The following paper is a compilation of responses from Australia's technology entrepreneurial community, via the Silicon Beach community, in relation to the following question:
What do we need to tell Australia's government to build our technology industry?
The goal of this document is to encourage discussion around the subjects of technology innovation and investment - to foster the growth of Australian technology companies.
The authors hope that consideration of this document will lead to more effective and supportive government policies - ultimately leading Australia towards hosting a stronger, more innovative and globally competitive technology industry.
The components
This paper clusters suggestions from over 30 Silicon Beach community members against three core themes: environment, investment, and people. The paper itself was edited separately by another 30 people to varying degrees. Contentious points were discussed in the public forum that makes up the near 600+ people on the Silicon Beach mailing list.
If the government implemented progressive policies in all of these themes, the majority view of the Silicon Beach community is that this will create a better future for Australia - economically and environmentally.
Building a world-class technology industry is not easily achieved. Governments around the world have spent billions of dollars in attempts to replicate the success of Silicon Valley, the world's most famous and effective technology centre.
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How Silicon Valley came to be: http://ipc-lis.mit.edu/globalization/Silicon%20Valley.pdf A history that claims that it was an aggregation of electronics companies, brought together by military and government R&D spending, that led to a cascading effect on the local environment. |
The secret of Silicon Valley cannot be replicated with money. It was developed and cultivated over decades. We need to start with clarity on the actual goals.
Before we can have a constructive discussion on how to improve the technology start-up process in Australia, we must identify what we want to improve, and why.
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Do we want to recognise Australian success and the industry already built?
There’s already one Australian company (Rocksoft) that leads the world in a technique that has become a must-have for the data storage industry. Their work has been copied by several billion-dollar companies. Almost no-one knows about them. - Information technology and telecommunications employs more than 300,000 people in Australia. Do we want it to employ more? If so, what will they be doing?
- Australia has many successful IT exporters. Do we want more?
- Australia has many successful IT innovators. Could there be more?
- Australian IP often finds a home offshore. Is this a concern that needs to be addressed?
- Australia has not produced a single breakout global success despite having a track record of successful innovation in other areas. Many people in the technology community feel that we ought to have had such a success by now. Is this cultural cringe or a real concern?
The Silicon Beach community's response to all of the points above is Yes. But that is not what we ultimately want. These are simply characteristics of a bolder goal.
What we want is for Australia to be recognized as an undisputed global centre for technology innovation.
When an American or European Internet company wishes to have Asian headquarters, Australia should always top the list. If an entrepreneur wants to learn from the best before s/he strikes it on their own, they should lose sleep trying to decide whether to go to Silicon Valley – or its Southern Hemisphere rival, Silicon Beach.
Wealth, jobs and international prestige occur once we have a thriving innovation industry. Rather than getting sidetracked by the affects of a strong sector, let us focus on and describe how the world will react to the industry we build here, in Australia - one that could generate envy in tech centres around the world.
Understanding the solutions
While the term 'ICT sector' is popular in government's language, it places software company Atlassian (contributor of 20% of Australia's software exports); social media art community Red Bubble (by the same founder of the high-profile Dot Com company "Lycos" in the 1990s) and Telstra (Australia's dominant telecommunications company) in the same bucket.
They exist in a similar ecosystem, with cross pollination of ideas and shared talent. But it is dangerously misleading for Australia's future success if the government considers their needs as being identical.
These diverse companies should not be considered as a monolithic group. Within the nominal "ICT sector", these diverse companies have different interests, different requirements for government assistance, and different problems with regulation.
Another way of looking at the 'ICT' sector is to consider the business cycle. There are four stages companies go through: startup, growth, maturity, and decline. Companies require different types of support at different stages. Startup and growth ICT companies have different requirements for success than mature or declining companies.
For example, acquiring talented employees is far more critical for a start-up than for established firms; therefore government taxation of share options (used to entice top tier talent by offering significant upside to employees) is a significant disadvantage for new local companies who cannot offer the salaries of more established competitors.
This paper particularly seeks to address 'ICT' companies in their startup and growth phases.
Technology entrepreneurs in Australia lack the support networks found in major innovation hubs.
