly regular basis. We look at more than 50 key milestones for companies and investors across the sector at p51.

Australia isn’t yet seeing the volume or size of the biggest deals being done in peer countries. The largest deals done in Australia over the last few years are still consistently smaller than those in places like the UK, Germany, Canada and Sweden. But with lots of dry powder in the system and high quality later-stage dealflow now much more common, this is likely to change in the near-term.

ACCESS TO WORLD CLASS TALENT IS GETTING BETTER

With Australian founders now able to raise more growth capital than ever, access to talent has become the biggest systemic barrier to rapid growth for many companies. As we explore at pp21-26, this situation is also improving. The introduction of a visa scheme aimed specifically at helping startups get access to the best tech talent in the world has helped, and a new initiative allocating 5,000 permanent migration places per year to highly skilled tech experts could help grow the pool further. The impact of these programs has yet to be fully felt, but their introduction underscores a clear mindset shift towards recruiting the world’s best to help boost Australia’s tech sector.

WE CAN’T REST ON OUR LAURELS

Rapid growth and prominent success stories should be celebrated, but they can’t be allowed to breed complacency. The economic fruits of technology present such a big prize that countries all over the globe are investing heavily in developing domestic sectors. It’s a case of needing to run fast to stay still. For Australia, many of our comparative metrics have actually slipped recently. Sydney, our only ecosystem ranked in Startup Genome’s top 30, dropped six places to 23rd in the world in 2019 (p81). Technology is notoriously a ‘winner takes most’ sector, with value distribution often quite uneven. That is as true for countries as it is for companies -- unless we keep investing we will be overtaken by fast-moving competitors.

WE CAN’T LOSE SIGHT OF EARLY STAGE SUPPORT

This report highlights that early stage support is an area of increasing concern (see p19). The data suggests that early stage funding is harder to come by for Australian companies than at any time in the last five years. 2018-19 saw roughly half as many early stage deals as 2016-17, when early stage funding was at its peak. The runaway success of many growth- stage startups may be a factor here, with capital chasing strong returns from proven companies.

This shift is mirrored in some startup support organisations, too -- programs targeting startups have increasingly been refocusing on later-stage scaleups. This is understandable in a climate where lower-risk companies are still presenting very strong returns. But without capital and support for early-stage businesses we risk limiting our ability to produce more high quality scaleups.

WE NEED TO KEEP INVESTING IN R&D

Across the economy, investment in research and development presents another significant risk. Australia already spends significantly less than the OECD average on R&D as a percentage of GDP. Both business expenditure on R&D and government expenditure on R&D has dropped in Australia for a number of years -- one of only a handful of OECD countries to see these numbers falling. In these circumstances it is particularly concerning that the main government support program for encouraging business R&D, the R&D Tax Incentive, has tightened its approach to software R&D in recent years (p37). This could act as a jarring handbrake on the sector’s rapid growth.

WE HAVE A REGULATORY DILEMMA

In the introduction to our last edition of Crossroads we identified the political clouds on the horizon for technology as ‘perhaps the biggest challenge facing the sector in Australia’. In the 12 months since that report we have seen this concern realised repeatedly. The political headwinds facing technology in general -- and particularly large global tech firms -- are now having very real ramifications for Australia’s burgeoning domestic tech sector (pp37-48). Politicians and policy makers in Australia and around the world are rightly grappling with difficult questions about the place of technology in society and the way tech companies operate. But, in a country such as Australia, with a still-developing technology industry, racing towards clamping down on tech could be counter-productive.
 

Bottom Line

The stakes here are high.

The data suggests startups, and the large technology companies they become, are already beginning to play a critical role in driving our economy. This is particularly true in terms of the jobs they generate, as we explore in detail at pp63-69.

In a world increasingly dominated by technology, the critical role this emerging sector plays is only likely to grow. It is therefore of fundamental importance that we think creatively and ambitiously about how we can push to become global leaders when it comes to generating high-value tech firms.

Ultimately, success in this could be the single biggest factor in whether Australia is able to maintain its economic success for the next generation.