Australia poison for startups

I’ve wanted to write this piece for a while now, after bootstrapping in Australia for over 5 years we’re finally getting traction. It’s been a long hard slog, we’ve failed at almost 8 ideas & taken absolutely no funding.

Maybe that’s another story – for now though I want to talk about how growing a Startup or idea in Australia is terribly difficult.

This isn’t a rant; instead I’m trying to highlight some of the current challenges I see in the Australian startup scene – which could be a reason why we don’t see more successful startups or investments in our lovely country.

Just to paint some perspective, here’s just some of the recent acquisitions in the Australian online space:

Acquisitions

  • Hitwise – $240M by Experian (US)
  • Melbourne IT (DBS) – $ 152M by CSC (US)
  • Retailmenot – ~$50-100M by WhaleShark Media in 2010 (US)
  • Chomp – $ 50M acquistion by Apple (US)
  • Ebook Library – $30M by ProQuest (US)
  • We Are Hunted – $ undisclosed by Twitter (US)
  • Sessions – $ undisclosed by MyFitnessPal (US)
  • 5th Finger – $ undisclosed by Merkle (US)
  • VOLT Media – $ undisclosed by Alphabird (US)
  • Trunk.ly – $ undisclosed by Delicous (US)
  • BuyInvite – $ undisclosed by OzSale (US)
  • Crowdmass – $ undisclosed by Groupon (US)
  • Grabble – $ undisclosed by Walmart (US)
  • Skitch – $ undisclosed by Evernote (US)
  • Tjoos – $ undisclosed by Internet Brands (US)
  • oo.com.au – $ undisclosed by Grays Australia (AU)
  • StyleTread – $ undisclosed by Munro Family (AU)
  • Vinomofo – $ undisclosed by Catch of the Day (AU)
  • MYOB – $ undisclosed by Bain Capital (US)
  • Buzz Numbers – $ undisclosed by Sentia Media (US)
  • Spreets – $40M by Yahoo7 (AU)

The first thing we notice is that the majority of acquisitions involve a partner that is located outside Australia.
There’s obviously a few potential reasons for this:

  • It’s difficult to scale products worldwide from Australia.
  • We’ve built a great products but other companies feel they an scale it to a much largeruserbase through an integration.

Just look at what WhaleShark media have done with RetailMeNot in 4 years. They’ve scaled the business to $78.5M in revenue per quarter. To do this they’ve needed to get closer to the clients (who are mostly US based businesses) & also the customers. Something that Bevan & Guy would have struggled to do with a team here in Australia.

What’s also interesting to note is that quite a few of the companies above actually left Australia completely to setup base in the USA.
We hear so often in the media about founders like Josh Reich from BankSimple who was recently acquired for $117M, it’s like our media like to hold onto the fact that someone from this country is doing something great, even though they had to leave Australia to do it in the first place. Even Atlassian left Australia to register itself as a UK business:

Basically, for startups it’s super expensive to do business in Australia compared to other big cities—wages, compliance, tax and even software costs are high, and to make it even more tough, there’s typically less funding available to meet these costs.

An article surfaced recently from 99dresses founder Nikki Durkin who talks at length about braving visa issues to join Y Combinator in the USA at the hope of really making an impact with her Australian born startup.

The Government Does Not Support Online Businesses

There’s almost no benefits given to startup founders in Australia that actually help us accelerate our business.
In fact our government recently announced a new budget designed to reduce our $49.9Bn deficit, which involves big changes to how they support startups (even though Tony Abbott is quite happy to spend $12Bn on 58 F-35 Fighter Jets).

The Government has cut funding to over 8 innovation & research programs. One of the first areas to be completely cut was Commercialisation Australia, an organisation that was there to help startups from early stage right through to acquisition – they had roughly $88M per year to help Australian products & services. They also cut the Innovation Investment Fund & 6 others to give combined budget savings of $845M.