The Silicon Beach mailing list was created a year ago, to help connect technology entrepreneurs interested in starting their own business in technology. A large proportion of the entrepreneurs in Australian information technology have some link to this community, and it has quickly become a rallying point for building the local industry.
Below are suggestions proposed by people in the community. It’s not conclusive nor complete, but it’s a start. A large number feel the government can’t do much other than “staying out of the way”, and would best act in the interests of Australian start-ups by doing nothing, and allowing the market to decide who succeeds.
However, other people suggested specific initiatives that that can inform government policy in the longer-term goal of encouraging the development of technology-developed enterprise.
The suggestions have been clustered into six core strategic goals.
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Theme |
Strategic goal |
What success would look like if achieved |
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People |
The top talent |
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Unique innovation culture |
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Environment |
World class infrastructure |
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Internationally competitive incentives |
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Investment |
Better capital availability |
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A self-managed reinvestment scheme |
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Should these goals be achieved, Australia will be make a compelling positioning as a global innovation centre for technology.
Below are specific solutions in response to the above goals.
Talent
Three approaches were identified in which the government can assist with to develop and attract the best talent.
- Better education to skill up Australian students
Universities can be a useful breeding ground for entrepreneurs. For example, university unions help fund clubs and societies that can give practical experience in organizational building and management. University research, thought leadership and exchange programs can allow students to explore their ideas and learn from others. Stanford University, by way of example, has things like "Entrepreneuship Thought Leaders", where they invite successful entrepreneurs back to university and share the experience.
Similarly, strong engineer and product skills are required to develop technology companies. A cross industry issue related to Australian universities that was identified by the Silicon Beach community was that students lack practical skills that make them useful following graduation. There are many ways this can be address through work experience whilst at university, more opportunities to conduct independent research; and develop workplace skills through student 'companies'.
- Make it easier to get visas to bring in the top international talent.
The Silicon Beach community has identified that there is significant difficulty in securing visas for some of the top computer science graduates overseas. To get the best talent, we need to remove these hurdles. The world’s best are self-selecting – let them move here to pursue their passions. One entrepreneur recounts his experience as unbelievably tiring, expensive and procedural - for example, his work experience whilst studying at university was excluded when determining his overall experience.
Silicon Valley is renown for having foreign nationals working in all the major tech companies. It is full of international employees - including many Australians - who come for several years and later return home after making money and gaining experience.
This has the potential to be the single biggest way the government can make an impact.
- Encourage multinationals to build an experienced local population
Silicon Valley really began with silicon chip factories, with people forming bonds at those companies and then using their wealth to invest and build new companies, leading to a cascading effect over time.
Ireland’s placing in Europe and its favourable tax environment had several companies relocate their European headquarters to the country, which has had a waterfall effect on the local ecosystem. The encouragement of multinationals will skill up the local workforce, bring in the world’s best talent, and see a transfer of knowledge and skills.
Google’s office in Australia has invented two of the most important products since its original innovation of search: Google Maps and Google Wave. (More specifically, Google acquired a Melbourne startup that became Google Maps; and the same founders of that startup in their capacity as senior management, are what drove Google Wave - what could become one of the global company's most innovative inventions to date.)
This not only has put Australia on the map as a place of innovation and attention due to the development of these technologies, but the local developer ecosystem also has benefited as they get upskilled by Google. We should see every major brand in technology have Australia as a major base of operations and R&D, as it benefits the local industry dramatically.
Culture
Culture is key in the development of industry. There is not much the government can do in this regard (although it can do plenty to stifle it), other than to support community efforts like Silicon Beach and The Hive.
The involvement of government officials in social events, the funding of social events, and other soft ways of support - is how the government can assist with the development of the culture needed to build repeat word-class technology businesses. Having clear avenues for funding events and communities removes one clear barrier for those looking to improve and expand the culture within this industry.
Australian entrepreneurs in Silicon Valley said the culture was the most important thing that needs to change. It's a culture that makes the environment more supportive ie, they claim they are surrounded by ten times more useful people to give them advice. One member in the community said we need to politely get our local entrepreneurs go walkabout for a few years, and come back once they've learned something from the world's best. The E3 visa negotiated under the US-Australia free trade agreement - and unique to Australian's - has become a very valuable tool to enable this.
