Government just doesn't 'get' startups, says StartupAUS

Despite some initiatives that will help make life easier for Australian startups, the government still doesn't really understand what tech startups are and their potential impact on the country's economy, according to StartupAUS.

The group, which promotes Australia's startup ecosystem, today released its second Crossroads report. The first <i>Crossroads</i> report was released in April last year.

In the 12 months leading up to the today's release of Crossroads 2015, there have been some positive changes in the environment for startups but government action is still falling short on a number of fronts, according to StartupAUS.

The group believes "that overall there is a significant gap in the government’s understanding of what tech startups are, how the government could support them, and the impact that they could have on Australia’s economy."

"Even the recently released Intergenerational Report acknowledges the impact that technology will have on society in the coming years, but sadly seems to assume that for the most part Australians will benefit from adopting or absorbing foreign technology, rather than by creating technology here that can be the basis of globally successful Australian technology companies," Crossroads 2015 states.

One example of a government shortcoming is the release in October of the Industry Innovation and Competitiveness Agenda (IICA). The $400 million plan included proposed changes to tax rules governing employee stock ownership plans (ESOPs).

Those changes, due to be take effect next financial year, have been advocated for by startups because offering employees a stake in their business has typically been one way they can compensate for otherwise unattractive salaries.

However, Crossroads 2015 argues that although there were positive aspects to the IICA, including changes to rules governing ESOPs, 457 visas, and crowd-sourced equity funding, "most of the proposed reforms are of little relevance to startups and seem to be focused on small businesses or companies in the 'priority industry sectors' (advanced manufacturing; food and agribusiness; medical technologies and pharmaceuticals; mining equipment, technology and services; oil, gas and energy resources; enabling technologies and services)".

"StartupAUS believes that the IICA significantly misses the mark by incorrectly assuming that startups (as defined in this paper) have the same needs as small businesses. Policymakers need to understand that tech startups have different needs from small businesses," the report argues.

"Furthermore the proposed sector bias, whilst supporting several important industries, is likely to exclude some of the most promising Australian startups from government support."

Are startups the same as small businesses?

Too often the government conflates 'startup' with 'small business', argues Crossroads 2015:

Startups are very different to small businesses. The term 'startup' is widely recognised to mean an emerging high growth technology-based businesses [that is using technology and innovation to tackle a large and most often global market], whereas a “small business” is generally considered to be a business that is providing less differentiated products or services, is often trading in a confined geographical area, and even if it experiences growth will remain a small business.

Startups, on the other hand, start small but have the capacity to experience massive and sustained growth, often enabling them to become significant players in global industries within a small number of years.

Small businesses are important to any economy because they are numerous (there are around 2 million in Australia, of which two thirds have no employees) and they provide an income to a significant proportion of the workforce (they represent almost half Australia’s employment in the private non-financial sector). However, small businesses are not a source of significant economic growth in the same way that startups are.

From an economic policy perspective it is vital to make a clear distinction between startups and small business because they have very different needs, as discussed below.

Source: Crossroads 2015

StartupAUS sets out a number recommendations to improve the environment for Australian startups. Topping these is the creation of a national innovation agency.

The government "does not possess a coherent innovation strategy to deliver Australia’s transition to a knowledge economy". One cause of this is the lack of a single department or government agency with responsibility for innovation policy and programs, the report argues.

"StartupAUS urges the government to consider the creation of a dedicated agency with responsibility for development of a comprehensive national innovation and entrepreneurship policy, and for oversight and delivery of programs under this policy," Crossroads 2015 argues.

Other top-line recommendations include the creation of a national network of entrepreneurship centres to "provide a vital layer of infrastructure around which startup communities can be fostered" and "support and connect" existing "private sector incubators, accelerators and co-working spaces, and provide much needed practical training to entrepreneurs".

In addition, the government should take action to increase the availability of early stage capital to Australian startups, including by increasing funding available to startups under the Entrepreneurs Infrastructure Program, tax incentives for angel investors, and "establishing a seed co-investment fund".

"The Australian government could stimulate greater levels of angel investment by matching private capital with funding from a seed-stage co-investment fund," the report argues. "Returns from investments could in time make the fund self-sustaining."