In a recent interview after winning a Pearcy award, Guy King the Co-founder of RetailMeNot mentioned how Commercialisation Australia was instrumental in helping them with the growth of their business.

Singapore is kicking our arse in the battle to become Asia’s tech hub and to secure the initial public offerings that would come with it.

The Government has however pledged $ 484M in a new Entrepreneurs’ Infrastructure Program, which we still have little to no information on.

Nor does it support venture capital

The amount of money invested by Australian VCs was at its lowest level in 2013 with just $111.44M invested, with the average investment around the $1M. Compare that to $1.71Bn in Singapore (which is a 600% increase since 2009).

There’s no sugarcoating the fact that the local VC environment is struggling; investors here are less experienced, they have to be pickier with the startups they back, there’s absolutely no support from the government & we have corporate VC like ANZOptus & that are more interested in funding startups that can benefit their own business.

To this end many Australian businesses continue to look for overseas investment:

  • Atlassian – $60M from Accel Partners (US)
  • The Iconic – $25M from Summit Partners (US)
  • LIFX – $12M from Sequoia (US)
  • App.io – $1M (Formerly Kickfolio) from Multiple Investors (US)
  • Campaign Monitor – $250M from Insight Partners (US)
  • QuikFlix – $10M from HBO (US)
  • SiteMinder – $30M from TCV (US)
  • BigCommerce – $40M from Revolution Growth (US)

It is well known that the Australian VC scene needs a few large homeruns to see money be invested back into the ecosystem, but right now our banks view tech startups as high risk & not many are willing to take the calculated risks we see elsewhere in the world. After all, when you invest money in equipment & infrastructure – if it all goes bellyup you still have some assets to sell right? Australia still has some way to go (as with a lot of things) for this to change.

Foreign investors want you to have a global vision

Even though we are a large country, our population is still relatively small – only 22.68M people. When you compare this to 314M in the USA or 63M in the UK our possible customer penetration is small unless you plan to target your product globally (a pattern that you’ll see ring true in many of the investments above).

There have been plenty of companies that have made an impact locally when you consider industries like Travel or E-Commerce. But to attract the right kind of funding that will drive growth you need to be in an industry or have a concept that you can scale globally.

Australia is struggling to provide enough market competitiveness due to rising costs, just look at the the E-Commerce space – many international companies ( ASOSEastbay & Amazon) are cleaning up due to cheaper shipping costs & lower product prices. And even many of our own iconic brands like Myer or David Jones are just being left behind due to lack of innovation or just being too late to the party.

Take our business Gleam for example, our potential customer base increases by 1500% or more just by selling into the USA market alone. We’re lucky that most of our sales & growth don’t require physical sales people.

Employee share systems in Australia are a joke

An effective employee share scheme should help Australian startups attract the right talent (I mean who wouldn’t want to come live in our country?), foster innovation & in the end help us see more success on the global playing field.

The current regulations & treatment of tax towards employee share schemes in Australia makes them downright useless.

In a nutshell start-up employees are liable for the tax charge on shares when they vest (not when sold), even though the value can’t be realised properly yet. This means that employees have additional tax charges without any additional income to cover them – even if the startup is destined to fail 6 months into the future.

I know, total bullshit.

Just so you know, it is possible to get around these tax liabilities – but it’s extremely expensive. Which most startups don’t have the time, money or resources to cover.

Very few tax breaks or grants

Tax breaks are hugely important to help startups get through those tough first few years where cashflow is tight.

Take Singapore for example (again), if you incorporate your Startup there they will allow your first $ 100k of income to be completely tax free for 3 years, there’s even more benefits if you earn up to $300k they cap your tax at just 8.5% – plus it’s even allowed on dividends & foreign income! Not only that, Singapore provides 50% deduction on taxes relating to Angel investing, no wonder Singapore has seen a massive investment & startup boom – the government understands the value.