The government supporting entrepreneurs, engineers, and other professions to move to Silicon Valley, build their networks, and learn from the best, is what long term will transform the industry. Already a strong expat community exists, that will serve as a useful channel to boost Australian capability - this is organically growing. The government can do something by recognising this and supporting programs that create "secondments". This is a simple, cheap, and powerful way to change the culture of Australia forever - as once a solid group of veterans return back to Australia, they guide future generations.
Infrastructure
This goal is dominated by the need for faster, better, cheaper internet access.
The Rudd government’s National Broadband Network is seen as a positive step for Australia by the Silicon Beach community, with South Korea providing a clear precedent in the benefits. In Korea's case, near-universal high-speed broadband created new demand in the consumer population who previously had not realised what they lacked. A similar example in Western countries is the growth of YouTube, which grew on the back of rising broadband penetration in Western countries.
Where the Silicon Beach community did voice concern was over the implementation of the NBN. If several points were not addressed, the network could waste its potential. Three things stand out that can be used as guiding points on the proposed NBN.
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Focus not just on the domestic data pipes but on the international haul
An insular NBN with the same back haul/contention ratios currently experienced in Australia to the global internet would be counter productive. Without allocating, say, 20% of money to the international data pipes, the 80% that would be spent on the development of a national broadband network is considered useless.
The submarine lines on the sea beds that connect Australia to Asia and America are ultimately the bottlenecks for any Internet in Australia. With the move to cloud computing and the decentralised nature of the internet, having appropriate links to the international network is key for speed.
A huge growth opportunity that could be coupled with the Climate change policies being led by the Rudd Government, is that of data centres. (Cloud computing, the biggest trend in technology now, relies on massive data centres where energy is a key cost – with solutions a key competitive advantages.) However, unless we are in a data path to other resources on the global internet map, or can entice the Americas, EMEA and Asia Pacific to use us for something we will remain a backwater.
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The NBN needs to be government managed as a wholesale network
There is concern that, depending on the way the ownership of the NBN is structured, it will affect the competitiveness of ubiquitous connectivity. Policies needs to be designed that ensure that the internet in Australia is the cheapest in the world. A replication of the Telstra story will make the NBN a liability for the Australia economy and a constant source of political pain.
- No clean feed
It is believed the only group to truly benefit from this scheme will be the companies that will provide the software to the government to run this.
A detailed letter was sent to Australian senators addressing this very issue in late 2008.
As a separate point outside of the NBN, suggestions were made that could reduce the cost of inputs for startup businesses. Subsidised or free spaces to operating businesses in, and making tech equipment cheaper, were cited as two ways in which they could help substantially.
Incentives
The improvement of incentives falls into three areas: tax, research, and leveling the playing field.
1) Tax
Tax, it was remarked by a Silicon Beacher, is what created the Persian wars, the American revolution, the French Revolution – and many other great changes in society. A carefully crafted tax policy, could transform Australia’s competitiveness overnight for the long term.
Policy on tax is complex, but below are suggestions that can be considered for initial discussion.
- Change the new ESOP policy. The Silicon Beach community has expressed anger at the new ESOP changes following the 2009 budget. Share options are one of the major ways startups globally give incentive to top tier talent that would otherwise go to large companies. The policy approach is seen as a blunt attack that could be better targeted, and preferably, removed.
- Tax breaks. Areas where targeted tax breaks could be implemented are
- R&D investments. In addition to reducing the cost of business for this research-intensive sector, more prominent impacts would be multinationals relocating their R&D centres to Australia, which upskill the local industry. Having said that, the current R&D tax allowances have been considered very helpful.
- Investors in startups. Angel investors play a fundamental role in the capital ecosystem, as they typically fund a concept that can go to launch – which latter get funded by venture capitalists, whose role is when a company has a market presence. By giving tax breaks to legitimate angels, it will see those with capital redirecting their wealth into the engine room of the economy.
- CGT on companies building value. The exit of a startup is core to the Internet industry, and capital gains on this exit has the potential to motivate or disincentivise market participants.
- Startups in the first two years. A functional definition of a startup is one whose revenues do not exceed its operating costs. It typically takes a few years for a startup to graduate to a growth business, which is when they pay actual tax – so a policy exempting startups in their first two years would have minimal impact to government taxation revenues. However, to eliminate most taxes on the first two years of a startup, will have global entrepreneurs and investors wanting to start their business in Australia with a stronger motivation to build revenue quicker.
