Ever since the Turnbull government launched the so-called “ideas boom”, a considerable amount of excitement has been generated about the future direction of Australia’s economy. While it is refreshing to see the government’s interest in exploring new avenues of thinking, we need to assess the transformation required to deliver the next generation of well-paid, good quality jobs for Australians.
In my view, Australia desperately needs to reinvent itself so innovation and risk-taking – outside the housing and mining sectors – drives the nation to a new economic frontier. So the ideas boom should solve this problem, right? Well, it depends on who you ask.
According to EY, just over $19m of seed (early stage) investment was made into Australian tech start-up ventures in 2015. In other words, total seed investment equalled the purchase of only 19 median-priced homes in Sydney. Or less than the $23m lost in online dating scams last year, according to the ACCC.
To make matters worse for the ideas boom, the greater challenge to overcome is the failure rate of Australian start-ups, which is much higher compared to other international jurisdictions. A study by Deloitte shows that for every one hundred start-ups in Australia, only 4.8% become successful; a very low success rate. Silicon Valley and New York, in contrast, have far higher success rates of around 8% and 6.7% respectively.
These figures suggest that due to a complete lack of local infrastructure dedicated to fostering innovation and entrepreneurship in Australia, our early stage start-up ventures are disadvantaged compared with their global peers.
So with the government implementing favourable tax and capital gains concessions to those who invest in early stage business ventures, this should theoretically increase the number of seed stage start-ups funded; hopefully this will be the case, even though reality suggests there is no evidence to support this in practice.
Look at California: its residents pay the highest top marginal rate of capital gains tax relative to any other state in the US. This amounts to 33% in total when factoring in federal and state taxes on capital gains. New York State is a close second at 31.5%.
Have high capital gains taxes in California and New York stopped local and global entrepreneurs from actively engaging each other within the respective state borders? Obviously the answer is no. Does the streamlined and supportive infrastructure in Silicon Valley, Los Angeles and New York allow entrepreneurs to efficiently allocate resources, enhance investment and networking opportunities, attract talent and secure appropriate facilities? Absolutely. And does the commercialisation of ground breaking innovation originally derived from, or funded by U.S government agencies such as the defence research agency Darpa or Nasa give the American innovation pipeline and startups a distinct advantage over the Australian commercialisation model of hope and pray? You bet it does.
It will be worthwhile for the Australian government to focus initially on funding, collaborating and building a similar structure to promote invention while spinoffs and startups figure out how to commercialise and locally manufacture newly derived innovation. A high standard must be set in order to justify our high cost of doing business. This must focus on expanding resources and research locally, not internationally.
The Coalition’s policy of building so-called “landing pads” in start-up capitals such as San Francisco will only risk exporting our young talent who may never return once they realise how much easier it is to do business in these locations because of its structure and processes that has created the likes of Google, Apple and Facebook, among many others.
Plans to increase the cost of university education in Australia, therefore limiting the number of graduates who can write code alongside other IT competencies, will not help. The backbone of innovation in Australia today is our highly innovative public sector, comprised of the university sector and scientific research agencies such as the CSIRO.
With the world watching, cutting employment at the CSIRO and keeping a tight leash over university-derived innovation does nothing to improve the structure of the local start-up scene. Neither does government-brokered, over-collaboration between big monopolistic businesses and start-ups help the cause, as it can be a recipe for an uncompetitive disaster.
While the government is investing millions of dollars into landing pads overseas, the local start-up environment has no fuel (money), no navigation instruments (structure), or a runway to launch and get to those landing pads.
Reconfiguring the national strategy to ensure entrepreneurial ventures are guided into an “action boom” should take precedence over assuming the money and structure already exists; when in reality, it doesn’t. If anything, this so-called ideas boom may not be all that its cracked up to be and never eventuate into its highly-productive examples set by our US counterparts. Let’s hope I’m wrong because time is not exactly working in Australia’s favour.
Lindsay David is the author of Australia: Boom to Bust and Print: The Central Bankers Bubble. He is the founder of LF Economics and Lcrowd.