There’s a few grants in Australia, the first major one is the R&D offset. If you can prove that your startup is conducting research & development you can claim back up to 38.5% of your development costs – however the payment is extremely lagged & can take more than a year after the actual activities for you to be able to claim (which doesn’t really help startups).

Export market development grants can help you reduce the cost of exporting any products overseas, for example advertising your business in other countries, travel, marketing & communications. You can reimburse up to 50% of these costs, again this rebate comes almost a year after the actual activity has taken place. What about incentives to grow my business locally?

Problem I have here is none of these grants do much to help me as a startup scale my business, the grants & tax breaks you see in Singapore actually align with how someone grows a business – those guys have their shit together.

Australia is getting really expensive

Australia is fast becoming one of the most expensive countries in the world to live in, this means that good talent is very expensive, cost of living is expensive & wages are generally in line with that trend. Australia has the 3rd highest average wage in the world (behind Luxembourg & Switzerland).

Consider myself & John. We’re both in our early 30′s, with a family & mortgages. We need roughly a MMR (monthly recurring revenue) of $25k AUD just to cover ourselves in Australia (fully loaded, including 9.5% Superannuation). John is a fairly competent developer who could easily get a lucrative corporate contract paying crazy daily rates.

This hurts two-fold, it makes it expensive to hire & retain good people – as they can command extremely high rates by default. And we all know that startups generally can’t match those rates without some other incentives (*cough* share options *cough*).

Secondly, if your company is currency agnostic (i.e. could potentially exist anywhere in the world) you end up paying much much more to run your business. I could go on about this point forever but you just have the look at the price of a Macbook side by side:

Heck, we can’t even get Game of Thrones in Australia without pirating it, apparently.

GST sucks

If you’re pure play Australian then GST is fine, but when trying to compete globally it just adds pricing complexities (Especially for SaaS). If your business earns more than $75,000 per year you must register for GST. This ends up screwing over people that want to buy your product in Australia.

For example, consider our $39 plan. If someone in the USA wants to purchase it, we charge them $39 AUD, however if someone in Australia wants to buy it we charge them $39 + 10%, or $42.90 – if we were a USA company Australians wouldn’t have to pay an extra.

You either take the GST hit, or hit the customer with it.

To make matters worse, we end up just collecting this 10% for the government & paying it back to them minus credits every quarter which is an admin nightmare (businesses can choose to claim back their GST credits).

Timezones make client communications hard

The majority of our business comes from the USA, which means they are awake mostly whilst we are asleep. This makes having meetings & communicating with customers very difficult – normally giving you at least a 24 lag on anything that crops up.

This lag definitely works against us in Australia in terms of the amount of business & efficiency of business we can do in the rest of the world. I’m guessing this is a big reason many startups move to the USA.

Lack of payment options, until now

Online payment options have been archaic to say the least for many years, here’s a good example of what a startup might have to go through.

We would have to get a merchant account with the bank, then find a payment processor, then do all the integrations.

Finally thanks to Stripe we were able to charge Australians in AUD from launch (as part of the beta), and only now they are rolling out the BETA of allowing Australian companies to charge in USD or GBP. It’s taken a long time, but finally there are solutions for Australian companies to play on a global field – without having to worry about the bureaucracy of banking.

None of this will stop us

Even though all this stuff makes Australia seem bad, there’s still thousands of entrepreneurs out there making it work day in day out – I’ve witnessed a huge explosion of enthusiasm in Australia, we’ve got more incubators than ever before, we got lots of amazing co-working spaces & everyone is really just trying to find their product market fit in the big bad world.

So here’s to all the Australian startups – maybe we’re all waiting for the next big thing to come along, will it be Australian? Who knows, but we’ll bloody well keep trying.

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Stuart McKeown is a co-founder of Gleam, one of the fastest growing startups in Australia. He’s passionate about growing businesses, whether it’s his own or yours – that’s exactly why he built Gleam. Check it out here https://gleam.io

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