The 2015 Federal Budget could be one of the few remaining opportunities for Australia to avoid falling behind the rest of the world in terms of innovation and investment in technology.
That’s according to the 2015 StartupAUS Crossroads report, which makes the case that Australia has an unprecedented opportunity to transition from an economy based on resources, primary industries and domestically focused businesses to one based on high-growth knowledge-intensive businesses that can compete globally.
According to the report, a growing number of governments are launching programs to invest in the creation and support of high-growth companies.
“Australia has not kept pace, and has under-invested in catalysing and supporting its high-tech industries, as evidenced by the fact that we now have one of the lowest rates of startup formation in the world, and one of the lowest rates of venture capital investment,” the report says.
Last year’s budget also saw the Federal Government cease funding to research bodies National ICT and the CSIRO. It also abolished the $300 million Innovation Investment fund and the axed eight startup programs.
In contrast, China has just launched an $8.3 billion seed-stage National Venture Capital Fund, while South Korea is implementing its $4 billion Creative Economy initiative.In the UK there is now a multi-billion pound suite of pro-startup programs, and New Zealand is extending its network of government supported startup incubators, innovation precincts and funding programs for startups.
The recent Startup Economy study undertaken by PwC and commissioned by Google Australia projected that high-growth technology companies could contribute 4 per cent of GDP (or $109 billion) and add 540,000 jobs to the Australian economy by 2033 from a base of about 0.2 per cent of GDP today – but only if action is taken to address several areas of market failure relating to culture, skills, markets, funding and regulation.
Australian technology industry leaders are calling for the government to provide budget incentives to boost international investment and competitiveness, but are prepared for the worst.
Distribution Central managing director, Nick Verykios, said: “It’s a far cry to expect anything that would make any serious impact on the degenerated fiscal plan the government currently has to minimise critical investments in anything, let alone technology and, in particular, those investments that would assist the channel,” he said. “I’m afraid to say we are on our own.”
He said what mattered today was significant investment by government in IT Infrastructure which would allow the country to be competitive against other developed countries. “We need government-led investments in partnership with private sector to upgrade the country’s infrastructure to be at least competitive. But we also need venture capital [VC] funding of private enterprise software start-up projects and applications, so that the IP and the investment stays here.”
Verykios said the Entrepreneurs Infrastructure Program, introduced in last year’s budget, had produced little or no effect. “Government has to match the rest of the world, so that our entrepreneurs stay,” he said. “IT is a global opportunity for an entrepreneur and any start up is going to look for best developers, best funders – including government and best tax policies. We just have to be competitive, nothing fancy.”
Data#3 managing director, John Grant, said he was seeing more business confidence in the first half of 2015.
“We had a good first half and we probably can see a good half in the second half,” he said. “I don't think the government needs to do much more than to just maintain the current line and certainly, in the preliminary comments that the prime minister has been making about the budget, it's going to be a pretty attractive budget for people. I don't think there will necessarily be any business incentives in it, but there won't be business disincentives.”
Grant said the government might be best placed setting policy drivers and then get out of the way. “If there are business opportunities then companies will find them given the right sort of incentive environment, providing funding is not necessarily an incentive,” he said.
“Incentives are provided in many different ways and the biggest tool that government has is through its taxation regime and things like employee shareholding. The government is better off looking to its policy settings rather than providing funding and I say that from experience and also because the amount of money applied is just not significant.”
StartupAUS has put forward an eight-point plan that, if implemented, could be the basis for development of a startup ecosystem in Australia that would contribute over $100 billion to GDP and create over half a million new jobs by 2033.
This includes creating a national innovation agency, improving the quality and quantity of entrepreneurship education, increasing the number of people with ICT skills, and increasing availability of early stage capital to startups, addressing legal and regulatory impediments.
Hosted Networks managing director, Ben Town, said, last year’s budget brought “huge” cuts to investments in innovation and startups. “We’re all prepared to see a fairly hard federal budget this year as well,” he said. “So a good start would be would be to minimise any cuts that will negatively impact the IT sector.
“However, I’m expecting to see further pushes via policies such as Cloud first, where the government looks to increase productivity while decreasing costs. This will come at a cost for some in the industry, where the government looks to make savings and shift spending away from traditional ICT expenditure.”
Town said he would like to see additional investment in government programs that improved efficiencies, while cutting government costs, as well as programs that looked to build upon innovative technologies through advice and R&D grants.
“The start-up world is very competitive and they can struggle to gain access to skilled talent, who are always in demand, especially when going up against higher paying employers. As such, I see the changes to the scheme being highly beneficial in gaining skilled talent and growing a business beyond the start up phase.”
Employee share schemes
On a positive note, the treatment of employee share schemes will be improved as of July 15. A bizarre situation has existed in Australia since 2009 in which options are taxed in the hands of employees at the time of issue, rather than at the time they received the proceeds. The government has recognised that this is out of step with the rest of the world.
Town said, “I see the changes to the scheme being highly beneficial in gaining skilled talent and growing a business beyond the start-up phase.”
Katana1 managing director, Nick Russel, said his company always had a direct investment approach to staff equity and that it was now exploring formalised staff share scheme.
“K1 relies on a healthy economy, where our customers have the confidence to invest in IT projects,” he said. “At present, clients are facing redundancies and downsizing and there are lots of delays in IT spending and IT projects. We are looking for the budget to restore some confidence in corporate Australia. We would also like to see continuing to support for R&D tax incentives to encourage the channel to make the investment in developing its own innovative solutions to customers IT challenges.”
Telsyte analyst, Rodney Gedda, said governments, companies and industry bodies needed to “pull together” to provide better collaboration, research and education for the industry. “We have heard about cuts to NICTA, so that’s not positive,” he said. “The IT industry will be looking for more infrastructure that supports growth and development – anything to do with tax breaks and support for emerging technology is a bonus.
“We are not doing enough in terms of making IT a career choice. If we did more to foster how the government can help with making it easier to employ people, sponsoring internships and sponsoring university placements that would also help.”
Mocana Corporation founder and author, Adrian Turner, said digital disruption had put industries that accounted for almost a third of Australia’s GDP in the line of fire.
“Without action, these shifts have potential to stall Australian economic growth, render whole industries uncompetitive and lead to climbing long term unemployment across the nation,” he said. “It sounds alarmist, but it’s not. It is reality. The choices we make right now will affect our generation and the ones to come. They will define our prosperity and place in the world.”
The Budget will be delivered by the Treasurer, Joe Hockey, on Tuesday, May 12, at 7.30pm.