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Create a tax-free economic corridor. There is a lot of thought that needs to go into this which won't be detailed here, but the concept is simple and has proven to work in a variety of Asian countries in the past. As a case in point, lower tax has such a powerful motivator, that dozens of global companies have restructured their operations in such a way, that all money flows through Ireland. By identifying a 50 by 50km radius somewhere in Australia where companies with a certain criteria are tax free for 10-20 years, in the medium term a transformation could occur in Australia's competitiveness that will last for the long term.
- Payroll tax. Although this is a state tax, it’s a common complaint by the Silicon Beach community. Some sort of arrangement that exempts small business will see more people being hired by startups.
2) Innovation and research grants
Any sort of government contribution to research could have a positive impact. This could be done through increasing the availability of research grants.
The Silicon Beach community identified three problems with most government grant programs:
- The requirement for matching funds. Until a technology startup is producing revenue, or has attracted significant external investment, it will not have spare cash. This is a particular issue in the technology sector, where the low costs of software development and online promotion mean that businesses can be, and usually are, started with low capital investments. This means that most start-ups - regardless of their merit or potential - will simply not have the matching funds available to match a grant, and thus are ineligible.
- Government attitude to the ICT sector. More imagination from funding bodies about what truly small tech companies can offer has been requested. One respondent from Silicon Beach believes his recent experience with the Climate Ready grant scheme and AusIndustry shows that ICT is not a government priority – an AusIndustry Customer Service Manager said that they automatically put applications for software R&D towards the bottom of the pile and discouraged him from applying. This anecdote of a government official engaging in de facto economic planning is disturbing.
- Onerous time requirements to apply. The sheer amount of time and effort required to prepare and follow through with an application for government grants distracts from the actual activities required to run, and grow, the business. This is an especially acute problem in technology start-ups where founders, and early employees will already be extremely busy. The allocation of time to preparing a grant (which may not even be approved) is often not considered effective.
3) Level the playing field
The Silicon Beach community believes certain industries receive far better attention, and that information technology companies should be included in various industry specific programs. Movies for example get a tax deduction, which it was remarked, leads onto to a red carpet launch; technology startups on the other hands, offer a massive multipler with sustained employment but with no such tax benefits.
Capital
It was remarked by many that the funding lifecycle is broken in many areas. The angel investor network is not considered strong enough; the venture capital industry is considered under-developed in Australia. Banks offering small business loans have proven to be ineffective for most startups
A review of the funding lifecycle is requested, with targeted initiatives to fix gaps. Specific suggestions that could assist include building the local VC industry by offering matching funds; also initiatives that strengthen the pipeline of startups invested by angels that can feed through to venture capital. Additionally, it was suggested another good funding scheme through the government could help.
Reinvestment
Reinvestment can assist with capital, demand, and innovation. The reinvestment of capital and skills into the industry is how it can grow over time to one of the world’s best. Specific initiatives that can assist this can help the long term prospects of the industry. Government actions in the way it operates is an indirect way is can reinvest into the industry.
Capital
Having the private sector more involved could assist, by giving them incentives to invest.
A suggestion is in revising Capital Gains Tax. One of the key aspects of the US ecosystem, is for the ability of investors to reinvest capital proceeds from previous investments without consequence. Removing any CGT on reinvested funds will encourage not just investment from previous successes, but also attract other investors to target their money into this sector.
Government
Ways the government can drive demand, is to follow the US governments lead, and become a major buyer of Australian technology. By reducing departmental hurdles and giving clear incentive to use Australian technology, this gives young startups enough of a base to expand in the market. This government investment, on money they already needs to spend - into a fragile ecosystem that's still growing - could be a great source of investment.
For example, most startup companies fail at securing deals with enterprise customers, because they don't have the long standing history and guarantee of success (and therefore continued delivery of service). Ironically, it is often the first few customers that can fund further development to grow a business to one that is sustainable. If the government is willing to take more risk on its technology investments, it could bootstrap an entire industry.
