Freelancer CEO Matt Barrie met with federal Communications Minister Malcolm Turnbull earlier this year to walk through the challenges facing Australia’s startup sector.
While many chasing the billion-dollar startup dream are fleeing Australia, bound for places like Silicon Valley and the UK where government policy is much more supportive of their business structures, there are a few big players who are toughing it out and flying the Aussie startup flag at home.
Barrie’s outsourcing site Freelancer.com is one Australian startup which hasn’t left the country. It listed on the ASX last year and is using its wins to help make Australia a better place for startups.
Following the meeting Barrie clarified his thinking to Turnbull in a long email which we’ve obtained and republished, with some edits for clarity, below.
The email from Barrie, known in the industry for his forthright and often polarising views, is a withering assessment of the current state of the industry but also looks more deeply at some of the policy areas not often aired that could affect the skills pool and incentives for investment.
Some of the suggestions came to fruition in the federal budget, including the axing of Commercialisation Australia and IIF grants, although with the swathe of cuts to government agencies delivered by Treasurer Joe Hockey it is likely they may have been targets anyway. But Barrie was clearly of the view that government handouts through those agencies were a hindrance rather than a help to startups trying to grow.
Here’s the email. Let us know what you think in the comments.
- We are at the start of the biggest technology boom in the history of mankind – Australia is completely missing the boat.
- Second highest country in the world to build a startup (wages, rents etc), local market too small, distance.
- VC industry stillborn – never showed a return in 2000-1, never got to “Series B”. Woeful funding environment past $50k invested. Only about $30m is invested per annum for the whole of seed stage, $40m in early stage and $20m in late stage in total for the entire industry, nationally. This is a national disgrace. This practically means that early stage is a train wreck, and no late stage investments will ever occur at home, because the average deal is north of $20m. It’s at the lowest point in a decade.
- Massive decline in skilled technologists- enrolments down 60% in CS alone in the last decade, let alone in STEM. This is a national emergency. Lots of “early stage” startups but all looking for “technical co-founders” and no deep IP.
- Lots of deep IP tied up in research institutions, impossible to commercialise because the business liaison offices do not have a model which works nor an idea on how to operate a business.
- Small population, declining tax base as population ages
- GDP growth purely comes from wasting assets (particularly mining)
My article on the issues on LinkedIn
Low cost solutions
1. Modernise school curricula
A total curriculum overhaul in high schools, particularly K-10 for technology- much more than the current national draft curriculum changes.
Education delivered online, and computer science should be broken out of woodwork and home economics and taught as part of mathematics or science.
The primary impediment today aren’t students but teachers, who are resistant to retraining and frankly, in many cases, incapable of being retrained.
James Curran, Associate Professor at Sydney University, he runs the National Computer Science School and has costed a robust K-12 curriculum online in computer science at $4million to deliver and is prepared to put it together.
Curran runs the National Computer Science Summer School and is the best person in the country to do this. This is a no-brainer.
2. Promote the ASX as tech’s funding source of choice
The ASX needs to be built up and promoted as the funding source of choice for technology (the ASX now realises this is a huge opportunity).
Ultimately this is the only solution for the funding problem in technology. The way this needs to occur is through tax relief and share loss relief for investors in qualifying early stage technology investments.
There is no path forward I can see where Venture Capitalism can ever be a powerful funding vehicle in Australia. Ultimately the government should give up on funding venture capital. It will always be a drop in the pan and require too much committed cash from government.
3. The Government needs a Chief Technology officer
We have a CTO, but it is only for procurement. It’s important someone is thinking about these issues on a daily basis in government.
4. Establish a national register of intellectual property
Creating a national register of IP in Australian Government funded research institutions to speed up the commercialisation process.
It should be organised into three levels (free IP that the uni doesn’t care about, small fee IP with a fixed known cost for minor things and higher fee IP for important pieces of IP).
5. Work visas for entrepreneurs
There should be a Startup Chile style program where work visas are provided to overseas entrepreneurs along with $50,000 in grant funding for coming to Australia to build a startup for 6 months, particularly focused on bringing across companies from high tech areas like Silicon Valley.
6. Fund the National Computer Science School
This trains our best and brightest nationally. Freelancer funds the NCSS more than the government does. At the moment there is zero commonwealth funding and $17,000 per annum from NSW. This program should be funded $1 million, and you will have a national treasure.
7. Tax relief for investors
This includes front-end relief in the form of tax credits or a reduced rate of tax, and back-end relief in the form of capital gains tax reductions or exemptions for qualifying venture investments.
Australia’s limit should be at least $500,000. No Capital Gains Tax should be paid on profits earned on shares held for more than three years. This is needed to get the ASX as the primary funding vehicle for technology. I think this is critical.
8. The listing rules for no prospectus should be replaced with a general <$5million rule but require basic information about the issuance to be lodged with the ASX on a private crowd-funding board, the requirement for professional and sophisticated investor replaced with a non-sophisticated investor cap of $100,000 per annum (linked to tax relief).
9. Introduce a provision for p2p debt crowd-funding from non-sophisticated investors to similar limits.
10. Loosen the requirements for an Offer Information Statement. It isn’t that different to a prospectus.
11. Share loss relief
Should the company go bankrupt, investors may claim loss relief on their investment which is equal to half of their total investment multiplied by their tax rate.
12. Fix the ESOP tax situation
I think this is well underway already. There is nothing to lose here because there has been hardly any successful technology companies to date where the ESOPs have been worth anything.
13. Ditch the entire VC industry’s IIF programs and grants
The way the system is set up now… has set up a culture of handouts to set up new funds which I think is holding the industry back.
Rather than increase IIF grants I think longer term the government should ditch the entire VC industry and IIF programs and instead provide broader tax incentives to investors so the ASX and the public can take over as the primary funding source for technology ventures.
14. Introduce payroll tax exemption for innovative companies
15. Increase R&D tax rebates. Australia isn’t competitive here any more.
16. Commercialisation Australia grants need to support early stage companies.
You could provide better Commercialisation Australia grants moving back to more early stage like START was – now it is too late stage. This won’t be necessary if the right taxation relief is provided for investors in technology.
Also I don’t think Commercialisation Australia grants have been particularly well allocated in the past – also no government will never be willing to put enough dollars here to make a difference with 50/50 matched funding so I think it is better to axe the whole program and aim again for the general public to have taxation relief to drive funding instead of the government.
17. Be careful how you tax Australian tech companies.
“While I am all for multinational technology companies in Australia [are] being forced to contribute more, I would be careful about how this is done,” Barrie wrote.
“Otherwise companies like Freelancer (and Rio Tinto) will end up paying taxes offshore- in multiple jurisdictions-, rather than Australia.”
18. Get the labels right.
Stop confusing ‘startups’ with ‘SMEs’ and ‘technology’ (high growth, deep IP, scalable, sustainable competitive advantage) with ‘digital’ (includes: media, carriers, cable TV, libraries, movie industry- mature industries etc. excludes: hardware, biotech, semi, and most of tech).
Banish ‘digital’ from the lexicon or you get too many other non-industry interest groups involved.
Turnbull’s office confirmed receipt of the email said while not all the suggestions come under his portfolio he did openly support the industry. “The Minister frequently consults with a wide variety of stakeholders and industry leaders in the ICT and start-up sector,” a spokesman said.
The spokesman added Turnbull favoured reform of tax arrangements for Employee Share Schemes.
“Reform proposals for the scheme are being considered by the National Industry Investment Competitiveness Agenda Taskforce, which is due to report by June 2014,” he said. “The Minister has been very vocal in his support of Australia’s start-up sector.”