There also needs to be reform of the tendering system for IT contracts that makes it easier, and encourages small businesses to apply for government work. The problem now is that the tendering system favors big companies
It was remarked that the government does not support innovation where it is most likely to occur - in individuals and small organisations. What needs to happen is the government needs to 'tender' for good solutions from these groups and award prizes for innovative solutions, as has worked well in the UK and US.
Innovation
There is a split between the Silicon Beach community on what support the government should give over open source technologies. Some believe the government should bias open source in government infrastructure; others claim government development in open source projects should be released to the public for the broader open source communities. It was also said though that it is not the role of the government to be advocating for open source. Although, opening up data was unanimously supported.
As it is the information revolution, setting free information helps spur that revolution. One of the key trends identified by the leaders of information technology globally, is on opening up data silos and reusing them in innovative ways. The government has vast mountains of valuable data that could really spur innovation in this area.
An example where the government prevented innovation in the past was with maps. For example, Google Maps was invented in Australia, but it was only implemented here a lot later – long after it had become popular overseas. A lot of other competing companies have struggled to enter the market due to the licensing costs imposed by the government– which are non-existent in overseas markets.
An example of what the government could do, is to follow the leads of the Obama administration in the creation of http://data.gov, and the UK government, who is currently being advised by Sir Tim Berners-Lee (the inventor of the Web) on how it can open up its data silos. Only days ago, San Francisco's mayor announced the opening up of government data which he expects will allow creative uses of it, to create new innovate information products.
Cloud computing is the long term trend of the technology industry, and with infrastructure "in the cloud", the underlying software no longer matters (and why some argue, supporting open source is irrelevant). What matters now is the data - and easy access to data that allows privacy-respecting interoperability is key. Practical steps that the government can do to pursue this is by supporting open standards - technical specifications that the market can adopt in the same way consistent railroad guages leads to a stronger national rail network - that allows government data to be reused with ease.
Other suggestions
A final comment which was communicated strongly was that there needs to be a dedicated government focus.- Follow the US in appointing a Chief Technical Officer to drive technology strategy in the country.
- Better trend tracking. That includes the identification on new ICT industries, specifically Internet based industries that can provide future job opportunities, wealth and growth both directly within the sector, and in support industries. Having identified these opportunities, the Government needs to do more broadly to encourage local startups. (An example would be recognisng the upcoming data web, where the releasing government data for public resuse could spur innovation in this upcoming trend.
- A formalized way for the government to talk directly with small business and start-ups, to understand their needs and how government can help them.
- Government resources seem to bias non-information economy industries in terms of funding, treaty negotiations, government expertise. That needs to change.
Many other ideas were submitted by the community, but have been excluded for editorial reasons. We hope however that this document spurs discussion and is the start of better dialogue between the government and this dynamic growth sector of the economy.
This paper had over 60 submissions driven mostly by 30 core people, was co-edited by dozens others, and had numerous other people giving advice on the development of this paper. The following are a few that made significant contributions:
| Lead writer and editor: Elias Bizannes | |
| Contributors: |
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| Tom Adams | Tristen Langley |
| Pat Allan | Mick Liubinskas |
| Gordon Anderson | James McCutcheon |
| David Banes | Geoff McQueen |
| Pascal Brenner | Phil Montgomery |
| Mike Cannon-Brookes | Matt Moore |
| Tyone Castillo | Charlie Perry |
| Stephen Collins | Pratibha Rai |
| Ryan Cross | Benjamin Ranck |
| Richard Cullen | Peter Renshaw |
| Ciaran Davison | Duncan Riley |
| Donal Duibhir | Chris Saad |
| Phillip Evans | Simon Sharwood |
| Alisdair Faulkner | Phil Sim |
| Viki Forrest | Andrew Simms |
| Lee Goodman | Simon Spencer |
| Tristran Gordon | Craig Thomler |
| Lachlan Hardy | Erik Unger |
| Michael Harries | David Vanderberg |
| Ross Hill | Martin Wells |
| Nick Holmes A Court | Andrew White |
| Renato Iannella | Alan Whiteside |
| David Jones | Hendro Wijaya |
| Jason Langenauer | Michael Zimmerman |
Thanks also goes out to Pia Waugh from Senator Kate Lundy's office who guided the effort.